G.P. International Pipecoaters Pty Ltd v The Commissioner of Taxation

[1989] HCATrans 261

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,, ... ~

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Perth No PS of 1989

B e t w e e n -

G.P. INTERNATIONAL PIPECOATERS

PTY LTD

Appellant

and

THE COMMISSIONER OF TAXATION

Respondent

BRENNAN ACJ
DAWSON J
TOOHEY J
GAUDRON J

McHUGH J

Pipecoaters(2)

TRANSCRIPT OF PROCEEDINGS

AT PERTH ON THURSDAY, 26 OCTOBER 1989, AT 4.00 PM

Copyright in the High Court of Australia

PlT 12/1/CM 1 26/10/89

MR P. FLETCHER:  May it please the Court, I appear for

the appellant.(instructed by Solomon Brothers)

MR C. J. CARR:  May it please the Court, I appear with

my learned friend, MR BHOJANI,for the respondent

Connnissioner .(instructed by the Australian Government)

BRENNAN ACJ:	Mr Fletcher.
MR FLETCHER:	Your Honours, I have taken the liberty of

preparing an outline of argument for the appellant.

I hand up copies now, together with a list of

authorities, which - although it is an amended list

of authorities and there are very minor changes to the list previously filed, although it looks rather daunting, I certainly do not - - -

BRENNAN ACJ:	Do you have copies of the authorities for us?
MR FLETCHER:	I do have copies of the authorities.
BRENNAN ACJ:	Well I do not think we need trouble you for

a list of authorities in that case. We use the

list of authorities chiefly for the purpose of

making sure we have the sources available to us. But

if· you are goin~ to provide us with ~em then you

neecL.no,t troubie with tfiem.

MR FLETCHER:  Your Honours, the appellant's outline of

argument proceeds - - -

BRENNAN ACJ:	Just give us a little time to read it if you would not mind, Mr Fletcher. Mr Fletcher, your notes of
argument go into some detail, of course. Perhaps
it might assist you in the presentation of your
argument to appreciate that the Court's time will
be limited as you have probably heard. We propose
to sit today until about five o'clock and we will
sit from about a quarter-past or half-past nine
tomorrow morning, but we will have to cease sitting
by one o'clock at the very latest.  So if you
would just bear those times in mind in the course
of the presentation of your argument, conscious of
the fact that you have been able to give us in your
type-written form some page references and the like which we can have regard to in the course of considering the matter.

MR FLETCHER: In view of the time constraints, Your Honours, I

do not propose to traverse the facts of this matter

It was a a factually complex case. The facts

were substantially set out in the ,.J:-btice to

.A.drn:i:e: Facts which ·was filed in the supreme court,

Your Honours. If I could simply refer you to that

notice which is at page 112 of the first volume of

the appeal book and without going through each fact -

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the facts are in detail set out- these were the

facts which the appellant contended arose in the

case and it is significant to note that

His Honour Mr Justice Pidgeon found the facts in

favour of the appellant and he - - -

DAWSON J: They were not admitted?

MR FLETCHER:  They were not admitted. By and large they

were not admitted. There was four days of evidence

on behalf of the appellant and at the conclusion of

the case His Honour Mr Justice Pidgeon said on

page 910 of the appeal book:

The taxpayer sought to establish certain facts

in its favour and led evidence for this purpose.

The evidence that was led on behalf of the

taxpayer to establish these facts impressed me

and I unhesitatingly accept it.

Now, Your Honour, the facts are set out in the
Notice to Admit Facts and consequently the appellant
considers that the facts have been well found and
are settled. Nevertheless,it may be appropriate for

me to very briefly refer to some of the more

specific matters given that they were referred to

by Their Honours in the Federal Court in arriving

at their decision to disallow the appeals. Those

facts were essentially that the taxpayer entered into a contract with the State Energy Connnission

of Western Australia whereby it would coat externally

and internally pipes that were to be used on the

Dampier to Perth natural gas pipeline project. The

agreement that arose following the acceptance of the

tender required the contractors to install plant

which would be owned by them in a workshop and

storage area on land they leased at Geraldtown and

they sought and obtained from the State Energy

Connnission,- SK6WA. - a payraent of the
amount of some $4.6 million for that purpose and

it was paid by SECWA by three instalments over a

Now the cost of installing th~ plant.was almost equal	six-month period while the plant was being installed.
to the amount received although ultimately the ultimate cost exceeded the amount received, so that there was no surplus in that sense and no gain in
that sense.

The plant was of no use to the taxpayer at the

end of the contract and it was sold for salvage

value at much less that the cost of purchasing and installing it. It is the taxpayers claim that the total amount in question is not income, but was

received as a capital payment. The Connnissioner's

claim was that it was remuneration under the contract,

although applied to a capital purpose and as income.

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Your Honours, if I could turn to the appellant's

outline of argument. The general contentions start
with the proposition that mon~ys which are received
by a taxpayer to defray in whole or in part the

cost of a capital asset or improvement to be

used for the purpose of generating income from

activities undertaken by the taxpayer for the payer,

may be capital receipts of the taxpayer. And

whether a particular receipt is of that character

depends upon the circumstances of payment and receipt

and those circumstances include the terms "upon

which the monies are received and the purposes for

which they are to be used".

The Federal Court had no difficulty with that

proposition and it is acknowledged as an established

proposition. There are cases unchallenged and

supported , in particular APA FIXED INVESTMENT TRUST

COMPANY V THE FEDERAL COMMISSIONER OF TAXATION, which

is a decision this honourable C'Jurt, single Judge,

in 1948, BOYCE V WHITWICK COLLIERY COMPANY LIMITED

which was an English decision in 1934 and - - -

BRENNAN ACJ:  If you wish us to have reference to these we

bette~ have the full references so we can find the

cases in due time.

MR FLETCHER:  Your Honour, the references are on the list of

authorities - - -

BRENNAN ACJ: . We do not have the list of authorities. We

expect them from the bar table, so if you give

U1em t , us from the bar table.

MR FLETCHER:  Yes. APA FIXED INVESTMENT TRUST COMPANY V

THE FEDERAL COMMISSIONER OF TAXATION,. (1948 )8 ATD 369,

and BOYCE V WHITWICK COLLIERY COMPANY LIMITED,

(1934 )All ER 706. The decision of the - - -

BRENNAN ACJ:  Do you propose to furnish us with copies of

these?

MR FLETCHER: I:have furnished copies, Your Honour, of all

cases to which I am going to be referring.

BRENNAN ACJ:  I see. And are there any passages in those

cases you wish us to have regard to?

MR FLETCHER: 

Yes, I was going to come to them shortly, but

not at this point, Your Honour. What I was proposing
to set out at the moment was the fact that the

essential principle has been established and has

been followed and has been applied in Australia and

in New Zealand and in the United Kingdom, and that

that essential principle was accepted by the

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Full Federal Court but that the Full Fedral Court

distinguished those cases and it is in its distinguishing

of the cases that, in my submission,Your Honours,

the Full Federal Court fell into error. Your Honours,

at page 952 of the appeal book, in the reasons for
decision of the Full Federal Court, the case

against BOYCE V WHITWICK COLLIERY is dealt with.

The case ,in essence,involved a colliery company

which had disused quarries which were full of water.

The local council required the use of that water.

The local council proposed to the colliery company that it would pay t

colliery company to supply it with water and

it would also pay the colliery company to construct

the necessary plant with which to pump the water.

There was only one agreement which covered both aspects of the contract and that agreement

provided for an amount to be paid by instalments

to recoup the expenditure which the colliery

company would incur in the course of creating

the pumping station. The court had no difficulty

in determining that there were two distinct matters

dealt with in that agreement. One matter was the

supply of the water, but prior to the company being

in a position to supply the water it had to be

equipped with the necessary pumping facilities and

the contract also distinctly dealt with that. The

contract also distinctly allowed for an agreed

price in respect of the supply of the water and

separately provided for the reimbursement of sums

designed to recoup the cost of the plant. Now,

Your Honours, in relation to the case at hand, the

similarity is evident in that in the present case

the contract between the SECWA and the appellant

provided for two distinct matters. The first was

that the appellant would create a very substantial

pipe-coating plant and it would be paid in advance

at the estimated cost of creating that plant. The

appellant would then use that plant solely and

exclusively to coat pipe for the State Energy

Connnission of Western Australia, which had provided

the funds for the creation of the plant. The

appellant was a joint venture company which had

hitherto not carried on business at all. It was

formed for the purpose.	The appellant received
the funds, built the plant and coated the pipe.	The
funds for the building of the plant amounted to

$4.6 million. There was no profit in the sense of

any surplus and in fact the plant cost it more to

construct than it received by contribution from the

State Energy Connnission. The appellant then

proceded to coat the pipe for which it received

some $26 million. Now a similarity is strong

between that and the BOYCE V WHITWICK COLLIERY case,

and the Federal Court acknowledged that. The

Federal Court distinguished BOYCE V WHITWICK COLLIERY

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on the grounds that it was there possible to

more clearly distinguish between the two payments,

the two matters dealt with under the contract and
secondly because the term of that contract and the

pumping of the water,the use to whi~h the plant

would be put, was far more substantial than the

term of the contract in the present case, namely

30 years as opposed to between two and three years.

Now, in our submission, that makes absolutely no

difference whatsoever and the Full Federal Court

sought to support its conclusion that the case was

distinguishable by reference to the

decision in SUN NEWSPAPERS, in

particular a passage from the r~asons for judgment

of His Honour Mr Justice Dixon. I propose to

refer to that in more detail in a moment.

But the first point that I wish to press upon

the Court is that, as is set out in the appellant's

o~tline of argument at paragraph 3, the INCOME

TAX ASSESSMENT ACT imposes tax upon assessable

incom~ not upon contractual receipts per se.	Each
receipt under a multi-faceted contract must be

characterized as income or capital depending upon

ordinary concepts and in accordance with the

provisions of the Act. A receipt under such a

contract should not be characterized as assessable

income merely because the contract also provides for payments which are clearly income. That was

the case in BOYCE V WHITWICK COLLIERY; that was
the case, we say here, there were clearly revenue

receipts to be derived,and it was also the case

in APA FIXED INVESTMENTS in which the revenue

receipts were rent and the capital contribution

was a contribution of an estimated amount of the

cost of the creation of the building which was

then rented back to the payer. So that in all of

those cases the court went to the trouble of

carefully analysing the receipts and did not simply

say, ''because these receipts are being received

under one agreement",''- which, in the case of

His Honour Mr Justice Pidgeon he described as' a

contract to be performed which had an overall price,"

that accordingly every amount was necessarily

assessable income.

And the reason why that is the correct approach,

even though it is in a commercial context, emerges
from cases such as COMMERCIAL AND GENERAL ACCEPTANCE

LIMITED V THE FEDERAL COMMISSIONER OF TAXATION, (1977)

137 CLR,and a copy of that has been handed up and I will come to it, and the reason is that it gives an

entirely incorrect reflex of the income of the taxpayer.

If one takes a totally simplistic approach and says

here is a company set up to engage in a profit-making

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activity, that profit-making activity arose

under a contract. That contract provided for

more than one thing to be done and more than one

series of receipts. Nevertheless,one need go no

further, every receipt is a receipt of assessable

income because it is being received in the context

of a commercial contract. Now, that notion is

propounded by the respondent and not only in this

case, but also in cases such as FEDERAL COMMISSIONER

OF TAXATION V SPEDLEY, which is No 7 on the list

by the Federal Court in that case,and more recently	list of authorities and which has been rejected
in COOLING V THE FEDERAL COMMISSIONER OF TAXATION,
89 ATC 4731. The same broad-brush approach
was rejected in that case and for very good reason.

· BRENNAN ACJ:  Mr Fletcher,if this contract had provided that

the title. to the plant was to be vested in SECWA. but that

it was to be operated by the taxpayer without charge,

would that have made any difference?

MR FLETCHER:  There is no flow of funds from the SEC, the

owner of the plant - - -

BRENNAN ACJ:  The SEC pays the taxpayer to construct the

plant, but the taxpayer does not acquire a title to the plant, and then the taxpayer operates it

without charge from SEC and derives the income that
it does derive from the pipecoating. Would that

make any difference?

MR FLETCHER: It may, Your Honour. It does not amount to a

contribution of capital. It is the making available

of a facility free of charge. There would be a

reflection in the rat~, no doubt, charged for the

coating of the pipe as a consequence of that. What

would otherwise be a revenue cost, namely the rental

to ·be paid for the use of that plant, would be
missing, but in so far as the company is agreeing to

form gratis a task in the hope that it will then get

a profit-making contract - - -

BRENNAN ACJ:  I am suggesting a single contract. The

only difterence between the contract which I am

positing for your consideration and the instant

contract, is the title to the plant, instead of that

being in the taxpayer,it is in SECWA.

MR FLETCHER: Well in that case, Your Honour, it would be an

expenditure of capital by the SECWA.

BRENNAN ACJ:	Why?
MR FLETCHER:	Because what it is - - -
BRENNAN ACJ:	WelJ ,it may be an expenditure of capital by

SECWA. Why would it be a receipt of capital by the

taxpayer?

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MR FLETCHER:  Because it is a payment by - well it would

certainly not be an assessable receipt by the

taxpayer, it is a payment -

BRENNAN ACJ:	Well why not, that is the point?
MR FLETCHER:	There is no profit-making intention in relation

to that activity. The activity - - -

McHUGH J: There does not have to be, does it? I mean it

would have built the plant and would have been

paid by SECWA for it.

MR FLETCHER:  But,Your Honour, I understand that the proposition

put by Mr Justice Brennan is that the payment would

be a payment of the amount to be expended by the

taxpayer in building the plant.

BRENNAN ACJ:  No, the proposition is that it is the same

contract as the present one, that is,that an amount

is to be paid being the contract amount. It may be

that it is expended. That is a different question.

The proposition is why is it that the amount in

total paid under the contract in such a hypothetical

case would not be assessable income? It may	be
subject to an allowable deduction,	but why would it not
be assessable income?

MR FLETCHER: Well, it would be in the sense that if it

is the case that there is a payment by the SECWA to

this company to create something which becomes a

property of the SECWA it is a supply contract. It

is a construction contract for the supply of the

plant and the cost to the appellant, the company,

of performing that contract, given that all other
things are equal, namely that the amount being

received is equal to the cost of creating the

asset, the cost will be deductible. It is creating

something for someone, it will be assessable income,

Your Honour, and - - -

MR BRENNAN ACJ:  The proposition then is this, is it not, that

whatever the nature of the asset might be for which

the money is outlayed and received, the question of
whether the receipt has the character of income or

capital depends upon the title to the property it

has constructed.

MR FLETCHER: With respect, Your Honour, I do not believe that

is the case. It depends upon, as it was put in

CITY MOTORS V NAPIER MOTORS, whether the receipt is

the proceeds of the profit-making business. In

this particular case it is arguable that there is

no profit-making business in relation to the

construction of the plant, given that there is

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simply no profit to be made on the construction

of the plant, but if it was the fact that this

was a construction company, and on those facts it

would be, ;it~would~b~ constr~cting for supply,

because at the end of the day there would be a
product, namely the plant, which has been created
for someone, namely the SECWA, which is quite the

obverse of the position that we have here. So it

would be a different situation indeed.

BRENNAN AcJ:	Yes.
MR FLETCHER:	Your Honours, the position in APA FIXED INVESTifENT

TRUST COMPANY V THE FEDERAL COMMISSIONER OF TAXATION

is a good illustration of the application of the

principle in Australia, the principle upon which

the appellant relies. Your Honours should have a

copy of APA FIXED INVESTMENT TRUST available to you.

McHUGH J: Would you explain to me what the practical significance

of this case is? Let it be assumed against you that

these are revenue receipts.	Your expenditure on building
the plant would be revenue outgoings, would they?	·

MR FLETCHER:  I would like to put that another way, Your Honour.

If it was the case that the expenditure on this

plant could be characterized as a deductible revenue

outgoing, then it may well be that the receipt is

an assessable revenue receipt, but the fact is that

by no measure can this expenditure be considered

to be a deductible outgoing. It is not. It is

a capital outgoing. That is the - - -

McHUGH J: Why is it? It seems to me that it is almost easier

to look at it from the point of view of your expenditure.

The money that you spend d.n erecting this plant being done for this particular project certainly seemed

to be a revenue outgoing, would it not? If you look at cases like BP and so on and that line of cases, you

are in that territory, are you not?

MR FLETCHER:	The position is that the expenditure on a plant of No. Well outside that territory,Your Honour.	this type - and if I could simply point out that the
plant was designed to coat 1500 kilometres of pipe- Lt
was a massive facility. It generated some $26 million
in revenue for the company. It is beyond comprehension, I submit, that that could be anything other than part
of a profit-yielding structure. It is part of that
aggregate of plant, materials and equipment with which
a recurrent, systematic, profit-making activity is carried on. It is, in my submission, impossible to
describe what the appellant was doing with that plant in any other terms other than operating a structure for the generation of profit.
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McHUGH J: In reality it is not really,in the context of this

case, an erection of a piece of capital plant. It

is no more than a piece of machinery, in effect,

which you use for the purpose of your contact.

In principle,is it any different from the spanners
you buy to install a pipe? I mean,that is part
of what you have got to bring into existence for

the purpose of this particular contract. It is

just an overhead, is it not?

MR FLETCHER:  No, with all due respect, Your Honour, it is not.

It is one of the expenditures which falls within

the class of capital expenditure. It is the creation

of the profit-yielding structure.	The others fall
into a different class.	You referred to spanners and
other consumable items.	Now they clearly are

deduct ble outgoings, the expenditure on acquiring

those things, because they fall within that class

of constantly renewable and consumable items, but

quite apart from the fact that it has never ever been argued in this case below that this was - I

am sorry, I should qualify that. It was raised in the

written. submissions and in the Full Federal Court

that this could be perhaps considered to be akin

to a consumable. That never formed part of the case in

the supreme court and quite apart from the fact that

if it was a consumable then there would have been

no basis whatsoever for the allowance and <lepreciation

deductions which it has been conceded are and have

been properly allowed.

But quite apart from that, the mere fact that this

particular plant happened because of the circumstance

that there was going to be very little likelihood of

another pipecoating contract coming around the corner,

it had a short connnercial life for this particular

joint venturer, has nothing to say about whether or
not it was a consumable. It functioned perfectly well
at the end of the contract as it did at the beginning

of the contract.

(Continued on page 11)

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MR FLETCHER (continuing):  In fact, the joint venture

agreement which is in evidence allowed for the
prospect that there may well be further contracts
but there were not other than an extensionless
contract when the SECWA decided to put out some

radial lines and there was an extension. If there

had been more extensions it could have gone on

indefinitely, it could still be generating. So that,

to say that because it happened, in this case, to

cease to have a useful life, this particular project

at a particular poin4 is really not to the point at

all. It nevertheless is precisely, in my submission,

what I described as a classical item of capital

asset, a profit yielding subject and - - -

McHUGH J:	I understand your answer.
BRENNAN ACJ:	The problem about that, Mr Fletcher, is this, is it not, that if you regard it as a profit yielding
asset, capital in nature, then the commercial
transaction which you seek to describe is one where
a person voluntarily pays money to another to
produce a capital asset?
MR FLETCHER:	Yes, of very rare occurrence.
BRENNAN ACJ:	Full stop.  In other words, we bifurcate that

agreement and we say one part of it deals with a

canital item and one part of it deals with an income

item and that it is incorrect to regard it all as a

single profit making venture.

MR FLETCHER:	Yes, indeed.
DAWSON J:	In other ~~ds, you say what they said. is, "Welll give you the

plant if you' 11 coat the pipes". .

MR FLETCHER:  Yes, but what must be appreciated, Your Honour,

is that in that that, "We will pay you the cost of

this plant. You build it at cost, we'll pay you

the cost provided that, of course, you use it to

coat our pipes".	If it was the case and the
ability was there that the contract was terminated

or cancelled at that point and if you regard it

as assessable income then you would have the

company, the appellant, left with an income tax

assessment on $4.6 million and nothing else; no

opportunity to use it to generate income.

DAWSON J:  It was a situation in which no one was going to

build a plant there unless there was some such

arrangement because once the contract was finished

it was likely to be useless. Is that right?

MR FLETCHER:  Likely to be, yes.

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DAWSON J:  So that, someone had to provide the wherewithal

to coat the pipes.

MR FLETCHER:	Yes.
DAWSON J:	And, in this instant it was said well, it is the

proprietor that - or whatever you call it.

MR FLETCHER:  No, the State Energy Commission of WA,

yes.

DAWSON J:  Yes, the State Energy Commission, because, if

they did not do it, no one would do it, perhaps

that is the situation I am faced with.

MR FLETCHER:  Yes, but furthermore, if they had so chosen

the evidence is quite clear they could have

retained ownership of that plant.

DAWSON J:	Why did they not?
MR FLETCHER:	Because it was a politcal embarrassment to

them and that is also in the evidence. You see,

Your Honour, the alternative would have been to have done more or less what has been done in

relation to the patra::hemical plant in this State

and that is for the government to contribute the

capital in a different form, namely, as share

capital. And, the advantage of that is that the

contributor of the capital quite commercially sensibly retains the right to profit from the

application of that capital. This is a most unusual

case where the capital is given for the creation

of the plant because then they will get something

that they want, namely, the pipe coated, but they

right it off, it is gone. It comes through very

clearly from the evidence, as far as the State

Energy Commission was concerned, this was simply part

and parcel from their point of view of getting what

they wanted, namely,	out of a $650 million
contract, $4. 6 million for the plant to get the pipe
coated was of no concern and, furthermore, it	·

meant that at the end of the day they could not be seen to be holding shares in a company which had

a useless - the description in the evidence is "a

white elephant'plant sitting out at Narngulu

near Geraldton.

DAWSON J:  Well, it was sold for something at the end, was

it not?

MR FLETCHER:  It was, indeed, and this is a very important

aspect. If it was regarded as assessable income,

the fact of the matter is the money had to be applied

in the creation of this plant. The plant was

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immediately, it was erected, worth nothing more
than scrap value. It would completely distort

the whole reflex to say that that is assessable income if you are looking to find the profit or gain that underlies a notion of income and the

reason for assessing tax upon the income.

DAWSON J:  Is the answer why the State Energy Commission

did not want to retain ownership and have the

company operated, that the amount was minimal,

insigificant and - - -

MR FLETCHER:  Well, there is no evidence to say that they

considered it to be insigificant.

DAWSON J:	What was it, in the end?
MR FLETCHER:	There is evidence to the effect that the

overall cost of the pipe project was $650 million

and they accepted, and the evidence is clear,

that they would have to incur the cost of providing

this plant to the appellant if they were going to
get the appellant to coat the pipe and they were

prepared to accept that. They did not, for

political reasons apparently, and also as -

DAWSON J:	What was the plant sold for at the end?
MR FLETCHER:	$550,000, Your Honour.
DAWSON J:	Which was a minimal amount.
MR FLETCHER:	The plant, of course, I should point out, was

built on leased land. You see, it is the government

providing funds to a company which it wants to contract with it, to create an assett to their

mutual advantage, a la BOYCE V WHITWICK COLLIERY,

on land which was leased from the government. It

is not a normal situation at all and it is not

the sort of situation that could recur with any

likelihood because no commercial organization is

going to hand out capital like that without either

retaining ownership of the asset the capital is

turned into or retaining a right to receive a flow,

a return on the application of that capital by way

of profits. So that, in examining the cases,

apart from the APA case, I cannot find any

significant cases that do not involve government-type

invo 1 vemen t.

DAWSON J:  Well, now, I am still sure I understand why the

State Energy Commission did not retain ownership
if only to receive the $500,000 in the end which was

received from. the sale of the plant.

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MR FLETCHER:  Your Honour, there is no evidence that

explains adequately why it did not; it simply did not.

The representative of the State Energy Corrunission

who gave evidence, Mr Fluor, simply said that, "We

are not in the business of coating pipe"; that

was his answer.

DAWSON J:	They are in the business of owning property.
MR FLETCHER:	Yes, but property which generates some sort of

a return and, I think, that they wanted the pipe

coating plant to be constructed here in Western

Australia. There was a demand that there be

Western Australian content. For political reasons,

the evidence says, they required that the plant be

constructed here, and also because it was better

• for them in the sense that they could keep a far

closer watch over the construction of the plant;

they had their own facilities at the plant; a

10-man office was set up there. They wanted that

sort of involvement. It was very much a joint

venture in that sense.

DAWSON J:  Well, was it an inducement.to the joint venture to

enter into the contract, this arrangement?

MR FLETCHER:  No, Your Honour, it was a requirement of the

joint venturer, that is to say the appellant, that

this plant be provided. It might have entered into

a contract on a different basis if it could not

have arrived at that arrangement but the fact of

the matter is that from the very beginning it

wanted that arrangement; it wanted the plant to be

paid for by the State Energy Corrunission and it

succeeded in getting it paid for. It was only of

any use to it to operate, to produce, and the whole

thrust of the contract and all surrounding documents

is that it is a pipe coating contract; it is a pipe

coating project. This is a necessary prerequisite

before we can even get into the activity of coating

the pipe, the essential activity. If I might just

point out, Your Honour, that there is no apparent

problem for the Corrunissioner of Taxation in relation

to grants of this sort and if I could refer to an

income tax ruling and I appreciate they do not have

the force of law but, nevertheless, an income tax

ruling - - -

BRENNAN ACJ:  Is that going to assist us very much in the

characterization of this receipt?

MR FLETCHER:  In relation to the point raised by Justice McHugh,

in practical terms it may. In practice there is no

difficulty, the Corrunissioner finds, with payments

by government organizations and instrumentalities

as contributions to capital assets and in the case

P 1 T 13 / 4, / JH	14	26/10/89
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of IT2308 it was a contribution of an estimated

amount for a company, the creation of a building,

which it would use to train apprentices to its

own benefit and also because it was considered to

be politically and, in terms of the corrnnunity, good,
beneficial. Furthermore, not only was it an

assessable income but there was no difficulty

whatsoever with depreciation deductions being

claimed in respect of the premises. So, it is not

a massive stumbling block; the only major concern

that might properly be felt is that there is no

opportunity arising from the application of this

principle for persons to transform what would

otherwise be assessable income into apparent capital

receipts.

McHUGH J:  What I do not follow - supposing you had to build

road~ or railway lines to carry the pipes and so on

and so it is a purely one-off contract, one-off

expenditure and it has got no benefit, .from your

not, where expenditure of building a road or building a railway line for the purpose of carrying these pipes?

point of view, outside this particular contract.

MR FLETCHER:	Well, Your Honour, if it was the case that that sort of thing was,. in. the authorities, accepted as
being a capital, I am sorry, a revenue outgoing,
then I could see no great difficulty. But, it has not been; it is regarded as being in a particular class.
The class is that of an asset of the type which
endures.  Now, if it so happens that you get a short
lived benefit from that asset, accelerated depreciation
deductions to some extent could be said to ameliorate
that but, nevertheless, it is a capital asset; it is
capital expenditure.  And, consequently, you cannot
expect and you will not succeed in obtaining a
deduction and, in my submission, although we are
talking about the practice of the Corrnnissioner, it
would not be proper, it would not be appropriate;
of capital things; things which do tend to endure
it is contrary to the authorities. It is of the class
whether or not you happen to have much of a use for it.
DAWSON J:	The payment by the State Energy Corrnnission is

really in the nature of a subsidy - that is the way

you are putting it, that it is a function of government

to do that - and really says nothing about the

nature of the expenditure of the sum.	You look to
other factors to determine that.

MR FLETCHER:  Yes, indeed. The fact of the matter is that

in this case not only was it - it happened to be a

capital outgoing by the State Energy Corrnnission

because it was an outgoing outlaid for the creation

of this massive, enduring asset.

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DAWSON J:	But, we are not worried about how they .....
MR FLETCHER:	No, that is really quite -
DAWSON J:	It really was a subsidy.
MR FLETCHER:	- - - irrelevant. Yes,and a subsidy will be

assessable if it fills a hole in income or

if it compensates for a revenue outgoing.

DAWSON J:  Yes. You say this was not those?

MR FLETCHER:  No, it is neither of those and the authority

which deals most adequately with that is

RECKITT & COLMAN PTY LTD V FEDERAL COMMISSIONER OF

TAXATION, 74 ATC 4185. If I could ask Your Honours

to turn to the third page of that decision and

half-way down the third page, the paragraph

commencing:

Where the amount is received by reason of

facts which arise in the context of the

business operations of the taxpayer,
several factors have been referred to as

relevant in determining the nature of the

amount received.

Your Honours, if I could pause there for a moment,

the statement is that:

Where the amount is received by reason of facts

which arise in the context of the business

operations -

then, one has to look at, what is its character?

The significance of that passage there is that

what is it? Then, down to the last sentence of that paragraph after:

the business context is by no means conclusive. well,

Brisbane Amateur Turf Club -

it refers to that as being: 

a case in which the payments made were

not calculated by reference to or
apportioned to any particular aspect of

the taxpayer's business activities.

Where the amount of subsidy is paid

by reference to the acquisition or the

reinstatement of an asset which qua the

particular taxpayer is a capital asset, the

amount may be held to be not of an income

nature.

PlT13/6/JH	16	26/10/89
Pipecoaters(2)

And, the example given there is WATSON V SAMSON BROS and I could also cite SEAHAM HARBOUR DOCK CO V CROOK,

(1931) 16 TC 333, another government subsidy-type

case and then down to the next paragraph:

However, where the subsdidy paid is

calculated by reference to profits made

or not made or is paid to make good the
deficiency in the normal profits which the

taxpayer would ordinarily have been

expecting to make, these circumstances

have been seen as supporting the conclusion

that the subsidy is of an income nature.

Over the page there is a reference to a series of cases and the statement in a case

CHARLES BROWN & CO VINLAND REVENUE, cited at the

bottom of the page there, the Master of the Rolls

referred to various cases and he referred to:

the effect of the significance of the item
in respect of which the payment was received
in the structure of the taxpayer's
business upon the categorization of it for

tax purposes.

In relation to the appellant:

the effect or the significance of the item

in respect of which the payment was received -

in its business structure was everything. Without

that, it had no business structure; it could not

coat a single pipe; it could not carry on business
in a systematic regular fashion, albeit for only

two or three years in relation to that as it turned out.

Without taking Your Honours to the specific

passages, there are references in that case also to

the manner in which the amount is calculated and the

point is that in HIGGS V WRIGHTSON, for instance,

which is there referred on occasion, the grant was:

calculated by reference to the area

ploughed.

And, that gave an indication that it was a revenue

compensating grant. But, where it is calculated

by reference to capital cost incurred, which is precisely the position in this case and was the position in APA FIXED INVESTMENTS and was the

position in BOYCE V WHITWICK COLLIERY, it took on

the character of the asset; it was capital in

all of those cases.

Pl T13 / 7;' JH 17 26/10/89

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BRENNAN ACJ:  Well now, the argument on that line is a

fairly simple one, is it not, and that is that

here is a capital asset; this was money that was

paid in respect of the construction of the capital

asset, ergo, it is capital? I mean, that is the

proposition is it not?

MR FLETCHER:	No, Your Honour.
BRENNAN ACJ:	Tell me where it is wrong.
MR FLETCHER:	What is missing from that postulation is that

the money was required to be spent on that capital

asset.

BRENNAN ACJ:  Well then, add that into it. Here is money

which is being paid from A to B; Bis to spend it

on constructing a capital asse~ that is an asset

which is capital in B's hands; here is an asset

which is capital in B's hands, therefore, the payment

is the capital nature.	The receipt is of a
capital nature.

MR FLETCHER:	Yes, and the outgoing by the recipient.
BRENNAN ACJ:	By the recipient. Well, now, in order to make

each of those steps good, one has to look, I take it,

at the contract itself?

MR FLETCHER:	Yes.
BRENNAN ACJ:	And, therefore, we find the character of the

payment in two primary facts. One is the contract

and the other is the nature of the plant in the

carrying on of the pipe coating business.

MR FLETCHER:  Yes, and more particularly, that it enabled that

business to commence.

BRENNAN ACJ:  Of course, yes. Well now, if one looks at

the contract, one finds, as you say, th~t they are

required to spend it on that project and one also

finds, does one not, that the recipient, the taxpayer

is bound then to devote the capital asset to the
operation of the business of coating pipes? Why is
it that the payment which is made is not made in
consideration of the construction of the plant and

the utilization of it in the coating of pipes?

MR FLETCHER:	For the same reason that payment in APA FIXED INVESTMENT TRUST was not entirely rent.
BRENNAN ACJ:	If you would just give me an answer in principle rather than by reference to authority, I would
be helped, I think,because it seems to me that if one

PlT13/ 8/ JH	18	26/10/89
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character, one must look at the contract as a	looks at the contract in order to give it the
whole and not simply look at some clauses of it.

MR FLETCHER: 

I accept, Your Honour, one must look at the

contract as a whole but in so doing one must
ascertain what does a contract require and there was
a requirement, an obligation, that the plant be

built with the money provided.  And, yes, there was

an obligation that that plant then be used to coat the pipe and subject to the State Energy

Connnission terminating that contract, which it could

do at its will under the terms of the contract,

and in the event of default the plant went back to
the State Energy Connnission, it had the right to
take it over by means of taking over the lease.

BRENNAN ACJ: 

Does that not rather make the point that the

payment was made so far as connnercial sense is

concerned in order to secure the undertaking of the

tax~yer that it would utilize this plant which

was to be constructed in the coating of pipes?

MR FLETCHER:	In a sense, Your Honour, I would accept that in that certainly it was a term of the contract
that unless the payment was received then the appellant would not coat the pipes; it could not coat the pipes. But, with respect, Your Honour, if that suggests that it is a payment for a service or a payment for doing something - - -
BRENNAN ACJ:	No, it is a payment for a connnitment to do

something. In other words, it is not simply, "Here

is the money to build something for yourself", it is

not a simple subsidy, it is a payment in order to
secure the commitment of .the asset of the taxpayer

to the work of coating pipes.

MR FLETCHER:  But, Your Honour, I have difficulty understanding

why that would make any difference to the situation
where it is a simple gratis gift or subsidy with
which, although you are required to use it in a

certain fashion, that there is then no further tie.

BRENNAN ACJ:  I suppose the answer to your question, my

question might be, if the contract was simply,

"Here is $100,000 in consideration of your

undertaking to provide over a period of time the

services which I require", would that be a capital

or an income receipt?

MR FLETCHER:	It would be an income receipt.
BRENNAN ACJ:	Well then, why is this not an income receipt?

Here is a payment of $4 million in consideration

of a taxp~yer undertaking to utilize its plant

for the coating of pipes.

P1Tl3 / 9/ JH	19	26/10/89
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MR FLETCHER:  With respect, Your Honour, that is not what

the contract says.

BRENNAN ACJ:	Is it not?
MR FLETCHER:	No, it was a payment to the taxpay~r designed

to reimburse the cost. It was not paid to

the taxpa~.7er: as an incentive to do anything.

BRENNAN ACJ:	Well, where are the terms of the contract; is that where we should look to? Perhaps I should ask you
first,  is the contract a relevant source of·
the understanding of the character of the payment or the
do you look elsewhere apart from that in the
nature of the plant itself?
MR FLETCHER:	All of the authorities, Your Honour,

distinguish between a situation where there is a

payment for something to be done, a service to be

provided, goods to be produced, and a payment

particularly in the case of, for instance, where

there is a tie such as the OIL COMPANY cases

where the payment is for expenditure, to reimburse

expenditure on a capital asset, the existence of
which and the use of which will inure to the

benefit of the payer, the initiator of the

transaction. Throughout the authorities there has

been no difficulty with the distinction between

that and the idea of income flowing from the

carrying on of business with that asset. The

contract provides that, in this case, the

appellant will coat the pipe and it will receive

certain agreed sums for doing that. The contract

also obliges the appellant to provide certain
things and the evidence is that the appellant said

that it would not provide· those things unless they

were paid for by the SECWA and those things

in aggregate amounted to the plant. So that, I

cannot, Your Honour, accept that it is correct to

characterize the contract as providing that that

payment is in any way an inducement in the sense

in which the word is normally used.

BRENNAN ACJ: 

My proposition to you was that apart from the

consideration for the payment, is the undertaking
to utilize the plant in that way and that is a
matter of construction @f the contract.

MR FLETCHER: 

Yes, it is and His Honour Mr Justice Pidgeon

and the Federal Court have not construed the

contract in that way. It seems to me to be
reading into the contract something which is not

apparent at all in that the contract is fairly

precise and fairly clear as to what will be done and

what will be paid for for which thing.

I cannot quarrel with the suggestion, Your Honour,

P 1 T 13 /1 O' JH	20	26/10/89
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that it in a sense amounts to an inducement in
that one would not do it because one says, "I will

not do it, I cannot do it	unless you provide
the means for me to do it.	I am prepared to

cause the plant to be constructed but you are to

pay for that and then we'll carry on business".

In that sense it might be said that the payment is

in some way with respect to the fact that the plant

will be used but it is rewriting the contract in

the sense that that is not what it provided.	I am
happy to, Your Honours, go through the contract
now if that would suit.

BRENNAN ACJ:  Perhaps tomorrow if you think it is necessary.

We shall not, I hope, delay you unduly as we have,

perhaps, this afternoon. Mr Fletcher, we will

adjourn until 9.15 am tomorrow morning.

AT 5.07 PM THE MATTER WAS ADJOURNED

UNTIL FRIDAY, 27 OCTOBER 1989

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