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PORT OF PORTLAND PTY LTD v FC of T

Members:
Downes P
GL McDonald DP

Tribunal:
Administrative Appeals Tribunal, Melbourne

MEDIA NEUTRAL CITATION: [2008] AATA 1162

Decision date: 23 December 2008

Justice Downes, GL McDonald (President, Deputy President)

Conclusion

1. The relevant tax legislation permits the depreciation of plant. The principal question is whether two breakwaters owned by the taxpayer Port of Portland Pty Limited, which form Portland harbour, are plant. It may be counter-intuitive to suggest that such substantial structural improvements, set on the seabed, are plant. This is, however, what we have concluded. They are part of the means by which the taxpayer carries on its business rather than the setting in which the business is carried on. We have concluded, however, that a groyne or retaining wall attached to the main breakwater, the primary function of which is to protect and retain reclaimed land, is not plant.

Legislation

2. Before its amendment in 2001, s 42-15 of the Income Tax Assessment Act 1997 (Cth) provided a depreciation deduction for "plant" which was used in the production of income. The then s 42-18 contained an inclusive definition of "plant". However, none of the specifically identified items described in s 42-18 are of relevance to this case. Consequently, the common law understanding

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of what is constituted by "plant" would apply if the 1997 Act had continued in force unamended. The 1997 Act was amended, however, in 2001 and the notion of "plant" was replaced in the substituted Division 40 by the concept of "depreciating assets".

3. Accompanying the amending Act was the Income Tax (Transitional Provisions) Act 1997 (Cth) which relevantly provides, in s 40-10(1), that that section applies to a taxpayer that had claimed depreciation for plant under the 1997 Act before it was amended. Section 40-10(2) applies the depreciation deductibility provisions introduced by the amended legislation to plant which continued to be held by the taxpayer at 1 July 2001. The breakwaters were the subject of earlier claims and were held by the applicant as at 1 July 2001.

Portland Harbour

4. Portland is the birthplace of Victoria. It was named, in 1800, after the Duke of Portland. Flinders and Baudin noticed it when they sailed past, weeks apart, in 1802. Whalers and sealers visited it in the first part of the nineteenth century. One whaler, Edward Henty, was first to settle there, in 1834, and begin to use its land for agriculture.

5. The land form gives the seafront at Portland some protection from the ocean. There is, however, no natural harbour, as there is with the three other commercially operating ports in Victoria (Melbourne, Geelong and Hastings). Nevertheless, by the middle of the nineteenth century, Portland was used for shipping. A jetty was constructed in 1846. A deepwater pier followed. By the middle of the twentieth century proposals were in train for the construction of a sheltered port. In 1945 the Victorian Parliamentary Public Works Committee recommended that a port should be developed. Plans were drawn up. A corporation called the Portland Harbour Trust, later called the Port of Portland Authority, was constituted by the Portland Harbour Trust Act 1949 (Vic).

6. Construction work began on the port in 1952. Basic infrastructure was in place by 1959, when shipping began to use the new port, with the necessary breakwaters being fully completed by 1965. Thereafter, the port facilities were expanded and modernised. Two wave walls were added to the breakwaters, but, apart from necessary maintenance, the breakwaters remained otherwise unchanged. The operation of the port continued under the Port of Portland Authority until 1996 when a decision was made by the Victorian government to privatise the port.

7. In 1996 the port was sold and its business and assets transferred to the taxpayer. The taxpayer has been conducting the business of the port since that time.

8. The evidence before us from Mr Scott Paterson, the taxpayer's Chief Executive Officer, Mr Peter Farrow, the Project Engineer, Mr Veluppillai Vijayapalan, the Port Marine Manager, Mr Peter Moir, the Operations Manager and Mr Geoff Atkins, an expert engineer with extensive experience in advising on harbour works, describes in great detail the design of the port structures and how it operates. However, there was little dispute on the facts. None of the applicant's witnesses were cross examined. It seems to us that the pertinent facts can be relatively simply stated.

9. Portland is set on the western side of Portland Bay which is a very large bay approximately 50 kilometres wide on the south coast of Victoria. At the western extremity of the bay is Point Danger and Lawrence Rocks which provide some shelter from the south and west. The shore at Portland is in the shape of an arc facing north-east. The modern port is enclosed by two breakwaters. The main breakwater is 1310 metres in length and runs broadly north-south and protects against the prevailing sea from the east and south-east. The other breakwater, the lee breakwater, is 1120 metres in length and runs broadly east-west and protects against seas from the north-east as well as minimising littoral drift of sand into the harbour and the effect of refractory waves from the main breakwater. If the gap between the entrance to the harbour between the two breakwaters is seen as containing the centre of a circle, the breakwaters are the radii and the shore is the arc joining them.

10. Within the harbour there are three berths immediately adjacent to the main breakwater. Two of these are located on the KS Anderson wharf. The third is the smelter berth used exclusively for handling aluminium. Alumina dust is unloaded and transported by an overhead

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conveyer belt constructed along the breakwater which passes underground as it leaves the port for processing in a nearby smelter factory. Additional berths are located on reclaimed land opposite the main and lee breakwaters. Two further berths are located on the SL Paterson wharf adjacent to the lee breakwater. The port provides bulk and general cargo facilities. It deals in substantial quantities of grain and woodchips.

11. A feature of the port is a deepwater turning circle which permits vessels to be turned by tugs, after entering the port, and then moored facing the entrance to the harbour. The SL Patterson Berth is generally used to tie up the tugs.

12. The port provides a vital shipping link for western Victoria and south-east South Australia. The port is linked to these areas, particularly western Victoria, by both road and rail. The areas support substantial grain growing and wood chip forestry. These, along with aluminium, provide a substantial, but by no means the whole, of the business of the port. Indeed, recent drought conditions have substantially reduced the throughput of grain.

13. Adjoining the port lands and extending south-east was some low lying land, in front of small cliffs, threatened by the sea. This land was reclaimed and protected by a groyne. The land and groyne were part of the property acquired by the taxpayer. The north-western end of the groyne joins the southern end of the main breakwater. The resumed land is used as the site of a fertilizer factory which benefits from proximity to the port. The taxpayer earns income from the occupation of the land by the factory.

14. The assets which the taxpayer acquired when the port was sold include the land on which the breakwater and the groyne are constructed and the reclaimed land on which the port facilities are constructed. In addition to loading and unloading equipment, the facilities include storage sheds for wheat and woodchips, grain silos, a bulk storage site presently used for woodchips and port offices. The breakwaters and groyne were transferred as structural improvements.

15. The assets transferred included a trawler wharf, built on an earlier breakwater on the same alignment as the main breakwater but much closer to the shore, with which is associated a slipway and a fishermen's wharf. The earlier breakwater is complemented by another small breakwater, now used to support a marina, which enclosed a smaller anchorage. It seems that the trawler wharf, slipway and fishermen's wharf and the land on which they are constructed, were transferred to the taxpayer. The evidence does not disclose whether the use of these facilities creates income for the taxpayer, but it seems likely that it would. The smaller anchorage also contains a yacht club and a boat ramp as well as the marina. Inside the lee breakwater there is reclaimed land along the shore which houses a museum. It is not clear whether this land was transferred to the taxpayer.

16. The taxpayer is the port authority. Port officials, such as the Harbour Master, are employees of the taxpayer. The taxpayer and these officials have duties under Victorian state legislation relating to safe navigation inside and outside the port and maritime safety generally and, since 2004, under a Federal regime regulating security at ports.

Are the breakwaters and groyne plant?

17. This case is concerned with the four income tax years ending 30 June 2001 to 30 June 2004. The taxpayer claimed a good deal of the port infrastructure as depreciable plant. This included, no doubt, movable items such as cranes and the like, as well as some fixed items such as bollards and dolphins. Some of these are constructed on the breakwaters. It also included the breakwaters and the groyne. Other items such as reclaimed land upon which the port facilities were constructed and the sloping rock wall sides of that land were not claimed as plant. Broadly speaking, the Commissioner allowed the claimed items except the breakwaters and the groyne.

18. A great deal was said in argument as to what was the business of the taxpayer. The taxpayer argued that its business included the provision of a safe port as well as the provision of facilities and services for the loading, unloading, repair and servicing of vessels. The Commissioner argued that the taxpayer's relevant business excluded the provision of the port facilities. The alternative submissions were

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presented to support, respectively, the arguments that the breakwaters did or did not perform a function as part of the taxpayer's business. In respect of the groyne the taxpayer submitted it was plant because it aided the function performed by the breakwaters and protected the reclaimed land from which the taxpayer received rent.

The breakwaters are plant

19. We are satisfied that the business of the taxpayer includes all of the described activities. We think this is obvious from a superficial examination of what the taxpayer does. This tentative conclusion is confirmed by the evidence. The heart of the business of the taxpayer is providing facilities and services for the loading, unloading, servicing and repair of vessels. An inseparable part of these activities is holding vessels in a firm and stable position so that the operations can take place. Part of this involves securing the vessel safely to a berth so that the operation can take place safely and efficiently and without damage to the wharf or vessel. It is obvious that the breakwaters play an important role in this function. One only has to contemplate what might be required to safely secure a vessel in the unlikely event that such a wharf were exposed to the sea. The probable answer is that no level of protection would provide the same safety and security as the breakwaters.

20. It is tempting to draw on experience that port facilities are often provided in natural harbours or in harbours not owned by the owner of the port facilities and to reason that the provision of a safe port is not part of the business of the owner of the port facilities. That is not, however, this case. This is a case in which the one corporation provides both the port and the facilities and employs its assets towards both ends. The business of the taxpayer is, accordingly, the provision of the port itself as a safe harbour and the provision of the port facilities.

21. This conclusion as to what the business of the taxpayer is does not, however, answer the question. The fact that the breakwaters are functionally part of the business of the taxpayer does not mean that they are necessarily plant of the taxpayer. The same is true of the groyne. The roof of a wool store is functionally part of the business of the operator of the wool store, in keeping all wool clean and dry, but this does not necessarily mean that the roof of the wool store is part of the plant of its operator. The question is whether the breakwaters and the groyne are merely the setting in which the business is carried on (see, for example,
Wangaratta Woollen Mills Ltd v Federal Commissioner of Taxation 69 ATC 4095; (1969) 119 CLR 1;
Federal Commissioner of Taxation v Broken Hill Pty Co Ltd 69 ATC 4028; (1969) 120 CLR 240; and
Imperial Chemical Industries of Australia and New Zealand Ltd v Federal Commissioner of Taxation 70 ATC 4024; (1970) 120 CLR 396).

22. We have concluded that the breakwaters are not merely the setting in which the business is carried on. Although their function can be described as excluding hostile elements from the harbour area, and to that extent they are like a building which houses a store, they are nevertheless much more. They do not move, like machinery does and to that extent they are passive. There are, however, many decisions holding that passive structures can be plant. We also note, from the supplementary statement of Mr Farrow, the port's Project Engineer, that the breakwaters and the groyne require maintenance, including removing rock thrown over the breakwater onto the adjoining roadway, and the replacement of rock lost through the action of the sea. Without the maintenance the ocean would over time breach the breakwaters which in turn would destroy the other port installations and be "catastrophic" (at 2) for the port operations.

23. The breakwaters are much more than the mere housing for an activity. They are part of the activity itself. They play a role in keeping vessels in place to enable loading and unloading just as significant as the bollards, dolphins, guards and lines which are attached to, or in contact with, the vessel itself. The breakwaters were carefully designed to provide a harbour which is protected from the sea. The evidence suggests that they were well designed for the purpose, but that does not really matter. There are no degrees of tax deductibility associated with degrees of excellence in design.

24. The parties helpfully referred us to a number of cases on the question of what

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amounts to plant at common law, commencing with
Yarmouth v France (1887) 19 QB 647, where a horse was found to constitute plant in a business operating carts and horses. There is, however, a limit to the helpfulness of authorities in assisting a tribunal to determine whether facts do, or do not, fall within a category defined by the common law. While our finding will be one of fact, it must be appreciated that, as Megarry J said in
Cooke (Inspector of Taxes) v Beach Station Caravans Ltd [1974] 1 WLR 1398 at 1402; [1974] 3 All ER 159 at 166, "[t]o some extent the matter must be one of impression, though it is important that the impression should not be untutored."

25. We think it appropriate to refer particularly to two of the cases to which the parties directed our attention. The first is a decision of the House of Lords relating to a dry dock:
Inland Revenue Commissioners v Barclay, Curle & Co Ltd [1969] 1 WLR 675; [1969] 1 All ER 732. The majority in the House of Lords (Lords Reid, Guest and Donovan) concluded that the dry dock was a single entity which could not be divided between the concrete structure, on the one hand, and equipment associated with it which actually raised and lowered the water, on the other. They went further and held that the excavation which preceded the construction of the walls and base of the dock was a necessary preliminary to the construction of the dock.

26. Lord Reid did not think "mere size" (at WLR 679) disqualified a structure as plant. The test was whether the structure "fulfils the function of plant" (at 679). He identified two stages in the company's operations (at 679):

"First the ship must be isolated from the water and then the inspection and necessary repairs must be carried out. If one looks only at the second stage it would not be difficult to say that the dry dock is merely the setting in which it takes place. But I think that the first stage is equally important, and it is obvious that it requires massive and complicated equipment… It seems to me that every part of this dry dock plays an essential part in getting large vessels into a position where work on the outside of the hull can begin, and that it is wrong to regard either the concrete or any other part of the dock as a mere setting or part of the premises in which this operation takes place. The whole dock is, I think, the means by which, or plant with which, the operation is performed." (Emphasis added.)

27. The present taxpayer's operations can be divided into two stages in much the same way as the operations of the dry dock. Indeed, identifying such a division was the first step in the Commissioner's argument. However, just as it was wrong to look only at the second stage to characterise the operations of the dry dock, so it seems to us to be wrong to look only at the second stage activities here. In the case of the first stage with the dry dock, the object was isolation from the water; in the present case, it is the associated object of protection from waves.

28. Lord Donovan's description of the function of the dry dock may relevantly be equated to our description of the function of the breakwaters (at WLR 691):

"… [T]his dry dock, looked upon as a unit, accommodates ships, separates them from their element and thus exposes them for repair; holds them in position while repairs are effected, and when this is done returns them to the water." (Emphasis added.)

29. We are satisfied that it is an integral part of the applicant's business to provide both a safe harbour and the port facilities. The respondent appeared to rely on a submission that the taxpayer earned no income from the provision of a safe port whereas it derived income from the provision of the facilities. Because the taxpayer is a corporation governed by the profit motive it must seek to carry on its business profitably. The assets employed in the business include the breakwaters and the groyne. Profitably carrying on the business will normally include seeking a return on the investment of all assets employed and the cost of maintaining them. Whether its charges isolate this item does not matter although it appears to us from the evidence that they do (see supplementary witness statement of Mr Paterson, Attachment A). Nor does it matter if the taxpayer has not expressly taken these matters into account in the calculation of its charges. The charges may, for example, be

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affected by the pressures of competition. What does matter is that the assets are used by the business. We have found that they are. In
Yarmouth v France Lindley LJ stated (at 658):

"…. in its ordinary sense, it [plant] includes whatever apparatus is used by a business man for carrying on his business, - not his stock-in-trade which he buys or makes for sale; but all goods and chattels, fixed or moveable, live or dead, which he keeps for permanent employment in his business".

30. We are satisfied that the two breakwaters should be considered as part of the applicant's overall business activity and accordingly they should be characterised as part of its plant.

The groyne is not plant

31. That brings us to the groyne. There is little evidence about the function of the groyne. There can be no doubt that a primary function of the groyne is to protect and retain the reclaimed land on which the fertilizer factory is constructed. There is some evidence that the groyne compliments the work of the main breakwater, by partially directing the prevailing waves along, rather than against, the main breakwater, and that the groyne protects the southern end of the main breakwater. Mr Geoff Atkins, an engineer called to give evidence by the taxpayer, identified three functions of the groyne "in no particular order". They were:

  • "1. To provide protection to the reclaimed land… ."
  • "2. To protect the base of the adjacent cliffs from erosion."
  • "3. To provide support for the root of the Main Breakwater… . Without the [groyne] the Main Breakwater would intersect the cliffs. At this location there would be a focus of wave energy that would possibly require a different design incorporating larger rock on the breakwater. At this location the focus of wave energy may also cause problems with the stability of the cliffs."

We had the advantage of a view of the groyne, as well as of the port and breakwaters, to assist us in understanding the evidence.

32. We are not satisfied that the function of the groyne as a whole is sufficiently associated with the operations of the taxpayer for it to be classified as plant. To the extent to which it is said that the function of the groyne is to protect the reclaimed land and the cliffs and the factory built on the land, we consider that that does not make the groyne plant. That function can be equated with the walls and roof of a warehouse. It is the setting in which the operation takes place. We find, from the slight evidence before us, that the function of protecting the main breakwater is a subsidiary function to the function of protecting the reclaimed land. We do not consider that it is sufficiently associated with the port operations for it to constitute the groyne as plant for that purpose. We are not satisfied, therefore, that the groyne is part of the taxpayer's relevant plant.

Decision

33. The result is that we uphold the taxpayer's claim that the main breakwater and the lee breakwater, but not the groyne, are plant of the taxpayer in its business. What is before us, however, are applications to review particular decisions of the Commissioner. We expect that the parties will be able to use these reasons to draft formal decisions to give effect to them. We will accordingly stand the matters over to enable agreed draft forms of decision to be prepared by the parties. In the event that the parties are not able to agree on the forms of decision we will list the matter for further hearing to enable us to make the decisions.


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