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Utah Development Co. v. Federal Commissioner of Taxation.

Judges:
Marks J

Court:
Supreme Court of Victoria

Judgment date: Judgment handed down 15 September 1983.

Marks J.

This is an appeal by the taxpayer against disallowance by the Commissioner of its claim for investment allowance as a deduction from its assessable income for its tax year adopted with the leave of the Commissioner ending 31 December 1979.

In that period it first used four new draglines in respect of which it had incurred expenditure which it claimed was eligible for ``investment allowance'' under sec. 82AA and sec. 82AB of the Income Tax Assessment Act 1936 (``the Act'').

The taxpayer with three other companies had a joint venture for the purpose of development and mining for coal, their separate interests being held as tenants in common, the dominant 76.25% by the taxpayer who managed it. The claim relates only to the taxpayer's share of the expenditure.

Commissioning the subject draglines was associated with expansion by the joint venture of its coal production capacity in central Queensland, in particular the establishment of a new mine at Norwich Park in the Bowen Basin approximately 200 kilometres south west of Mackay and a similar distance north west of Rockhampton. It was originally intended to commission all four draglines for the new mine but in about 1978 it was decided to use one at its Saraji mine which had been operated since 1974 about 50 kilometres north of Norwich Park.

Norwich Park and Saraji were open cut with the coal deposit basin-shaped so that overburden was deeper towards the centre. By 1978 overburden removal at Saraji was approaching the deeper section and required an additional dragline to maintain the rate of removal.

A dragline is an electrically powered excavating machine used to extract overburden. The aim is to excavate a hole or chasm in front of the machine moving the bucket or scoop back slowly and placing the soil material to one side. The dragline operates economically to a depth of approximately 45 metres and provides an accepted method of overburden removal.

Before development of Norwich Park the taxpayer had some 16 draglines, the majority being Marion 8050 (``Marion'') and Bucyrus-Erie 1370 (``BE'') models. Component parts and specifications for construction and assembly were provided for the BE by Bucyrus Disc Inc. (``Bucyrus'') of Wisconsin and for the Marion by the Marion Power Shovel Co. Inc. (``Marion'') of Ohio. Apparently these were the two largest companies in the United States which marketed draglines particularly of the model sizes. There was none in Australia.

There are some minor differences in design, dimensions and layout between the two models but by and large they are entirely similar with similar capacity. The machines

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weigh approximately 3,000 tons having a boom approximately 320 feet long set at a fixed angle some 200 feet in the air and attached to a frame which revolves about a stationary base. The whole machine can be moved very slowly for a limited distance on specially levelled surfaces. It moves or ``walks'' by means of two shoes connected by cam and gears to the body which can be lowered to the ground so as to raise and move it backwards. It can only move in the opposite direction to the boom for reasons of balance. The base is a series of steelplate fabrications combined into a pancake shape of about 60 feet in diameter. The machine, being virtually the size of a small ship and relatively immobile, must be constructed at a mine site. It can ``walk'' at about 1 kilometre per hour about 5-10 kilometres so long as the ground surfaces are level. To put a dragline into operation it is necessary to obtain delivery of component parts at a specially prepared construction site at or near the mine and put them together there. This assembly or construction takes twelve or more months and requires numerous expert personnel and supporting staff.

The taxpayer placed purchase orders for component parts for two BEs with Bucyrus and two Marions with Marion which were accepted in or about mid-1974. Although the orders were expressed in language which suggests purchase of the machines themselves I am satisfied that any contracts with the United States companies were merely for the supply of the component parts. Delivery was not contemplated to commence until 1976 and none took place until late 1976. However, the evidence does not show on what date manufacture of the first component part was commenced or completed. It is common ground that the work of putting the component parts together (which the taxpayer submits was ``construction'') did not commence until some time in 1978.

The claim for deduction was made in reliance upon sec. 82AA and 82AB of the Act. Section 82AA is in part as follows:

``82AA Subject to the following provisions of this Subdivision, this Subdivision applies in relation to a unit of eligible property acquired or constructed by the taxpayer that is -

  • (a) in the case of any taxpayer, for use by the taxpayer wholly and exclusively -
    • (i) in Australia; and
    • (ii) for the purpose of producing assessable income otherwise than by -
      • (A) the leasing of the eligible property;
      • (B) the letting of the eligible property on hire under a hire-purchase agreement; or
      • (C) the granting to other persons of rights to use the eligible property; or
    • ...''

Subsection (1) of sec. 82AB is as follows:

``82AB(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

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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.''

Section 82AQ(1) provides -

``In this Subdivision -

  • `construction' includes manufacture and `constructed' has a corresponding meaning;
  • `eligible property' means plant or articles within the meaning of section 54 and includes earth tanks...
  • `new' means not having previously been either used by any person or acquired or held by any person for use by that person, but does not include reconditioned or wholly or mainly reconstructed.''

Counsel for the Commissioner conceded that each dragline constituted a ``unit'', was ``new'' and ``eligible property'' within the meaning of the provisions and that the provisions of sec. 82AA(a) were satisfied by the taxpayer.

Section 82AQ(3) provides -

``In this Subdivision -

  • (a) a reference to the acquisition of property by a person is a reference to -
    • (i) the person becoming the owner of the property or taking the property on hire under a hire-purchase agreement; or
    • (ii) the construction of the property for the person by another person or other persons on premises of the first-mentioned person;
  • (b)...
  • (c)...''

It was contended for the Commissioner that the taxpayer had not established that it had acquired the draglines under a contract entered into on or after 1 January 1976 because the purchase orders had been accepted well before that date; and, further, that the taxpayer had not established that construction commenced after 1 January 1976 because it had not proved that manufacture did not commence earlier. Much of the argument turned on the use of language, counsel for the Commissioner contending that the manufacture, and thus the construction, of a dragline commenced with the emergence of the first component part from the production line whilst counsel for the taxpayer contended that manufacture of the components is not the construction or manufacture ``of the unit'' which did not commence until the taxpayer began to combine the component parts (after 1 January 1976).

Brian Louis Shepherd on behalf of the taxpayer described the relevant events and processes. His credibility was not seriously challenged and I accept his evidence. Delivery of component parts commenced about December 1976 at Saraji. It is common ground that construction did not commence either at Saraji or Norwich Park until well after 1 January 1976. The formal decision to commence mining operations at Norwich Park was not taken by the joint venture until approximately May 1977 although it had been long intended to work the deposit there. In the upshot, three lines were constructed at Norwich Park and one at Saraji. There was already a construction site at Saraji but it was necessary to lay a new floating concrete foundation on which to assemble the machine. At Norwich Park it was necessary to lay out a large construction site with four new concrete pads on three of which the machines, the subject of this appeal, came to be constructed.

By agreements dated 8 May 1978 the joint venturers engaged A.N.I. Engineering Pty. Ltd. (``A.N.I.'') as contractor to do the assembly and construction work on the four machines. By a contract dated 5 May 1978 Fluor Australia Pty. Ltd. (``Fluor'') was engaged as supervising engineer of the whole Norwich Park project including the construction and assembly of the draglines there. The assembly and construction at Saraji was supervised by the taxpayer's own staff.

Prior to 1973 delivery of the first component part normally began approximately 12 months after placement of the order and was completed within about 9 months. However orders for draglines escalated after the large increase in the

ATC 4549

international price of oil in 1973 and delivery times became two years to 30-32 months for the first piece of equipment.

After delivery of the component parts construction and assembly were long and complex. After preparation of the concrete foundation the base plate components were sandblasted and painted, carefully checked for dovetailing and then welded together. The revolving frame was then mounted on the base. It comprised the platform which bore the machinery for the various motions required to operate the drag hoist. Thus there were electric motors which enabled the superstructure to be moved through 360 degrees in either direction and to operate the drag hoist capable of pulling and lifting the scoop with 60 or more tons of material and dumping it to the side. Other motors operated the shoes which, when depressed, lifted the 3,000-ton body and enabled it to move backwards. The swing mechanism for revolving the frame was enclosed in housing which protected the machines from the elements.

Also fixed into the revolving frame is a structure known as the ``A'' frame used to anchor back the mast and boom. The mast supports the boom in position and anchors it so that it has the necessary structural rigidity to support the hoist ropes let out over its point down to the scoop or bucket. The revolving frame is approximately 26 metres long, 21 metres at its widest point by 2.5 metres deep and supports the drag hoist machinery, the swing drive, the motor generator sets and the ``A'' frame. It also contains some 410 tons of ballast to counterweight the cantilevered boom which with its bucket load weighs approximately 200 tons. The machinery is all electric of 6,600 volts requiring power from the State grid.

Fluor had some 60 personnel on the Norwich Park project of whom six were fully concerned with the erection of the draglines. At Saraji the taxpayer provided three full-time and one part-time employee to supervise the dragline construction there.

By and large the electric motors for the draglines were manufactured in the United States whilst the components of the base plate revolving frame, ``A'' frame, feet, boom and mast were manufactured by subcontractors to Bucyrus and Marion in Australia. However no part in excess of 90 tons could be transported to the construction site.

Thus production of the completed draglines was a large and complex operation involving many specialist skills. Bucyrus and Marion provided the component parts on contract with the taxpayer together with drawings and specifications plus specialised personnel to oversee that the work was done without jeopardising their warranties. A.N.I. was the erection and assembly contractor and Fluor the supervising engineer at Norwich Park. The construction demanded high skill, particularly the welding, rigging and electrical work. At Saraji the taxpayer was the supervising engineer. But the taxpayer, at both places, prepared the erection site, provided and maintained access roads to it and a security fence around it. It was contractually bound to supply the concrete erection pads and boom support foundations, electricity and treated water supply, power, water and compressed air lines from points on the perimeter fence to positions throughout the erection site, a furnished first aid station, prefabricated buildings to accommodate men (120 at Norwich Park and 92 at Saraji) employed by A.N.I. or its subcontractors, caravan sites (50 at Norwich Park, 16 at Saraji) for married workers, a wet and dry canteen for use by A.N.I. personnel, a prefabricated mess building with catering for the personnel of A.N.I. and its subcontractors together with workshop and warehouses administration and amenities buildings for use by A.N.I.

The taxpayer provided a 135-ton guyed derrick, a 70-ton and 31-ton crane for use by A.N.I. at Norwich Park and a 150-ton Lima crane at Saraji.

Although the taxpayer engaged A.N.I. and Fluor at Norwich Park its engineer, Shepherd, from time to time attended during the construction and oversaw the work.

In the Shorter Oxford English Dictionary ``construction'' is defined as:

``The action of framing, devising, or forming, by the putting together of parts; erection, building...''

and ``construct'' as:

ATC 4550

``To make or form by fitting the parts together; to frame, build, erect.''

I find as a fact that in its ordinary meaning ``construction'' first commenced on the four draglines at Norwich Park and Saraji some time after May 1978. The taxpayer played a significant role in that construction although in the main it was performed by A.N.I., supervised at Norwich Park by Fluor and by itself at Saraji. However, the taxpayer under its contract with A.N.I. was obliged to provide the equipment and services and facilities set out above. Its direct role in the construction was not insignificant.

The Commissioner's argument turns largely on the interpretation of sec. 82AB(1)(c)(ii). Mr. Ormiston Q.C. on his behalf contended that ``constructed by the taxpayer'' means ``constructed by the taxpayer himself'' so that the allowance is not available under that limb where the taxpayer has engaged an independent contractor to do the ``constructing''. This appeared, he contended, from the extended definition of ``acquisition'' in sec. 82AQ(3) which (inter alia) equates ``acquisition'' with ``construction... (for the taxpayer) by another person or other persons on premises'' of the taxpayer. He contended that the two limbs of sec. 82AB(1)(c) were thus mutually exclusive the first being applicable to construction under a building contract and the second where the taxpayer himself was in effect the builder and ``constructed'' in the absence of contract.

The investment allowance provisions of the Act (set out above) have been recently considered by the Full Court of the Federal Court in
F.C. of T. v. Tully Co-operative Sugar Milling Assoc. Ltd. 83 ATC 4495.

Referring to sec. 82AB Fox J. (with whom Lockhart J. agreed) said at p. 4501:

``The allowance given by the section depends upon the new plant being constructed or acquired. `Construction includes manufacture, but is not confined to it. One can construct by building or assembling, and it plainly accords with the policy of the section, as with sections in similar terms, that this can be done by a contractor for the taxpayer, as well as by its employees. It is intended, in my view, that the term `construction' should be given a wide meaning.

`Acquisition' is itself a broad term; its width in operation is sufficiently limited by the need for expenditure by the taxpayer in respect of it. It includes... the construction of the property by another person on the taxpayer's premises. In any view the last-mentioned example cannot reasonably give rise to the conclusion that construction by a contractor under a contract with the taxpayer must be treated as an acquisition. Rather it shows the intended width of the notion of acquisition, so that work done by another, if not to be regarded as construction, is included...

As I see it, the intention of the legislature is that `acquisition' and `construction' are between them intended to cover all cases, although they will commonly have application at different times in the development of a project.''

(Emphasis added.)

Mr. Ormiston Q.C. for the Commissioner contended that these observations were obiter dicta and therefore not binding. Their precise status is difficult to determine with certainty from the report but I suspect they were not. In any event, I agree with the observations of Fox J. In view of the controversy as to their status I give shortly my reasons:

  • a. If the legislature intended that the second limb of sec. 82AB(1)(c) be restricted to construction work done in the absence of outside contract then it could easily have said so.
  • b. The expression ``constructed by the taxpayer'' does not in its ordinary meaning imply the restriction for which the Commissioner contends. Mr. Ormiston Q.C. submitted that the expression should be read as ``constructed by the taxpayer himself''. It is not necessary, however, to imply the word ``himself'' to give business operation to the provision. But even if the word ``himself'' is read into it the meaning of the provision would become less rather than more clear. Mr. Ormiston contended that the provision applied where the taxpayer did not have a building contract but ``organized'' the work ``himself'' even if to a degree per media a number of contracts. But if the taxpayer

    ATC 4551

    ``constructed'' per media contracts in respect of different specialised work the resulting unit of property would still not necessarily be ``constructed by the taxpayer himself''. Mr. Ormiston then contended that the result would depend on the extent to which the taxpayer by himself or his employees did the ``construction'' work. He submitted the expression should be taken to mean ``constructed principally by himself'' which involves implication of further words. In my opinion the expression ``constructed by the taxpayer'' in sec. 82AB(1)(c)(ii) means what it says and applies where the taxpayer has constructed the unit of eligible property with or without the services and supplies of contractors.
  • c. Further, the words ``acquired'' and ``constructed'' appear as alternatives in the statute. Clearly they are not used to mean the same thing but, as Fox J. observed, are used together to cover the maximum number of situations to which the policy has regard. The policy clearly bears on use of new plant and equipment in furtherance of national resources development.
  • d. The argument for the Commissioner is that the extended definition of ``acquisition'' imports a limit on the meaning of ``constructed'' and ``construction'' which is carried over to the second limb. But ``construction'' and ``constructed'' are separately defined. I think that these words are more properly to be interpreted in the light of the definition and the context in the Act in which they appear than as the Commissioner contends.
  • e. Mr. Ormiston Q.C. contended that the policy of the legislation was to fix a date, namely 1 January 1976, for eligibility. I think the policy bears more on incentive for capital development, although the stimulus might well be to do something after 1 January 1976 which the taxpayer had not already done. An incentive to commence ``construction'' after that date is consonant with that policy.
  • f. Mr. Ormiston Q.C. contended that the first limb of sec. 82AB(1)(c) applies generally to acquisition which includes construction for the taxpayer by another on his own premises and the second limb where there is no contract. I do not think this way of regarding the subsection sufficiently explains the scope it might be construed as having and which the legislature may well have intended. The first limb may be seen as applying generally to new plant acquired by purchase and installation with the extended definition incorporating installation which involves ``construction''. It is difficult to contemplate these activities other than on the taxpayer's premises and this may explain the presence of words to that effect. However, generally speaking it is easier to associate the word ``acquisition'' with new plant which may or may not require ``assembly'' or ``construction'' or ``housing'' on the taxpayer's premises. The second limb may then be seen to apply more readily where the unit of eligible property is to emerge from extensive construction work whether done by independent contractors or not or even if done pursuant to a contract entered into before (but commenced after) 1 January 1976.

For these reasons I think it immaterial that the construction or assembly of the draglines was substantially performed by contractors for the taxpayer.

However, Mr. Ormiston Q.C. submitted that the second limb of sec. 82AB(1)(c) did not apply because the word ``constructed'' includes ``manufactured'' by virtue of sec. 82AQ(1). This, he contended, means that what must have been commenced after 1 January 1976 was ``the manufacture'' of the draglines. The taxpayer has not, he said, proved this because it has not proved the ``manufacture'' of the component parts commenced after that date. To this Mr. Merralls Q.C. for the taxpayer submitted that the dragline production involved two stages - the manufacture of the component parts then construction of the unit. He contended that it is an imprecise use of language to equate commencement of manufacture of the dragline with manufacture of the component parts.

Mr. Ormiston Q.C. did not contest that the purchase orders were other than for the

ATC 4552

manufacture of the component parts (not the unit) but contended that objectively the manufacture of the whole began with that of the first part. Mr. Merralls Q.C. replied that it is only the unit of property the construction of which must be commenced on or after 1 January 1976.

I think Mr. Ormiston's argument is falsely premised. The definition of ``construction'' and ``constructed'' in sec. 82AQ(1) merely states that ``manufacture'' is included. It does not equate ``construction'' with ``manufacture'' or with ``construction and manufacture''. In my opinion the subsection means that where the words ``construction'' and ``constructed'' appear in the Subdivision they have the same meaning and where the context permits ``manufacture'' and ``manufactured'' or both. As Fox J. said in Tulley ``construction'' is not confined to manufacture and the term ``construction'' should be given a wide meaning.

Mr. Ormiston's argument, as I understand it, could succeed only if the words ``the construction of which commenced'' read as ``the manufacture of which commenced''. That would, in my view, deprive the word ``construction'' of its ordinary meaning and render its use in the statute meaningless. It is certainly not required in my opinion by sec. 82AQ(1). But in any event, I think it correct to say the manufacture of the unit was not commenced by the manufacture of the component parts under a contract which did not include their ``construction''. Further, if Mr. Ormiston Q.C.'s argument was carried through, the same interpretation would have to be afforded the word ``construction'' in the extended definition of ``acquisition'' (sec. 82AQ(3)) which would greatly restrict its application, if not make it nugatory.

In the result, I find that the taxpayer commenced construction of the draglines after 1 January 1976 within the meaning of sec. 82AB(1)(c)(i), on which the taxpayer also relied.

Finally, Mr. Ormiston Q.C. in what he called his alternative argument submitted that expenditure incurred after 1 January 1976 for the components was not ``in respect of'' the ``acquisition'' or ``construction'' of the draglines within the meaning of sec. 82AB(1)(a). I think it was. Mr. Ormiston Q.C conceded the subsection distinguished capital expenditure ``of'' acquisition or construction from capital expenditure ``in respect of'' acquisition or construction. I think expenditure incurred after the specified date on supply of component parts for the construction of the draglines was, subject to proper proof, expenditure incurred ``in respect of'' the construction of the draglines.

For these reasons the appeal is allowed. It is common ground that eligible expenditure was incurred by the taxpayer but the quantum is not admitted.

I will stand the matter over further to allow counsel an opportunity to speak to the minutes of orders.


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