Case W76
Members:P Gerber DP
Tribunal:
Administrative Appeals Tribunal
Dr P. Gerber (Deputy President)
This matter proceeded on agreed facts. Summarised, they come to this: The taxpayer was a member of a partnership which carried on a business of cane farming on lands assigned to the Isis sugar mill, an enterprise which loomed large in Case U118,
87 ATC 710 against a substantially common factual background.
2. Some time in 1971, the Queensland Government declared its intention to build two weirs on the Isis River for the purpose of providing irrigation water for sugar-cane farms assigned to the Isis sugar mill in the general vicinity of those waters. The first weir was not completed until 1977; it was common ground that there was no realistic prospect that a second weir would be built in the foreseeable future.
3. In late 1980, the Isis Mill Suppliers' Committee (IMSC), acting for the cane growers assigned to the Isis sugar mill, made representations to the responsible Minister of the State Water Resources Commission requesting that the construction of the second weir be expedited, possibly with financial assistance from a levy raised from the growers. This resulted in the Commissioner for Water Resources writing to the IMSC in December 1980 to the effect that if the growers provided $1.55m. to the project, construction could commence in mid-1981. The letter outlined that to proceed to early completion, major expenditure would arise in 1981-1982, with completion in November 1982. A likely expenditure program would be:
$
1980/81 20,000
1981/82 1,800,000
1982/83 530,000
The Commissioner stated that he ``presumed'' that the Commission could finance the preliminary requirements of $20,000 in 1981-1982 and would provide some $250,000 in 1981-1982, and a maximum of $750,000 per annum in succeeding years.
4. In substance, the proposal put to the IMSC was that if it were to provide the sum of $1.55m. in 1981-1982, ``possibly by short term borrowing and meet all interest payments on the money raised until repaid, estimated to total $400,000'', the Commission would repay the principal over a period of four years. The offer at this point in time made it clear that interest charges on the loans would not be borne by the Commission, nor would the Commission provide any rebate of future water charges as an offset.
5. That proposal was not accepted by the growers. However, by letter dated 18 February 1981, the Commission submitted a further proposal to the growers which was accepted. This new proposal is referred to in the agreed statement of facts in the briefest of references:
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``The revised proposal allowed the growers certain concessions in relation to the cost of purchasing water but did not materially alter the arrangements as to the provision of finance as outlined above''. It seems that, as part of the consideration for the early construction of the weir, each cane grower would receive future water charges at a reduced rate. Put another way, the borrowing costs incurred on the loan - in part or in whole - were to be offset against future water charges. Since neither party addressed me on this aspect, I prefer not to speculate whether or not this alters the character of the outgoings.6. To this point the negotiations had been conducted for the growers by the IMSC. However, that Committee did not have power to enter into an arrangement such as that proposed by the Government and agreed to by the growers. It was therefore decided to establish the Herbert Weir Co-operative Association Limited (HWCAL). (Mill Suppliers' Committees were empowered to subscribe proceeds raised by levy to the capital of associations established under the Primary Producers' Co-operative Associations Act 1923-1978 (Qld).)
7. The IMSC was specially empowered by regulation to raise a particular levy on growers. The levy imposed raised $351,000 of which $6,980.10 was paid by the partnership in the year of income by way of deduction by the Isis mill from cane payments on 28 May and 4 June 1981.
8. HWCAL was incorporated on 19 June 1981.
9. On 3 February 1982 the sum of $351,000 was paid by IMSC to HWCAL.
10. The required contribution of $1.55m was borrowed by HWCAL from a merchant bank and paid to the Commissioner for Water Resources on 2 March 1983.
11. In the meantime the Commissioner for Water Resources had gone ahead with arrangements for the construction of the weir. Actual construction had been performed by a contractor engaged for the purpose by the Commission and the contractor was paid by the Commissioner. The weir was completed behind schedule and was opened in June 1983.
12. The sum of $351,000 was applied by HWCAL in meeting interest charges on the borrowing.
13. In the year now before me (1981), this taxpayer, one of four partners in a cane farming partnership, claimed his quarter share of the aforementioned $6,980 - described as a ``weir levy'' - as an allowable deduction under sec. 51(1) and/or 75B.
14. The case now before me is regarded as a test case in the sense that all cane growers who made similar levy payments to the HWCAL have lodged objections and are awaiting the outcome of this application.
15. As I see it, the issue comes to this: This taxpayer paid a levy, initially to IMSC, subsequently transferred to HWCAL, the latter having as its objects (a) to contribute to the cost of the construction by the Commissioner of Water Resources of a second weir on the Isis; (b) to borrow money for this purpose; (c) to pay to the lenders of such money interest thereon; and (d) to enter into agreements with the government whereby the money so borrowed (excluding interest thereon) shall be repaid to the lenders thereof by the Commissioner of Water Resources.
16. I find as a fact that this taxpayer's contribution became part of this fund and was used to pay the interest on the money borrowed to pay for the (accelerated) construction of additional water storage pending the availability of Government funding. The evidence leads me to conclude (i) that but for the combined action of the cane growers assigned to this mill, the water storage would not have been built when it was; (ii) that none of the moneys raised by way of levy (as distinct from the money borrowed from the merchant bank) was expended on the construction of the weir; and (iii) that the weir was designed to increase the income of the contributors. Are these findings sufficient to make the levy an allowable deduction?
17. The membership of the HWCAL was restricted to ``any bona fide sugar-cane grower on land situate in any one or more of the areas of land hereinafter described...'' Clause 10 of the articles of the co-operative, dealing with its share capital, provides that:
``The capital of the Association shall be raised by receiving the proceeds of a levy, raised by the Isis Sugar Mill Suppliers' Committee... which levy shall have amongst its purposes the main objects of the Association... Shares of a nominal value of
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one dollar ($1.00) each shall from time to time be issued to members in such quantities as will represent the amount received by the said Committee pursuant to the aforesaid levy from each member as certified by the Secretary of the said Committee from time to time provided always that in lieu of individual shares there may issue in such form as the directors may from time to time determine share certificates in the names of members bearing on the face thereof the number of shares issued with respect to the member in question and the nominal value of such shares so issued.''
18. In an instructive submission by Mr Callinan Q.C., senior counsel for the applicant, it was put to me that, given the purpose of this scheme, the levy should be seen as a loss or outgoing incurred in gaining or producing the assessable income of each of the contributors; alternatively, that it constituted a loss or outgoing necessarily incurred in carrying on this taxpayer's business of primary production. In a subsidiary argument, Mr Callinan submitted that even if I were to find the outgoing to be one of capital or of a capital nature, the deduction was allowable in reliance on sec. 75B, being an ``expenditure incurred on the construction, acquisition or installation of plant... for the purpose of... conveying water for use in carrying on that business on that land''.
19. Mr Callinan was so persuasive that I must guard myself against his plausibility. I have no doubt that if this taxpayer had, by his own resources, borrowed money to construct a weir on his land, the interest payments would constitute a sec. 51(1) deduction. The same result would flow if several cane farmers had combined to borrow funds to build a communal water storage facility. Does the detour via the co-operative produce a different fiscal result? In the instant case, it was not disputed that the active participant in this venture was HWCAL Co-operative and that its capital was raised by levies on the terms set out in para. 16 above.
20. Despite Mr Callinan's persuasive argument, I have, in the end, concluded that the cost of the acquisition of shares or units in a co-operative involves an outgoing of capital. Mr Callinan sought to overcome this hurdle in reliance on their Lordships' famous observation in
B.P. Australia Ltd. v. F.C. of T. (1964) 13 A.T.D. 268; (1965) 112 C.L.R. 386:
``The solution to the problem is not to be found by any rigid test or description. It has to be derived from many aspects of the whole set of circumstances some of which may point in one direction, some in the other. One consideration may point so clearly that it dominates other and vaguer indications in the contrary direction. It is a commonsense appreciation of all the guiding features which must provide the ultimate answer. Although the categories of capital and income expenditure are distinct and easily ascertainable in obvious cases that lie far from the boundary, the line of distinction is often hard to draw in border line cases; and conflicting considerations may produce a situation where the answer turns on questions of emphasis and degree. That answer `depends on what the expenditure is calculated to effect from a practical and business point of view, rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process' (per Dixon J. in
Hallstrom's case (1946) 72 C.L.R. 634, at p. 648). As each new case comes to be argued felicitous phrases from earlier judgments are used in argument by one side and the other. But those phrases are not the deciding factor, nor are they of unlimited application. They merely crystallize particular factors which may incline the scale in a particular case after a balance of all the considerations has been taken.''(At p. 397.)
21. The authorities relied upon are formidable. Nevertheless, I must decline Mr Callinan's attractive invitation to find that, because the HWCAL used its funds to pay interest on the money it borrowed to construct a weir used for the production of its shareholders' assessable income, the cost of the shares becomes an allowable deduction. If the law is to be thus extended, it must be done by a superior court. I am not prepared to dwell exclusively on what an expenditure is calculated to effect and, in the process, ignore the juristic classification of the legal rights thus secured merely because, ``from a practical and business point of view'', the impugned expenditure was incurred in gaining or producing the assessable income of the taxpayer. Paying interest on money borrowed which is applied to earn income is one thing,
ATC 698
buying shares is another. The former is on revenue account, the latter an affair of capital. If ``purpose'' can trump the mechanics by which it is put into effect, with the result that ``capital'' merges imperceptibly into ``revenue'', such consummation is more appropriately carried out before the High Court. Before an administrative tribunal, not even so formidable a chaperon as Mr Callinan can legitimate this union.22. For similar reasons, sec. 75B cannot save the taxpayer - the expenditure was incurred in subscribing to the share capital of the co-operative, not in the construction of a weir. Miss Wilson, learned counsel for the respondent, sought to persuade me that sec. 75B(10) in any event prevents a partner from claiming a deduction otherwise available for eligible ``plant'' as defined by the section. She has not persuaded me on this point.
23. This taxpayer has the misfortune to fail on a technicality. Had the committee been empowered to finance the construction of the weir without the necessity of having to resort to the artifice of a co-operative, the taxpayer's contribution to the interest on the borrowed capital would have been an allowable deduction.
24. For the above reasons I would affirm the decision of the Commissioner upon the objection.
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