Case G16

Judges:
FE Dubout Ch
G Thompson M
N Dempsey M

Court:
No. 3 Board of Review

Judgment date: 27 February 1975.

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F.E. Dubout (Chairman): This taxpayer, a company, carries on the business of timber merchants and sawmillers. In its returns of income of the years ended 30th June, 1970 and 30th June, 1971, the taxpayer claimed deductions under sec. 124JA of the Assessment Act in respect of capital expenditure on certain mill buildings and mill cottages. The amount of the deduction claimed under sec. 124JA was in each year $5,529, and these claims were wholly disallowed by the Commissioner. In respect of the second of the two income years mentioned, there were originally two other items of claim in dispute. One, a claim for the allowance of depreciation on plumbing for employees' amenities, was abandoned at the hearing. The one surviving is a claim for a deduction under sec. 51 in respect of expenditure incurred in the removal of structures from certain leased premises.

2. During the subject years of income, the taxpayer carried on sawmilling operations in some eleven or twelve mills at various places in a State. In these references, however, we are concerned with mills at only three places, and with their related or supporting cottages. As will be seen, the supporting cottages are, in one instance, at some distance from the mill. In respect of each mill and each cottage, or each group of cottages, the taxpayer has, for the purposes of sec. 124JA(2), estimated the number of years during which the building will be used for the purpose for which it was primarily and principally constructed or purchased. There is no challenge by the Commissioner to any of these estimated life spans, nor is there any argument about the cost to the taxpayer of any of the structures. The Commissioner's contention is simply that the subject buildings are not ``situated in a forest'' as required by para. (b) of sub-sec. (1) of sec. 124JA. At the hearing, the Commissioner's representative explicitly stated that no question was being raised by him in regard to the second requirement of para. (b), viz , that the buildings should be ``in or adjacent to the area where timber milled in the course of that business is or is to be felled.''

3. Turning now to the three mills with which the Board is concerned, I propose to adopt the order in which they were dealt with in the evidence, and I shall refer to them as the ``N mill'', the ``D mill''and the ``B mill''. The N mill and some mill cottages were purchased by the taxpayer in 1960, and there were extensions in that year and in 1963. The mill is on an area of approximately five acres of land, which is leased by the taxpayer from the Railways Department. (I use the present tense in this description, although in fact the taxpayer has since the relevant years of income ceased to operate the mill). Apart from one farm house which is visible from the mill, there is very little at the place N other than the taxpayer's mill

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and the cottages. There is a railway siding, which is unmanned, and at some distance, another farm house which can not be seen from the mill. Generally, the country is undulating, and of poor quality. The mill and cottages are located in a cleared area of some considerable extent, but on the east and south sides, there is a State forest at a distance of less than half a mile. On the west and south-west, it is perhaps a mile to the borders of areas of medium timber. On the north-west, one does not come generally into areas of forest for a distance of about two miles. In approaching the locality of N from any of the three townships which are nearest (they are each about 6 miles away), it is necessary to travel through forest.

4. Before passing to the L mill, I should state that in relation to all the subject mills and cottages, their locations and their surroundings, the Board was greatly assisted in its understanding by the evidence of the taxpayer's country sawmill superintendent. In addition, there were exhibited, variously by the taxpayer and by the Commissioner, aerial photographs, photographs of the mills and cottages, photographs of a mill under construction, and large scale Lands Department maps.

5. At the place known as L, the taxpayer has mill buildings and cottages which are situated on a 10 acre site owned by the taxpayer. The subject mill building was built in 1963, in replacement of an earlier mill destroyed by fire, and there were some small additions to the mill in the following year. In addition to the taxpayer's buildings, there is another mill, a general store, the remains of an old dance hall, and some cottages. A railway line runs through the place, and although the siding was attended in 1969-1970, it has now ceased to be attended. In my opinion, the place L might qualify for the description of a village, certainly no more. Immediately in the vicinity of the mill, the country is undulating, but beyond that it soon becomes rough and mountainous. The taxpayer's buildings are in a cleared area, but there are substantial forests on all sides, and their borders approach generally to distances under a mile. As with the N mill, I write in the present tense in relation to the L mill, although in fact production ceased there in 1973.

6. During the subject years of income, some of the employees working at the taxpayer's L mill lived in a small township C, which is about 12 miles from L, and others lived in a much larger town which lies beyond C at a distance of a further 12 miles or so. The taxpayer provided a bus which ran daily from the large town, via C, to the L mill, and then carried the employees back to their homes in the evening. Housing for employees had always been a major problem for the taxpayer, and in 1966, it built 2 cottages in C with a view to encouraging employees to come into the area. From the evidence, it would appear that C, as a place in which to live, is somewhat larger than L, and probably it is correctly to be described as a township, rather than as a mere village. There are in C several buildings ordinarily associated with one's notions of an established community. They are a hotel, police station, general store and Post Office, and there are several cottages apart from those owned by the taxpayer. C is situated on the banks of a river, in undulating country in which there is some dairy farming. However, at distances of from half a mile to a mile from the river, the country becomes hilly and there are substantial areas of forest on each side of the river.

7. The third mill, which we have called the B mill, is situated in or on the outskirts of the town of B. This was said to be a town with a population of about 1,000 people, which is supported by a fairly big dairying industry. In the district there is also grazing to a minor extent, and there is a considerable amount of banana growing. The district generally is well known for timber milling, and there are two other mills at B. All the taxpayer's cottages are in the immediate vicinity of the mill itself which is on land owned by the taxpayer. From the maps and aerial photographs it appears that the town of B is situated in a large area of open land.

8. All the subject mills are what is known in the timber milling business as ``bush'' mills, as distinct from ``town'' mills. While it would appear that the basis of classification into ``bush'' or ``town'' would frequently accord with one's ordinary understanding of those words, the evidence in this case indicates that there is not complete overlap between ordinary usage and the language of the trade. For the

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purposes of awards applicable to employees in the timber business, there are definitions of the expression ``bush mill''. As to the placement of these mills in relation to each other, it may be noted that B and N are about 6 miles apart in a direct line, and that L is in quite a different locality, about 40 miles in a direct line from B. In the subject years, the logging was, for each mill, carried out principally in nearby State forests, but there was occasionally some private timber available. At different times, logging would be carried on at different distances from the base and on some occasions, the taxpayer was logging at distances up to 25 miles from the mill concerned.

9. As Counsel for the taxpayer put it, he accepted as the starting point of his submissions certain remarks made about sec. 124JA by Mr. G.R. Thompson of Board of Review No. 2 in Case A56,
69 ATC 324 . Those remarks are to be found at p. 327 of the abovementioned report, and this is what was said -

``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.''

10. If I may say so, with respect, I think that Mr. Thompson has correctly seen what the section was intended to provide. Whether the intended results will flow when the actual words of the section have to be interpreted, however, is another matter. The inadequacy of the section, in some circumstances, to provide what it is thought that the legislature intended, is illustrated in the joint decision of Board of Review No. 2 in Case D68,
72 ATC 405 . In that case, the Board said, in the final paragraph of its decision -

``Our conclusion therefore is that while this mill, in view of the fact that its life span is likely to be comparatively short, is one which, in the light of the principle apparently lying behind sec. 124JA, ought to have benefited from the section, the objection must fail and the Commissioner's assessment be confirmed.''

11. In seeking to give a meaning to the expression ``situated in a forest'', the Board finds no assistance by way of statutory definition. The first meaning given for ``forest'' in the Shorter Oxford English Dictionary is probably as close to everyday usage as any - ``an extensive tract of land covered with trees and undergrowth, sometimes intermingled with pasture''. Under Australian conditions, the danger of bushfires makes it unlikely that a sawmiller would be allowed to set up his mill within the actual wooded areas of a State forest. One would not expect private owners of forest lands to be any more enthusiastic than State Forestry Departments about mills operating in the midst of a substantial growth of trees. It is perhaps easier to say what ``situated in a forest'' does not contemplate than what it does contemplate. One thing, I think, is reasonably clear - a taxpayer does not have to show (and indeed probably could never show) that his buildings were situated in a small sylvan glade, like a woodcutter's cottage in the middle of Sherwood Forest. Yet if the section is interpreted literally and narrowly, one would virtually have to insist that that is what ``situated in a forest'' means.

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12. In my opinion, it is not a distortion of language to say, for the purposes of this section, that in general a building is situated in a forest if, although it stands in an open or cleared area, there are areas of forest located close together but not necessarily continuously around the perimeter of the cleared area. The word ``perimeter'' in this connection, of course, is not used with any suggestion of mathematical precision. The first question then which is obviously going to be asked is, how remote can the surrounding areas of forest be from the mill etc. without it becoming no longer reasonable to describe the mill as being situated in a forest? For myself, I decline to attempt to lay down any distance that might represent an upper limit of acceptability. Subject to what I have to say in the next paragraph, however, I should think that if there are forest areas at radial distances (I use the word ``radial'' very imprecisely) from the mill of up to 3 or 4 miles, I would, applying the test that I have suggested above, feel justified in saying that the mill was situated in a forest.

13. The situation may be complicated by the fact that the mill is situated in or on the outskirts of a town or smaller centre of population which itself lies in a cleared area surrounded by forest. Difficulties of this kind were present to the mind of Mr. J.L. Burke, Chairman of No. 1 Board of Review, in
18 T.B.R.D. 50 Case T 11, and I am assisted, to an extent, by some of the remarks made in his dissenting reasons given in that case. At p. 53 of the abovementioned report, Mr. Burke said -

``A broad, rather than a narrow, construction of the provision in question is suggested by the approach of the High Court to the not dissimilar provisions relating to capital expenditure in the mining industry (see in particular the decision of Taylor J., in
Mount Isa Mines Ltd. v. F.C. of T. (1954) 92 C.L.R. 483 ; 10 A.T.D. 423 ). I agree with the Commissioner's representative that the question resolves itself into a question of degree and that, so approached, the enactment would extend to bring within its scope, for example, the sawmiller whose mill is located in a `mill' township completely surrounded by forest.''

14. I need not enumerate the many obvious examples of situations where a mill is in or adjacent to a town, and it would be impossible, in accordance with any accepted usage of language, to say that the mill was situated in a forest. It seems to me that in the passage from the decision of Mr. Burke which was quoted in the preceding paragraph, the key word for present purposes, is the word ``mill'', used as it is to qualify the word ``buildings''. If the town, or as it is more likely to be in these circumstances, the village, consists entirely or almost entirely of the mill buildings and/or the supporting cottages for the mill employees, then, if those buildings would, according to the test I have suggested, be regarded as situated in a forest, the fact that they substantially constitute a village would make no difference.

15. If I may be thought to have put an unwarranted gloss upon the section, I mention that I have done so in an effort to find some way in which the section can be made to work outside the narrowest pale of literal interpretation. If it has to work within that pale, then under Australian forestry conditions, its field of application must be microscopic. However, although I have sought to construe the section broadly, I should add that from my reading of the cases, I would have agreed with the Board, or in one instance, the majority of the Board, in rejecting the taxpayers' claims for deductions under sec. 124JA in each of 18 T.B.R.D. 50 Case T11; Case A56, 69 ATC 324; and Case D68, 72 ATC 405. I regard the present references as clearly distinguishable on the facts from each of the cases mentioned.

16. It follows from the reasoning stated above that my decision on the objections, so far as they relate to a claim for deductions under sec. 124JA, is as follows -

• In each of the years ended 30th June, 1970 and 30th June, 1971, in relation to -
• (a) N mill - allow deductions in respect of mill buildings and cottages as claimed, i.e., an amount of $1,834;
• (b) L mill - allow deductions in respect of mill buildings and cottages at L as claimed, i.e., an amount of $1,132;

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• (c) Village of C - maintain the disallowance of deductions claimed in respect of cottages at C ($219); and
• (d) B mill - maintain the disallowance of deductions claimed in respect of mill buildings and cottages ($2,344).

17. The second item in dispute in respect of the assessment for the year ended 30th June, 1971 is a claim for a deduction, under sec. 51, for the cost of removing at the termination of the lease, all the structures on land which the taxpayer held under the lease from a government instrumentality. The relevant clause in the lease agreement provided that the lessee (i.e. the taxpayer) was, prior to the expiration of the term, and without compensation, to remove from the lessor's land every structure erected or thereafter to be erected thereon.

18. In order to comply with the requirement to remove, the taxpayer let a contract to a demolition company, and the work was done, at a cost to the taxpayer of $4,185. For the taxpayer, it was contended that all it was doing was fulfilling a financial obligation under the lease, which was no different in character from an obligation to pay rent under the lease, and was not expenditure of a capital nature. In my opinion, the Commissioner correctly contends that the expenditure is one of capital. The case of
F.C. of T. v. Broken Hill Pty. Co. Ltd. (1968) 120 C.L.R. 240 differs very greatly in its facts from the present reference, and I would rely not so much on the actual decision in that case as upon certain of the reasoning of Kitto J. at p. 262. His Honour regarded all the structures which had been demolished as parts of the taxpayer's ``profit-yielding subject'', and quoted from the judgment of Dixon J. in the
Sun Newspaper case (1938) 61 C.L.R. 337 . It seems to me that in the present case, it is equally true to say of the demolished structures that they were part of this taxpayer's profit-yielding subject, and accordingly the cost of removing those capital assets assumes the same character. I think, therefore, that the taxpayer's claim for a deduction of the amount of $4,185 must fail.

19. My decision, then is as has already been stated in para. 16 above, viz , that the taxpayer's objections against the assessments for the years ended 30th June, 1970 and 30th June, 1971 should be allowed to the extent of allowing additional deductions in each year in the amount of $2,966.