Case D68

Judges:
AM Donovan Ch
GR Thompson M
RK Todd M

Court:
No. 2 Board of Review

Judgment date: 2 November 1972.

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A. M. Donovan (Chairman); G. R. Thompson and R. K. Todd (Members): In this reference the taxpayer company, a timber miller and merchant, claims a deduction pursuant to sec. 124JA of the Income Tax Assessment Act of expenditure incurred in respect of the purchase and construction of buildings constituting a timber mill. That section provides, in subsection (1) thereof, for a deduction calculated in accordance with the section in respect of expenditure incurred in the construction or purchase of a building -

``(a) for use primarily and principally in carrying on a business of milling timber for the purpose of gaining or producing assessable income, including a building for use primarily and principally as residential accommodation by employees of the person who are engaged in, or in connection with, that business, or by dependants of those employees; and

(b) situated in a forest and in or adjacent to the area where timber milled in the course of that business is or is to be felled....''

2. The mill in question is on the main highway between the capital city of the State in question and a country town from which the mill is three to four miles distant. Apart from being on the main road, the mill is also close to the railway line between the capital city and the town referred to, which lies to the south of the mill.

3. Between the mill and the town the country is partly pasture and partly timber. The pasture is itself partly reedy and low-lying. Opposite the mill, that is across the highway and to the west, there is a narrow band of pasture and then an estuary and dunes. To the north there is first another timber mill, not connected with the taxpayer's operations, then some bush timber and then, some two miles from the mill, the southernmost point of a State forest containing pine and tuart trees. This forest, however, has no connection with the forest which is the source of logs for the mill with which we are concerned. To the east of the mill there are some 20 acres of maiden bush, but there is hardly any millable timber on this area. To the south-east there is pasture, though in 1963 it would seem that this area was itself bush, being one with the 20 acre area of bush already referred to. There is some millable timber near the mill but it is all on private property.

4. The mill itself, which was constructed in 1962 or 1963, consists of the mill proper, with the saw-milling machinery in it; a workshop and saw shop; a mill landing; and a gantry containing a gantry crane for handling the majority of the sawn timber. There are also eight company houses for employees, the mill office, and a water supply system for the mill and the houses.

5. All of the logs brought in to the mill for milling come form an area of State forest, the nearest portion of which from the mill is at a distance of 20 miles by road, though a little less as the crow flies. In the relevant years this timber was cut under a saw-milling permit issued by the Forests Department. The timber is felled by contractors, and brought in by cartage contractors to the taxpayer's mill. Normally, some four truckloads, each representing 10 to 12 ``loads'' of 50 cubic feet, are brought in to the mill daily. This procedure, involving carting of logs some distance to the relevant mill, is the normal procedure in the area in the forest area in question. The mill may however be described as a true timber mill. It has no ancillary activities, and, apart perhaps from the provision of houses for married men, may be said to be identical with what would have been built had it been built in the forest at or close to the area where the timber is felled. The decision had however been made, for reasons connected with electricity supply, accessibility of the railway and other factors, that it was preferable to build the mill at the site

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described. It was pointed out that wherever the mill was placed the logs would have to be carried to it on trucks, and once this transport factor was involved it cost little extra to take the logs the extra distance to the preferred site.

6. In view of the estimated timber supply in the area, the taxpayer's witnesses estimated that the mill has a strictly limited life. In 1968 it had been considered to have a life of nine years only, though the Forests Department officer thought the appropriate figure might be 10 to 15 years. Until about that time the area of timber available to the mill had been somewhat greater. Once the timber supply ceased, the mill is virtually valueless save as scrap.

7. The area in which the mill is found was described by the Forests Department officer as being in a ``forest area''. A forest area, he said, was normally an area of country with forest and other land administered from a certain territorial headquarters. In this case the whole of the area forms a ``division'' which is administered from the department's local headquarters which are in the town near the mill. In this sense, that town itself is to be regarded as being in the ``forest area''.

8. Counsel for the taxpayer submitted:

(i) that the mill buildings were at the relevant time ``situated in a forest'';

(ii) that the mill buildings were ``in or adjacent to the area where timber milled in the course of that business is or is to be felled'';

(iii) that in any event the section only requires that the mill be situated in ``a'' forest and not in the very forest in which the logs brought to the mill in question are felled;

(iv) that for the purpose of determining whether the mill is situated in a ``forest'', the dictionary meaning of that word should be adopted, that this mill and its associated buildings are in an area which is substantially bush and pastureland with a number of trees in the area, and that these features are enough to lead to the conclusion that the mill is ``in a forest''.

9. Without deciding the questions finally, we are prepared for the purposes of this reference to accept the arguments set out in (ii) and (iii) above. Adjacency is essentially a relative concept, and we think that in this case, especially having regard to the conduct of timber felling operations in the general district, this mill was ``adjacent'' to the area where timber milled in the course of the taxpayer's business was or was to be felled. As to (iii), we think that the natural reading of the words of the section supports the argument contended for by taxpayer's counsel, and that the narrower meaning contended for by the Commissioner's representative could lead to a very narrow operation of the section indeed. It is to be noted that in
18 T.B.R.D. Case T11, Mr. R. C. Smith, Q.C., supported the wider construction of the words in question.

10. The decision therefore hangs on the arguments referred to in (i) and (iv) above. Counsel for the taxpayer submitted that the sense and purport of the section do not permit the expression ``a forest'' to be given a restricted meaning. Such an interpretation was, it was said, supported by the succeeding words of sub-clause (b), which require, for the purposes of the section, that the mill buildings be situated in or adjacent to the area where timber milled in the course of the business is or is to be felled. He further submitted that the physical location of this mill and its attendant buildings in surroundings of mixed bush and pasture land, with a number of trees in the area, was such that the mill should be regarded as being situated within a ``forest'' having regard to the general meaning of that expression. Essentially, the argument of counsel for the taxpayer was one which found favour with Mr. J.L. Burke (Chairman) in his dissenting reasons given in the decision of No. 1 Board of Review in 18 T.B.R.D. Case T11, to which we have referred above. In his decision Mr. Burke said at p.52 -

``5 The dictionary defines a forest as being a large tract covered with trees and undergrowth sometimes mixed with pasture (Shorter Oxford Dictionary) and, in Australian State, areas are dedicated as forests to be administered by State forestry authorities either for the purpose of establishing plantations thereon or in the process of the orderly extraction of natural growth.....

6. The Commissioner in the present case concedes that the mill buildings and residences are located in or adjacent to the

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area where timber milled in the course of the taxpayer's business was felled, but he argues that they are not `situated in a forest' and therefore the conjunctive qualification of sec. 124JA(1)(b) is not satisfied. If the words of the phrase are to be read in their strictly literal sense the Commissioner's contention would have to be upheld, but the strange and, apparently, unintended results which would flow from such a reading incline one strongly against it. Is a sawmiller to be denied the deduction because he operates in a high fire area and is required by the State authority to locate his mill beyond the boundaries of the forest in the interests of preservation of life and valuable property? Is an operator to be prejudiced because, as in the present case, he makes a decision to build outside the boundaries of the forest for reasons based on sound economic considerations? The section is designed to assist by revenue concessions the timber-mill industry and should not, in my opinion, be construed in such a way as to deny the statutory relief to a miller who, merely because of the area in which he operates, decides to site his mill outside the forest boundaries.

7. A broad, rather than a narrow, construction of the provision in question is suggested by the approach of the High Court to the not dissimilar provisions relating to capital expenditure in the mining industry (see in particular the decision of Taylor, J., in
Mount Isa Mines Ltd. v. F.C. of T. (1955) 92 C.L.R. 483). I agree with the Commissioner's representative that the question resolves itself into a question of degree and that, so approached, the enactment would extend to bring within its scope, for example, the sawmiller whose mill is located in a `mill' township completely surrounded by forest. I would also regard as satisfying the requirements of the section, assuming other conditions were met, a mill built on property just beyond but adjoining the boundary of a forest. In the instant case the mill in question was within a mile of the boundary of the forest from which the timber to be milled was obtained, it was located in an area which can truly be described as a forest region and, approaching the matter as one of degree, the mill, in my opinion, was situated `in a forest' for the purposes of the provision.

8. Finally it should be observed that the `write-back' provisions contained in sec. 124JB adequately protect the revenue should the company cease mill operations and dispose of all or some of the buildings in question at inflated `town' market prices.''

11. The members of the Board constituting the majority in that case were of a contrary view, holding that the mill buildings were so situated in a settled agricultural area as to exclude them from being properly described as being ``situated in a forest''.

12. This Board made a careful inspection of the site of the mill. It travelled to the neighbouring town and to the forest where logs are felled in the course of the taxpayer's business. It also had the advantage of inspecting aerial photos taken in 1963 and 1967.

13. It would no doubt be incorrect to say that forest conditions are uniform throughout Australia, but despite this it would in our opinion be surprising indeed if any disinterested bystander, confronted with the factual situation in this case, could be induced to think that this mill was situated ``in a forest''. No doubt even a mill in a small township itself closely surrounded by forest could in appropriate circumstances be said to be ``in a forest'', but the surroundings of this mill are predominantly cleared land, and the only land which could conceivably be regarded as ``forest'' is the area to the east, which in ordinary parlance would be described merely as ``bush''. We think that in Australian conditions it is not possible to regard a mill which is sited in surroundings of the type herein described as being ``in a forest''.

14. Our conclusion is that this mill is not ``in a forest'' in any sense in which that word is used in Australia. The question is really in the end one of fact and of impression, but we prefer the approach of the members constituting the majority in the decision of No. 1 Board of Review in 18 T.B.R.D. Case T11, (supra). This was also the approach adopted by this Board, as then constituted, in Case A56,
69 ATC 324, although one member

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based his decision on a different point. We should however add that we consider that our conclusion in this case would be the same even adopting the dictionary definition to which Mr. Burke referred. We cannot regard the area here in question as being ``a large tract sometimes mixed with pasture'' in the sense in which we read that expression. For some distance around this mill it seems to us that cleared or untimbered land predominates. Various definitions of the word ``forest'' other than that referred to at the hearing are available. Apart from those in dictionaries, there are no doubt definitions to be found in forestry treatises and there would be a variety of definitions promulgated by governmental departments and agencies in Australia and overseas. We doubt however that any definition would fail to include a notion that while there may be gaps in the forest, for it to remain a forest the area in question must be dominated by, or have a preponderance of, forest trees, and this notion is in our view present in the definition contained in the Shorter Oxford Dictionary. Whether such dominance or preponderance exists in any particular situation will of course be partly determined by the type of forest growth. For example, an Australian eucalyptus forest may be expected to be more thinly treed than an English beech forest.

15. Our conclusion therefore is that while this mill, in view of the fact that its life span is likely to be comparatively short, is one which, in the light of the principle apparently lying behind sec. 124JA, ought to have benefited from the section, the objection must fail and the Commissioner's assessment be confirmed.

Claim disallowed