Marbut Gunnerson Industries Pty Ltd v Commissioner of Taxation

MARBUT GUNNERSEN INDUSTRIES PTY. LTD. v. FEDERAL COMMISSIONER OF TAXATION
(1982) 60 FLR 241
Income Tax

COURT

IN THE FEDERAL COURT OF AUSTRALIA

GENERAL DIVISION
Fox(1), Davies(2) and Lockhart(3) JJ.

CATCHWORDS

Income Tax - Allowable deductions - Acquisition of right to fell standing timber - Deduction under s. 124J - Proportion of sums paid to acquire right attributable to year of income - Construction of s. 124J - Income Tax Assessment Act 1936 (Cth),s. 124J.

HEADNOTE

Each of the taxpayers purchased a separate sawmill business. The vendors to each taxpayer had licences to fell timber from the Victorian Forests Commission. As was its usual practice, the Commission terminated the vendors' licences and granted new licences to the purchasers. Each of the taxpayers claimed a deduction under s. 124J of the Income Tax Assessment Act of the amounts paid as part of their respective purchase prices to the vendors for the right to fell timber. In the case of the first taxpayer, the vendor to it contracted to attempt to procure the issue of a new licence to it. McGarvie J. of the Supreme Court of Victoria held on the basis of another first instance decision, Victree Forests Pty. Ltd. v. Federal Commissioner of Taxation (1977), 7 ATR 575, that the payment by the first taxpayer to its vendor was not deductible because it did not acquire a right to fell timber from the vendor. In the case of the second taxpayer, the vendor to it had a contractual right to its licence. On this basis, so much of the second taxpayer's payment to its vendor as related to the existing licence was held deductible by McGarvie J. The first taxpayer and the Commissioner appealed.

Held, appeals allowed, that s.124J should not be given a narrow construction. If sums are paid to acquire rights to fell timber, then that is sufficient to provide a deduction under the section. Both taxpayers had paid such sums. The appeals should be remitted to the Supreme Court to determine as matters of fact which parts of the sums paid were attributable to timber to be felled during the relevant year of income, and were hence deductible.

HEARING

1981, Melbourne, November 26-27; 1982, February 8; May 4. #DATE 4:5:1982

APPEALS

Appeals from the decisions of McGarvie J. of the Supreme Court of Victoria disallowing the first taxpayer's appeal against the disallowance by the Commissioner of its objections in respect of the years of income ended 30th June, 1973 to 1976, and allowing the second taxpayer's appeal against the disallowance by the Commissioner of its objections to assessment in respect of the years of income ended 30th June, 1973 to 1975.

B.J. Shaw Q.C. and N.J. Webb, for the appellant Marbut Gunnersen and the respondent Monaro Sawmills.

J.M. Batt Q.C. and J.W.K. Burnside, for the Federal Commissioner of Taxation.

Cur.adv.vult.

Solicitors for the appellant Marbut Gunnersen: R.W. Lloyd & Co.

Solicitors for the respondent Monaro Sawmills: Abbott Stillman & Wilson.

Solicitor for the Federal Commissioner of Taxation: B.J. O'Donovan Commonwealth Crown Solicitor.

J.H. TELFER

JUDGE1

May 4

The following written judgments were delivered.

Fox J. We are hearing together two appeals from the Supreme Court of Victoria which raise the same questions of law. McGarvie J. heard taxpayers' objections in both cases, one following the other, but appreciating their close similarity he eventually delivered one set of reasons embracing both (1981) 55 FLR 49. in Marbut Gunnersen Industries Pty. Ltd. v. Federal Commissioner of Taxation he dismissed the appeal to him, but in Monaro Sawmills Pty. Ltd. v. Federal Commissioner of Taxation he allowed objections related to two of the three years in question. The result is that in one case the taxpayer is the appellant, in the other the Commissioner of Taxation. At the opening of the appeals a document was handed up by consent, the short effect of which is to show agreement between the parties that although the taxpayer failed in one case, there were present in that case the circumstances which had led the learned judge to decide in favour of the taxpayer in the other. This was I think largely intended as a concession of fact, made on behalf of the Commissioner, but it appears that most or all of the material in question was before his Honour. It was not at the time relied on as being particularly significant. At all events, it is now clear that for the purposes of the questions which arise, the facts are closely similar.

The questions before us concern the construction and application of s. 124J of the Income Tax Assessment Act 1936, which is and was at all relevant times as follows:

"Where -

(a) a taxpayer has acquired -

(i) land carrying standing timber and part of the price paid for the

land is attributable to that timber; or

(ii) a right to fell standing timber; and

(b) during the year of income, the whole or a part of the timber is

felled -

(i) for sale, or for use in manufacture, by the taxpayer for the

purpose of producing assessable income; or

(ii) in pursuance of a right to fell timber granted by the taxpayer

to another person in consideration of payments to be made to the taxpayer as or by way of royalty,

so much of that part of the price so paid by the taxpayer to acquire the land, or so much of the amount paid by him to acquire the right, as the case may be, as is attributable to the timber felled during the year shall be an allowable deduction."

The taxpayers each paid substantial sums to the holders of timber logging licences granted under the Forests Act 1958 (Vic.) (see s. 52). The amounts were paid under written agreements, which provided for the sale of sawmills and other property to them, and for the sale to them of the vendor's logging rights. I shall deal in due course with distinctions in the language of the agreements. A substantial part of the consideration in each case was for the logging rights. In the case of Marbut Gunnersen it was expressly stated that the price was not apportioned. In the case of Monaro Sawmills the amount for the logging rights was expressly apportioned at $240,000.
Under the Act, the rights given by the licences were transferable, but only with the authority of the Forests Commission. A licence related to a particular area and was for a maximum stipulated amount of timber of a stated type or types. Many conditions were attached. The invariable practice of the Commission was not to consent to a transfer, but, in effectuation of agreements such as we are considering, to grant a new licence for the unexpired period of the existing licence, on the same terms, so far as they remained appropriate for the period. Under the Act, a licence cannot be granted for more than three years. Renewal is discretionary and the new licence may be granted on different terms. However, it is highly probable that a fresh licence will be granted provided that conditions of the licence have been performed satisfactorily, and the situation concerning available timber is suitable. Concurrent licences to fell (and remove) timber can be granted for the same area, but this would in practice only be done without limiting existing rights and operations. In the present cases, the Commission issued documents saying that it would not issue concurrent log licences and it seems that this undertaking is commonly given. I shall return to consider the statement in question, as it formed a fundamental basis upon which the learned judge decided in favour of Monaro Sawmills. A concurrent licence may be granted for some purpose other than felling (for example, removing stones or soil). A licence can be cancelled for breach of conditions, but only with the Minister's consent. No express provision is made for the surrender of a licence. No fee is charged for the grant of a licence, but royalties are payable under it. In some cases (of which the present are not examples) the Commission may formally note on the licence that, subject to the Forests Act and to the availability of log supplies, it will continue to grant licences to licensees for a further stated period.
In substance, the first submission on behalf of the Commissioner is that, the payments having been made to the previous licence holders, and the licences having been granted by the Commission, amounts have not been paid by the taxpayers to acquire (their rights) within the meaning of s. 124J. If s. 124J applies, a further question arises as to what amounts can be deducted, and in what year or years.
The agreement with Monaro Sawmills was made on 29th September, 1972; that with Marbut Gunnersen on 1st February, 1973. Relevant clauses of the agreements were as follows:
MONARO SAWMILLS - "1. The vendor agrees to sell to the purchaser and the purchaser agrees to purchase from the vendor all the right, title and interest of the vendor in the timber milling machinery plant and equipment and chattels at present being used by the vendor at its mill site at Goongerah in the State of Victoria and more particularly set out in the schedule hereto (hereinafter called 'the chattels') and together with the vendor's right to fell timber under log licence L1060 issued by the Forestry Commission of Victoria which licence is dated 3rd December, 1970, for the total price of $254,000....6. On the date possession of the chattels is given and the property therein passes to the purchaser (herein called 'the date of settlement') the vendor shall deliver to the purchaser such signed documents as may be required to enable the purchaser to apply for the transfer into its name of the log licence L1060 above referred to .... 14. This agreement for sale is conditional upon the subject to the Forests Commission of Victoria issuing to the purchaser the rights and benefits now held by the vendor pursuant to log licence L1060 hereinbefore referred to and should for any reason the said Forestry Commission refuse to issue to the purchaser the benefits held by the vendor under such licence then this contract of sale shall be null and void and all purchase moneys paid hereunder shall be refunded to the purchaser in full. Both the vendor and the purchaser shall apply to the Forests Commission of Victoria to have the rights and benefits conferred by the aforementioned licence issued to the purchaser....16. It is agreed between the vendor and the purchaser that the apportionment of the purchase price under this agreement shall be as follows: (a) for the goods listed in the schedule hereto the sum of $14,000; (b) the right to fell timber under log licence L1060 the sum of $240,000."
MARBUT GUNNERSEN "1. The vendor hereby sells to the purchaser and the purchaser hereby purchases from the vendor the following assets of the vendor's timber milling business carried on on the demised premises at Mansfield as aforesaid namely - ....(d) The right, title, interest and benefit (if any) of the vendor in and to the log licence held by the vendor from the Forests Commission a copy of which is annexed hereto. 3. (a) The purchase price payable pursuant to this agreement for the said assets shall be the sum of $160,000 and the same shall not be apportioned between the parties hereto....7. This agreement is conditional upon each and every one of the following - . . . . (d) The consent of the Forests Commission to the transfer of the vendor's log licence and timber allocation to the purchaser on the same terms as at present held by the vendor and/or the grant by the Forests Commission to the purchaser of a new or substitute log licence and allocation on the same or not less favourable terms. . . . 10. It is acknowledged between the parties hereto that the purchaser with the concurrence of the vendor took possession of the vendor's timber mill in contemplation of the execution and finalization of this agreement and commenced to operate same on 18th December, 1972, but such possession shall not in any way be or be deemed to be a waiver of any of the conditions and warranties set forth in this agreement or of the rights of the purchaser with respect thereto . . . . 13. Subject to the concurrence of the Forests Commission to the assignment of the vendor's log licence to the purchaser and/or to the grant by the said Commission to the purchaser of a substitute log licence as aforesaid, the purchaser shall be entitled to a full log allocation for a period of twelve months commencing 1st October, 1972, which is referred to in the annexed royalty agreement, and the purchaser shall be responsible for the payment of all royalties in that period pursuant to the royalty agreement. In the event of the vendor having prepaid any such royalties or any amount on account of such royalties, the amount so paid shall be refunded by the purchaser on settlement . . . . 17. (a) The vendor has the right which is conferred by the said log licence from the Forests Commission to cut and take away logs for sawmilling purposes to a volume of 3,200,000 super feet Hoppus log volume per annum of the specie common eucalpyts in the Mansfield forest district.. . . (c) The Forests Commission estimate is that this rate of extraction can be maintained for ten years; the estimate of standing timber to be felled is thus 32,000,000 super feet, but the vendor makes no warranty either as to such rate of extraction of the estimated amount of timber to be felled."
There were licences current at the times of the respective agreements and these were due to expire on 30th September, 1973. The licensing year seems to have commenced on 1st October in each year. The agreements plainly contemplated that the respective purchasers would secure further renewals of the licences in favour of themselves. In each case, on the joint request of purchaser and vendor, a fresh licence for the balance of the term expiring on 30th September, 1973, was granted to the purchaser for the same purpose and on virtually the same terms as the vendor had held the licence, but only for the balance of the timber permitted to be felled under the licence to the vendor. Renewals for three years were thereafter granted to the purchaser in both cases. In the case of Marbut Gunnersen a further renewal for three years, to 30th September, 1979, was granted. The first three-year renewals (1973-1976) were for the same volume and species of timber (although the question of species is not entirely clear in the case of Monaro Sawmills), to be felled during the same annual periods, as the licences which had at the time of sale been held by the vendors, but the sub-areas ("cutting sections", or "compartments") would seem to have been different in part in the case of Marbut Gunnersen and completely different in the case of Monaro Sawmills.
In Victree Forests Pty. Ltd. v. Federal Commissioner of Taxation (1977) 7 ATR 575., which the learned judge followed, the taxpayer agreed to purchase timber logging licences in Victoria for $100,000. The Forests Commission would not agree to transfers, but issued fresh licences to the purchaser, in much the same way, and apparently following the same practice, as occurred in the present case. It was contended on behalf of the Commissioner of Taxation that for an amount to be deductible under the section the payment had to be as consideration for the acquisition of the right, and the amount had been made, or promised, for a transfer which did not take place. Jenkinson J. did not accept this submission wholly. As a matter of analysis of what had taken place he concluded that, after the agreement for transfer, there was, in deference to the Commission's policy, a second agreement in which, for the payments already agreed, the vendor would consent to the termination of his licence and the taxpayer, as purchaser, would agree to the acceptance of a fresh licence. He considered that the "right" to which the section referred need not be of a proprietary nature. It could be contractual, and payment need not be made to the only person competent to grant the right, but might be made to the person for the time being enjoying it under a contract. He instanced the case of novation of a contract, the benefit of which was not assignable without consent. The learned judge, following this reasoning, then stated the following conclusion: "If the words of the section do not require that the amount paid should have been paid as the whole or part of the consideration for the right acquired, as to which I express no opinion, they do in my opinion require, at the least, that the amount paid should have been paid in consideration of something without which acquisition of the right in fact acquired would have involved breach of the law, civil or criminal, or paid in satisfaction of a statutory exaction which precludes acquisition of the right except upon compliance with its requirements" (1977) 7 ATR, at p 584. (The emphasis is mine.) He allied this statement of principle with the facts of the case: "There is nothing in the evidence before me to suggest that the licences granted to the appellant could not without any breach of the law have been granted at any time while the licences held by Timber Products remained in force. My conclusion therefore is that, upon the construction I have proposed, no part of the $100,000 which was paid by the appellant to Timber Products was within the meaning of s. 124J 'an amount paid . . . to acquire' any of the rights which the appellant acquired upon grant to it by the Commission of the licences issued on 3rd September 1969" (1977) 7 ATR, at p 584. His Honour then dismi ssed a further submission that the taxpayer had, under the original agreement, acquired a right to fell timber, the argument being that the vendor was to be its agent pending approval of the transfer of the licence.
In the case in which McGarvie J. decided for the taxpayer (Monaro Sawmills), he found an agreement by the vendor licence holder with the Commission that the latter would not permit anyone other than the former (or its assignee) to fell timber on the sites. He then held that this view did not conflict with the decision of Jenkinson J. in Victree Forests' case, which he felt obliged to follow, and that the terms of s. 124J were satisfied. He allowed deductions for the two taxation years during which the fresh licence subsisted (this period being the residue of that earlier granted, under a different licence, to the vendor). In accordance with the agreement of the parties, he did not settle the amount of the deductions, but held that only timber felled during the period of the new licence was to be taken into account in calculating the deductions. For reasons already explained, the question of a similar contract in the Marbut Gunnersen case did not arise.
Before the learned judge, the taxpayers submitted, to use the judge's words, "that in both its ordinary and its strictly grammatical meaning the expression 'so much of the amount paid by him to acquire the right' refers to an amount paid in order to acquire the right or for the purpose of acquiring the right". His Honour preferred this construction of s. 124J to that then contended for by the Commissioner but for reasons he gave considered he should follow the construction adopted by Jenkinson J. in Victree Forests' case. The passage from the latter's reasons for judgment which I last cited then becomes of importance.
His Honour held that s. 52(1) of the Forests Act contemplates that the issue of a licence can be associated with contractual terms and conditions. In the Monaro Sawmills case, as I have mentioned, he found an agreement with the Forests Commission which would have put it in breach of contract to grant the licence to Monaro Sawmills without the consent of the current holder, and vendor to it - Aberdeen Timber Company Pty. Ltd. (Aberdeen). The relevant term of the agreement is in cl. 4 of a document entitled "Information for Log Licensees" which, with other documents, was sent to Aberdeen affixed to the licence which it ultimately surrendered or allowed to be terminated. Clause 4 is as follows: "The Commission will not, without the licensee's agreement, issue a log licence in respect of a similar log type from the logging area to any other person or organization during the period of this, or any subsequent licence relating to such area, except - (a) in the event of failure by the licensee to cut and remove logs at the rate authorized by the licences issued; or (b) in respect of any timber which, in the opinion of the Commission - 1. will not be utilized by the licensee; 2. is likely, because of damage by fire or other cause to deteriorate before removal by the licensee; 3. is unlikely to be utilized by the licensee soon enough to satisfy silvicultural management, or protection requirements; or (c) to remove any species of timber other than the species named in the log licencee; or (d) where arrangements have already been made for another licensee to obtain logs from the logging area. Before issuing any such log licence, without the licensee's agreement, to any other person or organization, the Commission will allow the licensee a reasonable opportunity, not exceeding six months, to demonstrate his willingness and ability to utilize the timber concerned in a manner satisfactory to the Commission."

A document in the same terms was sent by the vendor to Marbut Gunnersen, namely J.H. Ryan & Sons. This fact and other surrounding circumstances were those I referred to at the beginning of these reasons as being conceded to the hearing of this appeal as the same in the two cases. In my view, the two appeals stand on the same footing with regard to the finding in relation to the agreement based on cl. 4.
On my view of the proper construction of s. 124J, and its application to the facts, it is unnecessary to form a concluded opinion as to whether there was in either case such an agreement as his Honour relied on.
The general purpose of the section is plain enough. It is to give a deduction in respect of a particular capital outgoing to the extent that in any year of income the capital asset acquired is consumed in gaining or producing assessable income. The problems are to determine the nature of the capital asset, if any, which was acquired, what was paid for it, and how one does the annual calculation for which the section provides.
Under the section, the capital asset may consist of land carrying standing timber, or a right to fell standing timber. It should not be assumed that land means a fee simple absolute in land; some lesser estates and interests will be included (see s. 22 of the Acts Interpretation Act 1901 (Cth)), and the fact of their inclusion gives some guidance as to the way the section should be understood. Also, the timber may be felled at any time after acquisition of the "land".
The taxpayer must first have acquired a right to fell standing timber. This, in one way or another, the taxpayers have plainly done. What is subject to the amortization allowance is part (or the whole) of the "amount paid . . . to acquire the right". The only amounts paid in the present case which are referable to the right acquired and in respect of which an amortization allowance can be claimed were paid to the vendors. The latter did not grant or assign any rights to fell timber. Nevertheless there can be no doubt on the facts, as the learned judge has held, that amounts were paid to acquire felling rights. These were a necessary accompaniment to the sawmilling businesses.
In ordinary language "to" in the context of "to acquire the right" means "in order to"; the former has become an acceptable abbreviation of the latter. This necessarily involves an inquiry as to the purpose of the payment. The payment must not only have the purpose, but must secure the necessary result. So there is a question of purpose and effect. It does not seem to me that one needs to, or should, invoke questions of consideration.
What is not required under the section is that the payee be the grantor of the right. In practical terms, or terms of policy, one might ask why it should. The capital asset is secured for payment made; it is thereafter depleted in trade. In the present case, payment was made to the respective vendors, and, with the active co-operation required of them, fresh licences were granted. It was not contemplated that the purchasers would fell timber under the existing licences to the vendors, operating in effect, as their sub-licensees. What was in contemplation was either consent to a transfer (this is what was first proposed to the Commission in the case of Monaro), or termination and a fresh grant. The existing licences were exclusive (see cl. 4 of the information document, set out above). Cancellation was not effected, nor could it be without grounds and the Minister's consent. Just as the Commission's consent was requisite for a transfer, so were the consents of the existing licensees to any fresh grants. The agreements to the terminations were expressly made on the basis of fresh grants. No payment to the Commission was necessary, and none was made. I have no difficulty in concluding that the payments were made in both cases to acquire the rights granted by the fresh licences. It is not a necessary part of my reasoning, but I should add that in my view the words in question should not be read in any closely analytical or technical sense. Rather are they explanatory of two ways in which payment may be made for timber rights, and possibly they comprehend all ways. The purpose of the section is clear enough.
In Victree Forests' case, Jenkinson J. implied a second agreement between vendor and purchaser, in partial substitution for the first and basic one, that in that case payment was to be for the vendor's acquiescence in the termination of his licence. To follow such an approach in the present case would in my view confuse the agreements with their method of execution.
As McGarvie J. found, it was expected by the parties that renewals of the licences would be granted, and the amounts paid were calculated on that basis. It also seems a reasonable conclusion that the Forests Commission expected that it would probably be granting renewals in due course.
It has been argued that in cases such as the present the deduction should only be allowed for timber felled during the period of the grant of the original (new) licence. The result would be that if the whole of the timber allowed to be felled under that licence was felled during the period of the licence, the whole of the amount paid would be deductible over that relatively short time. This may be a possible construction of the section, but plainly would be contrary to its evident policy as well as the commercial reality of the situation. What is more important, the section indicates that another construction, more consonant with good sense, is to be preferred.
It is in my view correct to say that the rights to fell which were acquired in these cases were only those under the original licences. This was simply because the vendors did not have it in their power to secure for the purchasers any further rights, and the grant of further rights, although probable, were discretionary. It is nevertheless the fact that the amounts paid by the purchasers greatly exceeded what would have been paid for felling rights under the initial grants and assumed renewals. It could perhaps be argued that the purchasers in fact acquired one or more renewals by the payments made, and this would be a fair factual assessment of the matter. I prefer to take the words of the section according to their ordinary meaning. The question which the section poses is whether, and if so to what extent, timber felled in a taxation year is attributable to the amount paid. The word "attributable" is important. It means capable of being attributed, and something is to be attributed to another factor if it happens or exists by reason of the latter, or is caused by the latter. The question thus raised is one of fact, to be decided in each taxation year in which a deduction is claimed. In the present cases, there could be little doubt that the amounts paid led by a fairly direct chain of causation to rights to fell timber beyond the term of the initial licences. It is therefore wrong to allow deductions during the period of the initial grants of the respective licences of the full amount paid, regardless of the amount of timber felled. The section does not provide for a deduction of the amount paid for the right, or the value of what is won under the right. The amount deductible is measured by what is attributable to the timber felled. The section deals with the exhaustion of the physical asset, and not the abstract right.
The calculation which the section requires forms part of the determination of fact. I do not think any fixed formula can be prescribed. Estimations and apportionments will often be involved, as they are in the present cases. There are at least two guidelines. One is the evident purpose of the section. Another is that in the ultimate no more than the amount paid can be deducted. In practice, the intention of the purchasers at the time of purchase as to the extent of the timber they were acquiring will probably be an important consideration. If, as was mentioned in Standard Sawmilling Co. Pty. Ltd. v. Federal Commissioner of Taxation (1974) 22 FLR 31., a purchaser has in mind that the amount paid will secure a perpetual or indefinite supply of timber, it may follow that the calculation in any year would produce a very small, perhaps a nil, deduction. If so, this would simply be because the asset acquired was not of a wasting nature, and no part of it was being used up in the production of assessable income.
It should not be thought that difficulties of fact, or problems of calculation are confined to the case of the acquisition of felling rights. The other case dealt with by the section, and to which the same words apply, is that of the acquisition of land carrying standing timber. Part of the price must be attributable (at some stage) to the timber, but questions have to be resolved as to the extent and nature of the timber, whether or not it was originally intended to be felled, what the position is if none is felled for many years, and possibly many other matters as well.
In the agreement of sale to Marbut Gunnersen it was stated that the purchase moneys were not apportioned. This does not bind the Commissioner, nor does it bind Marbut Gunnersen in its submissions to him. The provision does not assist in an application of the section, but it does not hinder it.
His Honour dismissed the appeal of Marbut Gunnersen, because no contract between the vendor to it and the Commission had been established. In relation to the appeal of Monaro Sawmills his Honour said:

"I have held that the taxpayer paid the sum of $240,000 in order to acquire the rights to fell standing timber contained in licence L1664 and succeeding licences. That was the purpose of the payment. However, under the construction of the section which I have adopted, the appropriate inquiry is not as to the purpose of the payment. Instead one asks: In consideration of, and exchange for what was the payment made? It was for, and only for, the consent of Aberdeen to the termination of its licence L1060 and to the grant of licence L1664. When the termination and grant were effected, the succeeding licences would be granted to the taxpayer as a matter of course, without any assistance from Aberdeen being needed. The $240,000 is therefore to be treated under the section as paid by the taxpayer to acquire the rights under licence L1664, and it is only in respect of timber felled in exercise of the rights under that licence that the taxpayer is entitled to an allowable deduction under the section: cp. Standard Sawmilling Co. Pty. Ltd. v. Federal Commission of Taxation.

"There was no argument before me as to the way in which amounts were to be attributed to the relevant financial years in the event of my reaching the conclusion I have, and if agreement is not reached, this may well be a question which the parties will wish to refer to me for further argument.

"The appeal by Monaro Sawmills Pty. Ltd. is allowed to the extent that I have indicated."
The order finally made shows that a deduction was allowed of $180,000 for the year ended 30th June, 1973, and of $60,000 for the following year. Although in this case his Honour found a contract, he otherwise felt constrained by the judgment of Jenkinson J. in Victree Forests' case in reaching his conclusion. For reasons I have given, I am not able to agree with the amendments to the assessments he proposed.
In my view the assessments should be reviewed in the light of these reasons. I would therefore propose that the appeals be allowed, the orders made set aside and the matters be remitted to the Supreme Court.
Costs are a difficult matter because both parties have been partially successful. The fresh material tendered, and the concessions made at the beginning of this hearing have not really affected the situation. I propose that in each case there be no order made as to the costs of the appeal. Costs of the appeals to the Supreme Court will be a matter for it.

JUDGE2

DAVIES J. I have had the opportunity of considering the reasons for judgement prepared by each of my brothers. I agree with each of them and with the orders proposed.

JUDGE3

LOCKHART J. I have had the advantage of reading the reasons for judgment of Fox J. with which I agree. I wish only to make a few general observations.

Section 124J permits deductions in respect of the exhaustion of wasting assets in the timber industry, namely, the right to fell timber which the taxpayer has acquired either by acquiring the land carrying the timber or by acquiring the right itself.
The section was introduced into the Income Tax Assessment Act 1936 in 1956. It replaced ss. 69 and 70 which provided:

"69. Where the taxpayer has acquired land carrying standing timber for the purpose of felling that timber for sale and part of the price paid for the land is attributable to that timber, so much of that part as is attributable to the timber felled in the year of income shall be an allowable deduction.
70. So much of the amount paid for a right to fell timber for sale as is attributable to the timber felled during the year of income shall be an allowable deduction."
Where the land and timber were bought (s. 69), if part of the purchase price of the land could be attributed to the timber, the amount so attributed was deductible from assessable income in proportion to the timber felled in each year of income. But the land on which the timber stood must have been acquired for the purpose of felling the timber for sale. Where a right to fell timber was bought (s. 70) the amount paid for the right was deductible in the years in which the timber was felled pro rata to the timber felled in each year. The sections overcame the decision of the Privy Council in Kauri Timber Co. Ltd. v. Commissioner of Taxes (1913) AC 771. where it was held that a taxpayer who carried on business as a sawmiller and timber merchant was not entitled to any deduction from the gross proceeds of its business in respect of the value of standing timber which it had cut because the cost of the acquisition of the right to fell timber on the land was a capital cost.
Section 124J enlarges the field or deductibility. Where the taxpayer acquires land carrying standing timber, it is no longer necessary that the purpose of the acquisitition be to fell the timber for sale. A deduction is available where timber is felled for use in manufacture by the taxpayer for the purpose of producing assessable income: for example sawmilling (s. 124J(b)(i)). A deduction is available for the cost of any timber or the right to fell timber where, instead of felling the timber himself, the taxpayer grants the right to fell it to someone else in consideration of the payment of royalties (s. 124J(b)(ii)).
Notwithstanding the removal of some anomalies with respect to the former ss. 69 and 70, the practical application of s. 124J can give rise to considerable difficulties. It does not specify the method of determining what part of the price paid for the land or for the right to fell timber is attributable to the standing timber. Nor does it prescribe the method of determining what part of the price paid for land attributable to the standing timber, or what part of the amount paid to acquire the right to fell it, is attributable to the timber felled during the year of income. Difficult questions of apportionment may arise.
There is no necessary correspondence between the times of acquisition of the land (or of the right to fell), of payment by the taxpayer of the price for the land or for the acquisition of the right to fell, of the felling of the timber itself, of sale of any of the felled timber - whether or not it is used in manufacturing processes or of receipt of any proceeds of sale of the felled timber.
The only stipulation as to time to be found in the section is that the timber must be felled during the year of income for which the deduction is claimed.
The circumstances in which a taxpayer may acquire land carrying standing timber or acquire a right to fell standing timber, and become entitled to a deduction under the section, are multifarious. He may acquire the land carrying standing timber or acquire the right to fell standing timber intending at the time of acquisition to fell all or only some of the timber. He may not direct his mind to the question of felling timber at all; for example he may intend to use it for grazing purposes and to retain the timber to provide shade and shelter for stock. Later he may change his intended use of the land for any one or more of a variety of reasons. The timber may become valuable due to increased market prices; the particular species may prove rare and in high demand; or, over the years after acquisition, the timber may grow and become millable whereas previously it was not. These are only some of the numerous possibilities.
The taxpayer may have agreed with the vendor of the land to apportion the purchase price between the timber and other property purchased including the land, plant and equipment. This in fact happened in the case of Monaro Sawmills. Yet the taxpayer may not apportion the price payable between timber and other property purchased or, as in the Marbut Gunnersen appeal, expressly agree not to apportion at all.
I mention these matters because they give some indication of the many and diverse circumstances which may attract the deduction afforded by s. 124J; and hence demonstrate the desirability of a practical and sensible construction of the section.
In ordinary language the words "paid by the taxpayer to acquire the land or . . . paid by him to acquire the right . . ." mean paid in order to acquire it. There is no necessity to introduce notions of consideration. This meaning permits the availability of the deduction in each of the circumstances mentioned earlier provided, of course, that the other requirements of the section as to deductibility are satisfied. The availability of the deduction in such a wide variety of cases is consonant with the evident purpose of the section, namely, to permit the deduction of the cost of acquisition of wasting assets in the timber industry to the extent that those assets are diminished in gaining or producing assessable income in any year of income. The section allows what is really a sinking fund deduction in respect of an amount paid either to acquire land carrying standing timber or a right to fell standing timber.
It is as well to remember that State legislation primarily governs the logging of timber in Australia; and it varies from State to State as do the practices of the various State timber authorities. These variations in legislation and practice are inevitably reflected in the particular means adopted by vendors and purchasers of logging rights to give effect to their disposition. This calls for no narrow or technical construction of the section; but one which avoids anomalies and recognizes commercial realities.
I agree in the orders proposed by Fox J.

[1982] FCA 70

04 MAY 1982