Case Q106

Members: MB Hogan Ch

P Gerber M
GW Beck M

Tribunal:
No. 3 Board of Review

Decision date: 2 November 1983.

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Dr. P. Gerber (Member)

I have had the advantage of reading the decisions of my colleagues. I agree with Dr. Beck's summary of the facts and his conclusion. For the reasons advanced by Dr. Beck, the claim for completed trusses ($347,469) and ``building materials for P.C. items, kitchens, etc.'' ($79,469) fails on the evidence. This leaves an amount of $256,580 for ``material in the factory at the end of June''. Since my colleagues are in wide disagreement, I must perforce give my reasons why I have concluded that this builder ``manufactures'' houses so as to enable him to claim the said items as ``trading stock'' as defined in sec. 6 and 82B(1). These sections - so far as relevant - are set out in the Chairman's decision.

2. At the outset, it is clear from the authorities that a builder who builds houses on the land of others enters into a contract for work and labour and materials supplied (cf.
Hewitt & Ors. v. Court & Anor. (1983) 57 A.L.J.R. 211 ). However, in my opinion, this conclusion does not resolve anything involved in this reference. We are not concerned with equitable liens, the passing of property or the various interpretations of sec. 4 of the Sale of Goods Act (since repealed in the United Kingdom) nor the ``substance'' (or ``essence'') of the contract test. We are here concerned whether a contract for work and labour must, by necessary implication, exclude a process of manufacture. I do not believe that it does.

3. I freely confess that I find the concept of ``manufacture'' elusive. I am fortified by the fact that I am in good company. Cutting scrap into smaller pieces and compressing it into bales of standard size does not involve ``manufactured goods'' (
M.P. Metals Pty. Ltd. v. F.C. of T. (1967) 14 A.T.D. 407 , (1968) 14 A.T.D. 540 ; (1967-1968) 117 C.L.R. 631 ); crushing large pieces of stone into smaller pieces of uniform size and shape does. (
Ready Mixed Concrete (W.A.) Pty. Ltd. v. F.C. of T. 71 ATC 4107 ; (1971) 45 A.L.J.R. 293 .) So be it. Clearly, it is a

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ATC 551

problem which has vexed greater minds than mine.

4. The word comes from the Latin - manu facere - to make by hand. I am not persuaded that the meaning of the word requires a search for some philosophical or abstract principle. I have concluded that the essence of ``manufacture'' involves a transformation; i.e. it involves more than mere labour. Thus a house painter does not ``manufacture'' and his paints and brushes are not trading stock. On the other hand, a baker does ``manufacture'' bread and his flour constitutes his trading stock. The difference between the two activities is one of transformation, in that the baker makes an article which is commercially different from the basic components that he uses; the painter, on the other hand, does not. In short, the process of manufacture involves the production of articles for use from raw or prepared materials which gives these materials a new form, quality and/or property which they did not possess before. In an age of mechanisation, it is irrelevant for tax purposes whether this process is done by hand or machinery. In
Dolese & Shepard v. O'Connell 257 III. 43 ; 100 N.E. 235 at p. 236 it is stated:

``Whenever labor is bestowed upon an article which results in its assuming a new form, possessing new qualities or new combinations, the process of manufacturing has taken place, whether the thing produced be a small article of commerce or a structure, such as a house, road or bridge.''

The above citation, whilst admittedly American and somewhat elderly, is nonetheless persuasive and, in the absence of binding authority to the contrary, a view of the process of manufacture I am prepared to adopt. Applied to this case, we have a builder who erects houses, albeit per alium, thus transforming bricks and mortar by his labour into a finished product and giving a new form, quality and combination to his materials which they did not have before. It is in every sense a process of manufacture. It follows that the taxpayer is entitled to the deduction for the amount of material identified as trading stock (as opposed to the remainder of the claim in respect of materials where property had passed to the landowner by accession).

5. It is no disrespect to Mr. Hill, of learned counsel for the Commissioner, who gave a most illuminating and well-researched address on the meaning of ``trading stock'', and in particular gave a most helpful judgment-by-judgment analysis of the decision of the High Court in
F.C. of T. v. St. Hubert's Island Pty. Ltd. 78 ATC 4104 , that I have refrained from dealing with his argument. In the end, I found his submission, however attractive, of little assistance on the question whether the building of houses involves material ``acquired... for purposes of manufacture'' within the meaning of sec. 6.

6. Even if what may be termed the more ``liberal'' concept of the manufacturing process is found to be too wide, this taxpayer is still entitled to succeed. The evidence makes it clear that it makes all kitchen cupboards, windows, trusses and wall frames, and that the material for these items constitutes the subject of this reference. This material is therefore in every sense acquired or purchased for purposes of manufacture and thus ``trading stock'' as defined in sec. 6 of the Act.

7. I would allow the partnership a deduction calculated in accordance with sec. 82AD(1) of an amount in respect of stock valuation adjustment on $256,580 of trading stock on hand at the commencement of the 1977 tax year. In the result, the taxpayer's assessed interest in the net income of the partnership is reduced by an amount equal to ⅕ th of that deduction and the taxpayer's assessable income is reduced by like amount.