FC of T v METAL MANUFACTURES LTD

Judges:
Lee J
Carr J
Sundberg J

Court:
Full Federal Court

MEDIA NEUTRAL CITATION: [2001] FCA 365

Judgment date: 3 April 2001

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Lee J

I have had the advantage of reading the reasons prepared by Sundberg J, which set out the relevant facts and issues.

2. With regard to the issue relating to fixtures I agree with his Honour, for the reasons he gives, that the learned trial judge (Emmett J) did not err in finding that the items of plant, the subject of the arrangement for sale and lease- back, were fixtures, and that an equitable interest in that property vested in the State Bank of New South Wales (``the Bank'') upon purchase [ reported at 99 ATC 5229].

3. In respect of the deductibility of the outgoings of rent, s 51 of the Income Tax Assessment Act 1936 (Cth) (``the Act'') excepts an outgoing from deductibility to the extent to which it is an outgoing of capital, or of a capital nature. Division of the characterisation of an outgoing does not, however, require separation of the facts relevant to each component. All relevant facts must be considered, giving due weight to any transaction relevant to the outgoing that may govern the rights and obligations of the taxpayer in respect thereof. That is not to say that those rights or obligations are considered to the exclusion of other facts (
Magna Alloys & Research Pty Ltd v FC of T 80 ATC 4542 ; (1980) 49 FLR 183 per Brennan J at ATC 4547-4548; FLR 190). However care must be taken not to introduce an hypothetical construct that is considered to the exclusion of the effect of rights or obligations established by a relevant transaction.

4. As was stated by Stephen and Aickin JJ in
FC of T v South Australian Battery Makers Pty Ltd 78 ATC 4412 at 4421; (1977-1978) 140 CLR 645 at 662 :

``... We do not read Dixon J's judgment in
Hallstroms Pty Ltd v FC of T (1946) 72 CLR 634 as intended to convey that practical business considerations are to be used to the exclusion of an analysis of legal rights.''

5. Indeed, there will be cases in which the legal rights and obligations which generate the outgoing are sufficient to characterise the nature of it and it will be unnecessary to go beyond them. (
FC of T v Broken Hill Pty Co Ltd 2000 ATC 4659 per Hill J at 4667).

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ATC 4154

6. In the present case the outgoings made were payments of rent made by the taxpayer to obtain the use of property used in the conduct of its business. The only advantage obtained by the taxpayer was that which it obtained as lessee. Counsel for the Commissioner submitted, however, that a ``collateral advantage'' was sought by the taxpayer by making payments of rent, namely, the reacquisition of the property upon termination of the lease, and that the taxpayer made payment of the rent with the intention of obtaining the advantage of being able to negotiate with the Bank to repurchase the property at a price equal to the residual value stipulated in the lease. It was submitted that the difference between the residual value, which, it was said, may be expected to be the price of the property on the sale thereof by the Bank on the termination of the lease, and ``market value'' would be in the order of $31 million and that the outgoings by way of rent should be taken to have sought the advantage of a reduction in the cost of the asset to that extent.

7. If the Bank were to deal with the taxpayer at the termination of the lease, the Bank would do so after deciding that it was in its interests to deal with the taxpayer after considering various factors, including whether the taxpayer had duly performed its obligations under the lease and whether the taxpayer had the means to purchase the property. The contention that the payment of rent was calculated by the taxpayer to maintain good standing with the Bank in order that the Bank would deal with the taxpayer at a later date in respect of the sale of the leased property, fails to describe a circumstance sufficient to ground a conclusion that some part of the payments made by the taxpayer by way of rent were of a capital nature.

8. If it could be said that the taxpayer anticipated that at the termination of the lease it could discuss with the Bank re-acquisition of the property sold to the Bank and leased back to the taxpayer, neither the realisation of that anticipation, nor, for that matter, entry into an arrangement to reacquire the property, could be an advantage secured or effected by a part of each payment of rent.

9. With regard to the contention that the advantage sought was purchase of the property at less than ``market value'', the learned trial judge noted that in FC of T v Battery Makers , the arrangement under consideration in that case provided expressly that payments made by way of rent by the taxpayer were to be applied by the lessor/vendor in amortisation of the price to be paid for the leased property under an option to purchase granted to a party related to the taxpayer. In that case it was held that no part of the rent was paid by the taxpayer to secure an advantage for the taxpayer.

10. Emmett J noted that in the case before him, even if it could be said that the Bank would deal with, or sell the property to, the taxpayer at less than market value, the taxpayer had no right to call on the Bank to sell the property to it at that price. Furthermore, if in due course, the property were to be purchased from the Bank by an entity other than the taxpayer, albeit an entity related to the taxpayer, any advantage represented by the difference between the purchase price and the market value would fall to the purchaser and not the taxpayer and could not be said to be an advantage in the nature of capital sought by the taxpayer. (see FC of T v Battery Makers per Gibbs J ATC p 4420; CLR p 660; per Stephen and Aickin JJ ATC p 4421; CLR p 662) In other words, the learned trial Judge was satisfied that the instant case was even a stage removed from the facts in FC of T v Battery Makers and that it could not be found that any part of the rent paid by the taxpayer sought to effect an advantage of a capital nature. In my opinion, his Honour's analysis was correct and involved no error of law.

11. It is unnecessary, therefore, to consider what principles should have been applied to ascertain what the value of the property would have been upon termination of the lease to determine whether that value exceeded the residual value.

12. When regard is given to the ``whole picture'' (
BP Australia Ltd v FC of T (1965) 14 ATD 1 ; (1965) 112 CLR 386 per Lord Pearce at ATD 9; CLR 399) the cardinal facts are that the taxpayer made genuine payments of rent pursuant to a Lease under which the taxpayer obtained no interest in the property the subject of the Lease. If the taxpayer defaulted under the Lease it could make no claim for relief against forfeiture in respect of the payments the Commissioner contends were payments in the nature of capital. No part of any outgoing paid by the taxpayer by way of rent is able to be isolated to be shown not to be rent but an

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ATC 4155

outgoing to obtain an interest of a capital nature. It is plain that the whole of the payments were incurred and discharged to obtain the right to use the property for the conduct of the taxpayer's business.

13. I agree with Emmett J that no part of the outgoings made by way of rent were shown to be an outgoing of a capital nature.

14. The final issue is whether Part IVA of the Act applied to the circumstances described. The appeal in this matter was heard in conjunction with the appeal in
Eastern Nitrogen Ltd v FC of T 2001 ATC 4164 ; [ 2001] FCA 366 . Both matters involved proposals for the borrowing of funds put to the respective taxpayers by Macquarie Bank Ltd. In the instant matter the funds obtained by the taxpayer on sale of the property to the Bank were applied in reduction of short-term debt and to put the finances of the taxpayer on a more stable foundation in the conduct of its business but there is no difference in substance in the respective arrangements under consideration in this case and in Eastern Nitrogen , and the further reasons provided by me, and by Carr J, in Eastern Nitrogen as to why Part IVA of the Act did not apply to the arrangements in that case, apply equally to this matter.

15. For the reasons provided by Emmett J, I agree with his Honour that an objective consideration of relevant facts did not show that the taxpayer, or any other relevant party, entered into the finance arrangements for the dominant purpose of obtaining a tax benefit for the taxpayer. Therefore, Part IVA of the Act did not apply to permit the Commissioner to exercise a discretion under s 177F to determine that any part of the payments made by way of rent were not an allowable deduction from the assessable income of the taxpayer. His Honour considered each of the components of s 177D(b) and applied those provisions to the facts before him. It has not been shown that his Honour erred in any respect in the construction of the provisions of s 177D or in his application of those provisions to the relevant facts.

16. The submissions put by the Commissioner relied on degrees of emphasis and on the weight his Honour may have given some facts if he had been persuaded so to do, and upon a contention that had his Honour so acted, he may have formed another view of the application of Part IVA to the facts of this case. As stated above, no error of law in his Honour's approach to the construction and application of the relevant provisions has been demonstrated.

17. The appeal must be dismissed.