Seatainer Terminals Ltd. v. Federal Commissioner of Taxation.
Judges:Murphy J
Court:
Supreme Court of Victoria
Murphy J.: Seatainer Terminals Ltd. (the appellant) appealed to this Court from the decision of the Deputy Commissioner of Taxation disallowing its objections to assessments of income tax for the year ending 30 June 1974, for the year ending 30 June 1975, and for the year ending 30 June 1976.
The appellant had lodged objections against the disallowance by the Deputy Commissioner of deductions that it claimed in each one of the said three years, pursuant to sec. 62A of the Income Tax Assessment Act 1936 as amended (hereinafter termed ``the said Act''), of a proportionate part of expenditure incurred by the taxpayer as the owner of a ``franchise'' which, the taxpayer alleged, fell squarely within the terms of sec. 62A. The Commissioner decided that sec. 62A was not applicable, and disallowed the deductions claimed.
As each part of sec. 62A appears to me to be pertinent to this appeal, it is as well to set the section out in full. It reads:
``62A (1) Where a franchise granted on or before 7 April 1978 requires that the undertaking which is the subject of the franchise shall become the property of the authority granting the franchise after the expiration of the period of the franchise without reimbursement of any of the expenditure thereon, a proportionate part of the expenditure which the owner of the franchise is required by the franchise to incur, and which he has in fact incurred, shall be an allowable deduction to him so long as he continues to be the owner of the franchise.
(2) The proportionate part of the expenditure referred to in the last preceding sub-section shall be calculated by distributing the amount of that expenditure proportionately over the period of the franchise unexpired at the date when the construction of the undertaking is completed, or, where there is no period of years fixed as the duration of the franchise, over such period as the Commissioner determines:
Provided that, where any income is derived in respect of the undertaking before its construction is completed, the proportionate part of the expenditure which may be an allowable deduction shall be as determined by the Commissioner.
(3) The aggregate of the deductions allowed by this section to any person shall not exceed the expenditure which that person is required by the franchise to incur, and which he has in fact incurred, and where in any case the aggregate of the deductions equals the amount of that expenditure no further deduction shall be allowed in pursuance of this section.
(4) For the purpose of this section, `franchise' means a grant by the Commonwealth or a State, or by a public authority constituted by or under an Act or State Act, whereby in consideration of the construction and maintenance of an undertaking of public utility a person is, during some limited period, authorized to collect and retain the revenue earned by that undertaking.''
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Before me the taxpayer was represented by Mr. D.E. Horton, one of Her Majesty's Counsel, and with him Messrs. D. Officer and J. Karkar of counsel, and the Commissioner was represented by Mr. R. Searby, one of Her Majesty's Counsel, and with him Mr. N. Good of counsel.
Section 62A was inserted in the said Act by sec. 7 of Act No. 46 of 1938. The researches of counsel have failed to reveal any decision by a court concerning the construction to be given the section.
The facts of the case do not appear to be in dispute. However, they are somewhat detailed.
The resolution of this appeal depends upon the construction to be given to the words of the section, and its application as construed to the facts of this case.
When this section was passed, there was already in the said Act, sec. 88(2) which related to leases and read:
``88(2) Where a taxpayer, who in the year of income is a lessee of land used for the purpose of producing assessable income has, either before or after the commencement of the lease, incurred expenditure in making improvements not subject to tenant rights on that land and such improvements -
- (a) have, under an agreement entered into after the commencement of this Act, been made as consideration for the grant to him of that lease;
- (b) are improvements which he was required to make under the provisions of that lease; or
- (c) have been made with the written consent of the lessor given after the commencement of this Act,
a proportionate part of the amount of that expenditure arrived at by distributing that amount proportionately over the period of the lease unexpired at the date when the expenditure was incurred, shall be an allowable deduction. In calculating the deduction under this sub-section, expenditure in excess of the amount, if any, specified in the agreement for the lease, or in the lease, or in the lessor's consent shall not be taken into account.''
Notwithstanding these provisions relating to leases, counsel appearing for the Commissioner, did not submit that sec. 62A does not extend to embrace leases, even though they are already covered by sec. 88(2) in this way.
What was submitted was that sec. 62A is not merely a repetition, in an alternative form, of sec. 88(2), and that the presence of sec. 88(2) does serve to highlight the importance and meaning of the differences to be found between sec. 62A and sec. 88(2), remembering that sec. 88(2) was already in the said Act when sec. 62A was first inserted.
There is, I think, strength in this sub-mission.
The employment in sec. 62A of the word ``franchise'' leads to some of the problems in construction which appear to me to arise in the section. It has certainly led me along paths which I had not previously trodden. Although in the long run, most of these paths were, for immediate purposes, unrewarding (for here the special meaning of ``franchise'' is defined in sec. 62A(4) of the said Act) some little of the delay in delivering my judgment and much of the enjoyment that I have derived from the case, has come from a consideration of the diverse subject matters to which the word ``franchise'' has been attached since its introduction into the law many centuries ago.
It has not always been reserved for application to the right of agencies to sell motor cars of a particular kind or to the right of stall holders to sell refreshments at a sports pavilion.
The word ``franchise'' is a corruption of an old French word meaning freedom, frankness, liberty or privilege. In England, it came to be used to describe privileges granted by the sovereign to a person or body or city of something which, prior to grant, formed part of the Royal prerogative. Such rights do not exist as franchises until they have been granted by the sovereign. Dr. Groenvelt's case (1697) 1 Ld. Raym. 213 at p. 214. (Grant to College of Physicians of liberty to fine members and retain such fine.)
The subject matter of such franchises were varied and might be, for example, royal mines, waifs, wrecks, estrays, treasure trove, fines and forfeitures, royal fish or swans.
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Speaking of franchises, Blackstone states, ``The kinds of them are various and almost infinite'', and, after touching upon some of the principal forms, he continues with other examples:``to have a fair or market: with the right of taking toll, either there or at any other public places, as at bridges, wharfs, or the like; which tolls must have a reasonable cause of commencement (as in consideration of repairs, or the like,) else the franchise is illegal and void.''
Blackstone's Commentaries (Archbold ed. 1811) Book 11 p. 37.
An interesting example of a franchise was the grant to a town or a city by the Crown (which had power to do so at common law) of a liberty to choose its own officer to execute the powers and duty of sheriff. The technical name for such a franchise, exempt from the authority of the sheriff of the county, was bailiwick, and the lord of the franchise was the bailiff (17 Vin. Abr. Prerogative of the King M.D.).
Franchises also were granted by the Crown of ferries, parks and warrens, pontage and murage, corporations, counties paltinate, counties corporate and the Cinque ports. See e.g.
Attorney General v. Horner (1886) 11 A.C. 66 at p. 80;
Simpson v. Attorney General (1904) A.C. 476.
Persons constructing new bridges were granted the franchise of pontage, the right to take a toll for the keeping and repairing of the bridge. Persons constructing walls for the purpose of defence were similarly granted a franchise of murage - but only for so long as the wall remained useful.
The essence of the franchise was the monopoly enjoyed by the owner, and the justification for the grant by the sovereign of that monopoly was that the existence of the subject matter of the franchise enured for the benefit of the public. See Attorney General v. Horner (No. 2) (1913) 2 Ch. 140 per Hamilton L.J. at p. 198.
In the latter case His Lordship said:
``The justification for the grant of a monopoly of market is that the existence of the market is for the benefit of the public. If the market keeper is not to get his outlay back and something more, he will give up the market, and where will the public be then? See the observations of Lord Macnaghten in
Simpson v. Attorney General (1904) A.C. 476 at p. 483.''
Franchises such as the right to conduct markets were not without their profitable aspects.
In the present case the appellant's business is that of conducting a container terminal and depot for the loading and unloading and storing of containers of goods to be transported on vessels at sea and on vehicles by land from Swanson Dock in Melbourne and from nearby depots ancillary to the terminal.
The appellant also conducts container terminals in Sydney Harbour and thereabouts and in Fremantle. These are not pertinent to the present appeal.
In the terminology of the trade, a container terminal means the place where container vessels can tie up and where very large, specially constructed cranes, which run on rail tracks set in concrete on the wharf, are available to lift the containers (weighing some twenty tonnes normally and sometimes forty tonnes) out of the vessel and onto trailers on the wharf - by which trailers they are then transported to stacking areas, where they are stacked, sometimes up to three or four or five high. When loading a vessel, the opposite procedure is adopted; specially designed equipment, trailers and specially constructed buildings and facilities and parking areas are essential.
The area adjacent to the terminal in Melbourne is called a container depot. Here containers may be packed, unpacked, serviced and/or parked, and collected by road or rail transport.
The depot and the terminal are complimentary to one another. They form a whole. Neither one appears on the evidence to be a practical business undertaking without the other.
The history of the matter, as revealed by the evidence, is that early in 1966, Overseas Containers Limited and Associated Steamships Pty. Ltd. contemplated entering upon a joint venture, to establish ``an oversea container terminal''. Together they formed a company, Seatainer Terminals Pty. Ltd. Negotiations were carried on with ``The
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Melbourne Harbor Trust Commissioners'' (see Exhibits E1 to 6) (hereinafter termed ``the Trust'').On 29 September 1967, at Melbourne, representatives of Seatainer Terminals Pty. Ltd. (the appellant) and of the Trust met and, as a result, ``Proposed Heads of Agreement for a Container Ship berth for Seatainer Terminals Pty. Ltd. at West Swanson Dock, Melbourne'' were drawn up. (See Exhibit E7.)
Over the next year, the appellant and the Trust met several times and discussed the matter and exchanged correspondence, negotiating the method by which a container terminal might best be inaugurated in Melbourne to the mutual satisfaction of both parties. (See Exhibits E8 to E14 inclusive.)
It is clear from these negotiations that both parties, each for their own separate reasons, were anxious that a container berth with appropriate ``back up facilities'' should be constructed at West Swanson Dock.
The Trust, a public authority, constituted under the Melbourne Harbor Trust Act 1958, was anxious to update the port facilities, to attract overseas shipping, and to recoup such costs as it incurred by the collection of appropriate fees.
The appellant, a company apparently formed (though I have not seen its Memorandum) to construct, operate and maintain a container terminal, and having interstate and international business connections with shipping companies and consortiums, was anxious to obtain long term berthing rights at West Swanson Dock, and to obtain long term possession of a sufficiently large area to enable a container terminal to be constructed, at which it could provide ``back up'' facilities, in the way of receiving containers, storing containers, servicing containers, loading containers, unloading containers, and servicing container ships. The types of operations that were to be conducted are photographically portrayed in Exhibits F and G.
It appears unlikely that, prior to execution, the parties to the several deeds of lease which came to be executed, and to the several ancillary agreements, ever turned their mind to sec. 62A of the Income Tax Assessment Act 1936 as amended (the said Act).
Whether or not this is so, it is, of course, irrelevant to the determination of the issue whether some $3,581,950 (or any part of this sum), which the appellant claims to have expended on the construction of buildings erections and improvements up to 30 June 1977, is an allowable deduction under sec. 62A of the said Act.
By deed of lease dated 16 October 1968 the Trust, a public authority, leased to the appellant, for twenty-one years, some twenty-two odd acres owned by it at Swanson Dock. (See Exhibit C1.) This is the main lease. The lease recites that it is granted to the intent that the said land and all buildings and improvements from time to time erected thereon should be used exclusively for the purpose of handling, storing, transport and distribution of cargo in connection with the business of the lessee and for no other purpose. The lease also provides that if the area leased was not used intensively then the rights of the lessee could be brought to an end or it could be required to stevedore any ship that the harbour master saw fit to direct it to stevedore.
Three months later, on 29 January 1969, the appellant and the Trust executed what the parties referred to as a ``First Call Agreement'' relating to the use of the wharf and docking area itself. (Exhibit C10.) The wharf and docking area were also the property of the Trust, but did not form part of the twenty-two acres of land leased to the appellant, although the wharf was immediately adjacent to and seaward of the terminal area leased. The width of the wharf area itself was some one hundred and thirty-eight feet and it was some hundreds of yards long. It was on this wharf area that the appellant, pursuant to a separate licence agreement executed by the Trust, erected two large cranes, to traverse up and down the wharf on rails set in concrete (see Exhibit C111). The First Call Agreement was designed to give the appellant and vessels nominated by it the preferential right to the use of the berth, wharf and docking space, but not so as to exclude therefrom vessels directed by the Harbour Master, if he reasonably required that they should dock there, and, in that event, the appellant was to stevedore the vessels so docked at the wharf by the order of the Harbour Master.
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The First Call Agreement specifically refers to the lease of the twenty-two acres granted to the appellant and also to the berths at the wharf adjacent to that land, which wharf was however constructed by the Trust itself. The main lease (Exhibit C1) does not refer to the First Call Agreement, and it is this lease which related to the land upon which the buildings improvements and erections have been constructed, and the cost of which is the subject matter of these claims.
The appellant paid to the Trust the large sums stipulated in the First Call Agreement for the preferential rights of berthing granted to it in the agreement, such sums varying according to the ``through-put'' of containers at the terminal.
The main lease (Exhibit C1) does not expressly authorize the appellant ``To collect and retain the revenue earned by the undertaking''. (See sec. 62A(4).) Nor for that matter, does any other lease or agreement, do so. The appellant submits that the right to do so is a natural incident of the lease itself. No doubt this is so but the right to collect revenue from users of the undertaking of public utility is, as such, a common incident of a franchise, and is in the grant expressed to be so.
Nor does the lease itself expressly state what (if anything) it is that is to be constructed by the lessee. It proceeds rather on the footing that buildings will in fact be constructed, and the lessor covenants in the lease to paint and maintain such buildings etc. in repair and to surrender them up to the lessor, on the cesser of the lease.
Even the Heads of Agreement (Exhibit E7) are silent as to these matters, and the parties appear content to spell out the details of the end result to be achieved rather than the details of the means of their achievement.
Section 62A(4) of the said Act does not, in my opinion, require that the ``grant'' itself must literally use the precise words of the subsection in order to enable a person to bring his case within it. What the grant must do is have the effect specified in the subsection. The language of the subsection is language employed to cover any number of a multitude of cases, and it is sufficient, in my view, to constitute a ``franchise'' within the meaning of sec. 62A(4) if:
- (a) There is a grant to the grantee of some special right which the grantor enjoys and
- (b) the grant is made by the Commonwealth, the State, or a public authority constituted by or under a Commonwealth or State Act, and
- (c) in pursuance of the grant the grantee is required to construct and maintain an undertaking of public utility
- (d) from which the revenue to be collected is to be retained by the grantee during the term of the grant.
A question raised by counsel is whether the provision in the lease that the grantee shall pay rent to the grantor during the term of the grant, alters what might otherwise possibly be a ``franchise'' and renders it a purely business transaction from which the grantee hopes to make profits in the conduct of the undertaking.
In my opinion, the mere requirement that the grantee is to pay an annual sum (whether it be called rent or howsoever it be titled) to the grantor for the right that he obtains, does not prevent the grant from being a ``franchise'', within the meaning of the section.
Grants of franchises by the sovereign have from the earliest days been subject to the payment of rent or some similar sum. For example, in
Lawrence v. Hitch L.R. 3 Q.B. 521, Kelly C.B. at p. 528 said: ``The earliest record of the manor of Cheltenham is that was granted by Henry III to the inhabitants, together with a weekly market and annual fair there for a term of four years from 1220 - at the yearly rent of £64.''
The precise wording of the detailed grant made in 1617 by Charles I, showing the sums to be paid in that case by the grantee for each franchise, is set out at pp. 529-30 (above cit.).
Returning to the facts of this case, another agreement was made by the parties relating to the erection of cranes on the wharf by the appellant, and relating to its ``licence'' to use them and the wharf itself. This licence and the main lease and the First Call Agreement all expire on the same date, namely 31 January 1990.
However, it appears that the Dudley Street-Sudholz Street Lease (Exhibit D2) expires on 31 December 1984.
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The cranes to be erected on the Trust's wharf pursuant to this licence were not to be unreasonably withheld by the appellant, from use for stevedoring ships other than those berthed by the appellant at the dock, and the appellant was to be entitled to make reasonable hire charges.
On the termination of the licence agreement, the cranes erected by the appellant on the wharf were to be removed by the appellant... see cl. 4(2) Exhibit C11A.
Further leases of land relating to some 6½ acres were made between the parties on 22 September 1967 and 16 October 1968. These were lands at Dudley and Sudholz Streets. The terms were essentially the same as are set out in the earlier main lease and insofar as relevant to the appellant's arguments in this appeal, this land also with all buildings erection and improvements was at the end of the term (which was in December 1984), to be delivered up to the Trust, without compensation to the appellant.
This area is referred to by the parties as the Dudley Street ``Depot''. The leases relating to this area do not refer to the main lease (Exhibit C1), or to the First Call Agreement (Exhibit C10) concerning Swanson Dock. The appellant uses all leased areas in conjunction.
It is true that other container loading and unloading facilities are available in Melbourne, but they are extremely limited. The facilities offered by the appellant are vital to overseas trade conducted in the Port of Melbourne.
Some containers themselves (integral units) have a refrigeration unit installed in them which operates by its own power, whilst others have a system of refrigeration which must be plugged in to an electricity supply, when parked or stored at the terminal or on the vessel itself. In order to make and keep the terminal complex operational and as part of its maintenance, the appellant assumed the responsibility for electrical installations, and for the supply of all necessary services, and for the maintenance of such services, both to ship and to containers, both import and export - see Heads of Agreement Exhibit E7.
At the hearing before me, apart from tendering these leases and the various agreements and the correspondence between the parties, the appellant also called viva voce evidence, which was given by John Richard Randall, Executive Director and Secretary of the appellant company and Robert Wyndham Merry, Commercial Service Manager for the appellant company. No evidence was called or led by the respondent Commissioner.
During the currency of the leases and agreements in question, the appellant clearly has performed substantial works of a permanent nature and expended moneys both in the ``terminal'' area and in the ``depot'' areas at Swanson Dock and at Dudley Street.
Foundations first had to be laid over large parts of all areas. Large buildings were erected. A bond store erected at Dudley Street, for example, was 420 feet in length by 85 feet in width. Roadways were specially constructed. A ``Stack'', which is a large building housing overhead cranes was constructed at Swanson Dock. In it, the cranes operate over an area 1000 feet long and they have a span of approximately 120 feet. There are three cranes servicing the ``stack'', each weighing some 350 tons. These cranes are quite distinct from the cranes erected and being operated under licence on the wharf area itself.
The ``stack'' building is 108 feet high, and containers are stacked in it, up to five high. The structures supporting the building are made of concrete blocks twenty feet by six feet in size, which in turn are supported by similar piling configurations. There are in excess of 1000 piles under the total complex. Specially constructed roadways run to and through the ``stack''.
A refrigeration unit was installed in the stack, capable of servicing 340 containers, and the unit was and had to be of exactly the same design and with the same ancillary system as that installed in container ships on the European and North American trades. There is a very high proportion of refrigerated cargo in containers used for export from Melbourne. Altogether, the facilities constructed for the storage of refrigerated containers in the ``stack'' enable the appellant to store in excess of 500 units.
A complex electrical system was installed at the Swanson Dock terminal to service the
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cranes, the refrigeration plant, the flood lighting at the terminal and other activities. An electricity sub-station had to be built by the appellant on the leased land; it is partly underground.The foundations of the roads and parking areas at the terminal had to be and are especially deep because of the weights carried on them. A maintenance area for servicing the mobile equipment used at the terminal was constructed. An administration building block was erected. All of these buildings are permanent structures.
This work was done in the main in 1968-1969, although, progressively, further works have continued up to 1976/77.
At any one time today there are in fact up to one thousand import containers and one thousand export containers stacked at the terminal. The terminal area can hold two thousand export, and the park areas can hold three thousand import, containers.
The parties have agreed upon the relevant sums expended by the appellant from year to year in constructing the permanent buildings erections and improvements on the said terminal and depot areas leased, between the year ending 30 June 1968 and 30 June 1977. (See Exhibit H.)
As I have said, some millions of dollars of expenditure were involved.
The Commissioner contended in this case:
- (1) that there is not to be found here an undertaking of public utility within the meaning of sec. 62A(4), but simply an ordinary commercial undertaking, conducted at the terminal and the depots.
- (2) that the appellant did not construct nor does it maintain the whole of the plant and constructions going to make up ``the undertaking'', because the dock, the berths and the wharf were constructed by and are maintained by the Trust.
- (3)that not the whole of the undertaking, but only part, namely the buildings and fixtures erected on the area leased at Swanson Dock and at Dudley Street for the purpose of the undertaking, will go to the trust when and if the leases expire in the future and are not renewed.
- (4)that the leases granted by the Trust are ordinary leases containing covenants as to user, and granting possession in the ordinary way; that the consideration moving to the appellant was not the authority ``to collect and retain'' revenue, but rather the right to occupy and use the land, and use it commercially for its business.
- (5)that this is not a ``franchise'' in the ordinary sense, nor in the statutory sense, as defined in sec. 62A(4) of the said Act.
Mr. Horton for the appellant pointed out to me that by sec. 28(2) of the Landlord and Tenant Act 1958 (Vic.), a tenant holding land by virtue of a lease may, unless there is a covenant to the contrary in the lease, during his tenancy or during such further period of possession of the premises that he enjoys, remove buildings and fixtures erected by him on the land leased, but he may not do so afterwards.
This statutory provision is, I find, negated by the covenants contained in the leases in the present case. I find that if the appellant, with the Trust's consent, constructed buildings, erections or improvements it was required to use them and the land for the purposes of its business, and to leave the building erections and improvements on the land leased on the expiration of the lease of the relevant land, all without compensation.
It seems obvious that a container terminal and depot could easily be an undertaking of public utility within the meaning of the statute. The Trust would be anxious to ensure that such a facility in the Port of Melbourne was available generally to importers and exporters. The expense necessarily involved in providing a container terminal would be so great that it would be unlikely to be created unless large sums of capital were available. Some financial advantage had to be hoped for if any private company was to enter upon the undertaking. Public moneys are notoriously scarce. As Lord Macnaghten said, speaking of the holder of a market franchise, ``Why otherwise would it do it?'' i.e. other than to make profits. It was also said in
Attorney General v. Company of Proprietors of Margate Pier and Harbours (1900) 1 Ch. 749 by Kekewich J.:
``Piers and harbours are, no doubt, works of great importance to the public, and the maintenance of them is for the public
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utility... and the powers which are given to companies of that kind... are all given on the footing that the companies are doing a public benefit, and yet they are commercial enterprises.''(See pp. 753-4 above cit.)
A great number, if not all of the cases at which I have looked are cases in which the mere fact that the owner of the franchise was conducting the same for profit, did not alter in any way the fact that it was a ``franchise'' which was being conducted.
The opportunity, even the ambition, to make commercial profit does not change a ``franchise'' into something else. Nor will it cause an undertaking of public utility to cease to be such an undertaking. The Act itself contemplates that income will be earned from such an undertaking; otherwise, it would have nothing to tax.
The advantage to the public, flowing from the whole concept of this container terminal is to my mind clear.
I find that the construction in the Port of Melbourne and the maintenance of a container terminal could readily constitute ``an undertaking of public utility'' within the meaning of sec. 62A(4) of the said Act.
It is conceded by the Commissioner that the ``lessor'' is a public authority constituted by or under a State Act, within the meaning of sec. 62A(4) of the said Act.
Another question which arises when considering sec. 62A(4) is whether the appellant company can be said to be ``authorized to collect and retain the revenue earned by that undertaking'', within the meaning of the definition in subsec. (4), and if so, whether it is so authorized ``in consideration of the construction and maintenance of the undertaking''. One can readily envisage that a person may be authorized by a franchise to collect tolls payable by members of the public using, say, a bridge the subject of the franchise or that a person might be authorized to collect fees payable by members of the public who purchase goods at a market, the subject of the franchise in question.
But, as Mr. Searby submitted, it is more difficult to see that in the circumstances here, the rights flowing from the lease granted in this case, namely the right to conduct a business undertaking, amount to an authorization within the meaning of sec. 62A(4) ``to collect and retain the revenue earned by that undertaking''.
It is equally difficult to conclude from the lease (grant) that such an authorization is given, in consideration of the construction and maintenance of the undertaking, when the lease itself requires no such ``construction'' to be effected.
No doubt it can be said that ``revenue'', in this context, means income.
``The revenue earned by that undertaking'' must, if it is to be applied to the facts here, refer back to the undertaking of public utility, and must refer to such stevedoring and other fees as are payable to the appellant by the shippers, importers and owners of vessels and of cargoes, using the import and export facilities offered by the container terminal, and the ancillary depot.
The factual problem that I see in the present case is that the leases do not make any mention of these fees, but, as would be expected in any normal business lease, proceed on the footing that, possession of the land leased having been given to the lessee for its business purposes, the lessee will naturally be entitled during the term of the lease to retain any profits earned from its undertaking.
When considering sec. 62A(4), the equation of the leases in question here to a grant, whereby, in consideration of the construction and maintenance of an undertaking of public utility, the grantee is authorized to collect and retain the revenue earned by that undertaking, would appear to strain the meaning of the section. However, my decision in this case is not reached simply because of this difficulty.
The leases of land from the Trust to the appellant, dated 22 September 1967 (Exhibit D1), 16 October 1968 (Exhibit C1 and Exhibit D2), 2 September 1970 (Exhibit C6) and 22 December 1971 (Exhibit C8), each contain some twenty covenants by the lessee (appellant), which appear to me to be to all intents and purposes identical.
In each one of these leases, for example, covenant (3) in cl. 2 reads:
``Not to erect or build upon the said demised premises any buildings
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improvements or other erections or remove or make alterations to the buildings improvements or other erections for the time being on the demised premises without the consent in writing of the lessors first had and obtained in any and every instance... and thereafter the construction or erection of such buildings improvements additions or alterations shall be completed at the cost and expense of the lessee in strict conformity with such plans and specifications as approved and under the supervision and to the satisfaction of the Chief Engineer for the time being of the lessors.''
In none of these leases is the lessee required to spend any moneys or required to construct anything, but each lease appears to proceed on the basis that the lessee will in all probability do so, for the lessee covenants to maintain any buildings that may be constructed, and to paint such buildings with approved colours, and at specified intervals, and to yield up such structures in good repair along with the land to the lessor on cesser of the lease.
By way of contrast, on 10 July 1974, a further lease of an additional 1.990 hectares at MacKenzie Road, Footscray in the Port of Melbourne (i.e. adjacent to the Swanson Dock land) was entered upon by the parties (Exhibit C9), containing in cl. 2 the same twenty covenants by the lessee (appellant) that there were contained in the earlier leases, and also containing a further pertinent covenant (21) as follows:
``(21) During the first two years of the term of the demise hereby created to carry out works to improve the demised premises as a container terminal to be used by the lessee in connection with the lessee's use of the demised premises by erecting or installing thereon as permanent improvements suitable paving fencing offices and other improvements the said works to be effected under the supervision of the Chief Engineer from time to time of the lessors and in accordance with plans and specifications first approved in writing by the Chief Engineer. The said works shall be carried out at the cost of the lessee and the lessee shall spend in carrying out the said works not less than $150,000. The lessee shall from time to time as and when required by the lessors produce to the lessors clear and comprehensive reports of the works carried out to date and the cost of the said works. If the lessee fails or refuses to carry out or complete the said improvements in accordance with the reasonable requirements of the said Chief Engineer the lessors shall have the right to carry out or complete the necessary work as and when they consider it fit and proper to do so and the costs so incurred by the lessors (provided that the cost shall together with the costs of the work (if any) already carried out by the lessee shall not exceed $150,000) shall be a debt due and payable by the lessee to the lessors on demand.''
It is almost as though at this stage in 1974 the draftsman of this lease proceeded with one eye on the provisions of sec. 62A, and especially on the provisions of sec. 62A(1) and (4).
This agreement succeeds in highlighting the fact that the earlier deeds of lease, which the appellant seeks to equate to the grant of the ``franchise'', do not require the lessee, (the ``owner of the franchise'') to incur any expenditure at all, and that even if some expenditure is impliedly contemplated, its amount is not specified.
The words in sec. 62A(1), ``a proportionate part of the expenditure which the owner of the franchise is required by the franchise to incur'' must next be considered.
Does the word ``required'' in this context mean -
- (1) that the grant of franchise must itself specify that an amount of expenditure is to be incurred, or
- (2) that the mere grant of the franchise must necessarily require the person to whom it is granted to incur expenditure of some amount.
I think that the words in sec. 62A(3) throw some light upon the matter. Here it is stipulated that the aggregate of the deductions to be allowed by the section to any person shall not exceed ``the expenditure which that person is required by the franchise to incur, and which he has in fact incurred, and where in any case the aggregate of the deductions equals the amount of that
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expenditure no further deduction shall be allowed in pursuance of this section.''In my opinion, in order to fall within sec. 62A, the grant of the franchise must require that some ascertainable sum or specified sum be expended by the owner of the franchise in the construction and maintenance of the undertaking of public utility to which it relates. Otherwise, if, as in the present case, the sum to be expended is not mentioned and is optional or ``openended'', there would be no ready way of calculating the ``proportionate part'' under subsec. (1) or (2), nor of knowing when the deductions were to cease under subsec. (3).
It was conceded in the present case by counsel for the Commissioner that the expenditure set out in Exhibit H (being the sums actually expended by the appellant) was reasonably expended by the appellant for the purpose of carrying on its own business. It might have been argued that the expenditure which the grant of the franchise impliedly required, equated the sum which the appellant itself determined that it had reasonably to expend, for the purpose of carrying on its business of constructing and maintaining the container terminal.
In my view to construe the section in this way would again be to strain the language of the subsection. Unless otherwise driven to do so, I would not so construe the subsection.
It was also submitted by Counsel for the Commissioner, that the leases in question did not require the appellant to construct anything in particular, and that therefore sec. 62A(1) did not apply to this case.
In my view (save for the particular lease executed on 10 July 1974 (Exhibit C9)) this submission is correct, for the reasons advanced.
It is not, I think, possible to sustain an argument that the so called owner of the franchise here is ``required by the franchise to incur'' expenditure - within the meaning of sec. 62A(1), (2) and (3). The case is one where, being granted a lease of land, the lessee as a matter of business judgment determined to expend money on improvements of a capital nature, believing those improvements of a capital nature, believing those improvements to be best suited to return profits to it during the currency of the lease. I tend to agree with Mr. Searby that no breach of contract would be committed if the appellant effected no improvements, and that at most it would be liable to lose its lease.
In my view, sec. 62A(1) contemplates that the owner of the ``franchise'' is required by the terms of the grant to expend certain moneys or certain ascertainable moneys in the construction of an undertaking of public utility and that pursuant to that requirement, he expends moneys, either less than or equal to the sums required to be expended on that construction. If he does this, then allowable deductions as calculated in the terms of the section may be claimable if otherwise the franchise owner falls within the section. If he expends more than he was required ``by the franchise'' to expend on the construction, then such additional sums are not allowable deductions under the section.
If that is the correct meaning of the subsection then the appellant in the present case fails to bring its case within the section.
Mr. Searby also submitted that the appellant, in the conduct of its undertaking, demonstrated that it was operating a private commercial venture and not conducting an ``undertaking of public utility'' within the meaning of sec. 62.
The manner in which the appellant has in fact conducted its business is not relevant in any way to the interpretation of the section - though of course it might be relevant to the question whether, on the evidence, the appellant brings itself within the terms of the section.
Because the appellant had entered into contracts with ``major clients'', which were ``on-going arrangements'', Mr. Searby submitted that the undertaking was not in fact an ``undertaking of public utility''. I do not accept this submission. I accept Mr. Horton's submission that the appellant was and is on the look out for new clients and that it was commercially motivated, and that it was prepared (provided it was convenient) to stevedore container ships owned by anyone at all. I see nothing antipathetic to the public utility aspect of the appellant's undertaking, in the fact that certain shipping companies entered into agreements with the appellant pursuant to which agreements those companies always use the facilities available at the appellant's terminal, and that
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preference in docking and stevedoring is given by the appellant to the vessels belonging to such shipping companies. Some order in the complex business of the appellant and in the conduct of the loading and unloading activities at the terminal is vital, just as it would be, for example, in the conduct of a market. But this would not of itself cause the undertaking to cease to be an undertaking of public utility within the meaning of sec. 62A(4) of the said Act, assuming that otherwise it should be so categorised.Today, in the Port of Melbourne, something like eighty per centum of all solid cargo is being moved inwards and outwards by containers. Most new vessels are customer built for container handling. In Europe, the United Kingdom and Japan, the bulk of all trade is operated by containers. Overseas trade demands that there should be available, in Melbourne, container terminals and depots for the storage, servicing, loading and unloading of such containers. Freight rates which a shipper is prepared to pay to a shipping company are affected by the availability, the efficiency and the cost of these services. The eventual cost of goods to the public generally, is likewise affected.
Facilities to handle containers, and to service container vessels are an essential part of modern shipping and of modern port management. The construction of such port facilities, terminals and depots is very expensive and the maintenance and operation of such terminals and depots require an expertise which, on the evidence, I should think is not readily available.
In my opinion, the introduction of such terminal facilities in Melbourne could do nothing but facilitate and advance trade in this State, ``and that for the good of the realm''. (cf.
Darcy v. Allin 11 Co.Rep. 84, 77 E.R. 1260.)
Privileges of trade have in the past commonly been the subject of franchises. (Comyns' Digest Prerogative D.30.)
It is clear that the doing of what the appellant has done at Swanson Dock in establishing the terminal, and all its facilities, and at the Swanson Dock and Dudley Street Depot, could only have been done with the authority of the Melbourne Harbor Trust, a public authority, and that the Trust itself had the statutory power to do these things, namely to construct and maintain a terminal and depot. See sec. 47, 59, 61 Melbourne Harbor Trust Act 1958.
The Trust also had power to set apart the relevant portions of the wharf and land involved here, ``for the exclusive accommodation of any person engaged in carrying on any particular trade for the reception of the vessels and goods belonging to or employed and conveyed by such person''. Section 78 of the said Act.
I find that the grant by the Commissioners to the appellant of these leases, hedged about as they are by the covenants contained in them, and of the ancillary agreements, was dictated by the desire of the Commissioners to ``promote the trade of the port'' (sec. 61(1)(c)), and ``to facilitate the lodging and discharging... of vessels'' (sec. 61(1)(a) Melbourne Harbor Trust Act 1958).
It is in my view not helpful to look at the motivation of the appellant either in obtaining and negotiating the leases of the lands in question, or in constructing and conducting this enormously expensive undertaking. The fact that the appellant was interested in profiting from the undertaking is not to the point, which is rather whether the undertaking is, within the meaning of the section, ``an undertaking of public utility''.
I think that it is clear that, had the Trust itself engaged in constructing the whole undertaking comprising berths, wharf, cranes, terminal and depots, it would without question have appeared in ordinary language to have been an undertaking of public utility.
Reference was made during argument on the public utility aspect of the case to principles expressed in some of the charity cases. It was submitted that this undertaking lacked the necessary ``public utility'' aspect to fall within the section. However, the public benefit element necessary to establish that a trust is ``charitable'', involves, to my mind, altogether different considerations from those which are involved in determining whether an undertaking is an ``undertaking of public utility'', within the meaning of sec. 62A(4). Cf.
Oppenheim v. Tobacco Securities Trust Co. Ltd. (1951) A.C. 297 at p. 306 per Lord Simonds;
Thompson v. F.C. of T. (1959) 102 C.L.R. 315 at pp. 321-2 per
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Dixon C.J.;Renmark Hotel Inc. v. F.C. of T. (1949) 79 C.L.R. 10 at p. 18.
In the Oppenheim case, Lord Normand said,
``I remind Your Lordships of the observations of Lord Simons in Gilmour v. Coats (1949) A.C. 426 at p. 443, that the law of charity has been built up not logically but empirically. It is the empirical development which has so often baffled efforts to reduce the law to systematized definitions''
((1951) A.C. at p. 309).
I see no warrant for transposing the special ``empirical'' considerations of the meaning of the word ``public'' in its application to charitable trusts into the law of income tax relating to sec. 62A(4).
In the Renmark Hotel case Rich J. said,
``No one would describe as a public authority an electric lighting company which had obtained statutory powers but possessed a share capital issued to shareholders and which carried on for profit, but we might call it a public utility.''
(79 C.L.R. at p. 18).
His Honour's remarks were quoted with approval by Taylor J. in
F.C. of T. v. Silverton Tramway Co. Ltd. (1953) 88 C.L.R. 559 at p. 571, and these remarks made, in the one case in reference to sec. 23(d) of the Income Tax Assessment Act 1936-47, and in the other, in reference to the First Schedule of the Sales Tax (Exemptions and Classifications) Act 1935-51, appear to me to be more apposite than the remarks in the charity cases to apply to the public utility aspect of the composite phrase, ``an undertaking of public utility'', appearing in sec. 62A(4) of the said Act.
In all the circumstances I am of the view that the construction and operation of the whole undertaking, and probably of the terminal and the depots alone could well be considered as an undertaking of public utility within the meaning of sec. 62A(4) of the Income Tax Assessment Act 1936 as amended.
But that is not to say that the construction and maintenance of such an undertaking of public utility need be performed pursuant to a ``franchise'' as defined in sec. 62A(4); and for the appellant to bring itself within the section, it must also be shown that any such ``franchise'' required that the undertaking ``shall become the property of the authority granting the franchise'' within the meaning of sec. 62A(1) of the said Act.
Mr. Horton for the appellant submitted that the ``undertaking'' referred to in sec. 62A(4) was made up solely of the several permanent buildings erections and improvements, constructed on the land, the subject of the grant. It was these ``buildings erections and improvements'' only which, on determination of the term, were to be yielded up to the Trust (see cl. 2(1) Exhibit C1).
He referred in support of this limited reading of the word ``undertaking'' to the words ``construction and maintenance'' appearing in sec. 62A(4), and to the words ``when the construction of the undertaking is completed'', and ``before the construction is completed'' appearing in sec. 62A( 2) of the said Act.
It does appear to me that sec. 62A is worded in such a way as to suggest that the word ``undertaking'' appearing therein is appropriate to apply to works or buildings which, pursuant to the grant of franchise, have to be constructed, rather than to a business undertaking or the ``undertaking of the company'', such as is contemplated by those words where they appear in cl. 16 of the Third Schedule to the Companies Act 1961 (Vic.), or in a mortgage debenture containing a floating charge given by a company, e.g.
Re Panama, New Zealand Co. (1870) L.R. 5 Ch. 318. It has frequently been said that the word ``undertaking'' is a word of variable meaning, and there is no doubt but that, in the cases, meanings which differ materially have been ascribed to it, depending upon the context in which it appears. See e.g. Balmain Electric Light Company Reference (1957) S.R. (N.S.W.) 100 at p. 129;
Edinburgh Street Tramway Co. v. Edinburgh Corporation (1894) A.C. 456 at p. 474;
King v. Cork County Council (1906) 2 Ir. R. 282 at p. 291;
Baytrust Holdings Ltd. v. I.R. Commrs. (1971) 1 W.L.R. 1333 at pp. 1353-4.
The fact that the section presupposes that one can pinpoint the date when ``the construction of the undertaking is
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completed'' (sec. 62A(2)) appears to require that the ``undertaking'' in sec. 62A, refers to some physical structure rather than to the business enterprise with all its assets in an operating condition.The word ``undertaking'' has not infrequently been employed in similar context, and has been interpreted as being limited to works or structures to be completed before a certain date. E.g. In
re Peckham Dulwich & Crystal Palace Tramways Bill (1910) 2 Ch. 1, 9, 10;
Gardner v. London Chatham & Dover Railway Co. (No. 1) (1867) L.R. 2 Ch. App. 201 at p. 217.
In this latter case Cairns L.J. said:
``The object and intention of Parliament, however, in the case of each of these various undertakings, was clearly to create a railway which was to be made and maintained, by which tolls and profits were to be earned, which was to be worked and managed by a company, according to certain rules of management, and under a certain responsibility. The whole of this, when in operation, is the work contemplated by the Legislature, and it is to this that, in my opinion, the name of `undertaking' is given. Moneys are provided for, and various ingredients go to make up the undertaking; but the term `undertaking' is the proper style, not for the ingredients, but for the completed work, and it is from the completed work that any return of moneys or earnings can arise.''
(see above cit. at p. 217) (emphasis added).
However, if this meaning of the word ``undertaking'' applies throughout sec. 62A, it may be that the whole section is limited in its application to undertakings in the nature of structures, such as bridges linking public roads, locks, tramways, railways, dykes, roadways, piers, and the like.
For buildings and structures adjacent to a wharf may or may not be an ``undertaking of public utility'', depending upon a number of factors, one of which would appear to me to be the use to which they may be put, or are put. They are not, of their very nature, undertakings of public utility.
Mr. Searby submitted that the ``undertaking of public utility'' which was, ex hypothesi, to be considered in the present case must be the whole of the business operation of the appellant as a going concern, including the licence to use the wharf, the berths, the special cranes on the wharf, the trolleys, the servicing facilities, the storage buildings, the depots, the bond shed at Dudley Street, and all other aspects of the loading and unloading facilities.
He proceeded then to submit that as the wharf was not in the possession of the appellant, and as the appellant was by the terms of the licence required to remove the wharf cranes from the wharf on cesser of the licence (cl. 4(2) Exhibit C11A) and as none of the movables passed and presumably as the Dudley Street lease expired in 1984, it was abundantly clear that the provisions of sec. 62A(1) could not be satisfied by the appellant. That is to say, ``the franchise granted'' did not ``require that the undertaking which is the subject of the franchise shall become the property of the authority granting the franchise after the expiration of the period of the franchise''. Section 62A(1).
Part of the undertaking already was the property of the authority, and part of it was by the terms of the agreement between the parties, to be removed by the appellant on the expiration of the term. Other parts did not become the property of the Trust on cesser of the lease.
I suppose that he might also have said that the lease of the depot land at Dudley and Sudholz Street was to expire in 1984, six years or so before the lease of the Swanson Dock area, and that a yielding up on different dates was quite inconsistent with or could not be reconciled with the terms of the section.
It does appear to me in the circumstances here, to be extremely difficult to isolate, as it were, the lease of the Swanson Street dock area, the subject of the main lease (Exhibit C1) and then to go on to say that ``the undertaking which is the subject of the franchise'' within the meaning of sec. 62A(1) is confined to the buildings improvements and erections of a permanent nature which were constructed on that area of land alone.
To do so would seem to be designed to achieve an artifical result, and to strain the words of the section beyond their limits.
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In all the circumstances, I conclude that sec. 62A is not applicable to the facts of this case.
Standing alone, the buildings and erections and improvements, on the leased area, which Mr. Horton submits are to be considered as ``the undertaking'' for the purposes of sec. 62A(1), cannot be regarded as ``the subject of the franchise''.
As already mentioned, the appellant covenanted in the leases not to erect ``any buildings improvements or other erections'' on the land leased without the prior consent of the lessor. (E.g. Clause 2(3) Exhibit C1.)
Such a covenant is one which it would of course be natural to find in a lease of land to be used for the business purposes of a lessee, but it appears to be altogether out of place in the grant of a franchise, falling within the definition of ``franchise'' in sec. 62A(4).
Moreover, it is difficult to say that the expenditure incurred on the construction of such buildings improvements or erections, as were in fact constructed following the grant of the lessor's consent, is ``expenditure which `the owner of the franchise is required by the franchise to incur''' (sec. 62A(1)). These words appearing in sec. 62A(1) are simply inapt to apply in the circumstances of this case.
I have reached the conclusion that the appellant's ``undertaking'', however that word is defined, and whatever be its breath, though capable of being considered as an ``undertaking of public utility'', was not constructed and maintained pursuant to a ``franchise granted'', and was not to become the property of the Trust after the expiration of ``the period of the franchise'', within the meaning of sec. 62A of the said Act.
Furthermore, I am not satisfied that the main lease taken alone, or looked at together with all the surrounding agreements and circumstances, could be considered a ``franchise'' falling within the definition in sec. 62A(4) of the said Act.
Accordingly in my view, the sums claimed by the appellant as allowable deductions are not allowable deductions pursuant to sec. 62A(1) of the said Act.
The appeals shall be dismissed.
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