W.A. Hughes Pty Ltd v Commissioner of Taxation

[1981] FCA 67

Re: W.A. HUGHES PTY. LIMITED
And: THE COMMISSIONER OF TAXATION (1981) 53 FLR 62
No. G23 of 1980
Income Tax

COURT

IN THE FEDERAL COURT OF AUSTRALIA

QUEENSLAND DISTRICT REGISTRY
GENERAL DIVISION
Franki(1), Deane(2) and Sheppard(3) JJ.

CATCHWORDS

Income Tax - Whether taxpayer entitled to investment allowance deduction in respect of cost of certain equipment - Whether eligible property was acquired by the taxpayer for use by the taxpayer for the purpose of producing assessable income otherwise than by the granting to other persons of rights to use it - Whether eligible property was leased by the taxpayer under a long-term lease agreement and whether the taxpayer entered into an arrangement with another person for the use of the property after the property was installed ready for use and while the lease was in force.

Income Tax Assessment Act 1936 (Cth.) ss.82AA(a) (ii) (C), 82AA(b), 82AG(3) (d), 82AQ(1)

Income Tax - Investment allowance - Whether right to use property granted to another - Whether long-term lease of equipment - Income Tax Assessment Act 1936 (Cth), ss. 82AA, 82AD, 82AG, 82AQ.

HEADNOTE

The taxpayer owned all the shares in two subsidiary companies which carried on a heavy haulage business in partnership with each other. The taxpayer supplied the equipment for the partnership and was paid, in effect, hiring charges for it. The taxpayer purchased a heavy haulage truck which was made available to the partnership. The taxpayer claimed an investment allowance under sub-divn B9, Divn 3 of Pt III of the Income Tax Assessment Act 1936. The Commissioner disallowed the claim on the basis that the taxpayer fell within s. 82AA (a)(ii)(c) in that it had granted other persons the right to use the equipment. The taxpayer leased a wheel loader from a bank. The taxpayer claimed that the lease was a "long-term lease" within the meaning of s. 82AA (b) and therefore it was entitled to an investment allowance because the bank had transferred the entitlement to it pursuant to s. 82AD. The Commissioner disallowed the claim. The taxpayer unsuccessfully appealed to a Board of Review and then to the Supreme Court of Queensland. The taxpayer then appealed to the Federal Court.

Held: Appeal dismissed - (1) The taxpayer had granted a right to use the truck within s. 82AA (a)(ii)(c).

Federal Commissioner of Taxation v. Tourapark Pty Ltd. (1980), 49 FLR 17, referred to.

(2) The lease was not a long-term lease within s. 82AA (b) because - (a) per Franki and Sheppard JJ., the arrangement between the taxpayer and the subsidiary companies for the use of the loader was made after the date when the taxpayer signed the lease agreement with the bank; (b) per Deane J., the lease did not commence until signed by the bank although it was expressed to operate for four years after a given date.

HEARING

Brisbane, 1981, February 13; June 3. #DATE 3:6:1981

APPEAL.

Appeal by the taxpayer from a decision of Kelly J. of the Supreme Court of Queensland dismissing its appeal against a decision of a Board of Review dismissing its appeal against the disallowance by the Commissioner of its objections in respect of assessments for the years of income ended 30th June, 1976 and 1977.

G.L. Davies Q.C. and L. Harrison, for the appellant.

J.G. Crowley, for the respondent.

Cur. adv. vult.

Solicitors for the appellant: V.J. Hefferan & Co.

Solicitor for the respondent: B.J. O'Donovan, Commonwealth Crown Solicitor.

J.H. TELFER

ORDER

1. The appeal is dismissed.

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

JUDGE1

This is an appeal, by leave, from the judgment of a Judge of the Supreme Court of Queensland dismissing an appeal by a taxpayer, W.A.Hughes Pty. Limited, from a decision of the Taxation Board of Review which confirmed assessments of income tax for the years ended 30 June 1976 and 1977.

I have had the opportunity of reading the judgments of Deane and Sheppard JJ.

I agree with the conclusions of Deane J. in relation to the 1976 tax year.

I will not set out the facts in relation to the 1977 tax year in detail but I will confine myself to what I consider to be the essentials.

On 15 February 1977 the appellant signed a lease agreement with The Commercial Bank of Australia Limited for the lease of a wheel loader for a period of 48 months from 15 February 1977. Clause No.12 of the agreement contains provisions relating to the period prior to the agreement being signed on behalf of the Bank. One provision was that the agreement ". . . shall not be binding upon the Bank and the letting herebefore contemplated shall not commence until after it has been signed on its behalf by a Bank Officer . . .". A tenancy at will was to arise if the goods were delivered before the agreement was signed on behalf of the Bank. The agreement was not in fact signed on behalf of the Bank until 23 March 1977. However, a declaration purporting to be made pursuant to s.82AD of the Income Tax Assessment Act 1936 ("the Act") was made on behalf of the Bank on 8 March 1977.

It was common ground that the wheel loader was delivered to the appellant on 16 February 1977 and that it was first used by the two subsidiary companies W.A.H. Pty Limited and Hughes Carrying Pty. Limited on 17 February 1977.

The appellant cannot succeed unless:

1. The agreement under which the appellant agreed to take the wheel loader on lease was for a period of not less than 4 years (ss.82AA(b) and 82AQ); and

2. The appellant did not enter into any arrangement with the two subsidiary companies for the use of the wheel loader while the lease was in force and before the expiration of 12 months after the wheel loader was first used or installed ready for use by the appellant (s.82AG(3)).

The decision of the learned Judge from which this appeal is brought turned upon whether s.82AG(3) applied. His Honour held that:
"There is no evidence that any arrangement for the use of the Wheel Loader by the partnership was made prior to its acquisition. At the latest, when the partnership actually commenced to use the equipment, which could not have been before 16th February 1977, there must have been an arrangement made for its use, but I can see no proper basis for inferring that any such arrangement was made before the lease came into force, that is, before 16 February 1977 when the tenancy at will commenced. The Commissioner in disallowing the deduction by reason of the operation of s.82AG(3)(d) has assessed the appellant on the basis that Subdivision B does not apply and the appellant has not shown that he was wrong in so doing and consequently it has not discharged the onus which lies on it of showing that the assessment is excessive."

Before us counsel for the appellant said:
"There seem to be two views of the evidence as to when the arrangement between the taxpayer and the partnership was entered into. One view is that it was pursuant to an arrangement of a general account made as early as 1977, and I mention that only in passing, because we do not really want to rely on it here, the view having been rejected by Kelly J. at page 206.3. We do not press that before this court.

The view that was really accepted by everyone, I think, and which in our submission is the correct view, is that the arrangement was entered into at the time the vehicle was acquired and de facto possession passed from the appellant to the partnership, and that was on 16 February 1977. I propose to say this, that delivery was taken on 16 February 1977. That appears at page 11.4. The loader went into service in the partnership business on the following day. That appears at 12.3.

Mr Hughes also gave evidence about that at page 194, lines 5 to 15, where he said much the same thing. I think he may have said one or two days later. The difference does not matter. His Honour accepted, as I said - and the passage of his judgment is 206.6 - that the arrangement between the appellant and the partnership took place on or about 16 February 1977. In our submission, that finding is really almost undisputable."

Upon these facts it is clear that there is no challenge to a finding that the arrangement was not made before 16 February 1977. It is clear that the arrangement between the taxpayer and the subsidiary companies for the use of the property was made after the date when the appellant signed the lease agreement. On no construction can the lease agreement be read as extending beyond 48 months from 15 February 1977. If it commenced any later than 15 February 1977 it is not a long term lease agreement within the meaning of s.82AQ(1). If it commenced on 15 February 1977 the provisions of s.82AG(3) preclude the allowance of the deduction claimed.

In my opinion it is therefore unnecessary to pursue the question of whether the lease agreement was a long term lease agreement because once the date of the arrangement is not shown to have been earlier than the commencement of the long term lease, but to have been after the date when the property was first used by the appellant, it must have been made "while the lease was in force" and therefore the provisions of Subdivision B are not applicable.

Senior counsel for the appellant presented an argument that there was what he called "a middle course". The argument was that there was no tenancy under the document until its execution by the Bank in March. He argued that once the lease was executed it created rights and obligations which existed prior to its execution and that from the time of its execution it was an effective long term lease. I am not attracted by this argument.

As the learned Judge of the Supreme Court mentioned, the taxpayer carried the onus of showing that the assessment of the Commissioner was excessive (McCormack v. Federal Commissioner of Taxation (1979) 79 A.T.C. 4111, (1979) 23 A.L.R. 583). In my opinion the taxpayer has not discharged this onus.

I would dismiss the appeal and order that the appellant pay the costs of the respondent in the appeal.

JUDGE2

Hughes Pty. Limited ("the taxpayer") beneficially owns all of the issued shares in two companies which carry on, in partnership, a coal haulage business in Queensland. Were it not for the interposition of those two companies and that partnership, it may well be that the respondent Commissioner would not have questioned the taxpayer's entitlement to an investment allowance deduction in respect of the appropriate proportion (40%) of the cost of a heavy haulage truck and a wheel loader which the taxpayer purchased for use in that coal haulage business. It is, however, common ground that the pageant, albeit insubstantial, of legal forms and fictions must be observed. The personae of corporate entities, created to serve half-forgotten and no longer effective purposes of tax minimisation and largely ignored in the real-life running of the business, are in possession of the field.

The taxpayer's two subsidiary companies are W.A.H. Pty. Limited and Hughes Carrying Pty. Limited. They carry on the coal haulage business in partnership under the business name "W.A. & M.D. Hughes". The taxpayer, for its part, carries on no independent business but owns the equipment which the partnership uses in its business. The shareholders in the taxpayer are Mr. William Allan Hughes, his wife Mrs. Margaret Dora Hughes and their daughter.

As a matter of practice, the facts and procedural niceties of company law had little effect on the running of the coal haulage business during the period to which this appeal relates. No directors' meetings were held. Money was transferred from one bank account to another as and when needed. It was the task of a firm of accountants, at the end of each financial year, to translate the business transactions of an uncomplicated business into a form appropriate to the not unsophisticated corporate structure which had been adopted.

During the tax year ended 30 June, 1976, the taxpayer purchased the heavy haulage truck. The taxpayer occupied the role of purchaser in accordance with the established practice that all equipment was owned by it. The truck was bought to be used by the partnership in the coal haulage business and was so used. Upon its acquisition, it became part of the overall pool of equipment owned (or being purchased or hired) by the taxpayer and used by the partnership.

During the tax year ended 30 June, 1977, the taxpayer entered into an Agreement with the Commercial Bank of Australia Limited for the "lease" to the taxpayer, for a period of forty eight months from 15 February, 1977, of the wheel loader. This loader, likewise, became part of the taxpayer's general pool of equipment which was used by the partnership for the purposes of its business.

The taxpayer's income, apart from dividends and interest, consisted of lump payments which it received from the partnership for the hire and running expenses of equipment and for administration charges. In the course of each financial year, amounts were transferred from the partnership account to the taxpayer's account as the taxpayer needed them. At the end of the financial year, the aforesaid firm of accountants fixed what was seen, by reference to the profits of the partnership business and taxation considerations, as being an appropriate global fee to be paid to the taxpayer by the partnership in respect of the relevant year. The fee, so fixed, for the tax year ended 30 June, 1976 was $70,000. The fee for the 1977 tax year was $102,227.

The dispute between the appellant taxpayer and the respondent Commissioner of Taxation in the present appeal concerns the taxpayer's entitlement to deductions pursuant to the provisions of Subdivision B of Division 3 of Part III of the Income Tax Assessment Act, 1936 ("the Act") in respect of 40% of the cost of the heavy haulage truck and the wheel loader. The Commissioner, in his assessment of the taxpayer's taxable income of the tax years ended 30 June, 1976 and 30 June, 1977 respectively, refused to allow the deductions. His refusal has been upheld, upon reference, by a Board of Review and, upon subsequent appeal, by the Supreme Court of Queensland (Kelly J.). This appeal is, by leave, from the decision of the Supreme Court.

In so far as the deduction in respect of the heavy haulage truck is concerned, the issue is whether the truck, being a unit of eligible property, satisfied the requirements of s.82AA(a) of the Act. Section 82AA(a) provides, for present purposes, that Subdivision B of Division 3 of Part III of the Act ("Subdivision B") applies in relation to a unit of eligible property acquired by the taxpayer that is for use by the taxpayer wholly and exclusively in Australia:
"for the purpose of producing assessable income otherwise than by -

(A) the leasing of the eligible property;

(B) the letting of the eligible property on hire under a hire-purchase agreement; or

(C) the granting to other persons of rights to use the eligible property;
. . . . . . . . . . ".

The taxpayer relies on its intended and actual use of the truck to generate the hiring charges from the partnership companies to satisfy the requirements of s.82AA(a)(ii) that the truck be for use by the taxpayer in Australia for the purpose of producing assessable income. The Commissioner does not dispute that the truck was acquired for use by the taxpayer in Australia for the purpose of producing assessable income. He argues that the requirements of sub-clause (ii) were not satisfied for the reason that the truck was acquired for the purpose of producing assessable income either by "(A) the leasing of" it to the partnership or "(C) the granting to" the partnership "of rights to use" it.

In the Supreme Court, Kelly J. reached the conclusion that the truck had been acquired for the purpose of producing assessable income by the granting to the partnership of rights to use it (sub-para. (C)). This conclusion made it unnecessary to determine whether the exclusion contained in sub-paragraph (A) of s.82AA(aa)(ii) was also applicable. In the result, the primary argument before this Court has been on the question whether the purpose of producing assessable income for which the truck was acquired was within (C). I turn to the consideration of that question.

The truck was plainly acquired for the purpose for which it was used. It was used by the taxpayer to produce assessable income in the form of the hiring fees which could, as a matter of established practice, be expected to be received and which were, in the event, received from the partnership companies. Can it properly be said that the hiring fees were, within the words of sub-paragraph (C), produced by the granting to the partnership companies of rights to use the truck? They were certainly produced by allowing the use of the truck. But were they produced by "granting" to the partnership companies "rights" to use it? According to the taxpayer, they were not.

The taxpayer's argument finds its factual basis in the disregard for corporate entities and partnership formalities which characterized the conduct of the coal haulage business. The truck, it would seem, was simply used in the coal haulage business carried on by the partnership without any express separate agreement or arrangement for its particular use being made between the taxpayer and the partnership companies. It would, it is argued, be contrary to the clear intention of the parties to imply into the arrangements between the taxpayer and the partnership any promise by the partnership companies that they would pay to the taxpayer a reasonable hiring charge in respect of the truck. That being the case, so the argument proceeds, the failure to agree, in advance, either on the amount of a hiring charge or a procedure for settling that amount, meant that the partnership companies were under no liability to make any payment for the use of the taxpayer's equipment and that they acquired no "rights" in respect of the truck. They were merely gratuitous bailees of it. It is said to follow that the procedure adopted did not involve the "granting" to the partnership companies of "rights to use" the truck within s.82AA(a)(ii)(C).

The above argument of the taxpayer does not improve upon closer acquaintance. To the contrary, each step in it is, in my view, disclosed as being unacceptable.

The annual fees paid by the partnership to the taxpayer for the hire and running expenses of equipment and for administrative charges were adequate to enable the payment of salaries to Mr. and Mrs. Hughes and to result in the taxpayer operating at a profit after allowing for depreciation of its equipment. The amounts of those fees, in the context of the depreciated value of the equipment, do not support the claim that it would be contrary to the clear intention of the parties to imply a promise on the part of the partnership companies to pay to the taxpayer a reasonable commercial hiring charge in the unlikely event that the amount was not settled consensually. In my view, the overall circumstances were such that a promise to that effect would be implied by law (see Heimann v. The Commonwealth (1938) 38 S.R. (N.S.W.) 691 at pp. 694-695; Scanlan's New Neon Ltd. v. Tooheys Ltd. (1943) 67 C.L.R. 169 at pp. 194-195; Bonython v. The Commonwealth (1948) 75 C.L.R. 589 at pp. 624-625).

Be this as it may, the bailment was not a gratuitous bailment. It was a bailment, pursuant to a commercial or business arrangement, on the plain understanding that a hiring charge would be paid. (See, Andrews v. Home Flats Ltd. (1945) 2 A11 E.R. 698 at p. 699; Chapman or Oliver v. Saddler & Co. (1929) A.C. 584 at p. 596; Collett v. National Fur Co. Ltd. (1944) 78 Lloyd's. Rep. 1). It is incorrect to say that the procedure did not result in the obtaining by the partnership companies of any "rights" from the taxpayer. The procedure involved the conferring upon the partnership companies of rights to possession and use which were good against all but the taxpayer and against the taxpayer itself until revoked by reasonable notice. Those rights were derived from the correlative duties of others to abstain from interference with the partnership companies' possession and use of the relevant equipment which included the truck. Just as the use of the equipment explains the payments made, so too the payments explain and qualify the use of the equipment (see per Lord Macnaghten, Gardner v. Hodgson's Kingston Brewery Company Ltd. (1903) A.C. 229 at p. 235).

Quite apart from the foregoing, it is, in my view, incorrect to approach the construction of s.82AA(a)(ii)(C) on the Hohfeldian basis that the "rights" referred to must be both formally defined and capable of being asserted and vindicated by legal proceedings. As was said in Federal Commissioner of Taxation v. Tourapark Pty. Limited ((1980) 80 A.T.C. 4,503 at p. 4,507), the word "granting" in sub-paragraph (C) is not used in a technical sense but in the sense of "an authoritative bestowal or conferring". The "rights to use" mentioned in the sub-paragraph include a right in the nature of a licence, that is, "an authority to do something which would otherwise be wrongful or illegal or inoperative" (Federal Commissioner of Taxation v. United Aircraft Corporation (1943) 68 C.L.R. 525 at p. 533). On any approach, such an authority to use vehicles and machinery in the equipment pool, including the truck, was granted by the taxpayer to the partnership companies. The only assessable income which the truck was destined to produce for the taxpayer was the hiring fee charged for that use.

In the result, I am of the view that the truck was acquired by the taxpayer for use by the taxpayer for the purpose of producing assessable income by "the granting to other persons of rights to use" it within sub-paragraph (C). It follows that the taxpayer's appeal must fail as regards the tax year ended 30 June, 1976 and that it is unnecessary to consider whether the disqualification contained in sub-paragraph (A) was also applicable. There remains for consideration the taxpayer's entitlement to an investment allowance deduction in respect of the 1977 tax year.

Section 82AA(b) provides, for present purposes, that Subdivision B applies in relation to a unit of eligible property acquired by a taxpayer being "a leasing company":
". . . for use wholly and exclusively -

(i) in Australia; and

(ii) for the purpose of producing assessable income,

by another person to whom the taxpayer has, on or after 1 January 1976, leased the eligible property under a long-term lease agreement that was entered into by the taxpayer in the course of carrying on business in Australia . . . ".
A "long-term lease agreement" is defined, by s.82AQ(1), as meaning "in relation to property" an agreement "under which a person agrees to take the property on lease for a period of not less than four years". While the word "lease" is inappropriate to refer to the hire of a chattel, it is convenient to follow the nomenclature of both Subdivision B and the Agreement and to use the word in that sense.

The wheel loader was leased to the taxpayer under the Agreement between the Bank and the taxpayer to which reference has been made. A question arises as to whether that Agreement was a "long-term lease agreement" within the definition of those words. If it was, the Commissioner does not dispute that the provisions of s.82AA(b) were prima facie complied with by the Bank in respect of the wheel loader.

Section 82AD of the Act provides for the transfer by a leasing company of the whole or part of a deduction to which it would otherwise be entitled under Subdivision B. It is common ground that the Bank duly complied with the procedural steps required by s.82AD and that the Bank has effectively transferred to the taxpayer the whole benefit of any deduction to which it would otherwise be entitled under Subdivision B.

Section 82AG(3)(d) of the Act provides, for present purposes, that Subdivision B does not apply in relation to property leased by a leasing company to another person ("the lessee") if, before the expiration of twelve months after the property was first used, or installed ready for use, by the lessee and "while the lease was in force", the lessee entered into a contract or arrangement with another person for the use of the property by that other person. Plainly, the arrangement between the taxpayer and the partnership companies pursuant to which the wheel loader was used by the partnership was an "arrangement with another person for the use of the property by that other person" within paragraph (d). The dispute between the Commissioner and the taxpayer, as regards clause (d), relates to whether the arrangement was entered into by the taxpayer "while the lease was in force". It was submitted, on behalf of the taxpayer, that "the lease" to which s. 82AG(3)(d) refers is "the long-term lease agreement" by reference to which the leasing company derives its prima facie entitlement to a deduction. In my view this is so.

It can, therefore, be seen that the taxpayer's entitlement to an investment allowance deduction in respect of the wheel loader ultimately falls to be determined by reference to the answers to two distinct, but related, questions. The first of those questions is: Was the Agreement between the Bank and the taxpayer a "long-term lease agreement" for the purposes of s.82AA(b)(ii)? The second is: Was the Agreement "in force" at the time when the taxpayer entered into the arrangement for the use of the wheel loader by the partnership companies? If the taxpayer is to prevail, the first of those questions must be answered in the affirmative and the second must be answered in the negative. A negative answer to the first question or an affirmative answer to the second question will preclude entitlement to any deduction. A hackneyed reference to Scylla and Charybdis inexorably comes to mind.

The Agreement between the taxpayer and the Bank is dated 15 February, 1977. It was apparently executed by the taxpayer on that day. On 16 February, 1977, the taxpayer took possession of the wheel loader. The evidence does not indicate precisely when it commenced to be used by the partnership. It would, however, seem to be common ground that it was either on or shortly after 16 February, 1977 and that the arrangement between the taxpayer and the partnership companies for its use by the partnership was entered into at the time when it was first so used. The Agreement was not however signed for and on behalf of the Bank until 23 March, 1977.

Clause 1 of the Agreement provides that "THE Bank agrees to lease to the Lessee and the Lessee agrees to take from the Bank the goods described in the Schedule . . . for the whole period stated in the Schedule on and subject to terms and conditions set out in this Instrument . . . ". The Schedule states that the "Period of Lease" is "forty eight months from the fifteenth day of February, 1977".

Clause 12 of the Agreement provides:
"This instrument shall not be binding upon the Bank and the letting hereinbefore contemplated shall not commence until it has been signed on its behalf by a Bank Officer and the provisions of this Clause shall not be affected or prejudiced by reason of any prepayment of moneys by the Lessee or the delivery of the goods to the Lessee which, pending such signing, shall be deemed merely provisional, but in the event of such provisional delivery, the Lessee's obligations as to insurance care and use of the goods and otherwise (except as to payment of rent) under this Agreement shall bind the Lessee from the time of his execution of this instrument and the Lessee shall be a tenant at will of the goods at a daily rent equal to one-thirtieth of the first instalment specified in the Schedule, which in the event of the signing of this instrument on behalf of the Bank, shall be applied by the Bank in reduction of the rent provided by the Schedule . . . ".

The provisions of Clause 12 of the Agreement specifically cover the circumstance of possession of the wheel loader being taken by the taxpayer prior to the execution of the Agreement on behalf of the Bank. Those provisions operate to govern the situation which existed from the time possession was taken by the taxpayer on 16 February, 1977 to the time when the Agreement was signed on behalf of the Bank on 23 March, 1977 and, as regards that period, are paramount.

If one were simply to read the terms of the Agreement in vacuo, the conclusion would be inevitable that the taxpayer "agreed to take the property on lease for a period of not less than four years". The primary provisions (Clause 1 and The Schedule) of the Agreement were to that effect. In the present case however, one is not concerned merely with the theoretical construction of the primary provisions of the Agreement regardless of the practical reality of when and to what extent they became operative. One is concerned with ascertaining whether, for the purposes of a taxing act, the Agreement can objectively be said to meet the requirements of a particular definition. To adopt the words of Russell L.J. in Roberts v. Church Commissioners for England ((1972) 1 Q.B. 278 at p. 284), that issue must be determined by reference to "the question of the actual effect in law of that which the parties did, and the further question whether the effect in law that was achieved falls within the statute by force of the definition . . . ".

What then was the effect of the Agreement between the Bank and the taxpayer in the context of the actual circumstances? It is somewhat difficult to see how, on any approach, the effect of the Agreement was that the taxpayer agreed to take the property on lease for a period of not less than four years since the evidence indicates that the loader was not even acquired by the Bank until 16 February, 1977 which is the day following the commencement of the only suggested period of four years. This problem of a possible deficiency of one day in the requisite period of four years by reason of the lack of any title in the Bank was not, however, raised on behalf of the Commissioner in the course of argument before the Court and, in the view I take, it is not necessary to decide the matter by reference to it.

As has been mentioned, the Agreement was not signed on behalf of the Bank until 23 March, 1977. Clause 12 of the Agreement expressly provided that, in those circumstances, the instrument did not bind the Bank and the letting did not commence until that day. It is true that, under Clause 12, in the event of prior delivery of the goods, a tenancy at will commenced pending execution on behalf of the Bank and that, upon such execution, Clause 1 and The Schedule operated to fix the duration of the taxpayer's interest as a period expiring on 15 February, 1981, that is, four years from 15 February, 1977. Nonetheless, the fact remains that, applying the terminology and effect of a lease to the hire of a chattel, the actual effect in law of that which the parties did was that the operation of the lease as a letting for a term or period only commenced on 23 March, 1977 when it was signed on behalf of the Bank (see, Shaw v. Kay (1847) Ex. Rep. 412).

Whatever may have been in the initial contemplation of the parties, the operation and effect of the Agreement in the circumstances which existed was that there never was an operative agreement for lease for a period of not less than four years. From the time the appellant took possession of the wheel loader until the time the Agreement was executed on behalf of the Bank, the provisions of clause 12 operated: there was a bailment or "tenancy" at will, the Agreement was not otherwise "binding upon the Bank" and the "letting hereinbefore contemplated" did not "commence": there was no operative agreement for a period at all. When the Agreement was executed on behalf of the Bank, an agreement for lease for a period became operative for the first time. Whatever may be the position inter partes, it was not within the competence of the appellant and the Bank to alter retrospectively, for the purposes of Subdivision B, the objective character of the tenancy at will which had in fact existed under the express terms of the Agreement. The objective effect in law of the Agreement in the circumstances which occurred was that the appellant agreed to take the wheel loader on lease under a bailment or "tenancy" at will up to the time of execution on behalf of the Bank and thereafter for a period of less than four years. In operation and effect, the agreement was not one "under which a person agree(d) to take the property on lease for a period of not less than four years". It was not "a long-term lease agreement" for the purposes of Subdivision B.

In the result, it is unnecessary to decide whether the Agreement was "in force" at the time when the taxpayer entered into the arrangement for the use of the wheel loader by the partnership companies with the consequence that the disqualifying provisions of s.82AG(3) (d) would be applicable to preclude a deduction.

The taxpayer's appeal fails in respect of each of the tax years. The appeal should be dismissed with costs.

JUDGE3

In this matter I have had the opportunity of reading the judgment to be delivered by Deane J. In relation to the first question - the claim to deduct an amount by way of an investment allowance in the 1976 tax year - I agree with his conclusions and his reasons therefor. There is nothing that I would wish to add. In relation to the second question, which concerns the 1977 tax year, I agree with his conclusion that the taxpayer should fail. My reasons for doing so are, however, somewhat different from his. In order to state them I propose to refer to the facts and the relevant provisions of the legislation, notwithstanding that those matters are also referred to in the judgment of Deane J.

The wheel loader, which is the equipment in question, was the subject of an agreement made between the Commercial Bank of Australia Limited and the taxpayer whereby the Bank agreed to lease to the taxpayer and the taxpayer agreed to take from the Bank the wheel loader for the period of 48 months from 15 February, 1977, at a monthly rental of $1,350.81. In the document, which was headed "Lease Agreement", the taxpayer is referred to as the lessee. The evidence of Mr. Hughes, which was accepted by the learned trial judge, was that he had signed the agreement on behalf of the taxpayer on 15 February, 1977, and that the loader was received by him on behalf of the taxpayer, if not the very next day, very soon afterwards. He also said that very shortly after the loader was received it was used by the partnership. Before the Board of Review Mr. Hughes had said that the loader had been used by the partnership the day following its acquisition. His Honour's finding, which was not challenged before us, was that the partnership did not commence to use the equipment prior to 16 February, 1977.

Before referring further to the agreement and to some other facts it is necessary to refer to the relevant provisions of the legislation. The taxpayer claims the deduction because it says that it has brought itself within the provisions of s.82AA(b) and s.82AD of the Act. The former provision is as follows:
"82AA. Subject to the following provisions of this Subdivision, this Subdivision applies in relation to a unit of eligible property acquired or constructed by the taxpayer that is -
. . . . . . .

(b) in the case of a taxpayer being a leasing company, for use wholly and exclusively -

(i) in Australia; and

(ii) for the purpose of producing assessable income,

by another person to whom the taxpayer has, on or after 1 January 1976, leased the eligible property under a long-term lease agreement that was entered into by the taxpayer in the course of carrying on business in Australia and was so entered into by the taxpayer and the other person at arm's length."
The expression "long-term lease agreement" is defined in s.82AQ(1) to mean, in relation to property, an agreement under which a person agrees to take the property on lease for a period of not less than four years.

If there were no further provision, the taxpayer entitled to a deduction for an investment allowance could not be a lessee such as the taxpayer here; it would be the Bank. However, s.82AD provides, so far as it is relevant, as follows:
"82AD.(1) Where a leasing company that would, but for this section, be entitled to a deduction under this Subdivision from the assessable income of the company of a year of income (in this sub-section referred to as the 'relevant deduction') in respect of property leased to another person (in this sub-section referred to as the 'lessee') has, before the prescribed date, lodged with the Commissioner -

(a) a declaration in writing, signed by the public officer of the company, stating that the company transfers to the lessee the benefit of the whole, or of a specified fraction, of the relevant deduction, or the benefit of so much of the relevant deduction as does not exceed an amount specified in the declaration; and

(b) a statement, signed by the public officer of the company, containing the following particulars;

. . . . . . . . (there follows a statement of the required particulars which it is not necessary to set out)

there shall be allowed as a deduction from the assessable income of the lessee of the year of income during which the property was either first used, or installed ready for use, by the lessee -

(c) if the declaration by the company stated that the company transferred to the lessee the benefit of the whole of the relevant deduction - an amount equal to the relevant deduction;
. . . . . . . . . . . . ."

Pursuant to s.82AD the Bank made a declaration. The declaration was made on its behalf on 8 March, 1977, by Mr. F. S. Allan who was then the Bank's public officer. Mr. Allan declared that the Bank was a leasing company as defined in s.82AQ of the Act and that the Bank had entered into a lease agreement with the company. The declaration said that the Bank "Transfers to the Lessees (sic) the benefit of the whole of the deduction allowable in respect of the Investment Allowance". In paragraph 4 of the declaration Mr. Allan stated that the property was acquired on 16 February, 1977, and that the date of the lease agreement was 15 February, 1977. The period of the lease was said to be 48 months.

The date of acquisition I would take to be the date of acquisition by the Bank. The declaration was made pursuant to s.82AD of the Act and contains the particulars required by paragraph (b) of sub-section (1) thereof. These include the date on which the property was acquired. That is clearly a reference back to the opening words of s.82AA earlier quoted which refer to a unit of eligible property "acquired . . . . by the taxpayer". For the purposes of paragraph (b) of s.82AA the taxpayer is a leasing company, in the present case the Bank. There is no reason to think that Mr. Allan intended to do otherwise than give the particulars required by the legislation. It follows that the Bank acquired the equipment on 16 February, 1977.

In addition to the sections of the Act already referred to, it is necessary to refer to s.82AG(3) which, so far as it is relevant, is as follows:
"(3) This Subdivision does not apply, and shall be deemed never to have applied, in relation to property leased by a leasing company to another person (in this sub-section referred to as the 'lessee') if, before the expiration of 12 months after the property was first used, or installed ready for use, by the lessee -

. . . . . . . . . . .

(d) while the lease was in force the lessee entered into a contract or arrangement with another person for the use of the property by that other person;

. . . . . . . . "

It is now appropriate to return to the lease agreement itself. I have already referred to the fact that it purports to be for a period of 48 months from 15 February, 1977. The agreement is dated 15 February, 1977, and was apparently executed by the taxpayer on that day. That is in accordance with Mr. Hughes' evidence earlier referred to. However, the lease was not executed by the Bank until it was signed, on 23 March, 1977, for and on behalf of the Bank by someone designated as an authorised officer.

Clause 12 of the agreement, so far as it is relevant, is as follows:
"12. This instrument shall not be binding upon the Bank and the letting hereinbefore contemplated shall not commence until it has been signed on its behalf by a Bank Officer and the provisions of this Clause shall not be affected or prejudiced by reason of any prepayment of moneys by the Lessee or the delivery of the goods to the Lessee which, pending such signing, shall be deemed merely provisional, but in the event of such provisional delivery, the Lessee's obligations as to insurance care and use of the goods and otherwise (except as to payment of rent) under this Agreement shall bind the Lessee from the time of his execution of this instrument and the Lessee shall be a tenant at will of the goods at a daily rent equal to one-thirtieth of the first instalment specified in the Schedule, which in the event of the signing of this instrument on behalf of the Bank, shall be applied by the Bank in reduction of the rent provided by the Schedule."

The Commissioner submitted that the company was not entitled to the deduction either because -

(a) the agreement under which the taxpayer agreed to take the property was not a long term lease agreement within the meaning of s.82AA(b) because it was not an agreement to take the property on lease for a period of not less than four years; or

(b) the taxpayer had while the lease was in force entered into a contract or arrangement with another person; the provisions of s.82AG(3)(d) thus operated to deny it the deduction.

I deal with these submissions in order. In the absence of other evidence, the fact that the Bank did not sign the agreement until 23 March, 1977, would mean, notwithstanding that the agreement is dated 15 February, 1977, that no agreement came into force until 23 March, 1977. Clause 12 of the agreement plays no part in that conclusion. It is warranted by the application of general principles relating to the law of contract. Indeed clause 12, like all other clauses of the agreement, could have had no effect until the agreement had been executed by both parties. I have not, in what I have so far said, taken into account any application of the doctrine of estoppel. It would not be relevant to do so.

Evidence of the dates upon which each party executed the agreement is not, however, the only evidence which it is relevant to consider. One needs to take into account the terms of the declaration made on behalf of the Bank pursuant to s.82AD of the Act. The effect the making of that declaration was intended to have was to transfer to the taxpayer the benefit of the deduction to which the Bank would otherwise have been entitled. The declaration was intended by the Bank to be acted upon, not only by the Commissioner, but also by the taxpayer. It stated that the Bank had entered into an agreement on 15 February, 1977. That is the date which the agreement in fact bears. The declaration also stated that the period of the lease granted by the agreement was 48 months. In my opinion the declaration was an acknowledgement by the Bank that on and from 15 February, 1977, there was in force an agreement binding upon it for the lease of the equipment in question for a period of four years. It is true that the agreement as executed by the taxpayer included clause 12. But, so it seems to me, that clause could have no operation because the Bank, by reason of what is contained in the declaration, had rendered nugatory any operation the clause might otherwise have had.

I am therefore of opinion that there was an agreement to take the equipment on lease for a period of not less than four years. There is, however, a further difficulty. It was not mentioned in argument. Although the agreement purports to grant a lease of the equipment for a period of four years, the grant is of a term of four years from 15 February, 1977. Upon the evidence earlier referred to, the Bank did not acquire the equipment until 16 February, 1977. There is much to be said for the view, not overlooking the words of the agreement, that the lease granted thereby could only have been for a period of four years less one day. That is because the term commenced one day after the date of the agreement. That was when the equipment was acquired by the Bank.

In the absence of submissions by either counsel on the point, I am loath to express any opinion upon it. I find I am saved the need of doing so because of my view that the taxpayer cannot succeed in its argument against the second of the submissions relied upon by the Commissioner. In simple terms the lease granted by the agreement which was dated 15 February, 1977, was, within the meaning of s.82AG(3)(d) "in force" when the taxpayer entered into the arrangement for the use of the equipment by the partnership. If the lease were not then in force, there could not have been an agreement under which the taxpayer agreed to take the property on lease for a period of not less than four years.

Counsel for the taxpayer endeavoured to overcome the effect of these considerations by saying that, although the agreement operated from 15 February, 1977, it was not in force because of the operation which clause 12 of the agreement had between the date of the agreement, 15 February, 1977, and the date of its execution by the Bank, 23 March, 1977. Thus, so his submission ran, the arrangement with the partnership which was made on 16 February, 1977, was made, although after the agreement had some existence, before it was in force. I confess to having had difficulty in understanding the very fine distinction which this submission appears to involve. Be that as it may, I am satisfied, by reason of the signing on behalf of the Bank of the declaration pursuant to s.82AD of the Act, that there was, on and from 15 February, 1977, an agreement for the grant of a lease of the equipment binding on and enforceable by both parties. Whether, because the Bank did not acquire the property until the following day, the agreement was an agreement to grant a lease for four years is a question I leave undecided. Whether it was or not, the agreement, and thus the lease, were in force when the arrangement with the partnership was made.

In the result I agree that the appeal should be dismissed with costs.