Case H28

Judges: FE Dubout Ch

N Dempsey M
P Gerber M

Court:
No. 3 Board of Review

Judgment date: 13 July 1976.

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N. Dempsey (Member): This taxpayer, a subsidiary of a large public company, carries on business as Wharf Owners and Wool Dumpers. In its return for the year ended 30th June, 1972 a deduction of $3,100 was claimed and in support of the claim the return contained a memo, reading as follows: -

``Brick store

The brick and woodwork in a vacant brick store on the company property had become infested by protein beetle with a consequent danger of contamination of wharf cargo. To prevent the spread of infestation the brick store was demolished as quickly as possible and the debris removed at a cost of $3,100.''

The claim was disallowed and the company lodged an objection, grounds 2, 3 and 4 of which, being the only relevant matters, are quoted and are as follows: -

``2. The expenditure claimed was incurred in the year of income to prevent a loss of

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income to the company through the possible infestation by protein beetle of wharf cargo lying adjacent to the brick store. The facts were that brick and woodwork in the vacant brick store on the company's property had become infested by protein beetle and had this contamination spread wharf cargo would be in jeopardy. In order to prevent this loss of income being sustained, it was decided that the brick store would have to be demolished.

3. In these particular circumstances it is submitted that the costs associated with the demolition were not incurred for the purpose of increasing the capital value of the property, but were the direct result of a decision made to minimise a loss of revenue. As such the expenditure incurred should be allowable as a deduction pursuant to sec. 53, 51 or other section of the Act.

4. Particulars as set out in the Income Tax Return of the Company for the year ended 30th June, 1972 and letter attached hereto are requested to be regarded as forming part of the grounds of this objection.''

2. In relation to ground 4 and although in the context of the case it is of little importance, it might be mentioned that the ``attached letter'' referred to therein was not received in the Department, or if received, it was mislaid.

3. The evidence shows that on part of the land owned by the company there stood a brick building comprising a basement and two floors. The basement level was below the adjacent road and the floor above the basement was about loading height above the general ground level.

4. For over fifty years, this building was not used by the company in connection with its cargo handling and wool dumping operations. It was let to a company which used it as a hide and skin store. Due to this usage the wooden floors of hardwood had become coated and impregnated with grease and fat from sheep skins and salt used to preserve hides.

5.Hides are susceptible to infestation by a beetle referred to in the objection as a ``protein beetle'', but as evidence showed, it is more correctly called a hide beetle. It feeds off hides and skins and other animal substances and if not controlled will destroy them. It also will attack soft timbers boring holes in same and thereby destroying or weakening it.

6. The tenant of some fifty years, whilst it occupied the building, naturally took steps to control the infestation. However, when it vacated the premises, remnants of its occupancy in the grease and salt remained and naturally the beetles would seek means of subsistence. The tenant actually vacated the building about July of 1971. Efforts to obtain a tenant were taken, but due to the condition of the floors and walls the only likely tenant was one who would use the building as a hide store, but this severely restricted the field.

7. It was considered necessary that the beetles still remaining in the building and which it was stated had actually penetrated the soft mortar in the walls, the building being approximately 100 years old, should be controlled and if possible eliminated. Enquiries revealed that this would be quite expensive, probably in the vicinity of $6,000 and that a single treatment could not be guaranteed to be completely effective. Demolition of the building was then decided upon, such decision apparently being taken about August, 1971 and the actual demolition carried out about October, 1971.

8. It might be mentioned that the building was still structurally sound and that any damage that the beetles had caused was confined to the soft timbers comprising the joinery being items such as doors, architraves etc.

9. Taxpayer contends that because the demolition was carried out to ensure that cargo did not become infested, the cost is not a capital expenditure but a revenue item to minimise loss of revenue.

10. It appears to me that irrespective of the motive which actuated the decision to demolish the building, the expenditure on such work is of a capital nature.

11. In the case of
F.C. of T. v. Broken Hill Proprietary Company Limited (1969) 120 C.L.R. 240 , Kitto J. dealt with expenses of demolition in a most comprehensive way. Commencing at the foot of p. 260 and continuing onto p. 261, he summarised seven somewhat overlapping categories into which the demolitions there involved fell.

12. He then proceeded to deal with each category and despite any differences he found that each category was of a capital nature. I would particularly refer to category (5):

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``buildings and plant demolished because redundant or obsolete not associated with new plant and buildings not replaced by anything.'' At p. 262, he went on to say:

``Each of the demolitions in question was, in my opinion, effected to obtain a lasting improvement to the appellant's complex `instrument for earning profits', and was not carried out as part of `the continuous process of (the) use or employment (of the instrument) for that purpose'. The improvement which the demolitions by themselves effected was either (1) the clearing of land which an existing structure had rendered unavailable for a use that the appellant wished to make of it, or (2) the removal of a continuing source of danger or disadvantage (even if only from congestion of the premises) in the conduct of the business. The clearing of land by removing a piece of capital equipment in order to make way for the installation of another piece of capital equipment was, in my opinion, of the same nature as the purchase of extra land for that purpose; and the dangers or disadvantages from which the appellant's premises were freed by the demolition of redundant or obsolete structures otherwise than to make way for new structures (see category 5) were such that the demolition was a positive and enduring advantage to the premises as the site for the carrying on of the business. It was referred to in the evidence as in the nature of `housekeeping', but in that word there is a suggestion of the constant work and expense that was required in order to reap the continuing advantages of the premises, and for that reason I regard the expression as question-begging and in fact inapt. I suppose a householder who pulls down an unwanted shed so as to provide more free space in his back garden might call his action a piece of housekeeping; but the expense would be of a capital nature all the same. For these reasons I am unable to sustain, as regards any of the seven classes of demolitions, the contention that the expense involved was an allowable deduction under sec. 51(1).''

13. I do not propose to repeat or quote what his Honour said, commencing at the foot of p. 263 and continuing through pp. 264 and 265, in relation to an alternative argument advanced. Suffice it to say that, whatever argument might be advanced to the contrary, the cost of demolishing plant or buildings is a capital outlay irrespective of the reason underlying the demolition. Finally, it might be mentioned that on appeal the decision of his Honour of this matter was upheld by the Full High Court.

14. I do not consider it necessary to deal at length with the decision of Kitto J. in
F.C. of T. v. Western Suburbs Cinemas Ltd. (1952) 86 C.L.R. 102 . I interpret this decision as clearly indicating that it matters not that, if a certain course was followed, an expenditure would be allowable as a revenue deduction under sec. 51(1). What has to be considered is not what might have been done, what expenditure might have been made, but on the contrary, the nature of the expenditure actually made, and whether it can be brought within the limits of sec. 51. If the expenditure is of a capital nature it must be so treated. Kitto J. in the Broken Hill case supra, enumerated seven categories of demolition expenses and could not see that any one of such categories was allowable under sec. 51. For myself, I cannot imagine any further categories and if there be others I still cannot conceive them being allowable under sec. 51.

15. Relying therefore, on the decision of Kitto J. in the Broken Hill case supra, I would uphold the decision of the Commissioner that the objection be disallowed and would confirm the assessment.