Monier Colourtile Pty. Ltd. v. Federal Commissioner of Taxation.
Judges:Lee J
Court:
Supreme Court of New South Wales
Lee J.
This is an appeal under sec. 187 of the Income Tax Assessment Act 1936 (as amended) by Monier Colourtile Pty. Limited (hereinafter called the company) against an assessment of the Commissioner, which rejected claims by the company for investment allowances in respect of expenditure made by the company on plant during the year 1978. The claims for the allowances were made under Subdiv. B of Div. 3 of Pt. III of the Act which deals with investment allowances on plant purchased by the taxpayer in certain circumstances therein set out.
Section 82AB in that Subdivision provides as follows:
``(1) Subject to this Subdivision, where -
- (a) on or after 1 January 1976, a taxpayer has incurred expenditure of a capital nature (in this section referred to as `eligible expenditure') in respect of the acquisition or construction by him of a new unit of eligible property in relation to which this Subdivision applies;
- (b) the eligible expenditure exceeded $500;
- (c) the eligible expenditure was incurred -
- (i) in respect of a unit of property acquired by the taxpayer under a contract entered into on or after 1 January 1976 and before 1 July 1985; or
- (ii) in respect of a unit of property that was constructed by the taxpayer and the construction of which commenced on or after 1 January 1976 and before 1 July 1985; and
- (d) the unit of property was first used or installed ready for use before 1 July 1986;
there shall be allowed as a deduction from the taxpayer's assessable income of the first year of income during which that unit was either used for the purpose of producing assessable income, or installed ready for use for that purpose, an amount (in this section referred to as the `relevant amount') ascertained in accordance with the following provisions of this section.
(2) Where the eligible expenditure was incurred -
- (a) in respect of a unit of property acquired by the taxpayer under a contract entered into before 1 July 1978; or
- (b) in respect of a unit of property that was constructed by the taxpayer and the construction of which commenced before 1 July 1978,
and was so incurred in respect of a unit of property that was first used or installed ready for use before 1 July 1979, the relevant amount is such percentage of the amount of the eligible expenditure as is prescribed by sub-section (3).
ATC 4401
(3) For the purposes of sub-section (2), the prescribed percentage in relation to an amount of eligible expenditure is -
- (a) where the eligible expenditure is less than $526 - 2%;
- (b) where the eligible expenditure is not less than $526 but is less than $976 - 2% increased by 2% for each whole $25 by which the amount of the eligible expenditure exceeds $501; or
- (c) where the eligible expenditure is not less than $976 - 40%.''
Section 82AQ(1) defines ``eligible property'' to mean ``plant or articles within the meaning of section 54....''
Two claims were made, one in relation to the purchase of pallets used in tile making; and the other in respect of the leasing of what may be called a radio ``system'', comprising a base station and mobile receiver transmitters and an executive handset. It is common ground in this case that the property respectively purchased and leased by the company was ``plant or articles'' within sec. 54.
So far as the pallets were concerned, the evidence showed that the company, in the normal course of its operations as a tile manufacturing company, purchased 5,150 pallets at a total cost (including freight) of $29,174 and that on 15th May 1978 these were delivered to one of the company's manufacturing sites at Darra, Queensland. The company operated in New South Wales also.
The company in its tax return for the year ended 30th June 1978 claimed the 40 per cent investment allowance provided for in sec. 82AB(3)(c) on the total purchase price, $29,174, i.e. claimed a deduction from its assessable income of $11,670. The company asserted that the entire batch of pallets purchased was a ``new unit of eligible property'' within sec. 82AB(1)(a).
The Commissioner rejected the claim, taking the view that each separate pallet was ``a new unit of eligible property'' and that as the cost of each pallet was only $5.66 no allowance was available.
In the same year, in February, the company acquired on lease at a cost of $7,860, the two-way radio ``system'' referred to above, which comprised a base station and fourteen mobile out-stations. A month later, in March 1978, the company leased from the same lessor a further two mobile out-stations and one executive handset, all of which were intended to form part of the company's internal radio system.
The fourteen mobile stations cost $565 each, and the two subsequent ones purchased cost $540 each. The base station cost $1,962. The cost of the executive handset is not stated. (The documentary evidence tendered supports the acquisition of a base station and twelve mobiles and later two further mobiles but I have stated the facts according to the affidavit of Mr. Green, the group general manager, and nothing turns upon the discrepancy as to number of mobiles.)
The lessor of the equipment, in accordance with sec. 82AD, transferred to the company the benefit of the deduction to which it would have been entitled as a leasing company under sec. 82AA and 82AB and then the company claimed the 40 per cent investment allowance provided for in sec. 82AB(3) referable to the entire purchase price of all the equipment. It contended that the whole of the equipment constituted ``a new unit of eligible property'' within sec. 82AB(1).
The Commissioner, taking the view that each of the sixteen mobile sets and the executive handset and the base station were all separate units of eligible property, rejected the claim for a 40 per cent allowance on the mobile sets and allowed only a deduction referable to the individual purchase price of each item, which meant allowances of 4 per cent on those costing $540 each and 6 per cent on those costing $565 each (sec. 82AB(3)(b)). The cost of the base station qualified it for the full 40 per cent allowance (sec. 82AB(3)(c)) and this was allowed.
It is not disputed by the Commissioner that, assuming the property under consideration, i.e. the 5,150 pallets, and the complete radio system to be respectively one unit of eligible property as claimed by the company, all other conditions prerequisite to the application of sec. 82AB were fulfilled.
The sole questions are whether the 5,150 pallets are to be treated as one unit, and
ATC 4402
whether the two-way radio ``system'' is likewise to be so treated. It is necessary now to deal with the two matters separately and I shall now deal with the pallets.The evidence establishes that the pallets used are aluminium pallets 42½ cm long and 33½ cm in width and that pallets are an integral part of the process of manufacture of tiles. The function of each pallet, stated simply, is to carry concrete in it through the various stages of the production line to the point where a completed tile is produced and separated from the pallet; but as this function must be seen in the context of the entire tile-making operation, it is necessary to set out the detail of that operation. The pallets are cast so that the upper surface which receives the concrete as it passes through the tile machine is shaped to take the form of the underneath of the tile. When the concrete passed through the tile machine and emerged on the other side the surface of the concrete had been impressed to form the shape of the upper surface of the tile. The process was accurately described by Barwick C.J. in
Redland Tiles Pty. Ltd. v. F.C. of T. 71 ATC 4056 at p. 4057, and I take the following extract from that description:
``A conveyor carries to a hopper a continuous line of metal forms which are called machine pallets. The upper surface of these forms is in the configuration of the under surface of the concrete tile which the machine ultimately makes. The hopper towards which the line of machine pallets is moving contains concrete of the appropriate composition and consistency kept in agitated condition. The metal pallets move under the hopper on a solid base with an intermittent or discontinuous motion so that one pallet at a time comes wholly under the hopper. When the machine pallet is wholly under the hopper the concrete falls on the upper surface of the pallet. No means of escape is provided for the concrete except an aperture at which I might call the leading edge of the pallet formed by the under surface of a fixed block called a slipper and the upper surface of the pallet itself. As the pallet comes wholly under the hopper the concrete is forced under considerable pressure through this aperture. The under surface of this block or slipper is shaped so that the concrete forced under and past it takes the shape of the upper surface of a roofing tile whilst the pallet gives to the concrete the shape of the under surface of the tile. As the concrete is forced through the aperture the pallet moves forward at a suitable pace so that the concrete taking shape as it passes through the aperture becomes a continuous ribbon which rests on the pallet. This continuous strip or ribbon of concrete having the shape of a concrete tile is borne forward on the succession of machine pallets as they move from under a hopper. It remains as a continuous strip or ribbon until a point is reached where a guillotine cuts the concrete ribbon into lengths which correspond precisely with the length of the machine pallet.''
The concrete tile in a green state is then carried to the automatic racking machine which forms an important element of the manufacturing equipment. It ensures the continuity of the process. This machine consists of a vertical circuit of crates and these crates are so positioned in the machine to bring them into exact alignment with the conveyed column of green tiles on their pallets. As each tile and pallet is pushed into the crate, a hardened or cured tile still on its pallet is discharged from the rear of the crate. Thus with the entry of the uncured tile and pallet a cured tile and pallet is discharged. Thus, the crate remains full at all times. This motion is essential to the maintenance and balance of the crate, it being necessary to maintain the crates to keep them completely charged at all times is essential for the continuity of operation of the horizontal closed system circuit. The curing of the tiles takes eight hours. This stage of the manufacture of the tile is essential and forms part of the circuit.
The cured tiles, together with the pallets, continue to the rotary end of the conveyor and enter the back of the conveyor, at which point pneumatic tyres angularly mounted engage the edges of the tiles to cause a lifting action which dissociates the cured tiles from the pallet. The tiles are then manually removed and the pallets continue on the closed circuit journey back to the moulding machine, where the whole process commences again.
ATC 4403
At all stages of the process, the pallets remain separate independent units, separate from each and capable of being replaced by other single pallets.
In order for the closed system circuit to operate a certain number of pallets are required. The number must be at least sufficient to prime both the horizontal and vertical circuitry (that is, the conveying and the automatic racker). At the Darra works of the appellant the minimum numbers required are 97 pallets on the horizontal circuitry and 360 pallets on the vertical circuitry, a total of 457 pallets. Unless these numbers are maintained, the process will not perform efficiently and will ultimately stop.
The number of pallets needed for one shift are those in actual motion on the moulding (i.e. conveying) and racking circuits and those in a static condition in the curing chambers. This number is governed by the speed of the tile machine. The speed itself is dependent upon the economics of production for the market place. A shift production is usually four hours twenty minutes. Differently shaped pallets produce differently shaped tiles, but only one style of tile can be produced at any one time.
The 5,150 pallets, the subject of the present action, produced ``Elabana'' tiles, and the evidence is that in 1978 these tiles had become popular and there was a need for an increase in production. The sole reason for the purchase of the pallets was to increase output of tiles. In order to produce more tiles in the same time as tiles were presently being produced alterations in the speed of the tile machine were made. These alterations were made to the gearbox, electrical motor pulley and sprocket. The alteration in speed enabled an increase in output from 44 tiles to 54 tiles per minute and this meant an increase in production from 9,000 tiles to more than 16,000 tiles in one run.
I should stress at this point that no alterations at any stage were made to the shape or operation of the pallet, nor did the increase in speed require a larger number of pallets to be actually upon the moving production line than before. Provided there were at all times 457 pallets in actual use in the process involving the tile machine and the racker the process would continue for as long as there was a supply of pallets available. Alterations to the speed of the machine did not alter the basic requirement for efficient operation of the machine, namely 457 pallets.
It is also to be stressed that the figure of 5,150 pallets had relationship solely to the company's commercial interest in production and had no relationship to the function of the tile machine or the racker or any other part of the process of manufacture. Mr. Cunningham, the production manager of the roofing division of the company in Queensland, made it quite clear in his evidence (pp. 43 and 44) that the selection of the number of additional pallets to be purchased would be a matter of calculation of the extent to which it was desired to produce more tiles, and that this depended upon the machine being set to produce the required quantity in the same production time as before. The evidence is that prior to the additional pallets being purchased there were 12,000 Elabana pallets on hand and production of about 9,000 tiles was being achieved. After the purchase of the additional pallets, output increased to 12,000 between April and June 1978, 15,000 in July and in August it went up to 16,800 tiles. Mr. Cunningham's evidence also makes clear that the new pallets were in use on the circuit with the old and that output could be increased to any number that was desired. A small allowance was always made for possible breakages.
In the result the question in the case, so far as the pallets are concerned, is whether the purchase of the pallets to give an increased production in tiles meant that the whole of the pallets purchased for this purpose should be treated as a ``unit of eligible property'' within sec. 82AB(1) of the Act. Counsel for the plaintiff contended that any number of pallets ordered for the purpose of increased production could be regarded as a unit, within the section, whether it be 100, 1,000, 5,000 or more. The submission was that the pallets being purchased for the express purpose of increased production meant that the performance of the machine was varied, and that this brought the pallets within the test set out by Thomas J. in
ATC 4404
Tully Co-operative Sugar Milling Association Ltd. v. F.C. of T. 82 ATC 4454 at p. 4459. In that case his Honour, having referred to the remarks of Kitto J. in
Ready Mixed Concrete
Wangaratta Woollen Mills Ltd. v. F.C. of T. 69 ATC 4095 at p. 4103; (1969) 119 C.L.R. 1 at p. 13 with reference to the meaning of ``unit of property'' in sec. 62AA of the Act, said:
``It can be seen that his Honour [meaning McTiernan J.] was prepared to regard things both great and small as capable of being units within an overall manufacturing system. In my opinion a component may be a unit of property for purposes of sec. 82AB in the context of a manufacturing system, if it can be shown to perform a discrete function, or if it can be shown to vary the performance of that system.''
I adopt the test set out by Thomas J. in Tully Co-operative Sugar Milling Association Ltd. v. F.C. of T. (supra) not merely for the sake of consistency (
Hamilton Island Enterprises Pty. Ltd. v. F.C. of T. 82 ATC 4088 at p. 4093 - see also
R. v. Abbrederis (1981) 36 A.L.R. 109) but because in my respectful opinion it adequately and correctly expresses the concept of ``unit of property'' to which the Act is intending to give effect in the various sections where the phrase is used. It is not a narrow or technical test, but a test which permits a realistic and consistent assessment of what is or is not a unit of property. That test to the extent that it uses discrete function as the test of what is a ``unit'' avails itself of the approach made by Kitto and McTiernan JJ. in reference to sec. 62AA in the cases above mentioned to which Thomas J. referred. Section 62AA provided for a deduction for new manufacturing plant. Although the words ``unit of property'' are not defined for the purpose of investment allowances under sec. 82AB the definition of ``eligible property'' in sec. 82AQ, it is to be noted, has the result that the investment allowance will be available to those who will also be entitled to claim depreciation under sec. 54 and the expression ``unit of property'' is found in sections dealing with depreciation. I should mention here that it was submitted by counsel for the company that as the clear object of the investment allowance provisions in the Act is to encourage the purchase of new plant and equipment, this justifies a wider meaning being given to the expression ``unit of property'' than is appropriate when depreciation is under consideration. I am unable to see any basis for such differentiation - indeed it seems to me that there is every reason to treat a unit of property as the same thing for both depreciation and investment allowances. No definition pointing to the real meaning of ``unit of property'' is to be found in the sections dealing with depreciation, but sec. 53G and 62AA in providing that ``unit of property means a unit of property not being trading stock of the taxpayer'' stand as mute testimony to the belief of the draftsman that the words cannot be - or ought not to be - defined. Even so, the exclusion of trading stock is in keeping with a test based on function. One can in my view readily discern the suitability of the functional test in some of the sections where ``unit of property'' occurs. Section 55 refers to ``the effective life of the unit'', sec. 56 contemplates that a unit will have a value as such and sec. 59 contemplates that it can be lost or destroyed. Section 82AB contemplates that the unit will have a price or construction cost as such and excludes units that cost less than $500. Both in regard to depreciation and investment allowance the inquiry is the identification of property as a unit, and the discrete function test sensibly applies to both, and achieves consistency. A ``unit'' is, as a matter of ordinary English, an entity, an entire thing in itself, and whether property is such can for the purposes of the Act be ascertained by reference to its capacity to perform a definable, identifiable function. The function test, furthermore, readily accommodates the case where any number of single items, each having a specific purpose, are brought together so as to create an item having its own function. A motor car for instance comprises multifarious parts, each having a specific function, but all in combination produce a readily identifiable unit with its own individual function, viz. a means of carriage of persons, a vehicle. Such a case is of course always to be distinguished from the mere attachment together of items of property which themselves have a separate independent function. No new unit of property is then created. The truck with the concrete mixer attached to it dealt with in
ATC 4405
Ready Mixed Concrete (Victoria) Pty. Ltd. v. F.C. of T. (supra) is an illustration.The test set out in Tully, however, also covers the case where some piece of property on being ``attached'' to a unit of property which has its own independent function varies the performance of that unit. In that event, the attachment and the original unit do not constitute a further unit of property but each remain as separate units of property. An illustration of this is to be found in Wangaratta Woollen Mills Ltd. v. F.C. of T. (supra). McTiernan J. at ATC p. 4103; C.L.R. p. 13 said:
``Counsel for the Commissioner submitted that a sliver can with piston and spring is a `unit of property' to which the words `manufacturing plant' in subsec. (1) apply. He said that a piston and spring without the can were in the nature of spare parts for the `unit of property', and that it was the policy of the section to encourage manufacturers to buy new plant, rather than to patch up the old.
In my opinion it is not necessary to embark upon this consideration of policy. Sliver cans are used in the spinning factory for other purposes besides use with spring and piston to hold a sliver. For example they are commonly used to hold fibre bobbins on removal from the machine. I therefore regard the can as one unit of property, and the spring and piston as another, as an additional attachment to enable the can to be used for a more specialised purpose. It is true that the spring and piston cannot be used without the can, but the same could be said of any attachment for a tractor such as a mower or post hole digger operated from a power take off.''
A similar problem arose in Case M98,
80 ATC 689 dealt with by the Board of Review. There the taxpayer, a grazier, claimed an investment allowance with respect to a tractor and two items of equipment used with it, a carry-all which cost $252 and a soil ripper, which cost $164. The investment allowance was allowed in respect of the tractor but not in respect of the two items of equipment, each being less than $500. The Board treated all three items as separate units. The tractor had its own independent function, as a tractor, and the carry-all and the ripper, in order to carry out their purposes, needed the tractor to pull them. The carry-all and the ripper, it could be said, applying the approach made by McTiernan J. in Wangaratta Woollen Mills Ltd. v. F.C. of T. (supra) enabled the tractor to be used for specialised purposes.
It must be said, however, that the test to be found in Tully, although a readily understandable test, will be difficult of application in some instances because of the array of machinery, equipment, attachments and gadgetry which may be found in many manufacturing processes in this day and age. Each case must be approached and dealt with entirely by reference to its own facts. The question whether property is ``a unit of property'' or not is a question of fact.
Let me return now to the submission of counsel for the company that as the purchase of the pallets enabled the output of the machine to be increased, this constituted the pallets ``a unit of property'' because the performance of the system was thereby varied within the test set out by Thomas J.
With due respect to counsel's careful argument, his Honour's reference to varying the performance of the system was intended as a reference to the operational function of the system, as I have earlier explained. The additional pallets did nothing to alter the operation of the system which produced the tiles. The system remained exactly as it was before except that the alteration in the speed of the machine altered the output of the machine. The system ran for the same time and in the same way as before, but at a faster rate and produced more tiles, thereby requiring more pallets. I am quite unable to see that there can be any basis, in language or logic, for calling the 5,150 pallets a unit of property. The 5,150 pallets remained 5,150 individual pallets, each one performing its individual function of carrying concrete through the various steps of the process until a tile was produced and detached from it. The total number of pallets, i.e. 5,150, never took on or performed a function additional to and distinguishable from that of the individual pallets making up that total, as was the case for instance in
New Zealand Refining Company Ltd. v. C. of I.R. (N.Z.) 82 ATC 6037. In that case the taxpayer, which operated a petroleum refinery,
ATC 4406
purchased a large quantity of 3mm pellets treated so as to form a catalyst (containing innumerable pellets) though which gas in the refining process would pass. The effectiveness of the catalyst deteriorated over a long period and the pellets had to be replaced. It was held that the catalyst was plant, within the meaning of sec. 117A of the New Zealand Land and Income Tax Act 1954. The case is an illustration of the situation in which a number of items collected together in sufficient number give to the totality a separate, definable function. That is not the case here.Counsel for the company submitted that the 5,150 pallets could be regarded as ``a unit of property'' on another basis. It will be remembered, from the description of the process of manufacture of the tiles, that 457 pallets were required to be available and in action on both the horizontal and vertical circuitry at any given time in order to keep the process going continuously during a production run. If at any time the number of pallets passing through the tile machine and in the racker fell below that number the circuit would cease to be efficient and in due course would jam up and come to a stop. It was said that the 5,150 pallets should be regarded as 11 ``units'', plus 123 ``spares''. As an arithmetical calculation this is correct, but the calculation has no relevance at all to the acquisition or use of the pallets. They were neither intended by the company to be, nor could they have been in fact, related to the requirement that 457 tiles should be on hand at all material times, in continuous production. The company had a stock of 12,000 on hand at the time the 5,150 were purchased.
It follows then that the pallets can only be regarded as individual pallets, each having been acquired at a cost of $5.66. As the minimum expenditure necessary to qualify for the investment allowance is $500 it follows that the company was not entitled to the benefit of any deduction under sec. 82AB.
I should, for the sake of completeness, mention that the notice of objection lodged on behalf of the company, and a letter accompanying the notice, both claimed that the expenditure of $29,174 on the pallets represented ``an entire replacement of existing pallet plant''. There was no evidence to support such a claim, and in fact counsel for the company made it clear that that claim had been made in error.
Let me now consider whether the company's claim that the two-way radio system comprising the base station, mobile stations and handset is to be regarded as one ``unit of property'' within sec. 82AB is soundly based. The Commissioner, as I pointed out in the beginning, treated the base station as well as each mobile and the handset as separate units of property. I have set out earlier the facts in relation to the acquisition of the radio system, and it only needs to be said here that the radio system, which was a UHF system, was purchased to replace a VHF system, and thus give a greater range of communication between the operational centre at Darra and the company's representatives in the field and those concerned with transporting to and fixing the tiles at the building sites. Its acquisition meant that the sales representatives only had to come to the main operational centre to report in once a week, their cars becoming in effect their offices. It also meant that supply of tiles to building sites could be much more closely correlated with the requirements of those engaged in building operations at the site.
The contention advanced on behalf of the company is that all the components of the system constitute one unit of property - or at the very least those in the initial acquisition in February, viz. the base station and the fourteen mobiles. It is stressed that the base station is useless without one or more mobile stations and vice versa. Whilst it must be acknowledged that this is true in a commercial sense so far as the user is concerned, that forms no basis for a conclusion that the entirety is to be regarded as one unit for the purposes of sec. 82AB. The test laid down in Tully Co-operative Sugar Milling Association Ltd. v. F.C. of T. (supra) results in the conclusion that the base station, each mobile station and the handset were separate units of property, within the meaning of the section. Each had a distinct function and each could be acquired at a particular price. The base station was capable of being put into operation, i.e. performing its function as a base station,
ATC 4407
without any mechanical dependence at all on the mobile stations. Likewise the mobile stations and handset were capable of exercising their function without any mechanical dependence upon the base station. The base station and each of the mobiles were physically separate from each other and intended to remain so. The fact that the base station would not receive any communications unless a mobile or some mobiles were brought into play, or that any transmission by it would be fruitless unless there were mobiles, does not prevent this conclusion. The test has regard to the unit and its purpose or function, without regard to the fact that that function may only become commercially useful or valuable to the holder of the property if some other equipment is also put to use according to its particular function. Such a state of affairs has always been commonplace, and modern technology increases the instances of interaction of the functions of diverse pieces of property. A television set is still a television set although the television station goes off the air. A transmitter remains a transmitter though there be no receiver. Each can be separately replaced as required and separately paid for. Each can be separately located, remote from each other.In the result then, I am of the view that the Commissioner was correct in treating the mobile station as one unit, and each mobile and the handset as separate units of property. Accordingly, the investment allowances to which the company was entitled in respect of the radio ``system'' were those allowed by the Commissioner. I should mention here for the sake of completeness that had I reached the conclusion that the initial purchase of the base station and fourteen mobiles were all one unit, it would then have been necessary to consider whether the two additional mobiles and the handset purchased later were each to be regarded themselves as separate units or whether they formed part of the initial unit. This question however does not arise.
In the result then the Commissioner was correct in the assessment which he made; the company was not entitled to any investment allowance in respect of the pallets, and was only entitled to the lesser allowance allowed by the Commissioner in respect of the items making up the radio system. The appeal therefore fails and is dismissed. The assessment is confirmed. The company is to pay the respondent's costs.
This information is provided by CCH Australia Limited Link opens in new window. View the disclaimer and notice of copyright.