Case S51

Judges:
MB Hogan Ch

P Gerber M
GW Beck M

Court:
No. 3 Board of Review

Judgment date: 2 July 1985.

M.B. Hogan (Chairman)

My colleague, Dr Beck, has summarised the brief facts relevant to this reference. The point in issue is the question of what, on the facts of the case, is to be classified as the ``unit of eligible property'' which constitutes ``plant'' for purposes of sec. 54 of the Act. Though the claim involved here concerns investment allowance in respect of a ``unit of eligible property'', in terms of sec. 82AB(1) of the Income Tax Assessment Act, sec. 82AQ(1) defines ``eligible property'' as meaning ``plant or articles within the meaning of section 54'' which latter section provides a deduction for depreciation ``of any property, being plant or articles'' owned and used by the taxpayer in the year of income for the purpose of producing assessable income or installed ready for use in that year of income and held in reserve for that purpose. The concept of ``any unit of property'' from which the phrase ``unit of eligible property'' plainly derives, is to be found in sec. 55(1) and 56(1) of the Act. Thus what is really in issue here, is whether the new power source installed in the partnership's trawler during the year, can be seen, standing alone, to be a unit of eligible property.

2. The Commissioner took the view in disallowing the claim, that the only unit of property involved here was the trawler itself incorporating as part of the trawler its power mechanisms. As the new power mechanism replaced a power mechanism of considerably smaller capacity, which latter power mechanism, it was agreed between the parties, was not at that stage in need of repair, the Commissioner capitalised the costs of the new diesel engine, drive shaft, propeller etc., thus denying the taxpayer any claim for repair whilst, at the same time, refusing investment allowance. The total of the expenditure in respect of which the dispute in this reference arises, was the sum of $41,848. In the partnership return, the Commissioner has allowed depreciation on the capitalised costs of the installation, obviously accepting that the installation was plant for purposes of sec. 54. That being so, in terms of sec. 55 the Commissioner must be seen to have determined


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``the effective life of the unit'' (of property) on which he has made the first calculation of depreciation on the installation in the year in question - a stance which appears to me as strangely at odds with his stance in denying investment allowance. It would seem, that in the interests of consistency of approach, he should have refused a deduction for depreciation as well as deductions in respect of repairs and investment allowance. Be that as it may, this total was made up of:
      Engine cost                    $26,000
      Installation cost              $15,748
          

Included in the installation costs were the costs of fabricating - ($995 each) - and fitting - ($452) - two new fuel tanks, fuel lines etc. and, as it emerged in evidence, the cost of a new propeller ($2,600) to meet the requirements of the Maritime Services Board in relation to the new configuration. A new propeller shaft was installed but that appears to have been done some two months or so later, after the vessel was first put back in the water using the old propeller shaft. Advantage was taken of the first slipping of the repowered vessel to install the new shaft; a special extension of time was given by the Maritime Services Board for installation of the new shaft as the new shaft had to be imported from America. It appears that the cost of the new shaft has not found its way into the total costs; the prepaid cost of installation of that shaft was included in the installation costs. The evidence was then that there was a complete new installation of an auxiliary engine, the main engine, drive shaft and propeller and a replacement of the stern bearing all within the year of income. There was a period of operation with the old drive shaft, but as I read sec. 82AA and 82AB, the fact of temporary operation with the old shaft does nothing to disqualify the overall installation in the year of income from eligibility as a ``new'' installation provided the installation can be shown to be a ``unit of eligible property''. In practical terms, many a ``new'' installation must be made to work with older plant in course of replacement during an hiatus in the course of construction of the new installation.

3. No member of the partnership appeared to give evidence but the engineer who installed the new motor etc. did give the Board some insight into the reasons for the engine changeover. He explained that:

``You design a boat and engine together for a purpose... if the purpose changes, well then it may be necessary to change the configuration...''

He had explained that it was his understanding that the engine change followed a decision of the partners to fish for hake which is a deep sea fish; it was necessary to trawl at fairly considerable depths. He gave the following description of the operations:

``I have seen them off the coast actually trawling and they... barely are moving at one knot or one and a half knots and they are using full power from their engines. You might have anything from up to one and a half ton of fish in the end of the net which you are pulling through the water - maybe two hundred feet down.''

His evidence also was that, by the time the changeover was completed, ``the vessel... was as good as any trawler of that size''. The whole tenor of his evidence was that the hull was adaptable to various power configurations, given a variation in the mode of trawling that was to be used.

4. It appears to me that there are here two separate functions, the function of the hull being to provide a base from which the trawling operations may be carried on and the separate function of the power generation unit to provide mobility for the hull and power for the multitudinous operations involved in the trawling operations that are the end and object of the partnership. This is especially so as the evidence is that the power unit (i.e. engine, shaft, propeller etc.) which was replaced, was sold some time later, and, after a complete overhaul, was fitted in a newly constructed hull by the engineer who supervised the re-power of the vessel in question here. The position here is not unakin to that considered by Kitto J. in
Ready Mixed Concrete (Vic.) Pty. Ltd. v. F.C. of T. 69 ATC 4038 where his Honour had to deal with a contention on the part of the Commissioner that the transit mixers in which concrete was transported, were debarred from investment allowance under sec. 62AA because they were in terms of subsec. (3)(b) ``road vehicles... of the kinds ordinarily used for the... delivery of goods (including the delivery of goods of a particular kind)''. His Honour found at p. 4042:


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``Even assuming that a component part of a road vehicle may be excluded from the section by this paragraph, it is clear, I think, that a transit mixer is not within the description. It is not really a component of a total vehicle comprising itself and the truck, being a vehicle ordinarily used for the delivery of ready mixed concrete. Notwithstanding the mode and degree of annexation, the truck and the mixer are functionally separate and independent units of property. The function of delivery belongs to the truck. The use of the mixer is for mixing, as a step in the production of concrete in the condition required for pouring, and its nature is understated to the point of misdescription by saying that the machine - for that is what it is - is ordinarily used for delivery.''

(my emphasis)

The ``degree of annexation'' alone is not to be seen as determining that a particular item may not be seen to have the character of a separate unit of property. The question is rather whether the hull and the power source may be seen to be functionally separate. The evidence is that a change in operations to deep sea trawling required the installation of a more highly rated power source. Thus it can be seen that propulsion of the hull is merely an ancillary function of the power source of a fishing trawler. Functionally, as in this case, the power source must be adapted to the type of operations to which the trawler is put. In
Tully Co-operative Sugar Milling Assoc. Ltd. v. F.C. of T. 82 ATC 4454, Thomas J., after adverting to the decision of Kitto J. which I have quoted above, went on after considering later developments in the decision of McTiernan J. in
Wangaratta Woollen Mills Ltd. v. F.C. of T. 69 ATC 4095, to state at p. 4459:

``In my opinion a component may be a unit of property for the purposes of sec. 82AB in the context of a manufacturing system, if it can be shown to perform a discrete function, or if it can be shown to vary the performance of that system.''

(my emphasis)

Nothing in the decisions of the judges of the Federal Court on appeal disturbed the view expressed above by Thomas J., see
F.C. of T. v. Tully Co-operative Sugar Milling Assoc. Ltd. 83 ATC 4495. Fox J. at p. 4500 indicated that the phrase unit of property ``... is not to be understood in sec. 82AB in a narrow or technical sense''. Lockhart J., who expressed general agreement with the judgment of Fox J., stated at p. 4504:

``... the nearest one can get to enunciating a test of fairly general application is that it is the function or purpose of the particular item to which one looks to see if it answers the description on the facts of the case of `a unit of eligible property'.''

(my emphasis)

In my view, the facts in this reference establish that the new power unit (the ``re-power'' of the boat to use the phrase appearing on the invoices) had a discrete function or purpose of changing the operational base of the vessel thus varying the performance of the trawling operations in which the vessel owned by this partnership was engaged. The expenditure incurred in the re-power operation was expenditure incurred in the construction or acquisition of a new unit of eligible property in terms of subsec. (1) of sec. 82AB.

5. Dr Beck's decision has raised the question of whether costs of installation are to be included as part of the ``expenditure of a capital nature in respect of the acquisition'' by this taxpayer of the power unit installed here. I take the view that, because the whole power configuration is dictated by the Maritime Services Board - the evidence of the engineer was that the Board, using its licensing powers, lays down rules governing the matching of the components of the power source - what the partnership was required to do here was to ``construct'' a whole new power source. I find on the evidence that that was what the partnership did. The expenditure on construction would include the whole of the costs of assembling and installing in situ the engine, drive shaft, propeller etc., i.e. the cost of constructing within the hull an operating power unit.

6. I would add in relation to the words ``acquisition or construction'' as they occur in para. (a) of subsec. (1) of sec. 82AB that it is my view that they must be given a meaning which is in harmony with the conception of ``cost'' on which the operation of the depreciation provisions of the Act has been based for so many years, vide sec. 56, 62. It is, I believe, plain that Subdiv. B of Div. 3 of Pt III of the Act is intended to operate in harmony with the depreciation provisions of the Act. So much is evident from the choice of the common


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base of a ``unit of property'' on which both the investment allowance and depreciation provisions proceed, a view generally adopted in the Tully Co-operative case (supra). It has been long-standing practice to incorporate installation costs of plant as part of the ``cost'' because the installation costs are capital expenditure associated with the installation of the plant as an operating entity. Nevertheless, on a strict interpretation, it may be that, in circumstances such as arise here, where the individual units are bought in by the owner/taxpayer who claims depreciation (whether or not the installation is effected by supplier or another party) the ``cost'' would be the purchase price plus delivery charges of the basic unit only. Such an approach would conflict with all established accounting practices which properly capitalise the installation expenditure and amass that expenditure with the basic unit cost to determine the cost for purposes of distinguishing between capital and revenue expenditure in the accounts and for purposes of sec. 62 of the Assessment Act. Similarly, it seems to me that the expenditure on installation here is ``expenditure of a capital nature... in respect of the acquisition'' of an operating power source for the trawler. The definition of ``eligible property'' states that it ``means plant or articles within the meaning of section 54''. Such plant or articles must be either operated for the purpose of producing assessable income during the year or installed ready for use for that purpose by the end of the year of income. Thus ``expenditure of a capital nature in respect of the acquisition... of a new unit of eligible property'' has to mean expenditure of a capital nature in respect of an operational new unit of property. In the circumstances, it appears to me to be a distortion of the patent intention of the Act to rely on the one word ``acquisition'' to limit the allowance under Subdiv. B to expenditure on the bare purchase price of the components installed in the vessel. Though in its dictionary meaning, ``acquisition'' may bear that narrow connotation, the practices of many years for determining ``cost'' for depreciation purposes upon which it appears to be the clear intention of the legislation that the allowance of a deduction under Subdiv. B should be based, mean the word must, in this context, be given a wider interpretation. As Lord Wilberforce observed in relation to the word ``office'' in his speech in
Edwards v. Clinch (1982) A.C. 845 at p. 860:

``Of course it would be desirable in an ideal world for expressions in tax legislation to bear ordinary meanings, such as a citizen could find out by consulting the Oxford English Dictionary. But it is a fact that many words of ordinary meaning acquire a signification coloured over the years by legal construction in a technical context such that return to the pure source of common parlance is no longer possible.''

Thus, it appears to me that the word ``acquisition'' in the context of Subdiv. B must be read in the light of the accumulations incorporated in the word ``cost'' in the depreciation provisions by long standing accounting and income tax practice.

7. In the circumstances, I would reduce this taxpayer's assessment by reducing her share of income from the partnership by an amount of $4,174.


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