New Zealand Refining Company Ltd. v. Commissioner of Inland Revenue (N.Z.)

Greig J

High Court (New Zealand)

Judgment date: Judgment handed down 14 May 1982.

Greig J.

This is a case stated pursuant to sec. 32 of the Land and Income Tax Act 1954 which turns on the meaning of the word ``plant'' in sec. 117A of the Land and Income Tax Act 1954.

The objector is a public company which operates the petroleum refinery at Marsden Point. It is owned as to 70 percent by the five oil distributors operating in New Zealand and receives and refines the crude oil feed stock for these oil companies. The objector's annual balance date for its financial accounts is 31 December and the Commissioner accepts a return of income in respect of any year ended on 31 December as being in respect of the year ended on the following 31 March. In furnishing its return for income tax purposes for the year ended 31 December 1973 the objector claimed deductions for ordinary and special depreciation and investment allowance in respect of a quantity of material used as a catalyst in the refining process. The Commissioner disallowed these claimed deductions and after objection and correspondence the objector required the Commissioner to state a case. At the hearing the claim in respect of ordinary and special depreciation was not proceeded with and what is left is the claim for investment allowance made by the objector under sec. 117A of the Act.

The questions posed in the case stated for the determination of the Court are whether the Commissioner acted incorrectly in making the assessments which disallowed the investment allowance claimed and, if so, then in what respects should such assessments be varied. The Commissioner accepts that if the Court determines that the catalyst falls within the meaning of the word ``plant'' in sec. 117A then the company's claimed deduction under the section is to be allowed. It will be seen then that no answer is required on the second question posed.

It is necessary for me to describe in some detail the process of refining for a proper understanding of the use and effect of the catalyst in the process. In addition to the factual matter set out in the case stated I have been assisted in my understanding of the process by the evidence given at the hearing by Arthur Leonard Hilton who is the head of operations of the objector at Marsden Point.

The crude oil feed stock is first of all separated into certain components by a process of distillation or fractionation. One of the components which is used for the production of gasoline is naphtha. To produce the appropriate quality of gasoline the naphtha is reformed or cracked in a chemical process which comprises heat and the catalytic effect of the catalyst. This reforming process breaks down and reforms the molecules in the naphtha producing a high octane accelerant component which with further processing becomes the regular or premium petrol used in the internal combustion engine.

The reforming process requires the liquid naphtha to be heated until it is a gas and then

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that gas is passed through three reactors: the gas is reheated before it is passed into the second and third reactors. The reactors are large, cylindrical vessels which are constructed to contain a perforated cylinder which in turn contains the catalyst. The heated gas is passed through the cylinders and through the catalyst which both accelerates and completes the reforming or cracking process.

The catalyst is a large quantity of innumerable pellets or granules which are spherical in shape. Each granule is about 3 millimetres in diameter and comprises a centre of alumina which is coated with platinum, rhenium and chlorine. The surface of each granule is not smooth or dense but under magnification gives the appearance of porosity. The spheres or granules provide the greatest surface area to the gas and this is increased by the apparent porosity so that there is a very large surface area of the catalytic components available to the gas passing through the reactors.

The catalyst is a true catalyst in that it causes the chemical effect or change in the gas without itself undergoing any change or forming part of the process except by its presence. The only changes which take place on the catalyst are the loss of the chlorine which is restored by the objector from time to time and by the building up of carbon deposits which coat the surface and reduce the catalytic effect. From time to time the carbon deposits are removed by heat but after a number of these applications of heat the surface area is reduced by sintering or melting with the result that after some years the catalyst loses some of its effect permanently to such an extent that it has to be replaced.

The quantity of catalyst in question were described as the third charge and was installed in October 1973. The first charge was installed in 1963 and was added to in 1967. The second charge was installed in or about December 1969 and the fourth charge was installed in or about June 1980. It will be seen that each charge lasts for a number of years and it is to be observed that the reactors operate 24 hours a day, 365 days in the year, except for occasions of shutdown for repair, maintenance and regeneration of the catalyst.

Each charge is, so to speak, loose in the perforated container within the reactor and when its life for refining purposes is over it is removed. Because the catalyst contains platinum and rhenium, both of which are precious metals, the charge at the end of its refining life is sold for the recovery of those metals. It appears that the third charge cost the company $870,272 and that it was sold on its removal from the reactors for approximately $1.215M.

The evidence shows that the cracking or reforming process, at least in a chemical sense, can be achieved by heat alone. That, however, produces a low-grade gasoline and it is the effect of the catalyst that produces the high-grade gasoline which is required for motor vehicles and other internal combustion engines in New Zealand. The platinum, or platinum and rhenium, catalyst is commonly used throughout the world in the petroleum refining process. It was suggested by the Commissioner that the use of the catalyst was merely for the acceleration of the process and for commercial or economic purposes but I am satisfied that in practical terms to provide gasoline which is required in the present day the catalyst as used by the objector is an essential part of its process.

A claim for special allowance made by the objector is made in terms of subsec. (5) of sec. 117A of the Act then in force which provides that where a taxpayer has incurred expenditure of a capital nature on new plant or machinery for use by him in the production of assessable income a deduction shall be allowed in the income year in which that new plant or machinery is first used of an amount equal to 20 percent of the expenditure. It was accepted by the Commissioner that all the relevant provisions of the section applied to the deduction but the Commissioner claimed that the catalyst was not plant or machinery. The objector did not claim that the catalyst can be said to be machinery so that the sole question is whether it is plant.

The Act does not define plant or machinery in any general way but in sec. 117A there is an inclusive definition of the term ``plant or machinery'' which includes a motorcar in certain uses and expressly excludes any other motorcar, hand tools or

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loose tools or any unit of plant or machinery where the cost to the taxpayer of that unit does not exceed $100. It can easily be seen that there is nothing particularly helpful in that section, or indeed anywhere else in the Act, to construe the word ``plant''.

The word ``plant'' in its particular context in each case has been the subject of judicial consideration on a number of occasions. On many of these occasions it has been said that the word ``plant'' is an ordinary English word and to that extent the starting point of the inquiry must be the dictionary meaning. In vol. 7, pt. 2 of the Oxford English dictionary the relevant meaning is expressed to be:

``The fixtures, implements, machinery and apparatus used in carrying on any industrial process.''

That volume was published in 1909 and is based on sub-editing of the slips collected by Professor Murray and his helpers between 1900 and 1907. The first quotation for that meaning which is apposite is dated 1789 and is from a work of Mrs. Piozzi, and is as follows:

``The ground was destined to the purposes of extensive commerce, but the appellation of a plant gave me much disturbance, from my inability to fathom the meaning.''

An earlier dictionary definition in Johnson's dictionary, the edition of 1866, is as follows:

``In large establishments, breweries, railways, and the like, it denotes the stock, fixtures, &c., required for carrying on the business.''

As I have said, the word has been considered in many cases and the starting point of that is
Yarmouth v. France 19 Q.B.D. 647, decided in 1887. The statement of Lindley L.J. has been often quoted with approval as well in England as in Australia and New Zealand, and is as follows, at p. 658:

``... in its ordinary sense, it includes whatever apparatus is used by a business man for carrying on his business, - not his stock-in-trade which he buys or makes for sale; but all goods and chattels, fixed or moveable, live or dead, which he keeps for permanent employment in his business.''

That was a case of a claim for compensation under the Employers' Liability Act 1880 and it was held that the horses which were used by a wharfinger in his business were part of the plant within the terms of that Act. It is, I think, helpful to quote in addition a passage from Lord Esher's judgment in the same case, at p. 652, when he said:

``The principal part of the business of a wharfinger is conveying goods from the wharf to the houses or shops or warehouses of the consignees: and for this purpose he must use horses and carts or wagons. They are all necessary for the carrying on of the business. It cannot for a moment be contended that the carts and wagons are not `plant'. Can it be said that the horses, without which the carts and wagons would be useless, are not?''

The definition stated by Lindley L.J., as I have already indicated, has been accepted as the meaning of the word ``plant'' in the construction of a variety of enactments. It is not a statutory definition although one might be forgiven for thinking that, judicial analysis of it since then has almost treated it as having statutory effect. It has a generality, not to say universality, which permits its application in different cases under different Acts, but subject to the changes in commerce and, in particular, technology, since 1887. Care must be taken to beware of applying it too strictly in taxation cases without regard to the differing terms and provisions of the taxation Acts in England, Australia and New Zealand. This point was emphasised by McTiernan J. in
Wangaratta Woollen Mills v. F.C. of T. 69 ATC 4095, although he applied in the context of that case the definition in Yarmouth v. France. The result has been that in applying Lindley L.J.'s definition not only the horse in that case but a dry dock, office partitions, a lawyer's library and a swimming pool have been held to be ``plant'', while the electric lights in a restaurant was operated was held not to be ``plant''.

A collateral principle which has been drawn from this judicial definition is that the test to be applied in any case is a functional test. The question is the use to which the

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particular item is put by the taxpayer in the course of its trade. That test has been expressly accepted by Lord Donovan in
I.R. Commrs. v. Barclay Curle (1969) 1 All E.R. 732, the dry dock case, and more recently by Buckley L.J. in
Benson v. Yard Arm Club Ltd. (1979) 2 All E.R. 336, the barge restaurant case. One way in which this has been expressed in the particular circumstances of the case was in the speech of Lord Diplock in
Haigh v. Charles W. Ireland Ltd. (1973) 3 All E.R. 1137, at p. 1148, when he said this, after citing the definition of Lindley L.J.:

``It is a definition of a physical object by reference to the use to which it is being put. Where, as in the Factories Act 1961, all references to `plant' are to plant within a factory in which an industrial process is carried on, the only relevant use, in my opinion, is that to which the physical object is being put in that factory. If it is there as part of the apparatus for use in carrying on the industrial process undertaken on those premises, it is `plant' within the meaning of the Act even though it may be temporarily out of use or in the course of installation, repair or removal. If it is there for the purpose of being subjected to that industrial process it is an `article' as that term is used in the definition in s. 175 to describe the physical objects on which are carried out those industrial processes which qualify the premises where they are undertaken as a `factory' within the meaning of the Act; it is not `plant', whatever may be the use to which it has been previously put or may be subsequently put elsewhere.''

Another aspect of the definition which has been subject to explanation is the reference by Lindley L.J. to ``permanence''. That does not mean literal permanence or even any great length of time. There has to be some degree of durability and if the items in question are used up quickly in the course of the operations that may tend to show that they are not ``plant'' but rather items which are subjected to the industrial process. In this case a catalyst by its very nature is not used up and it is clear on the facts that the constant process over some years means that the catalyst has a sufficient durability to meet the requirement of ``permanence''.

A particular difficulty in construing the word ``plant'' is that it has an extensive meaning and can include what might ordinarily be thought of as buildings or even animate objects which might not normally be thought of as plant. It has, therefore, in its connotations a comparative sense in that the particular item or items have to be distinguished from the building or premises of the commercial activity and from the stock-in-trade and from other items which do not fall within the definition. In some contexts the particular statute expresses the distinction, particularly as between premises and buildings. In the present context, sec. 117A, there is no such comparison expressly stated although there is necessarily an implicit comparative process required. The Commissioner sought to call in aid on this aspect other sections of the Act which deal with depreciation and deductions. In particular he emphasised the reference to equipment as well as plant and machinery and premises or their repair in sec. 113. When one considers the various sections relating to depreciation in the 1954 Act from sec. 110 onwards it is seen that there are a number of different expressions used in various sections. I do not think that the Commissioner's appeal to the other sections is permissible because of the varying expressions used in the sections and because the plan of this part of the Act is to disallow deductions by way of depreciation and then to except in particular sections and in limited ways certain deductions. At all events sec. 117A in its inclusive definition excludes hand tools, loose tools and units costing up to $100 which might otherwise be thought of as equipment. The result is that other items which might be considered to be equipment must fall within the inclusive definition in the section. On this aspect of the matter I should note that it has been accepted by the Commissioner and the objector that the word ``machinery'' does not affect or flavour the meaning of the word ``plant''.

It is clear in this case that the catalyst is not and cannot be treated as part of the premises or building of the objector. It is not part of the stock-in-trade of the objector - indeed a catalyst by its very nature in this process could not be stock-in-trade. It is not, in my view, equipment to be distinguished from plant. It is, in my view, of sufficient

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permanency to qualify as ``plant'' and its use or function by the objector is as a necessary and integral part of its industrial process. It is, within the definition, used by the objector for carrying on his business as an essential part of the reforming or cracking process. It is kept for permanent employment in that business and without it the operation could not be adequately carried out. I am in no doubt that the catalyst is ``plant'' and that the objector is entitled to the allowance under sec. 117A for the cost of the third charge. I answer the question, therefore, in the affirmative and determine that the Commissioner acted incorrectly in making the assessment which disallowed the deduction for investment allowance under sec. 117A in the year ended 31 December 1973.

The objector is entitled to costs in the sum of $250 together with disbursements to be fixed by the Registrar.

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