Macquarie Worsteds Pty. Ltd. v. Federal Commissioner of Taxation.

Mahoney J

Supreme Court of New South Wales

Judgment date: Judgment handed down 21 May 1974.

Mahoney J.: During the year ended 30 September 1970, the taxpayer constructed, in its factory at Albury, a false ceiling. The taxpayer claimed that this false ceiling constituted ``plant'' within sec. 62AA(2) of the Income Tax Assessment Act, 1936, (as amended) and that it therefore was entitled to an allowable deduction under that section for the purposes of calculating its taxable income of the cost of erecting the ceiling; the Commissioner of Taxation rejected the taxpayer's claim and assessed the taxpayer accordingly.

On 11 December 1973, the Taxation Board of Review No. 1 (by a majority) confirmed the Commissioner's assessment and the taxpayer has appealed to this Court.

The parties are agreed that the only issue between them in this proceeding is whether the ceiling is ``plant'' within the section.

The circumstances in which the ceiling was erected are as follows - At all relevant times, the taxpayer used the factory for the purposes of preparing worsted yarn from raw wool tops and polyester tops. The process involves a series of steps which have been referred to before me as combing, drawing, spinning, twisting and winding.

The premises in which this business was conducted were premises some 40 or more years old. In 1966, they consisted of a large factory having a roof of a saw-tooth shape, of the kind depicted in the photographs Exhibits D and E. The factory had no ceiling in the conventional sense, but portion of the external roof consisted of glass and portion of other building material, and, apart from beams, girders and the like and functional items such as lights, pipes, the space between the floor of the factory and the roof was open.

In 1966, the plaintiff, with a view to improving the efficiency of its business, installed in the factory certain machines, described as Savio machines. These machines were designed to carry out a twisting process upon the fibres in question. It was found that the machines were not operating to the desired efficiency. Upon investigation, the view was formed that, if the desired degree of efficiency was to be obtained, it was necessary to ensure that the machines operated in particular atmospheric conditions; in particular, the view was formed that they should operate under particular conditions of humidity.

It was also in contemplation at the time that there would be installed in the factory, machines of another type, described as ``Repco'' machines, and the view was formed that for these machines also to operate to the desired degree of efficiency, particular conditions of humidity were necessary. The conditions appropriate to each of the machines do not appear to have been precisely similar, but in each case it was felt

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necessary that steps be taken to modify the humidity which would naturally obtain in the factory.

For this purpose, expenditure was incurred upon items which are included in those set forth in Schedule 16 of the taxpayer's income tax return (see ff. 29 and 30 of Ex. A). In the period December 1969 to January 1970, a number of air conditioners and exhaust fans, and an air humidifier were installed and the ceiling here in question (described as ``false acoustic ceiling... $34,160'') was constructed.

In or about September 1970, the Repco machines, in contemplation when the work here in question was done, were installed in the premises.

There is not in the evidence a coherent and detailed description of the work done upon the premises in relation to the matters here in question. However, after that work, the factory building consisted of a basement (having no particular relevance to the present issue) and a main area. That main area (a rough floor plan of which is set out in Ex. L) consisted, as to part, of offices, amenities and other non-manufacturing areas, and, as to the main part, of a large manufacturing area divided into two areas (these two areas being respectively the areas occupied by the Savio machines and the Repco machines depicted in the photographs in Exs. F and G). Having regard to the state of the evidence, I am not able to form any conclusion whether or not the office section of the building extended down the whole of what was described by Dr. Taylor as the street side of the building or down only portion thereof, as shown in Ex. L. I am also not able to form any conclusion whether there was, prior to the work here in question, any partition between the office area and the manufacturing area although I infer that following the carrying out of the work to which I have referred, these two areas were separate.

There was constructed over the whole of the manufacturing area, a ceiling of the kind depicted in the photographs. I am not able to conclude whether such a ceiling or any ceiling was constructed over the office portion of the building.

As the result of this work, the desired conditions of humidity were attained and the machines worked with a higher degree of efficiency.

The ceiling in question was a suspended ceiling made of perforated acoustic panels with one inch of fibreglass batts on top of the panels.

The function served by the ceiling was to limit and contain the quantity of air to be conditioned by the apparatus installed by the taxpayer. Two main problems existed in relation to the achievement of the necessary conditions. First, having regard to the saw-toothed construction of the roof of the building and other factors, it would have been either impracticable or too expensive to condition the whole of the air within the factory premises; if however, by the installation of such a ceiling as that in question, the quantity of air to be conditioned was reduced, the creation of the necessary conditions of humidity became easier. Second, as I infer from the evidence of Dr. Taylor, the conditioning of large areas is made more difficult by the existence of ``pools'' of air to be conditioned can be reduced and its circulation controlled, its conditioning becomes easier.

It may be also that other practical reasons existed for the installation of the ceiling, but I am satisfied that the installation of the ceiling was a step taken primarily for the purpose of enabling the necessary conditions of humidity to be created.

The ceiling was constructed of panels readily available and apt to be used for ordinary ceilings in factory or other premises. I am satisfied that, except in one respect, the ceiling did not differ substanitally from the kind of ceiling which might be expected to be installed in factory premises for the purposes of improving the appearance of the premises or reducing the incidence of noise.

However, in the construction of this ceiling, it was desired to have material which would not be affected by the moisture incident to a constant humidity of the order of 65%-75% and for this purpose the fibreglass material was placed upon the top of the panels. What was the order of this moisture

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and whether it posed a problem different from that likely to be encountered in premises in areas of high humidity, does not appear from the evidence. I am satisfied that the fibreglass material was expedient to be added for a purpose directly associated with the conditions sought to be created for the manufacturing process. Some additional cost in relation to the ceiling was incurred which improved its acoustic qualities. However, this was merely an improvement of a ceiling which it had already been decided to install for the specific purpose in question and was not, I am satisfied, the purpose for which the ceiling was erected.

Mr. Gleeson, for the taxpayer, has submitted that the ceiling constitutes plant within sec. 62AA(2). He has made three main submissions: first, that the fact that the thing in question is of its nature a structure or forms part of a structure which is not itself plant, does not exclude the possibility of the thing being plant:
I.R. Commrs. v. Barclay, Curle & Co. Ltd. (1969) 1 W.L.R. 675 at pp. 679, 690-1;
Jarrold v. John Good & Sons Ltd. (1962) 1 W.L.R. 1101 at p. 1105; (1963) 1 W.L.R. 214 at pp. 222-3; second, that the question to be answered is whether the thing in question is that with which the taxpayer carries on his business rather than that in which he carries on his business: I. R. Commrs. v. Barclay, Curle & Co. Ltd. (supra) at p. 691; or whether the thing can be said to ``have no other function than to provide a convenient stand'' in which the business is to be carried on:
Wangaratta Woollen Mills Ltd. v. F.C. of T. 69 ATC 4095 at p. 4100; 119 C.L.R. 9 at p. 9 or to be ``merely a general setting in which'' the business is carried on: ibid., at p. 4100;
Imperial Chemical Industries of Australia & New Zealand Ltd. v. F.C. of T. 70 ATC 4024 at p. 4025; 120 C.L.R. 396; Imperial Chemical Industries of Australia & New Zealand Ltd. v. F.C. of T. 72 ATC 4213 at p. 4231; 46 A.L.J.R. 679 at p. 683; and, third, that if there is a test to determine whether a thing is plant, it is what has been described as ``the functional test'': I.R. Commrs. v. Barclay, Curle & Co. Ltd. (supra) at p. 691F per Lord Donovan.

``Plant'' is, as has been suggested, an ordinary English word, but it is a word the meaning of which may be influenced by the statutory context of which it is used: Wangaratta Woollen Mills Ltd. v. F.C. of T. 69 ATC 4095 at pp. 4099-4100; 119 C.L.R. 1 at pp. 7-8; in the present case the meaning of the term in the context of the present section has been discussed by McTiernan J. in Wangaratta Woollen Mills Ltd. v. F.C. of T. 69 ATC 4095 at pp. 4099-4102; 119 C.L.R. 1 at pp. 7-11. Its meaning cannot be paraphrased by any simple verbal formula which will readily provide the solution in the instant case:
Quarries Ltd. v. F.C. of T. 106 C.L.R. 310 at p. 315. The kind of thing which may be comprehended by the term may vary, perhaps, according to the context in which it is found; see
Manchester Marine Ltd. v. Duckworth (1973) 1 W.L.R. 1431 at p. 1435D.

I do not think that the question in an instant case can be solved merely by asking the kind of question which Mr. Gleeson poses in his second submission. It may be that when, in 1887, Lindley L.J. said that, ``in its ordinary sense'' plant included ``whatever apparatus is used by the business man for carrying out his business'':
Yarmouth v. France (1887) 19 Q.B.D. 647 at p. 658; the mode of carrying on a business then common was of a kind sufficiently uncomplicated to enable a distinction to be made between those things which were stock in trade or the mere setting of the business on the one hand, and those things which were plant on the other hand, by the use of the term ``apparatus''. However, now the nature of business operations often requires that the setting of the business be more specialised than a setting which merely excludes wind and weather, and be a setting in which particular conditions or facilities are available, and the term ``apparatus'', or its contrast with ``setting'' and ``stock in trade'', does not provide a test by the application of which an inevitable answer is produced, in such a case as the present.

It has been held that a thing is not plant if it has no other function than to provide a convenient stand for the operation in question:
Moreton Central Sugar Mills Co. Ltd. v. F.C. of T. 116 C.L.R. 151 at p. 157; or if it merely provides shelter for persons as they work and for their equipment:
Broken Hill Proprietary Co. Ltd. v. F.C. of T. 120 C.L.R. 240 at p. 263

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per Kitto J.; but I do not think that the fact that a thing is, for example, more than a convenient stand for performing the operations means that therefore and necessarily it is plant within the present section. Thus, in the Wangaratta case, McTiernan J. in deciding that the structure in question was plant, did not do so merely because it was ``more than a convenient setting''. His Honour (at p. 4101) said -

``I am of opinion that the appellant's dyehouse is `in the nature of a tool' in the trade and does `play a part' itself in the manufacturing process. It is much more than a convenient setting for the appellant's operations. It is an essential part in the efficient and economic operation of the appellant's business.''

To-be plant, a thing of the kind here in question must be more than mere setting for the taxpayer's operations; but if it is, the question still remains whether its relationship to the operations is such that it should be held to be within the meaning of the term.

Nor do I think that, as Mr. Gleeson at one stage in his able argument appeared to suggest, it is sufficient to find that the thing performs some ``function'' in the relevant operations of the taxpayer. In the Imperial Chemical Industries case 70 ATC 4024 at p. 4025, the wiring, circuits, and trunking clearly performed a function in enabling the taxpayer's operations to be carried on, but this was not, of itself, sufficient for them to be held to be plant. ``The functional test'' requires that there first be asked ``what function'', and that function may be an active or a passive function: I. R. Commrs. v. Barclay, Curle & Co. Ltd. (1969) 1 W.L.R. 675 at p. 691F, per Lord Donovan.

Where the question has been whether buildings, structures or the like, or parts of them, constitute plant, the process of decision appears generally to have been, not of deriving the decision merely by deduction from a verbal formula or test, but of deciding whether the function performed by the thing is so related to the taxpayer's operations or special that it warrants it being held to be plant. There does not appear to have been evolved any formula of words to describe the relationship exhaustively.

Lord Donovan referred to the functional test as having been propounded by Pearson L.J., as he then was, in
Jarrold v. John Good and Sons Ltd. (1963) 1 W.L.R. 214. In that case (at p. 225) his Lordship drew the distinction between moveable partitioning which operated merely as the internal walls of an office building, and the partitioning there in question. He said -

``...the respondent company, instead of having internal walls in their office building, need to have, and do have, for the special requirements of their business, moveable partitioning by means of which they can, in response to changing volume of business in their departments or to the cessation of departments or the emergence of new departments, rapidly and cheaply and without much interruption of business alter the subdivisions of their office building. On that view of the facts, the partitioning undoubtedly can be regarded as `plant'.''

Similarly, in the Imperial Chemical Industries case (supra), Kitto J. 70 ATC 4024 at pp. 4025-4026 stressed the fact that the ceiling structure and the wiring and circuits performed no function peculiar to the taxpayer's business, but merely made the building ``a suitable general setting for a wide range of possible activities'' (at p. 4026), and therefore held them not to be plant.

I do not think that, in the present case, the ceiling is such, or performs a function so related to the taxpayer's operation, that it is brought within the ambit of the term plant in sec. 62AA.

The function performed by the ceiling, as indeed by the walls and the floor in this regard, is basically to limit the volume of the room in which the air conditioning machinery is to operate. Subject possibly to one matter to which I shall refer, this ceiling appears to perform no other function, in relation to the taxpayer's operations, than would be performed by any normal ceiling. Had a ceiling already been installed in the building when the Savio and Repco machines were installed, that ceiling would

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have performed that function; at the least, the evidence does not satisfy me that (apart from the matter to which I shall refer), the ceiling was constructed in a way or in a place different from that in which any ordinary ceiling would have been constructed. I do not think that in providing, with the walls and the floor, a convenient volume of space for the operation of the air conditioning apparatus, the ceiling is properly to be held to be involved in the process of air conditioning or thereby in the manufacturing operations for which the air conditioning was installed.

The only feature which, in my opinion, was arguably peculiar in relation to the ceiling was the treatment of it to cope with the humidity of the conditioned air. The panels chosen were panels generally available and apt to be used for ceilings generally, but they were said to have been chosen because those panels as compared with others also commercially available would not be affected by the humidity: see Ex. B, pp. 24-26 and Ex. J. Fibreglass batts were put over the panels to keep the humidity under the ceiling and the one inch of fibreglass was seen as acting as additional insulation against heat descending through the factory roof and affecting the temperature and therefore the humidity in the areas below the ceiling.

I do not think that, at least in cases such as the present case, part of a structure should be dissected into separate parts for the purpose of consideration: compare F.C. of T. v. Broken Hill Proprietary Co. Ltd. 120 C.L.R. 240 at p. 263; Wangaratta Woollen Mills Ltd. v. F.C. of T. 69 ATC 4095 at pp. 4101-4102; Manchester Marine Ltd. v. Duckworth (1973) 1 W.L.R. 1431 at p. 1435. The fact that the ceiling was constructed so as to be humidity resistant and was insulated is significant only insofar as it may be considered to show that the ceiling was involved as part of the operations of the taxpayer.

It may be that, in a particular case, a room may have such a special relationship to the taxpayer's operations that the room itself may constitute plant, even though the building as a whole does not. However, I do not think that in the present case, the room or the ceiling, should be so regarded. No doubt the occasion of installing the ceiling was the decision to air condition the particular areas of the factory and no doubt the kind of ceiling installed was a kind of ceiling adapted to resisting humidity and otherwise adapted to conform with the purpose of the air conditioning apparatus. However, essentially that which was installed was installed to perform the function of a ceiling rather than to perform some separate or special function, and I do not think that the fact that the kind of ceiling installed was (as would be the case in, for example, a bathroom) one adapted to deal with the conditions expected to be met, should cause it to be classified as plant.

Apart from the fact that, for example, the Versilux brand of panel, which did not absorb moisture, was chosen in preference to the Stramit brand of panel, which apparently did: see Ex. B, pp. 24A, 25; and that the ceiling was insulated with fibreglass in a manner which was not suggested to be special or other than might be found in a factory ceiling in an area where outside temperatures ``well over 100 degrees in summer'' were apt to be encountered, nothing was suggested to be, in relation to this ceiling, out of the ordinary.

In the Imperial Chemical Industries case 70 ATC 4024 at p. 4025, Kitto J., in relation to panels and associated equipment constituting a sound absorbing ceiling, said -

``Their sound-absorbing qualities do, no doubt, make working in the building more comfortable, and consequently, I presume, more efficient, and to that extent they are better ceilings than sound-reflecting ceilings would be. But every part of a building makes some contribution to the comfort and efficiency of those who work in it. To take it notionally to bits and describe as `plant' any bit that has a function which is useful in connexion with the business carried on there seems to me indefensible. The truth is that the ceilings with which we are concerned do nothing for the appellant's business that they would not do for the business of any other occupier. They are in like case with the walls, floors, windows and doors, not to mention the roof; that is to say they are useful for

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anyone who wants to work in the building, and more useful than less well thought out units of the same kind would be, but still only part of a general setting for work, not part of the apparatus of any income-producing process.''

The present case is, perhaps, not as clear as the case there before his Honour but the installation of the ceiling in the present case, in my opinion, left the building ``useful for anyone who wants to work in the building'' and who desires to have a ceiling. I do not think that the fact that the nature of the taxpayer's operations makes it expedient that the building have a ceiling means that the ceiling is part of the plant with which the operations are conducted.

In my opinion, the taxpayer's appeal fails and it will be dismissed, with costs.

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