Kosciusko Thredbo Pty. Limited v. Federal Commissioner of Taxation.

Judges: Mason CJ
Wilson J

Brennan J
Dawson J
Gaudron J

Court:
Full High Court

Judgment date: Judgment handed down 23 December 1987.

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Brennan J.

To ascertain the operation of sec. 88(2) of the Income Tax Assessment Act 1936 (Cth), it is convenient to divide the cases in which, by the general law, a lessee may lawfully make improvements on demised premises into four categories: (1) when the improvements are made "as consideration for the grant to [the lessee] of [the] lease" (to adapt the words of para. (a) of sec. 88(2)); (2) when the improvements are those which the lessee is "required to make under the provisions of [the] lease" (to adapt the words of para. (b) of sec. 88(2)); (3) when, in the absence of the lessor's consent, the making of the improvements would be in breach of covenant or would expose the lessee to liability for waste but the lessor consents to the making of the improvements; and (4) when the making of the improvements is not in breach of covenant and does not expose the lessee to liability for waste. In this case, a question arises as to the coincidence of cases falling within the third and fourth categories and cases in which improvements "have been made with the written consent of the lessor" (the words of para. (c) of sec. 88(2)). A lessee taxpayer who incurs expenditure in making improvements which fall within the first two categories and which otherwise satisfy the criteria expressed in the introductory words of sec. 88(2) is entitled to deduct from his assessable income a proportion of that expenditure provided the lease was granted on or before, or in pursuance of an agreement entered into on or before, 22 October 1964: sec. 83AA(1). A lessee taxpayer who incurs expenditure in making improvements which fall within the third or fourth categories and which satisfy the criteria expressed in the introductory words of sec. 88(2) is entitled to deduct from his assessable income a like proportion of that expenditure provided the lessor has given written consent to the making of the improvements and provided that, on or before 22 October 1964, the lessor had given or had agreed to give written consent and, in the latter case, the written consent and, in the latter case, the written consent was in fact given within a period allowed by the Commissioner: see sec. 88(2)(c) and 83AA(4). The "consent" mentioned in sec. 83AA(4) is the same "consent" mentioned in sec. 83AA(4) is the same "consent" as that mentioned in sec. 88(2)(c), that is, a written consent of the lessor to the making by the lessee of improvements on the leased land.

The criteria of deduction prescribed by para. (a), (b) and (c) of sec. 88(2) are mirrored by the criteria prescribed by sec. 87. Section 87 includes in the lessor's assessable income a proportion of the estimated value to the lessor of the improvements as at the expiration of the lease. In cases which fall outside para. (a) or (b) of sec. 88(2) and outside the corresponding provisions of sec. 87, the giving of the lessor's written consent is the material criterion upon which the relevant tax consequences depend: an addition to the assessable income of a lessor who gives written consent, and a deduction

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from the assessable income of a lessee who is given written consent. The tax consequences prescribed by sec. 87 and 88(2)(c) depend not on the lawfulness of the making of improvements, but on the giving of written consent to the making of improvements. As between the lessor and the lessee, the giving of written consent determines, in the ordinary case, whether the lessee is entitled to a tax advantage and the lessor is liable to a tax burden. The need for written consent was stated by the 1932 Royal Commission on Taxation in para. 736 of its report:

"Other witnesses asked that all expenditure by the lessee upon improvements, whether incurred under agreement or not, should be allowed to him as a deduction. It is impossible for us to support this request. It would be unfair to impose upon the lessor in such circumstances liability to pay tax in respect of improvements made without his consent, and possibly against his will."

It would be unfair to impose a tax burden on the lessor if the lessor had not given his consent to the making of the relevant improvements, even if the lease did not preclude the lessee from making those improvements. The distinction between making improvements with the lessor's written consent and making improvements lawfully is important in this case. The relevant improvements for the purposes of this appeal appear to come within the fourth category so that the taxpayer was lawfully entitled, without the lessor's consent, to make those improvements.

A lessee who alters the demised premises, whether by erecting a building or otherwise, is not liable for waste if no injury is thereby done to the inheritance:
Doe d. Grubb v. Earl of Burlington (1833) 5 B. & Ad. 507 at p. 517 ( 110 E.R. 878 at p. 882) ;
Meux v. Cobley (1892) 2 Ch. 253 ;
Hyman v. Rose (1912) A.C. 623 at p. 632 . In
Jones v. Chappell (1875) L.R. 20 Eq. 539 , Sir George Jessel M.R. said that a lessee of land who erects a building thereon without the lessor's consent does not commit waste unless the building is an "injury to the inheritance". Buckley J. in
West Ham Central Charity Board v. East London Waterworks Co. (1900) 1 Ch. 624 at pp. 635-636 , followed Jones v. Chappell in holding:

"... that the lessee of land who erects buildings thereon without the consent of his lessor does not commit waste within the definition in Co. Litt. 53a, unless it can be shewn that such building is an injury to the inheritance. I am content to take the law from the case of Doe v. Earl of Burlington ... If the permanent character of the property demised is not substantially altered,... I conceive that the law is that it is not now waste for the tenant to do things which within the covenants and conditions of his lease he is not precluded form doing. Within those covenants and conditions he may use his holding as he pleases."

In determining whether the act which is said to be an act of waste has in fact changed the nature of the demised premises "regard must be had to the user of the demised premises which is permissible under the lease": per Lord Loreburn L.C. in Hyman v. Rose, at p. 632, and cf.
Hunt v. Hodges (1849) 1 Ir. Jur. 33 .

Although a lessor's consent to the making of an improvement is unnecessary if there is no covenant against making it and its making is not an act of waste, a written consent is required if the tax consequences are to be attracted. No doubt such a consent may be found in the lease itself or in a separate written instrument, as Jacobs J. said in
G.J. Coles & Coy. Ltd. v. F.C. of T. 75 ATC 4128 at p. 4136: (1975) 132 C.L.R. 242 at p. 256 , but a lease which creates in the lessee such an interest as permits the lessee to make improvements in using the land for a particular purpose without consent is not necessarily to be regarded as itself a written consent to the making of any such improvements or as an agreement to give such a written consent so as to attract the operation of sec. 88(2)(c). If it were otherwise, the lessee would have a discretion not merely to make the improvements but to cast a tax burden on the lessor by making particular improvements to which the lessor had not given consent in fact. The specificity of the consent needed to attract tax consequences was considered in reference to sec. 88(2)(b) in G.J. Coles. Mason J. there said (at ATC p. 4135; C.L.R. p. 254) that "para. (b) merely requires an identity between the improvements required and the improvements made". Although para. (c) does not necessarily import the same degree of specificity, it would be incongruous if it did not; indeed, unless the consent of which para. (c) speaks is a consent to "the improvements made", the criterion of written consent as a

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means of according fairness to the lessor fails in its purpose. If the lessor were treated as having consented to any improvement the making of which is not an act of waste, the submission which the 1932 Royal Commission was concerned to reject would, in effect, be accepted. Therefore the inclusion in the lease of a stipulation as to the purposes for which demised premises may be used is not necessarily a consent to the making of any improvements which might serve those purposes: no such consent is needed under the general law, and the lease should not be construed as giving a written consent merely in order to satisfy a criterion of deductibility under sec. 88(2)(c). With respect, I am unable to regard a stipulation as to the purpose for which the leased land may be used as having the character of a consent to any improvements which a lessee may choose to make to serve that purpose. The lessee is not a stranger who needs consent to do something on the demised premises: the demise itself confers on him the right to use the demised premises as he pleases and to improve them as he pleases subject to any restrictive covenant and subject to the obligation not to commit waste. However, if on a proper construction of a lease, a particular provision can be seen to be both a purpose of use clause and a consent to the making of a particular improvement, the clause will satisfy sec. 88(2)(c). Whether a clause is intended to be merely a purpose clause or to be a consent as well is a question of construction.

These being the general principles, it remains to apply them in the construction of cl. 4 of the Deed of Lease dated 29 June 1962 between the Minister as lessor and the taxpayer as lessee. Clause 4(9) of the lease requires the lessee to make certain improvements, and improvements made pursuant to that subclause fall within para. (b) of sec. 88(2). Clause 4(7) and 4(10) authorise the lessee to make certain further improvements subject, in one case, to the written consent of the Trust and, in the other, to the approval of the Trust in regard to plans, specifications and details. These are clearly consent clauses which satisfy the requirements of sec. 88(2)(c) and 83AA(4). They add nothing to the right to make improvements which the lessee was entitled to exercise in virtue of the liberty it was given, subject to cl. 4(11), to use the demised premises for the purposes prescribed in cl. 2 and 4(5) and 4(6), the texts of which are set out in the majority judgment. But the improvements which remain in controversy in this appeal were not made pursuant to cl. 4(7), 4(9) or 4(10). There is no express provision of the lease which either required the relevant improvements to be made or expressly consented to the making of them. The taxpayer placed some reliance on the provisions of cl. 2 and 4(5) and 4(6), but these provisions merely specify the purposes for which the lessee may use the demised premises - in contrast to cl. 4(7) and 4(10) - which authorise the making of specific improvements. Although regard must be had to the purposes for which the land may be used in determining whether the making of a particular improvement is an act of waste, I am unable to construe cl. 2 and 4(5) and 4(6) as a written consent to the making of the particular improvements which now remain in issue. They are certainly not an agreement to give a written consent to the making of those improvements. I would agree with the following passage from the judgment of Toohey and Wilcox JJ. in the Full Court in the present case [reported at 85 ATC 4829 at p. 4842]:

"In the case now before the Court, it is said, not only is the use of the land for a ski lodge and ancillary recreational facilities not a breach of covenant, but the lease expressly contemplates that use. This much may be accepted but it does not follow that, because the lease does not prohibit the use of the land for a ski lodge, the erection of such a lodge is done with the consent of the lessor for the purposes of subsec. 88(2). Indeed, the taxpayer's submission carries with it the conclusion that no matter what improvements the lessee may make upon the land over the 45 year term of the lease, so long as those improvements fall within the general description in cl. 2 of the lease, the lessor must be taken to have consented to them. That submission cannot be accepted."

As the taxpayer relies solely on the lease which was executed prior to 22 October 1964 as the written consent or the agreement to give written consent to the making of the relevant improvements, the attempt to bring the case within sec. 88(2)(c) and 83AA(4)(b) fails.

I should add that I regard both the statutory and the contractual requirement of approval by the Trust to the making of particular

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improvements as immaterial to this case. If cl. 2 and 4(5) and 4(6) constituted the lessor's consent to the making of the relevant improvements, the circumstance that a third party's consent was also required would be immaterial to the application of sec. 88(2)(c).

I would dismiss the appeal.