Monier Colourtile Pty Ltd v The Commissioner of Taxation

[1984] FCA 362

Re: MONIER COLOURTILE PTY. LTD.
And: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
(1984) 2 FCR 489
No. NSW G.217 of 1983
Income Tax
84 ATC 4846

COURT

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
McGregor(1), Fisher(1) and Neaves(1) JJ.

CATCHWORDS

Income Tax - Allowable deductions - Investment allowance - Expenditure on batch of pallets used in tile-making and mobile out-stations for two-way radio system - Whether batch or one single pallet was a "unit of property" - Whether each had a discrete and identifiable function - Whether taxpayer's selecting a particular number of pallets for the purpose of increasing speed of operation and output relevant - Identifiable function of each out-station - Whether intended use of taxpayer relevant - Income Tax Assessment Act 1936 (Cth), ss 54, 82AB, 82AQ.

HEADNOTE

The taxpayer claimed allowances for expenditure made by it on plant acquired during the relevant year of income consisting of a batch of 5,150 pallets used in tile-making at a total cost of $29,174 and the leasing of a two-way radio system, comprising a base station and fourteen out-stations.

Held: (1) The trial judge was correct in concluding that each of the pallets and each of the base station and mobile radio out-stations was a separate item or entity capable of performing a discrete and identifiable function.

Redland Tiles (Australia) Pty Ltd v. Commissioner of Taxation (1971) 45 ALJR 201; 2 ATR 189; Tully Co-operative Sugar Milling Association Ltd v. Commissioner of Taxation (1982) 13 ATR 410 and on appeal, (1983) 68 FLR 39; 14 ATR 495; Wangaratta Woollen Mills Ltd v. Commissioner of Taxation (1969) 119 CLR 1, referred to.

(2) In applying the "function or purpose" test, a number of items purchased do not constitute a single unit simply because they were purchased for a particular purpose or function. The consequence of the purchase of the pallets was not to alter or vary the operation of the system, it remaining exactly as before except that the increase in the speed of operation enabled the production of more tiles.

(3) As long as an item of property is capable of independent operation, even though that operation is not the operation for which the taxpayer acquired the property, it can still constitute a unit of eligible property:

D M J Bennett QC and D Bloom, for the appellant.

Section 23(b) of the Acts Interpretation Act 1901 (Cth) requires words in the singular number to include the plural, and thus, the reference to "unit of eligible property" where appearing in s 82AB(1) of the Income Tax Assessment Act 1936 (the Act) includes a reference to units of eligible property so that s 82AB'S requirements are satisfied if the taxpayer acquires units of property and the "eligible expenditure" in relation to them exceeds $500. Policy considerations support such a conclusion. Where there is a fungible or quasi-fungible item such as the pallets, a taxpayer may buy such number as he chooses and as long as that number is purchased for a particular function or purpose such as the acquisition of spares, increasing capacity or speed of machine, it is capable of constituting a unit of eligible property. (He referred to Tully's case, supra, New Zealand Refinery Co Ltd v. Inland Revenue Commissioners 82 ATC 6037, and Wangaratta Woollen Mills Ltd v. Commissioner of Taxation (supra).) The pallets do not remain separate independent units at all stages of the process. They are part of the machine when the concrete is extruded onto them in a continuous strip, at which point they cannot be removed from the machine. Further, the machine could not work without the pallets and cannot work properly if some are withdrawn, 457 being required for the machine to operate at all. Accordingly, 457 pallets must constitute a unit.

D G Hill, for the respondent.

Whether an item is itself "the whole" is a finding of fact and in arriving at this finding, attention is directed to the function or purpose of that item. Section 82AQ(1) of the Act in its definition of "eligible property" provides a "bridge" between the investment allowance provisions and the depreciation provisions and the expression "unit of property" has the same meaning in both. It follows that a unit of property is an item which has its own independent effective life, is separately depreciated, separately capable of disposal, loss or destruction (see s 59) and replacement by acquisition thereafter (see s 59(2D). (He referred to the policy of the investment allowance deduction and in particular to the fixing of a minimum level of expenditure as being directed towards investment that will have the greatest stimulatory effect on the economy and also to ss 15AA and 15AB of the Acts Interpretation Act 1901 and the Second Reading Speech of the Treasurer, the Hon Phillip Lynch, to the Income Tax Assessment Amendment Bill 1976, the Explanatory Memorandum stating that a unit of property was used in the sense of "individual items of property", not individual items collectively totalling at least the minimum sum.) There were three functions of the pallet, briefly, forming the shape of a tile, carrying a ribbon of concrete until guillotining and containing the tile while being cured. These were separate from the functions of any other pallet. Further, each pallet has existence independent from each other pallet. Factually, there is no basis for either regarding the relevant unit as being 5,150 which figure merely represented the number ordered, depending on market demand, machine efficiency and breakages. There is no logical basis in adopting any number less than 5,150 (not being one) as the unit. The mobile out-stations were each "whole", for example, each was capable of independent operation as a two-way radio.

HEARING

Canberra, 1984, July 13; November 9. #DATE 9:11:1984

APPEAL

Appeal from judgment and orders of the Supreme Court of New South Wales dismissing an appeal against the disallowance of the taxpayer's notice of objection to an assessment to income tax.

Cur adv vult

Solicitors for the appellant: Abbott Tout Creer & Wilkinson.

Solicitor for the respondent: Australian Government Solicitor.

GFV

ORDER

1. The appeal be dismissed.

2. The appellant pay the respondent's costs of the appeal.

Appeal dismissed with costs

JUDGE1

This is an appeal by Monier Colourtile Pty. Ltd. ("the taxpayer") from a decision of the Supreme Court of New South Wales whereby that Court dismissed an appeal against the disallowance of the taxpayer's notice of objection to an assessment of income tax. The Commissioner of Taxation of the Commonwealth of Australia ("the Commissioner") had by his assessment rejected certain claims by the taxpayer for investment allowances under sub-division B of Division 3 of Part lll of the Income Tax Assessment Act 1936 ("the Act"). The taxpayer claimed in respect of the year of income ending 30 June 1978 allowances for expenditure made by it on plant acquired during that year. The disputed expenditure related to the purchase of 5,150 pallets used in tile making for a total cost of $29,174 and the leasing of a two-way radio system. This system initially comprised a base station and l4 mobile out-stations. The taxpayer then leased 2 additional out-stations and an executive handset. The first 14 mobile stations cost $565 each and the 2 additional stations $540 each. The base station cost $1,962. The cost of the handset was not stated.

1. The claim for investment allowances on these acquisitions was made under s.82 AB of the Act, the relevant portions of which are as follows:
   
   

"(1) Subject to this Subdivision, where-

(a) on or after 1 January 1976, a taxpayer has incurred expenditure of a capital nature (in this section referred to as 'eligible expenditure') in respect of the acquisition... by him of a new unit of eligible property in relation to which this Subdivision applies;

(b) the eligible expenditure exceeded $500;

(c) the eligible expenditure was incurred -

(i) in respect of a unit of property acquired by the taxpayer under a contract entered into on or after 1 January 1976 and before 1 July 1985; or

(ii) ... and

(d) the unit of property was first used or installed ready for use before 1 July 1986,

there shall be allowed as a deduction from the taxpayer's assesable income of the first year of income during which that unit was either used for the purpose of producing assessable income, or installed ready for use for that purpose, an amount (in this section referred to as the 'relevant amount') ascertained in accordance with the following provisions of this section.

(2) Where the eligible expenditure was incurred -

(a)in respect of a unit of property acquired by the taxpayer under a contract entered into before 1 July 1978; or

(b)...

and was so incurred in respect of a unit of property that was first used or installed ready for use before 1 July 1979 the relevant amount is such percentage of the amount of the eligible expenditure as is prescribed by sub- section (3).

(3) For the purposes of sub-section (2), the prescribed percentage in relation to an amount of eligible expenditure is -

(a) where the eligible expenditure in less than $526 - 2 per centum

(b) where the eligible expenditure is not less than $526 but is less than $976 - 2 per centum increased by 2 per centum for each whole $25 by which the amount of the eligible expenditure exceeds $501; or

(c) where the eligible expenditure is not less than $976 - 40 per centum."

1. Section 82AQ defines "eligible property" but there is no definition of "unit of property". Eligible property means "plant or articles within the meaning of section 54" and it was common ground that the pallets and the two way radio system were "plant or articles" within that section.

2. In respect of the 5,150 pallets the taxpayer argues that as the total purchase price was $29,174 it was entitled to a deduction of 40% of this amount pursuant to sub-section 82 AB(3)(c). It based this claim on its contention that the entire batch of 5,150 pallets was one "new unit of eligible property" within sub-section 82 AB(1)(a). The Commissioner's view was that each pallet was separately a "new unit of eligible property" and the cost of each being $5.66, there was no entitlement to an allowance because sub-section 82 AB(1)(b) prescribed $500 the minimum expenditure for each unit of eligible property. The issue before the trial judge on this aspect of the appeal was therefore whether the 5,150 pallets were to be treated as one unit or 5,l50 units of eligible property which issue he decided in favour of the Commissioner. Against this decision the taxpayer appealed to this Court.

3. The trial judge's description of the pallets and the function they perform in the tile making process was, with one exception, accepted by the parties. It is carefully set out in his reasons for judgment where he adopted as an accurate description of the process of tile making the words of Barwick C.J. in Redland Tiles Pty. Limited v Federal Commissioner of Taxation (1971) 71 A.T.C. 4056 (Redland Tiles) at page 4057 which we need not repeat. Briefly it is sufficient to note that the pallets are of aluminium, 42.5 cms x 33.5 cms in size and are an integral part of the process of tile making. The trial judge stated that the function of each pallet was to carry concrete through the various stages of the production line to the point where the completed tile was produced and separated from the pallet: the upper surface of the pallet which received the concrete as it passed through the moulding machine was shaped to form the underneath of the tile and the tile machine impressed the surface of the concrete with the shape of the upper surface of the tile. This process was described in great detail by Barwick C.J. in Redland Tiles. The trial judge described the subsequent operations whereby each tile in its green state is carried to an automatic racking machine. This machine consists of a vertical circuit of crates into each of which a pallet and green tile were pushed, thereby discharging a cured tile and pallet. The cured tiles together with their pallets continued on the conveyor to the back thereof where the tiles were removed from the pallets. These pallets then continued on the circuit back to the moulding machine, where each received a further extrusion of concrete.

4. The trial judge stated that at all stages of the process the pallets remained separate independent units, separate from each other and capable of being replaced by other single pallets. Before us counsel for the taxpayer contended that in this regard the trial judge was not correct in that the pallets were, he said, part of the tile making machine at the time the concrete was extruded, that the machine could not work without the pallets and could not work properly if some were removed. The pallets and the other parts of the machine, he said work together as a single entity. We do not see these contentions as casting any doubt upon the conclusion of the trial judge. It was open to him, assisted as he wqs by a view of a similar plant, to conclude that the pallets were separate independent units.

5. The trial judge adopted and applied the test of Thomas J. in Tully Co-operative Sugar Milling Association Ltd v Federal Commissioner of Taxation (1982) 82 A.T.C. 4454 at page 4459. After referring to McTiernan J's remarks in Wangaratta Woollen Mills Limited v Federal Commissioner of Taxation (1969) 119 CLR 1 at page 13 Thomas J. said:
   
   

"In my opinion a component may be a unit of property for the purposes of s.82 AB in the context of a manufacturing system, if it can be shown to perform a discrete function, or if it can be shown to vary the performance of that system."

1. Shortly after the trial judge delivered his judgment in this matter the Full Court of this Court dismissed an appeal against the decision of Thomas J (Federal Commissioner of Taxation v Tully Co-operative Sugar Milling Association Limited (1983) 83 ATC 4495 (Tully)). Each of the members of the Full Court adopted what can be termed the "function or purpose test". Fox J. reviewed other sections of the Act, as did the trial judge in this matter. There is no need for us to repeat that review. At page 4500 Fox J. said of the phrase "unit of property"
   
   

"There are many other uses of the phrase in the Act. Those which I have examined suggest that the term 'unit' is not used so much to limit, or require preciseness of definition, as to distinguish between the generality and something more specific, which is capable of being separately regarded and treated."

Later on the same page he said:

"When one looks to see whether there is a unit,one normally looks to see whether there is a whole something. Whether there is a whole will normally be judged by the intended function or purpose of that which is being looked at. ... As used in the section (and other sections) the matter is more one of identification than of structure."

1. Fox J. accepted that the findings of the trial judge on this aspect were generally "findings of fact" and he saw, as did the other two judges, no reason to disturb them.

2. Lockhart J. adopted the same test and made comments which are of particular relevance when applied to the facts of this matter. At page 4504 he said:
   
   

"It is true that ultimately the question what constituted 'a unit of eligible property' depends on the facts of the particular case, but some guidance to the Commissioner and taxpayers is called for. In my view the nearest one can get to enunciating a test of fairly general application is that it is the function or purpose of the particular item to which one looks to see if it answers the description on the facts of the case of 'a unit of eligible property'. It is not necessary that it be functionally operative though in many circumstances this may be called for. For example, if five parts are installed in an assembly line and all that is needed to render the line operative is a sixth part, but until that part is installed no part may function or operate, the functional incompleteness does not necessarily deprive each of the five units of its character as 'a unit of eligible property' for the purposes of the Assessment Act. It depends on the facts of the case."

Fitzgerald J. at page 4506 said:

"In the present case, the Judge recognized that questions of fact and degree were involved. He concluded, with the assistance of uncontroverted expert evidence, that the relevant units were the discrete sections of the milling system and that each had been constructed by the taxpayer. He was clearly entitled, in my opinion, to conclude that the sections of the milling process constituted units of property. Without seeking to provide an exhaustive definition, I see no reason to doubt that there is, for present purposes, a unit of property if it is capable of independent existence, not necessarily self-contained, e.g. it may be incorporated into an operating system such as a machine or complex of machinery in a manufacturing process, but capable either of separate function, or of function in conjunction with different parts, or in a different context, from its current user."

1. Counsel for the taxpayer accepted that the trial judge adopted the appropriate test but contended that the number of pallets purchased should be regarded as a single unit because they were purchased for the express purpose of increasing production. He said that any number purchased for this purpose, whether it be 100, 1,000 or 5,000 would constitute a single unit, as the taxpayer was, in counsel's words, "entitled to select the level of generality". His contention was that the number purchased came within the test in that they were purchased for a particular purpose or function, namely the purpose of increasing capacity by increasing the speed of operation. This increase in the speed of operation of the tile making system, he said, amounted to a variation of the performance of that system. The trial judge did not accept this submission and, in our opinion rightly rejected it.

2. There was in consequence of the purchase no alteration or variation in the operation of the system, it remained exactly as before except that the increase in the speed of operation enabled the production of more tiles. Moreover the number of additional pallets necessary to increase the speed of operation bore no relationship to the number of pallets purchased. In our opinion, the trial judge, on the evidence before him, was entitled to conclude that each of the pallets purchased was a separate item or entity capable of performing a discrete and identifiable function. With respect we agree with that conclusion.

1. Counsel's subsidiary submission was that each parcel of 457 pallets, being the minimum number required to operate efficiently the machine, constituted a unit. On this this view the number purchased comprised 11 units plus 123 spare pallets. On this contention the trial judge found that the pallets purchased were neither intended to be nor could they have been related to the requirement that 457 pallets were required to be on hand at all material times. In fact the taxpayer had 12,000 pallets on hand at the time of the purchase. Whilst it may be said that the subjective purpose of the taxpayer at the time of acquisition is irrelevant the trial judge in our opinion correctly applied the purpose and function test in rejectingthis submission. There is therefore no reason to disturb this finding which again was one of fact.

2. On the basis of the findings of fact of the trial judge, the taxpayer is not entitled to any deduction under s.82AB of the Act as the amount expended on each unit (viz. $5.66) was less than the minimum qualifying expenditure per unit (viz. $500).

3. In relation to the lease of a base station,16 mobile stations and an executive handset, there was again no suggestion that the trial judge had applied the wrong test. It follows that, as Fitzgerald J. put it in Tully, the ultimate finding is a matter of fact and degree. The taxpayer contended that the whole of the equipment leased constituted a "new unit" of eligible property for which it was entitled to a 40% allowance of the total amount expended.

4. The Commissioner's view was that the base station and the executive handset and each of the l6 mobile handsets was a separate unit of eligible property. On this basis he allowed deductions of eligible expenditure as follows:
   
   

"40% on the base station (sub-s.82AB(3)(c)) 6% on each mobile station which cost $565

(sub-s.82AB(3)(b))

4% on each mobile station which cost $540

(sub-s.82AB(3)(b)).

1. The trial judge found as a fact that each of the mobile stations was functionally complete in itself and each had a separate independent existence. He noted that it was stressed by the taxpayer that the base station was useless without one or more mobile stations and vice versa. Whilst he acknowledged that this was true in a commercial sense as far as the user was concerned, he regarded this circumstance as no basis for a conclusion that the entirety was to be regarded as one unit for the purposes of s.82AB. In his view each was capable of independent operation although such operation was not the operation for which the taxpayer acquired the property

2. In our opinion there is no reason to disturb the finding of the trial judge.

3. We would dismiss the appeal with costs.