Case N68

Judges: MB Hogan Ch
P Gerber M

GW Beck M

Court:
No. 3 Board of Review

Judgment date: 21 August 1981.

---

Dr. G.W. Beck (Member)

The corporate taxpayer is a wholesale distributor of products which, measured on the basis of turnover of perishable to non-perishable, are 75% perishable. The total turnover is significant and a very large storage area is required. The storage area for perishables must be maintained at all times within a temperature range 16 to 20 degrees Celsius with controlled humidity. No business other than wholesaling is carried on; the company

---

ATC 357

receives products from manufacturers, it stores them and it distributes them to retail outlets for eventual sale to the public. The company lodged returns for years ending on 30 November and during the year ended 30 November 1977 it leased an extra 18,000 square feet of warehouse accommodation. The leased building had masonry walls, two steel roller doors, very large louvre windows and a galvanised sheet steel roof. In order to achieve inside that warehouse the necessary temperature and humidity conditions for the safe storage of the perishable products certain steps had to be taken. Consultants were called in and, in the words of the taxpayer's representative, there was installed -

``... three 25 tonne Pope air-conditioning units, four Negretti temperature recorders; secondly, insulation to warehouse roof; thirdly, insulation and partitioning to warehouse windows.''

This installation became the subject of a financial lease agreement and it was common ground that the finance company had taken the necessary steps to transfer any benefits under the Investment Allowance Subdivision of the Act to the taxpayer. The Commissioner asserted in his reg. 35(1) statement:

``1. No deduction is allowable to the taxpayer under sec. 82AD because the leasing company was not entitled to the benefit of the investment allowance in respect of the amounts of $5,995 and $4,995 expended on roofing and window insulation respectively in that:

• (a) the expenditure was not in respect of `eligible property' as defined in sec. 82AQ(1); and
• (b) the expenditure was made in respect of a number of separate units of property each of which did not exceed $500 in value as required by sec. 82AB(1)(b).

2. Alternatively, no deduction is allowable in respect of the amounts of $5,995 and $4,995 expended on roofing and window insulation respectively in that the expenditure was in relation to structural improvements of a type other than those referred to in sec. 82AE.''

There is no dispute regarding the investment allowance on the air-conditioning units or the temperature recorders.

2. The windows were totally blocked out by insulating screens made with covered joins and consisting of a two inch polyurethane core between sheets of asbestos cement. These screens were of a size appropriate to the size of the windows (height was 12 feet) and were firmly, but not permanently, attached by screws to the walls. The roof was insulated by two inch thick fibreglass held up by sisalation (aluminium foil) sheeting joined at the edges by aluminium tape to create an unbroken heat shield. Tendered photographs of the roof insulation showed the sisalation laid over timber joists at right angles to the run of the joists. It does not appear possible that the sisalation could be recovered and reused although the fibreglass might be capable of removal and further use. The cost of removal of the roof insulation would appear to make such action very unlikely.

3. Assertion 1(b) by the Commissioner (as per para. 1 above) could not be sustained on the evidence and the Commissioner's representative argued it only faintly when this became clear at the hearing. The other assertions are, however, not easily disposed of and it must be determined firstly whether the expenditure was ``eligible'' in terms of sec. 82AQ(1), i.e. whether the window screens and roof insulation were plant or articles within the meaning of sec. 54 and secondly, whether these items were structural improvements excluded from the Subdivision by sec. 82AE. Failure to satisfy either of these sections must mean that the taxpayer fails.

4. I can see no reason to consider the screens and the roof insulation separately. Both were modifications to the building made by the lessee so that the business could be properly carried on. It was not disputed that the modifications were necessary for the preservation of the perishable goods that the taxpayer sold, but this, of course, is saying no more than that the taxpayer had to have a building with a roof and walls to keep out rain, and lockable doors to prevent theft. A landlord's waiver dated 19 September, 1979 and addressed to the finance company/lessor agreed that ``notwithstanding that the goods shall become affixed to the said premises

---

ATC 358

they shall not be treated as fixtures and that you or the lessee may at or prior to or within a reasonable time after the expiration of the lease take remove and carry away... the said goods'' and the taxpayer's commercial manager stated in evidence that a verbal waiver had been obtained from the owner of the warehouse before the screens and roof insulation were commenced.

5. Because the items were firmly screwed or otherwise attached to the building it is possible to argue that until they were removed by authority of the landlord's waiver they were fixtures and part of the building and were thus owned by whoever had title to the building. This would mean that the screens and insulation could not be regarded as owned by the taxpayer during the tax year and as only plant or articles owned by taxpayers fall under sec. 54 they could not be ``eligible property'' as specified in sec. 82AQ(1). I think there are, however, more persuasive grounds why the taxpayer's objection fails. The Commissioner's representative contended that the screens and insulation could not be encompassed by the description ``plant or articles'' and the Board was referred to the usual sequence of cases from Yarmouth v. France (1887) 19 Q.B.D. 647, to
Quarries Ltd. v. F.C. of T. (1961) 106 C.L.R. 310 and especially p. 316, and to Wangaratta Woollen Mills Ltd. v. F.C. of T. 69 ATC 4095; (1969) 119 C.L.R. 1. I consider that the last mentioned case - which at first appears to give support to the taxpayer's claim - makes a critical distinction that annihilates the claim. The dyehouse in Wangaratta Woollen Mills was designed and constructed so that it performed functions in the manufacturing process and I am unable to discern similar functions performed by the window screens and the roof insulation. They helped to create the environment in which the air-conditioning plant operated, stock-in-trade was handled and sales effected, but one cannot say more than that.

6. Finally I come to the Commissioner's assertion (No. 2 in para. 1) regarding the exclusion of the items by sec. 82AE because they were structural improvements, and not of a type to which the subdivision applies. If the window screens and roof insulation are structural improvements there can be no doubt that the investment allowance is not available. I have been unable to find any specific interpretative consideration of the description ``structural improvement'' although what is an ``improvement'' has been considered on a number of occasions. In this connection Case C31
71 ATC 141 is apposite and it refers to the main cases. A reading of that case leaves me with little doubt as to the appropriate test and in the case under consideration here I am of the view that the window screens and roof insulation rendered the building better suited to the needs of the lessee and they were therefore improvements. I do not think it could be seriously suggested that improvements made to a warehouse building are not structural improvements.

7. For the foregoing reasons I agree with the Commissioner's decision on the objection and confirm the assessment for the year ended 30 June 1977.

Claim disallowed