Case A43
Judges: JL Burke ChRC Smith M
RE O'Neill M
Court:
No. 1 Board of Review
R. E. O'Neill (Member): The main business of the taxpayer company - engineers and contractors - is the manufacture and ``on site'' erection of steam raising plant and equipment - the construction of thermal power stations for electricity authorities. To a lesser extent it manufactures and instals plants for heavy industry. The components parts for plants are manufactured at its Sydney works whence they are transported to the client's site where the plant is to be erected. In 1962; the year to which this reference directly relates, the larger jobs on which it was engaged comprised five contracts for power stations - two in Victoria and three in Queensland, and six contracts for industrial installations - in Tasmania, South Australia, Victoria and N.S.W. The ``on site'' work force included 400 to 500 men employed directly by the company. Others were employed ``on site'' by sub-contractors. The construction of a complete power station is a long-term project carried out in stages so that the company may be engaged on a particular site for as long as six years or more. The contract price for each stage runs into many millions of dollars.
2. When the company's tender is accepted it starts upon the manufacture at its works in Sydney of the component parts. About the time when manufacture of components is sufficiently advanced to ensure that deliveries from the Sydney works will provide continuity of the contract work on the site, steps are taken to establish the site. In terms or a typical contract the company has such access to the site as will enable it to carry out the works of the contract. The client undertakes to make available to the company storage areas on the site for the handling and storage or contract plant and materials, but the company is obliged at its own expense to provide any office, store, or other erection that it may require; the company must also provide at its own expense change rooms for workmen and sanitary accommodation on the site. Upon completion of the contract the company is bound to remove from the site all such erections as it has put there for its needs while carrying on the contract work.
3. Thus the establishment of the site calls for the provision by the company of sheds for such uses as site offices, storage of construction items and tools, workshops for maintenance of machines and tools on the job, mess huts, locker and change rooms, toilets, and wash rooms. The supply of such sheds to a site is a function of an employee of the company who is designated as erecting gear
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and equipment controller. He maintains a ``tool control card'' for each shed on which is recorded its distinctive number, description, date of purchase, cost, and its location. An inventory of all gear and equipment including sheds on each contract site is taken annually and any discrepancies between the inventory and the tool control cards is investigated. The system amounts to the keeping of a ``plant register''. The main issue in this reference is whether the company is entitled to a deduction for depreciation in respect of such sheds.4. For the company's accounting purposes it divides the sheds into two classes: standard sheds and special sheds. The standard sheds are easily portable either as units or in convenient sections. The cost of standard sheds is debited to Erectors Tools Account and depreciation is written off such cost at 10 per cent per annum and charged to a General Erecting Expense Account which is allocated to jobs on the basis of direct labour costs. For balance sheet purposes Erectors Tools Account is treated as representing fixed assets.
5. The cost of special sheds is not capitalized in the company's accounts but is charged to the cost of a particular job where the sheds are erected. This is done by charging the cost to a subsection of the job cost where it is held in suspense. Periodically, transfers at the rate of 10 per cent per annum are made from the suspense section of the job cost to the running section of the job cost. The balance of the suspense account at the close of the company's accounting year is treated as work-in-progress. On completion of the site work on any particular job the balance of the cost of special sheds put on the site is adjusted against the contract to reflect any scrappings or sales. If a special shed is moved from a site to a new job site, its written down value is transferred to the suspense section of the job cost of the new job. The written down value of any special sheds held for an unknown future use is transferred to Erectors Tools Account from the suspense section of the relevant completed job.
6. The company objected against the disallowance by the Commissioner of deductions it claimed in its 1962 return in respect of both standard and special sheds. By its objection it claimed - (a) that standard sheds are depreciable as being plant or articles within the meaning of sec. 54, and (b) (i) that special sheds also are depreciable as being plant or articles in terms of sec. 54 or alternatively, (b) (ii) that the special sheds represent direct costs of carrying out the relative contracts and are not outgoings of a capital nature and the amounts charged as reductions in their value are deductible under sec. 51. Eventually the Commissioner allowed the objection in part to the extent of conceding that some sheds, generally those classed by the company as standard sheds, are depreciable items. But he adhered to his original decision refusing any deduction in respect of those classed by the company as special sheds and in respect of a few sheds which the company had transferred from job costs suspense to Erectors Tools Account so that thereafter they were accounted for in the same way as were standard sheds.
7. In the course of discussions with the Commissioner the sheds were classified into seven groups and, at the hearing of the reference, evidence was given in relation to each of the seven groups -
- (1) Constructed as completely portable units: Included in this group are seven sheds each 10ft. by 10ft. and one shed 30ft. by 15ft. All are timber framed with weatherboard walls, timber floor and galvanized iron roof. Excepting the one larger shed the sides, roof and floor are sectionalized to enable sections to be bolted together and thus readily assembled or dismantled. On the site they simply rest by their own weight upon loose brick foundations sufficient to keep the timber bearers clear of mud and arranged to give a level floor. The larger shed is used as an office and instrument store; the other seven serve as site offices and as stores for small construction items. All may be moved as fully assembled on units being handled on and off the transporting vehicle by mobile cranes; for movement over long distances all but the larger shed are broken down into sections. The size of the larger shed, which is not sectionalized, restricts its portability.
- (2)
constructed in conveniently portable sections:
This group comprises 17 sheds 24ft. by 12ft. and a brick cutting machine shed 9ft. by 6ft. Their construction is the same as those in group (1) and when assembled on site they rest by their own weight on loose foundations. They are used on contract sites as stores for small tools and equipment, as foremen's offices, as locker and change rooms, and
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as mess huts. These sheds differ from those in group (1) only in that their size and general design do not permit their handling as fully assembled units. For transporting they must be broken down into their sections. - (3) Readily sectionalized for transport: The one shed in this group is a standard product marketed by Wiles Steel Constructions. It is 18ft. 1in. by 10ft. 4in. It is of steel frame construction with walls of metal panels, roof of steel tiles, and floor of timber. Like the sheds in groups (1) and (2) when assembled on a site it rests by its own weight on loose foundations. It is used variously as a site office, store for small items, or locker room. For transportation it is broken down into sections.
- (4) Readily sectionalized for transport - Hawksley Huts: The three sheds in this group are standard products of Hawker Siddeley Co. Each is 65ft. 6in. long by 26ft. 9in. wide. They are constructed of a steel frame, walled and roofed with aluminium panels, and with a timber floor. They are erected on hardwood stumps sunk into the earth so as to give clearance above ground level. The steel frame is bolted to the hardwood stumps. They are used on site as offices and locker rooms. They are designed for ready assembly and dismantling. For transportation over long distances they must be reduced to their component parts. To date, sheds in this group have only been moved short distances - 12 miles from one contract site to another, and for relocation within the one contract site. On those occasions the taxpayer company has reduced a shed into three sections and transported each section as a complete unit.
- (5) Framework readily sectionalized for transport: This group is made up of 16 sheds which are the standard products of various manufacturers. They vary in size from 100ft. by 40ft. to 30ft. by 25ft. In principle they are similar to one another in construction, but details vary in accordance with the manufacturer's standard. Basically the structure of each shed consists of a number of steel portal frames each consisting of prefabricated sections. A portal frame section consists of two uprights each with a slanting member. For assembly the upright is bolted to the slanting member which may be bolted to an extension piece which, in turn, is bolted at the centre to a repeat number of pieces on the opposite side. The frames are then stood up independently and braced to each other on the end for wind resistance. Each frame leg is bolted to a base plate attached to concrete footings containing holding-down bolts. In between, the frames are joined by bolting to them steel angle, or timber, girts and purlins. Corrugated galvanized iron roof and wall sheeting is fixed to the purlins and girts by hook bolts to angle, or screws to timber. Sheds in this group used as storage sheds usually have an earth floor, those used as workshops or amenities blocks generally have a light concrete floor.
- Sheds of this type are purchased with a view to transporting them from one contract site to another and some have in fact been so moved even interstate; others have been moved and relocated within a particular site. For transportation the walls and roof are rendered piece-small and loaded in bundles; the frames are reduced to sections. It is the company's policy to keep the sections and components of each shed as a unit.
- (6) and (7)
Fixed sheds for one site only:
These two groups may be conveniently dealt with together. They are erected on a long-term contract site in the expectation that their usefulness will be exhausted at the end of the site work. The two groups embrace 13 sheds varying in design and construction. Three are weatherboard huts
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two used as site offices and one as a mess room: two are fixed to concrete piers and one to a concrete floor. Seven have timber frames bolted to concrete floors and are fitted with corrugated iron walls and roofs; they are used as wash rooms or toilets. One is a galvanized iron bulk store with earthen floor. Of the remaining two sheds one is a bundy time clock shelter built as a three-sided lean-to against a Hawksley hut with a timber frame bolted to the concrete floor and having walls and roof of corrugated iron; the other is a two-sided open-ended cover for powerful winches and is constructed with timber frame and corrugated iron sides and roof and it rests on the ground by its own weight.
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Two of the abovementioned corrugated iron amenities sheds have at one time or another been broken down completely and such of the resulting materials as could be used were used to construct elsewhere another fixed toilet or wash room. These two sheds comprise group (6), but for present purposes I think they must merge with group (7) which comprises sheds built without thought of their being dismantled for relocation.
8. The Commissioner allowed depreciation on the sheds in groups (1) to (3) because it was his view that they come within the decision in
Quarries Ltd.
v.
Federal Commissioner of Taxation
(1961) 106 C.L.R. 310
in that they are not fixed to the ground in any way and are constructed so as to be readily portable. Quarries Ltd. carried on the business of quarrying and crushing stone to fulfill contracts which frequently required that it conduct its operations at remote places so that it had to move its equipment and employees from site to site. To provide accommodation for its employees it used portable sleeping units each 8ft. by 7ft. consisting of a timber frame with walls and roof of galvanized iron. The units rested on the ground by their own weight and were loaded on and off transports by crane. The duration of operations at each site varied from three to 12 months.
Taylor
J. held that the units were ``plant or articles''.
9. On the other hand it was said of sheds in groups (4) to (7) that they are not constructed so as to be readily portable and are so fixed to the ground that they constitute buildings on the site. They are no more than the local setting for the company's ``on site'' construction activity in which they play no active part but have only a passive role. The uses made of them and their appearance as buildings combine to take them out of the concept of ``plant'' and hence depreciation is not allowable on them.
10. So far as it need be quoted for present purposes sec. 54 provides -
``54. - (1.) Depreciation during the year of income of any property, being plant, or articles owned by a taxpayer and used by him during that year for the purpose of producing assessable income... shall, subject to this Act, be an allowable deduction.
(2.) In this section, `plant' includes -
- (a)... machinery, implements, utensils and rolling stock;
- (b) fences, dams and other structural improvements on land which is used for the purposes of agricultural or pastoral pursuits...''
11. In
Broken Hill Proprietary Co. Ltd
v.
Federal Commissioner of Taxation
(1968) 41 A.L.J.R. 377
Kitto
J. held,
inter alia,
that the company's iron ore pelleting plant at Whyalla was not ``necessary plant'' within the meaning of sec. 122(1) as it stood prior to amendment by Act No. 60 of 1968, because it was not acquired as being appropriate or convenient for the carrying on of the mining operations and its only claim to be considered as ``plant'' was in relation to operations subsequent to and separate from mining. At pp. 487-488 his Honour said
-
``As to the meaning of the word `plant', it is sufficient at this point to refer to a line of English decisions from
Yarmouth v. France (1887) 19 Q.B.D. 647 , at p. 658 , to
J. Lyons & Co. Ltd. v. Attorney-General (1944) 1 Ch. 281 , at p. 287 , and
Jarrold v. John Good & Sons Ltd. 40 T.C. 681 , and to say that, in my opinion, in accordance with the exposition to be found in these cases, the word as used in sec. 122(1) includes every chattel or fixture which is kept for use in the carrying on of the mining operations not being (in the case of a building) merely in the nature of a general setting in which a part of those operations are carried on.''
12. In
Waratah Gypsum Pty. Ltd.
v.
Federal Commissioner of Taxation
(1965) 112 C.L.R. 152
McTiernan
J. was also concerned with the application of sec. 122(1), as it stood prior to amendment by Act No. 60 of 1968, to expenditure on ``necessary plant''. He there held that expenditure on the erection of a carpenter's workshop, an engineering workshop, a blacksmith's workshop, a store, a shed for fuel storage and an office was expenditure on ``plant'' which, he said at p. 161, ``is the fixtures, implements and machinery used in an industrial process''.
13. Although in the above citations there is an accent upon ``plant'' being things used in an industrial process and this is strictly in accord with the denotation of the word, it may be noticed that in both cases their Honours were directly concerned with ``plant'' in the context of the special mining provisions of the Act. It has however been suggested that the denotation of the word restricts its application in the depreciation provisions (sec.
ATC 249
54 et seq. ) to property used in manufacturing or industrial processes((1966) 17 T.B.R.D. Case S25, pp. 147-149), but in light of its connotation in those provisions the better view, it seems to me, is that it should not be so restricted (
(1965) 15 T.B.R.D. Case Q7 at pp. 29-30;
(1965) 15 T.B.R.D. Case Q8, at pp. 34, 37-38;
(1966) 17 T.B.R.D. Case S27 at p. 164 contra pp. 165-166). This aspect need not be further developed in the present case for here the taxpayer's ``on site'' activities constitute a manufacturing process - see
Prestcold (Central) Ltd. v. Minister of Labour (1969) 1 All E.R. 69 .
14. In the B.H.P. case (supra) Kitto J. was also concerned with a contention that the expense of demolishing in the company's steelyards a structure to permit the erection of a new structure was, if the new structure was ``plant'', part of the cost of the new structure on which depreciation should be allowed under sec. 54 et seq. Speaking to that contention his Honour said at p. 387 -
``This contention has required careful consideration, because I am of opinion that most of the structures that the appellant has erected on sites set free by demolitions are in the nature of plant. I do not exclude buildings simply because they are places where operations are carried on. I do exclude those which merely provide shelter for persons as they work and for their equipment, e.g. offices: the prefabricated rigid-frame building which houses the new pipe shop, the construction store, the blacksmith's store, and the painters' and lubrication engineers' workshop; the changehouses and the works canteen; but I regard as plant the buildings which are more than convenient housing for working equipment and... play a part themselves in the manufacturing processes...''
15. Although there appears to be some contrast between the views of
Kitto
J. and
McTiernan
J. as to what buildings might be categorized as ``plant'', the relevance of the two cases to the present problem is that both learned Justices treat the term ``plant'' as being capable of including permanently fixed things such as buildings
-
see also per
Jordan
C.J. in
Australian Gas Light Co.
v.
Valuer-General
(1940) 40 S.R. (N.S.W.) 126
at p. 139.
16. That is a view which has of recent years also been expressed in Board decisions, e.g.,
(1965) 15 T.B.R.D.
Case
Q7 on pp. 23-24 where citations are gathered from relevant authorities and
(1966) 17 T.B.R.D.
Case
S25 at pp. 147-149. In
Case
S25 Mr. J. D. Davies said at p. 148
-
``In my view, it may well be proper to term a particular building or a structure in the nature of a building, either by reason of the slightness of its structure, or the impermanence of its situation, or the unusualness of its construction and design or its function, as plant. One must look at the particular case. The true rule is correctly stated by saying that, prima facie, buildings are not plant.... It seems to me that there would in fact be many items of property in the nature of buildings which would come within the description of `plant'.''
17. Accepting that the term ``plant'' is capable of including permanently fixed things such as buildings, it necessarily follows that the fact that a building or a structure in the nature of a building is affixed or annexed to the land is not of itself conclusive that the structure is not ``plant'' within the meaning of sec. 54. Nor has the inclusion as ``plant''
-
by definition in sec. 54(2) (b)
-
of ``structural improvements'' on land used for specified purposes been regarded as a provision from which it necessarily follows that ``structural improvements'' on land that is not used for any of the purposes specified cannot be ``plant'' for depreciation purposes. That view is implicit in the passage already cited from the
B.H.P. case
and in such Board decisions as
11 C.T.B.R.
Case
37 (tile manufacturer's chimney stack) and
(1960) 11 T.B.R.D.
Case
L19 (effluent disposal system of sugar mill).
18. It follows from the foregoing in my opinion that the fact that sheds in groups (4) to (7) are fixed to sites where the taxpayer company is building power stations is not enough of itself to deny to them the character of ``plant''.
19. But then it is said that the sheds in question have only a passive role and play no active part in the company's ``on site'' activity and so their real character is no more than that of local setting for site operations. I doubt very much whether it is right to say that sheds provided pursuant to contractual obligation for use in the course of performing the contract work on the site play only a passive rather than an active role. In any event neither the portable sleeping units which in the
Quarries case
(1961) 106 C.L.R. 310
were held to be depreciable ``plant or
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articles'', nor the movable office partitions which in Jarrold v. John Good & Sons Ltd. 40 T.C. 681 were held to be ``plant'', played any active part themselves, in the one case, in the quarrying of stone or, in the other, in the operations of the business of shipping agents.20. When, in the B.H.P. case, Kitto J. said that he would exclude from ``plant'' buildings which merely provided shelter for persons as they worked and for their equipment, the buildings he had in mind were all permanent features of fixed business premises - the company's permanent steelyards - in which the company carried on business and in those circumstances he treated them as being merely in the nature of general setting in which business operations were carried on. The context in which taxpayer uses sheds on contract sites seems to me to distinguish them from like structures in such circumstances as his Honour had in mind, for ``setting'' and ``plant'' are not mutually exclusive conceptions ( Jarrold v. John Good & Sons Ltd. 40 T.C. at pp. 688, 692, 694).
21. Here the taxpayer's business is just as much of a special character as was that of the taxpayer in the Quarries case 106 C.L.R. 310 - a matter stressed by Taylor J. in that case. The present taxpayer's main business consists of carrying out contracts which it enters into with various authorities throughout Australia and which require it to supply and erect power plants on widely scattered sites. Its contractual obligations require it to provide on the site and at its own expense any office, store, or other erection that may be needed, including change rooms and sanitary accommodation for the work force it engages for the job. To meet such requirements it had in 1962 some 60 or more sheds located on various sites. In those circumstances the question is whether such sheds form ``part of the premises in which the business is carried on, or part of the plant with which the business is carried on'' - see per Pearson L.J. in John Good's case 40 T.C. at p. 696.
22. The most generally accepted judicial definition of ``plant'' is that of
Lindley
L.J. in
Yarmouth
v.
France
(1887) 19 Q.B.D. 647
at p. 658
: ``In its ordinary sense, it 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 movable, live or dead, which he keeps for permanent employment in his business.'' That definition was approved by the House of Lords in
Inland Revenue Commissioners
v.
Barclay Curle
&
Co. Ltd.
(1969) 1 All E.R. 732
where it was held that a dry dock including the concrete walls and floor was ``plant''.
23. On the face of Lindley L.J.'s description it appears squarely to cover the sheds in question in the present case as being apparatus used by the taxpayer for carrying on its business. The nature of the taxpayer's business dictates that it should put such sheds on contract sites. Their special purpose is to facilitate ``on site'' construction and their positioning on site is pursuant to its contractual obligations. In relation to the taxpayer's business of performing large scale engineering contracts on various clients' sites it seems to me to be unreal to say that sheds it puts on such sites are mere setting in which some part of its business is carried on. At any particular time sheds upon a contract site are there only temporarily for the duration of and for the purposes of and in relation to the particular job which the company has contracted to do at that site. In such a context it seems to me that the sheds have the character of ``plant'' rather than that of ``setting'' even though like structures would be ``setting'' if located permanently on the company's own business premises for similar uses in relation to its continuing operations at those premises.
24. In the circumstances of this case I find myself unable to deny to the sheds in question the description of apparatus used for carrying on the taxpayer's particular business - that description seems to me to be just as applicable to these sheds as it was held to be applicable to the office partitions in Jarrold v. John Good & Sons Ltd. 40 T.C. 681. In my opinion the sheds in question are ``plant'' in terms of sec. 54. I make no distinction between sheds in groups (4) and (5) which are sectionalized to permit their being dismantled and re-erected elsewhere with minimum expense and trouble and those in groups (6) and (7) which are not so designed. Sheds in groups (6) and (7) are, no less than those in groups (4) and (5), put on contract sites only temporarily for the duration of a contract and to enable the taxpayer to carry out that contract. Upon completion of any contract the taxpayer's obligation is to remove all sheds of whatever
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kind it has put upon the client's land for its own use while it is performing the contract.25. It was specifically stated by the Commissioner's representative that it was not disputed either that the sheds were (a) ``owned by the taxpayer'' or (b) that they were ``used by it... for the purpose of producing assessable income''. In light of concession (a) there was no discussion at the hearing of what the position might be if in any case a contract should contain a clause vesting in the client such plant and equipment as the taxpayer might bring to the site for carrying out the work - see Halsbury, 3rd Ed., Vol. 3 at pp. 502-506 where, inter alia, the following statement appears -
``Vesting of plant, etc. In the course of building and engineering operations, in which it is necessary to use plant which is more or less affixed to the soil, it depends on the circumstances of the case whether the property in the plant vests in the owner of the soil. The intention of the parties when they entered into the contract is the governing factor. During the continuance of the contract hoardings, etc., seem, apart from special stipulations, to remain the property of the contractor.''
26. For the reasons given I would allow the taxpayer's claim for a deduction for depreciation and further amend the assessment accordingly.
Claim allowed.
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