Monier Colourtile Pty. Ltd. v. Federal Commissioner of Taxation.
84 ATC 4846
Full Federal Court
Judgment date: Judgment handed down 9 November 1984.
McGregor, Fisher and Neaves JJ.: This is an appeal by Monier Colourtile Pty. Ltd. (``the taxpayer'') from a decision of the Supreme Court of New South Wales [reported at 83 ATC 4399] whereby that Court dismissed an appeal against the disallowance of the taxpayer's notice of objection to an assessment to 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 Subdiv. B of Div. 3 of Pt. III 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 14 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.
The claim for investment allowances on these acquisitions was made under sec. 82AB 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 assessable 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
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 is less than $526 - 2%;
- (b) where the eligible expenditure is not less than $526 but is less than $976 - 2% increased by 2% 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%.''
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-
84 ATC 4848
way radio system were ``plant or articles'' within that section.
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 subsec. 82AB(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 subsec. 82AB(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 subsec. 82AB(1)(b) prescribed $500 as 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 5,150 units of eligible property which issue he decided in favour of the Commissioner. Against this decision the taxpayer appealed to this Court.
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. F.C. of T. 71 ATC 4056 (Redland Tiles) at p. 4057 which we need not repeat. Briefly it is sufficient to note that the pallets are of aluminium, 42.5cm x 33.5cm 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 was carried to an automatic racking machine. This machine consisted 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.
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 was by a view of a similar plant, to conclude that the pallets were separate independent units.
The trial Judge adopted and applied the test of Thomas J. in
Tully Co-operative Sugar Milling Association Ltd. v. F.C. of T. 82 ATC 4454 at p. 4459. After referring to McTiernan J.'s remarks in
Wangaratta Woollen Mills Ltd. v. F.C. of T. 69 ATC 4095 at pp. 4102-4103; (1969) 119 C.L.R. 1 at p. 13, Thomas J. said:
``In my opinion a component may be a unit of property for the purposes of sec. 82AB 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.''
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. (
F.C. of T. v. Tully Co-operative Sugar Milling Association Limited 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 p. 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,
84 ATC 4849
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.''
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.
Lockhart J. adopted the same test and made comments which are of particular relevance when applied to the facts of this matter. At p. 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 p. 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 of eligible property 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.''
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.
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.
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 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
84 ATC 4850
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 rejecting this submission. There is therefore no reason to disturb this finding which again was one of fact.
On the basis of the findings of fact of the trial Judge, the taxpayer is not entitled to any deduction under sec. 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).
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.
The Commissioner's view was that the base station and the executive handset and each of the 16 mobile stations was a separate unit of eligible property. On this basis he allowed deductions of eligible expenditure as follows:
40% on the base station (subsec. 82AB(3)(c)).
6% on each mobile station which cost $565 (subsec. 82AB(3)(b)).
4% on each mobile station which cost $540 (subsec. 82AB(3)(b)).
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 sec. 82AB. In his view each was capable of independent operation although such operation was not the operation for which the taxpayer acquired the property.
In our opinion there is no reason to disturb this finding of the trial Judge.
We would dismiss the appeal with costs.
THE COURT ORDERS THAT:
1. The appeal be dismissed.
2. The appellant pay the respondent's costs of the appeal.