Canwan Coals Pty. Ltd. v. Federal Commissioner of Taxation.Judges:
Supreme Court of New South Wales
Sheppard J.: This is an appeal by Canwan Coals Pty. Limited, hereinafter called the appellant, against an assessment of income tax in respect of income earned by it during the year ended 31st August, 1969. The appeal concerns the disallowance by the Commissioner of a deduction claimed in respect of certain expenditure by the appellant upon an installation, the appellant contending and the Commissioner denying that the expenditure is allowable as a deduction by reason of the provisions of Div. 10AAA of the Income Tax Assessment Act 1936 (as amended), hereinafter called the Act. A deduction for expenditure incurred in respect of the same installation was also claimed in the Company's return of income for the previous year and disallowed by the Commissioner. There is no appeal in respect of that year of income because the taxpayer in any event incurred a loss, but if the taxpayer should be successful in this appeal there will need to be an adjustment for the purposes of sec. 80 of the Act. This is something which the parties themselves will attend to if my decision is favourable to the appellant.
Division 10AAA was introduced into the Act by the Income Tax Assessment Act (No. 2) 1968 (No. 60 of 1968) which came into force on 25th June, 1968. Section 123B of the Act provides that where a taxpayer has incurred capital expenditure to which the Division applies, one-tenth of that expenditure shall be an allowable deduction from the assessable income of the first year of income after the year of income that ended on 30th June, 1967. Section 123A of the Act, so far as it is relevant, is in the following terms -
``(1.) Subject to this section, this Division applies to capital expenditure incurred by a taxpayer on or after the first day of July, One thousand nine hundred and sixty-one, on, or by way of contribution to capital expenditure of another person on, a railway, road, pipe-line or other facility constructed or acquired for use, in the carrying on of a business for the purpose of gaining or producing assessable income, primarily and principally for the transport of minerals obtained from the carrying on by any person or persons of prescribed mining operations, or of processed materials produced from such minerals, other than transport wholly within the site of prescribed mining operations, as reduced by -...........''
Section 123(2) of the Act is as follows -
``In this Division, a reference to capital expenditure on a railway, road, pipe-line or other facility shall be read as including a reference to capital expenditure incurred by a person -
- (a) in obtaining a right, whether by means of a licence, permit or otherwise, to construct or install a railway, road, pipe-line or other facility, or a part of a railway, road, pipe-line or other facility, on land owned or leased by another person or in an adjacent area within the meaning of section six AA of this Act;
- (b) in paying compensation in respect of any damage or loss caused by the construction or installation of a railway, road, pipe-line or other facility or part of a railway, road, pipe-line or other facility; or
- (c) on earthworks, bridges, tunnels and cutting that are necessary for a railway, road, pipe-line or other facility,
but as not including a reference to expenditure in respect of railway rolling stock, road vehicles, ships or port facilities or other facilities for ships.''
The nature of the installation in question is described in the evidence of Mr. Gale and Mr. Peter. There is no dispute about that evidence and it is unnecessary for me to refer to it in detail or to the plans which were tendered in order to explain it.
The appellant is the assignee from a company, Sydney Wansey Pty. Limited, of a leasehold interest in certain land situated at Carrington near Newcastle. The lessor is the Commissioner for Railways and the lease is for a period of fifty years from 24th March, 1966. In the relevant years there were four major exporters of coal from the Newcastle area. Coal was loaded by them into vessels in the 35,000 to 50,000 ton range by the
ATC 4233Maritime Services Board loader which came into operation in 1967. The stockpile area from which the loader took the coal to be loaded was inadequate and did not permit the loader to maintain its capacity to discharge one thousand tons of coal per hour into the ships' holds. The installation in question is situated not far from the loader and its use as a stockpile area by some of the exporters, including companies in the Gollin & Co. group of companies which subsequently acquired a controlling interest in the appellant, provided reserve capacity and enabled the Maritime Services Board loader to operate to a much greater capacity. In the relevant years coal from the installation was taken to the loader's stockpile, usually by rail but on occasions by road. In more recent years a conveyor system has been installed.
Apart from providing the reserve capacity which I have mentioned, the installation was used for another important purpose. Virtually all coal exported from Newcastle is supplied to purchasers according to their specifications. Sometimes the specification will require the supply of one type of coal so that it comes from one mine, but more often than not the coal which is specified is not obtainable from one mine so that two or more types or varieties need to be mixed or blended. The blending is frequently of two or more types of coal recovered from mines situated in different parts of the Newcastle, Maitland, Hunter Valley of Gunnedah coalfields. The installation was used not only as a reserve storage area from which the Maritime Services Board stockpile could be quickly replenished, but also as a blending area. In para. 3 of his affidavit Mr. Peter said -
``Initially, limited blending operations were undertaken but as the blending of coal was one of the main functions to be performed, as the volume of coal received for export increased, the amount of blending undertaken was also increased and there was an expansion of and refinements to the blending process to the extent that during the relevant tax period approximately 90% of all coal received on the leased land was blended by the Company in accordance with specified instructions given by the owners of the coal.''
In para. 12 he said -
``It was a principal function of the Company to attend to the blending of certain coal types which possessed individual qualities and which any of the users of the Facility may have had stacked at any one time therein. The blending process resulted in a final product which, by meeting a required specification changed the previously separate coal types into a blended and far more saleable coal product.
Blending was performed by the Company pursuant to written instructions received from the users of the Facility whose coal was to be blended, which instructions were usually given to the Company prior to the estimated time of arrival of the vessel upon which such coal was to be loaded for export. After the acquisition by the Gollin group of companies of the controlling interest in the Company, most blending at the Facility involved its coal and was done pursuant to its written directions a typical copy of which is annexed hereto and marked with the letter `B'.''
The document annexed is a specification requiring the blending of a consignment of 5,000 tons of coal to be made up of six different varieties of coal to come from five or six different sources.
I have reached the conclusion that the evidence establishes that the installation provided a most important service to the coal export trade from Newcastle, not only because of the reserve storage capacity which it made available but equally because it enabled coal to be blended at a central point close to the wharf area.
The installation in the relevant years consisted of the land itself, which was used as a stockpiling and blending area, an office building, a coal bin, a weighbridge, floodlighting and certain coal gantries. In addition to incurring expenditure on these items the appellant incurred substantial expenditure in treating the dumping areas where the coal was to be stockpiled in the way that is described in Mr. Peter's affidavit.
The appellant contended that the installation is a facility within the meaning of sec. 123A of the Act, that it was constructed for use in the carrying on of a business for the purpose of gaining or producing assessable income and that it was used at the relevant time primarily and principally for the transport of minerals obtained from the carrying on by any person or persons of prescribed mining operations. There is no question that the installation is used in the carrying on by the appellant of a business for the purpose of gaining assessable income and there is no issue that the coal which comes to and leaves the installation is a mineral obtained from the carrying on of prescribed mining operations.
The Commissioner submitted that the appellant is not entitled to the benefit of the provisions of sec. 123B for the following reasons -
- 1. The installation is not a facility to which the Division applies because the use of the words ``a railway, road, pipe-line or other facility'' indicates a legislative intention to restrict the meaning of the word ``facility'' to something which is of the same kind as a railway, road or pipe-line, and the installation in question is not of that kind.
- 2. The installation is not used primarily and principally for the transport of minerals, an equally, if not more, important reason for its existence being the blending of different types of coal.
- 3. The installation is not used at all for the transport of minerals but rather for their storage.
- 4. The installation is in any event a port facility and by reason of sec. 123(2) not entitled to the benefit of the deduction.
- 5. If, contrary to the grounds so far relied on, I find that the installation is within the Division, I should nevertheless refuse to allow deductions in respect of expenditure upon the office building, weighbridge and coal bin.
The appellant relied very much upon what was submitted to be the reason for the introduction of Division 10AAA into the Act and the mischief with which it was said that Division was intended to deal.
On 1st March and 10th April, 1968, Kitto, J. gave judgment in a matter,
Broken Hill Proprietary Company Limited v. F. C. of T., 120 C.L.R. 240. His decision was in part favourable to the taxpayer and the Commissioner appealed to the Full High Court. The appeal was heard in October 1968. The Court, by majority, reversed the decision of Kitto, J. In the meantime, on 25th June, 1968, that is after judgment had been delivered by Kitto, J. but before the appeal from his decision had been heard, the legislature had repealed the provisions of the Act which concerned Kitto, J. and introduced an amended Div. 10 and a new Div. 10AAA. The amendment was to the degree indicated retrospective and could have applied to all or part of the expenditure incurred during the years of income of B.H.P. with which Kitto, J. was concerned in the case just cited. In his judgment Kitto, J. described extensively one of the installations which was in question and which was situated at Whyalla, and on a number of occasions used the word ``facility''. He used it in a very wide sense and in a sense which would, if transport facilities were the expression in question here, include the installation under consideration.
Although it may be inferred that Div. 10AAA was inserted into the Act as a result of the problems which arose in the B.H.P. case and although it may also be the case that the word ``facility'' came into the Act by reason of its use by Kitto, J. in his judgment, I do not think that these considerations assist much in the resolution of the present problem. I think that all one can do is to have regard to the words which are used in the sections in questions and endeavour to arrive at the legislature's intention from a consideration of them. It is true that Div. 10 in its pre-1968 form was not nearly as wide in its terms (nor, as the majority of the High Court thought, in its operation) as the provisions of the new Div. 10 and 10AAA, but I do not find the matters relied upon by the appellant in the judgment of Kitto, J. helpful in pointing to the ``mischief'' with which the amendments were concerned.
In construing the relevant sections, however, I shall of course bear in mind that the Division is one which confers upon taxpayers
ATC 4235to whom it applies a benefit, with the result that it is to be construed liberally and not restrictively.
I come then to the submissions of the Commissioner which I have above set out. In
Cody v. J.H. Nelson Pty. Ltd., 74 C.L.R. 629, Starke, J. said, at p. 639 -
``The contention is that acts or omissions which the Governor-General may declare to be black marketing should be construed according to the rule or canon of construction called `ejusdem generis' or `noscitur a sociis.' It is not a rule of law. But where there are general words following particular or specific words the general words should be confined to things of the same kind as those specified. This `rule of construction is subordinate to the real intention of the parties, and does not control it; that is to say, that the canon of construction is but the instrument for getting at the meaning of the parties, and that the parties, if they use language intimating such intention, may exclude the operation of this or, I suppose, any other canon of construction' (
Thorman v. Dowgate Steamship Co. Ltd., (1910) 1 K.B. 410 at p. 419).''
R. v. Regos 74 C.L.R. 613 at pp. 623-4, Latham C.J., speaking of the ejusdem generis rule, said:
``The rule is that general words may be restricted to the same genus as the specific words that precede them (
Thames & Mersey Marine Insurance Co. Ltd. v. Hamilton, Fraser & Co., (1887) 12 App. Cas. 484, at p. 490). Before the rule can be applied it is obviously necessary to identify some genus which comprehends the specific cases for which provision is made. In
Tillmanns & Co. v. S.S. Knutsford Ltd., (1908) 2 K.B. 385, it was pointed out that `Unless you can find a category there is no room for the application of the ejusdem-generis doctrine' - per Farwell L.J., (1908) 2 K.B., at p. 403; see also per Vaughan Williams L.J., (1908) 2 K.B. at p. 409. In
Mudie & Co. v. Strick, (1909) 100 L.T. 701, Pickford J. said: `You have to see whether you can constitute a genus of the particular words, and, if you can, then unless there is some indication to the contrary, you must construe the general words as having relation to that genus. If you cannot do this, then... you must read all the particular words separately, and take the general words separately also', (1909) 100 L.T., at p. 703. In
S.S. Magnhild v. McIntyre Bros. & Co., (1920) 3 K.B. 321, there is a full discussion of the rule by McCardie J. in which it is clearly shown that where it is sought to apply the rule to a case where an enumeration of specific things is followed by general words it must appear that the specified things `possess some common and dominant feature' so that they can be described as constituting a genus distinguished by that feature.''
Having considered what was said about the ejusdem generis rule by the two learned judges in the passages which I have set out above I have reached the conclusion that the installation is not a facility within the meaning of the Division. I agree with the Commissioner's argument that the use of the words ``railway'', ``road'' and ``pipe-line'' before the words ``or other facility'' does indicate that the legislature contemplated a particular kind of installation. What it had in mind was an installation upon which or through which minerals would actually move or be conveyed from the mine to a place of manufacture or shipment. Obviously the word ``facility'' would include a conveyor system, an aerial ropeway, a chute and an elevator, but in my opinion it does not include an installation, however important and indispensable, which is a separate and distinct storage area.
I would agree that in order for expenditure incurred in respect of an installation to be deductible it is not necessary that it be spent directly on the purchase or placement of railway lines, the surfacing of a road or the purchase of pipes or the laying of a pipe-line. Expenditure on items necessarily incidental to such an installation or facility would also, in some circumstances, be allowable as a deduction; but there is a limit to the incidental items, expenditure on which will entitle a taxpayer to a deduction, which arises by reason of the words used in sec. 123 (2)(c). In saying this I bear in mind that that
ATC 4236subsection does not exhaustively define the capital expenditure with which it is dealing, but the words used in para. (c) do, in my opinion, shed light upon the extent of the operation which the Division was intended to have. During the argument there was discussion as to whether expenditure on a marshalling yard as an adjunct to a railway or on a reservoir as an adjunct to a pipe-line would be deductible. I do not express a view on these questions because the installation here is not part of a rail or pipe-line system; it has to be viewed separately and in isolation. When this is done it seems to me to appear clearly that the installation was not at the relevant time of the nature or kind that the section envisages.
I think further force is given to the Commissioner's submission in this regard by the use of the words ``for the transport of minerals''. This is a different point from the third submission upon which he separately relies, which depends upon a consideration of those words alone and a contention that a storage area is not a facility for transport. The words ``for the transport of minerals'' qualify each of the words ``railway'', ``road'', ``pipe-line'' and ``other facility'', and thus bring to one's mind the notion of a system whereby goods are in fact transported. No doubt a storage area, a marshalling yard, a reservoir or a storage bin may be part of such a system, but the installation in question here is not part of a more extensive system or installation. It has, as I have indicated, to be considered separately from the road and rail systems which lead to and away from it. In my opinion it is not, despite the width that may nevertheless be given to the expression ``or other facility'' a facility within the meaning of the Act.
This is enough to dispose of the appeal, but I should also say that the evidence does not satisfy me that the installation is used primarily and principally for the transport of minerals. The use of the two words ``primarily'' and ``principally'' in conjunction serves to emphasise the dominance of transport as the use to which the installation must be put. Leaving aside what I have said about the meaning of the word ``facility'' and assuming for the moment that the installation was a facility within the meaning of the Division, it cannot be said upon the evidence that it was used primarily and principally for the purpose of transport. That may be said to have been an important purpose, but an equally important purpose of the installation was blending and that is sufficient to take the facility, assuming it were one, out of the Division.
In relation to the third submission of the Commissioner, namely that the installation was not used for the transport of minerals, I have reached the conclusion that the appellant's argument is sound. Although the coal is stored temporarily in the installation as distinct from being carried whilst it is there, I consider it to be used for the transport of minerals because the purpose of the minerals being taken there is in connection with their transportation from the mines in question to the ships in which they are to be carried away. What prevents the installation being one to which the section applies, leaving the blending operations out of account, is the use of the words ``other facility'' in conjunction with the words ``railway'', ``road'' and ``pipe-line''.
I do not consider that the installation is a port facility.
If I had been otherwise in favour of the appellant's arguments I would have decided that the office, weighbridge and coal bin forming part of the installation were part of the facility and that expenditure incurred in respect of them was deductible pursuant to sec. 123B. However, for the reasons I have given the appeal fails and is dismissed. The appellant must pay the Commissioner's costs of the appeal.