Case S51

Judges: MB Hogan Ch
P Gerber M

GW Beck M

Court:
No. 3 Board of Review

Judgment date: 2 July 1985.

Dr G.W. Beck (Member)

This taxpayer is one of four partners in a fishing business. Her husband is also a partner and the Board had a reference from him, B.220 of 1983, in which precisely the same matters are in dispute. The main asset of the business is a trawler and in 1979 tax year the engine was removed from the vessel and replaced with a new engine of significantly greater power. At the same time two additional 500 gallon fuel tanks and a new propeller were installed, and two or three months later a new drive shaft was fitted. The old and new engines were both driven by diesel. The Commissioner refused to allow the partnership an investment allowance of $16,739 in respect of expenditure shown in the return totalling $41,848 on the engine, the two fuel tanks, the propeller and the installation work, including installation of the drive shaft. An amount of $3,351 was incurred for other capital costs and the total expenditure to re-power the trawler appears in the depreciation schedule as $45,199. At the hearing the taxpayer's representative agreed that the cost of the engine itself was overstated in the return by $100, the correct cost being $26,000. Amending for this minor error results in total claimed eligible expenditure of $41,748 and claimed investment allowance $16,699.

2. A copy of an adjustment sheet addressed to the taxpayer's husband is included in the Chairman's file and the adjustment to partnership net income is described thereon: ``Investment allowance disallowed as not being in respect of a new complete unit of eligible property, $16,739.'' However, the reg. 35(1) statement gives the following reasons for the disallowance:

``(i) The new marine engine with component parts and two new fuel tanks installed into a fishing trawler by the partnership A, B, C & D are not plant or articles within the meaning of section 54 of the Act, and do not constitute eligible property under section 82AQ(1) of the Act.

(ii) In calculating the net income of the said partnership for the year ended 30 June 1979, no part of the amount of $16,739 claimed as investment allowance in respect of expenditure incurred on the engine, component parts and fuel tanks is an allowable deduction in terms of section 82AB(1) of the Act.''

At the hearing the Commissioner's representative did not formally abandon the contention that the expenditure was not on ``plant or articles within the meaning of section 54'' but he did not argue it. I think this aspect can be disposed of swiftly in view of the judicial view since the words of Lindley L.J. in
Yarmouth v. France (1887) 19 Q.B.D. 647 that plant included ``whatever apparatus is used by a business man for carrying on his business''. It is difficult to dispute that a trawler is an essential part of the apparatus of deep sea fishermen, and this partnership was engaged in fishing mainly for hake which the Commissioner's witness told the Board called for trawling ``at fairly great depths''. The power unit of the trawler is a component of what I think can be called a ``fishing factory'' and is certainly plant.

3. In order to obtain the investment allowance under sec. 82AB the acquisition by a taxpayer must be of ``a unit of eligible property'' and ``eligible property'' is defined in


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sec. 82AQ(1) as ``plant or articles within the meaning of section 54''. Having accepted that the power unit on which the expenditure was incurred did fall within sec. 54 the remaining question is whether the expenditure was on one or more units of property.

4. There is no statutory definition of the expression ``a unit of property'' but it is assumed that the intention of the legislation was expressed when the Treasurer in his explanatory notes indicated the view that would be taken by the Commissioner in applying the investment allowance provisions. He said: ``To be a unit (i.e. an individual item) of plant, the property must be functionally complete.'' On the basis that a marine diesel engine and individual fuel tanks are already in a form to perform their respective functions, i.e. of providing power output and holding fuel, it seems to me the Commissioner would need to point to some identifiable characteristics of the items themselves that have caused him to conclude that each is not a unit. His representative did not do this, but rather relied on a 1968 Board of Review decision, Case T68, 18 T.B.R.D. 349. There is, certainly, a deal of similarity between the facts of that case and the facts of the case under review here. In Case T68 a partnership in 1965 tax year replaced the kerosene engine in a 1954 model tractor with a new diesel engine and No. 2 Board, as then constituted, found the expenditure did not satisfy sec. 62AB. That section granted a deduction for investment in plant used in primary production in virtually the same terms as a deduction is now granted under sec. 82AB. The No. 2 Board reasoned as follows (at p. 351):

``Section 62AB requires one to look for expenditure on a new unit of property. Was the partnership's expenditure expenditure of this description? The word `on' is not a word having specific force but refers to the connection to be found between the expenditure and the subject matter thereof, that is to say the purpose, object or effect of the expenditure. Looked at in this way, it seems clear that the partnership's expenditure was not expenditure on the diesel engine and other parts but on or achieving the conversion of the tractor from kerosene to diesel. The labour element in the total charge sufficiently demonstrates this point. The expenditure was not, therefore, expenditure on a new unit of property unless the converted machine be such.''

With the utmost respect, the statement that ``it seems clear that the partnership's expenditure was not expenditure on the diesel engine and other parts but on or achieving the conversion of the tractor from kerosene to diesel'' is factually incorrect. The expenditure was on buying an engine and achieving a conversion (or, put another way, re-powering the tractor) and, if the engine was ``functionally complete'' the investment allowance should have been allowed because it certainly was, in the words of the Treasurer, ``a unit (i.e. an individual item) of plant''. Moreover, in Case T68 the tractor could not be the item falling under sec. 54 for it had already been totally written off, and, in any case, I can find no words in the sections (i.e. sec. 62AB then and sec. 82AB now) which would preclude a deduction of the appropriate percentage of expenditure on a unit which will, in the course of operation, become part of another (inevitably larger) unit.

5. Prior to Tully Co-operative Sugar Milling Assoc. Ltd. v. F.C. of T. 82 ATC 4454 and F.C. of T. v. Tully Co-operative Sugar Milling Assoc. Ltd. 83 ATC 4495 (before three judges of the Federal Court) I would have been hesitant to grant investment allowance on any expenditure other than that outlaid to acquire individual items of plant each of which is functionally complete. This would have meant that only the engine and fuel tanks were eligible plant under sec. 82AA. However, in the light of those decisions where expenditure on the first and third crushing mills in a chain of five, and on a mixed juice pumping station, was found to be eligible for the investment allowance, it seems that the total power unit of the trawler must classify as a unit of property. In the Tully Milling decisions considerable emphasis was placed on the ``discrete function'' of the crushing mill and the pumping station. The power unit of a trawler - including engine, fuel tanks, mountings, bearings, shaft and propeller - also has a discrete function. It powers the ``floating factory'' that is represented by the trawler itself.

6. The partnership is entitled to an investment allowance of 40% on $41,748, i.e.


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$16,699. This taxpayer's assessment should be amended to allow her a deduction of $4,174 as a one-fourth share thereof.

Claim allowed


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