Case A56

Judges: AM Donovan Ch
JD Davies M

GR Thompson M

Court:
No. 2 Board of Review

Judgment date: 9 September 1969.

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G. R. Thompson (Member): Section 124JA of the Income Tax Assessment Act provides for certain deductions in respect of expenditure of a capital nature incurred in the construction or purchase of a building -

``(1)...

(a) for use primarily and principally in carrying on a business of milling timber for the purpose of gaining or producing assessable income, including a building for use primarily and principally as residential accommodation by employees of the person who are engaged in, or in connexion with, that business, or by dependants of those employees; and

(b) situated in a forest and in or adjacent to the area where timber milled in the course of that business is or is to be felled,...''

The taxpayer claimed deductions under that section in respect of the income years ended 30 June 1964 to 30 June 1966. These deductions were disallowed by the Commissioner, and these references relate to the disallowance of objections lodged by the taxpayer against the Commissioner's decisions.

2. The taxpayer is the proprietor of a large and important industrial complex, the end product of which is newsprint. This newsprint is produced by pulping several varieties of hardwood by chemical and mechanical means. The principal raw material used by it goes on to the premises in the form of very large logs of hardwood which have been extracted from stands of timber located in a wide area ranging from 4 to 60 miles distant from the taxpayer's premises. Before being carted in, the trees are felled, trimmed and cut into lengths, each a multiple of 4 feet. This work and the cartage is done both by employees of the taxpayer and by independent contractors. Upon arrival at the premises, the logs are subjected to a number of highly mechanised processes, as a result of which the bark is removed, the logs are docked into lengths of 4 feet and either sawn or split into billets of a size which makes it possible or convenient for them to be used in the pulping process.

3. It was stated on behalf of the Commissioner that the part of the premises upon which these processes took place is a ``timber mill'' and, having had the opportunity of inspecting the premises, I believe that this concession was properly made.

4. This timber mill adjoins the remainder of the complex which, for the purpose of convenience, I shall describe as the paper mill. In close proximity also there are a number of residences erected by the taxpayer. The taxpayer's claim also related to two of these residences and, without detailing the evidence, I find it sufficient to say that I accept that the residences in question were erected for and, apart from a period during World War II, have been used as residential accommodation by key employees of the timber mill and their families. These residences have the external appearance of the type of residence that one would find in a working class suburb or a country town as ordinary domestic accommodation. Both the timber mill and the paper mill are located at the side of a running stream in what appears to be a very fertile valley which, judging by the farm houses erected thereon, appears to have been turned over for farming purposes for a very considerable time. At the rear of the timber mill, the country rises into hilly country which, by comparison with other areas inspected by the Board, particularly the ``concession'' areas, could best be described as being covered with low-grade timber. This area showed evidence of having

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been devastated by fire, but the inspection leaves one with the impression that it was never, at any time, comparable as to density of growth and size of timber with the areas that are currently being used for the purpose of timber-getting.

5. The timber mill is physically divided from the paper mill by a main railway line, but is connected with it by a light, narrow gauge tram line which is used to convey the billets of timber from the timber mill to the paper mill over a distance that I would estimate to be something less than 200 yards. The timber mill and the paper mill are also connected by a well-constructed and maintained roadway capable of carrying the heavy transport that is no doubt associated with both the timber mill and the paper mill.

6. Evidence was given, which I accept, that costing records were kept which enabled the costs of the timber milling to be readily ascertained, but I am left with the belief that the timber mill is treated for accounting and costing purposes as a department of the paper mill. There was no evidence that leads to the belief that anything in the nature of a commercial sale of the billets took place between the paper mill and the timber mill. Evidence was given that, at times, the timber mill had sold some heavy section-milled timber of the nature of bridging timber to outside authorities. It could not be said, however, that this was as a regular commercial activity of the timber mill.

7. The foregoing are, I believe, the salient facts in this reference, and I trust that I do no disservice to the taxpayer's case by not setting out fully the mass of detailed information carefully and, I believe, truthfully placed before the Board by the witnesses for the taxpayer. It is sufficient to say that, in reaching my decision, I have paid careful attention to the full transcript of the hearing.

8. Section 124JA, when one comes to construe it closely, embodies a number of inherent difficulties, but viewed as a whole it is clearly a section designed to provide some form of assistance to taxpayers engaged in some facets of the timber industry. The inclusion of residential accommodation and the use of the expression ``situated in a forest'' creates, in my mind, the impression that the section is designed to benefit what would be known colloquially as ``bush'' timber mills as distinct from ``town'' timber mills. One is familiar with the bush mill which is a fixture of the landscape in heavily-timbered areas to be found throughout Australia, and one is also familiar with the town mill which is usually of a more sophisticated type found located in the proximity of closely-settled areas. It is a characteristic of the bush mill that it is somewhat remote from settled areas and embodies, in close proximity to the actual sawmill, a small hamlet or village made up of cottages of relatively inexpensive construction in which the employees of the mill reside. One is also familiar with the sight of the remains of bush mills that have been abandoned after the stand of timber upon which it relied has been cut out. It is easy to understand that the capital works associated with such a venture, particularly the buildings, have a more expendable character than similar structures associated with other business activities.

9. Looking at sec. 124JA more closely, it is clear that to qualify for deduction under the section the deduction for expenditure of a capital nature must be associated with an activity that can be described as ``carrying on a business of milling timber'', and it must also satisfy the test of location by being ``situated in a forest and in or adjacent to the area where timber milled in the course of that business is or is to be felled''.

10. On the first point, I think the taxpayer runs into immediate difficulty. Did its milling activities amount to ``carrying on a business of milling timber''? I think not. The business of the taxpayer, as at present organised, can, I think, only be described as that of manufacturing and selling paper, and the milling of timber that was undertaken can fairly be described as only a process in that business. The highest at which the case could be put for the taxpayer, I think, is that it was engaged in timber-milling operations. It appears to be the intendment of the Act that the deductions provided for in sec. 124JA apply to a business of milling timber rather than mere timber-milling activity.

11. The question whether or not a business is being carried on is one of fact to be determined on a consideration of all relevant facts, and such a consideration leads me to the conclusion that the taxpayer was carrying on one business and one business only, that is the business of manufacturing and selling paper. It was not carrying on what could be described as a business of milling timber

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any more than the manufacturer of furniture could be said to be engaged in the business of milling timber because he cuts timber to the appropriate size for the purposes of his business, or that a person engaged in gold-mining could be said to be carrying on the business of quarrying because he uses certain quarrying operations to achieve his business goal. Thus, the taxpayer's claim fails in limine.

12. This renders it unnecessary to consider the other submissions relating to the situation of the timber mill in a forest and in or adjacent to the logging area which were very ably presented to the Board, but I would remark that if the views that I have expressed earlier in these reasons, that sec. 124JA was intended to apply to ``bush'' timber mills, are correct, the claim of the taxpayer would fail, for the overall impression that I gained from the evidence and from inspection of the subject property is that the timber mill is many stages removed by its location and the degree of sophistication of its operations from a ``bush'' mill.

13. For these reasons, I would uphold the Commissioner's decisions on the objections and confirm the assessments before the Board.

Claim disallowed