Case D77

Judges: FE Dubout Ch

G Thompson M
N Dempsey M

Court:
No. 3 Board of Review

Judgment date: 21 November 1972.

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G. Thompson (Member): The taxpayer, a dental surgeon, in respect of the year ended 30 June 1970, claimed certain removal expenses as a deduction under sec. 51 of the Act. In an annexure to his return of income for that year, the taxpayer set out his claim in detail as follows -

``Removal of surgery to Temporary Premises during re-construction of building

The taxpayer has been a tenant of the `X' Bank for approximately 30 years.

During 1969, the Bank demolished its building and built new premises on the site. This activity extended over almost twelve months during which time the taxpayer was obliged to find alternative accommodation for his dental practice. The following costs were incurred in connection with the shift to alternative accommodation:

      Removal expenses to temporary

      premises                                     $45

      Electrical and Plumbing disconnect-

      ion at old premises and installation  in

      temporary premises                          $523

                                                 -----

                                                  $568

                                                 -----
        

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ATC 454

The following costs were incurred in connection with establishing the dental practice in the new building:

      Removal Expenses from temporary

      premises                               $45

      Electrical and Plumbing installation

      of equipment                          $738

      Erection of Partitions               $1183

      Painting Partitions etc.              $309

                                           -----

                                           $2275

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The taxpayer was refused reimbursement by the landlord of expenditure incurred in establishing his dental surgery in the new building.

Partitions removed from the old building were destroyed by the builders and unable to be used in the new building. These partitions as well as the plumbing and electrical installations were in a satisfactory state for the conduct of a dental practice.

The whole of the expenditure incurred by the taxpayer as noted above was incidental to the carrying on of his practice of dentistry in that the expenditure was brought about by a decisions of his landlord and it is not expected that any additional income will accrue by reason only of the expenditure.''

2. In his adjustment sheet accompanying his assessment the Commissioner disallowed the claim of $2,842 ( sic ), to which assessment the taxpayer objected. It will be convenient to set out the taxpayer's grounds of objection in detail which are as follows -

• ``1. I consider that the costs incurred in moving to and from temporary premises were incidental to my income-producing operations. Without this expenditure I would have been unable to practice ( sic ) as a dentist during most of the income year.

• 2. The expenditure was incurred because of a decision of my landlord to demolish the premises I occupied as a dentist and construct new premises. I had no control over this decision.

• 3. I do not consider that the expenditure was capital, or of a capital nature. As the moving of chattels used in my dental practice was temporary only (being solely for the duration and purpose of demolition of the old building and construction of the new building), and the work performed in dismantling and installing in each location could not be utilised by another person for income-producing operations, the costs were wholly written-off as incurred within one income year, as they are not expected to benefit future income.

• 4. The new partitions replace those used in the old building which were destroyed during demolition. The new partitions are able to be removed without affecting the structure of the new building.''

3. The Commissioner in his statement furnished pursuant to Reg. 35(1) of the Income Tax Regulations claimed that no part of the total of $2,843 claimed by the taxpayer is allowable as a deduction pursuant to sec. 51 of the Act in that the expenditure was not incurred in gaining or producing assessable income, nor necessarily incurred in carrying on a business for the purposes of gaining or producing such income, and in any case was an outgoing of capital or of a capital nature. The Commissioner's representative at the hearing supported these contentions in argument.

4. It is not always easy to discern the dividing line between expenditure of a capital or of an income nature. It has become standard practice over the years to refer to the judgment of Dixon J. (as he then was) in
Sun Newspapers Ltd. v. F.C. of T. (1938) 61 C.L.R. 337 . In view of the arguments submitted by the taxpayer, I may be pardoned for quoting in some detail from his Honour's judgment at pp. 359-360 on the general distinction between capital and income payments. His Honour said as follows -

``The distinction between expenditure and outgoings on revenue account and on capital account corresponds with the distinction between the business entity, structure, or organisation set up or established for the earning of profit and the process by which such an organisation operates to obtain regular returns by means of regular outlay, the difference

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ATC 455

between the outlay and returns representing profit or loss. The business structure or entity or organisation may assume any of an almost infinite variety of shapes and it may be difficult to comprehend under one description all the forms in which it may be manifested. In a trade or pursuit where little or no plant is required, it may be represented by no more than the intangible elements constituting what is commonly called goodwill, that is, widespread or general reputation, habitual patronage by clients or customers and an organised method of serving their needs. At the other extreme it may consist in a great aggregate of buildings, machinery and plant all assembled and systematised as the material means by which an organised body of men produce and distribute commodities or perform services. But in spite of the entirely different forms, material and immaterial, in which it may be expressed, such sources of income contain or consist in what has been called a `profit yielding subject,' the phrase of Lord Blackburn in
United Collieries Ltd. V. I. R. Commrs. (1930) S.C. 215 , at p. 220; (1929) 12 T.C. 1248 , at p. 1254 . As general conceptions it may not be difficult to distinguish between the profit-yielding subject and the process of operating it. In the same way expenditure and outlay upon establishing, replacing and enlarging the profit-yielding subject may in a general way appear to be of a nature entirely different from the continual flow of working expenses which are or ought to be supplied continually out of the returns or revenue. The latter can be considered, estimated and determined only in relation to a period or interval of time, the former as at a point of time. For the one concerns the instrument for earning profits and the other the continuous process of its use or employment for that purpose. But the practical application of such general notions is another matter.''

The above judgment was referred to more recently by Kitto J. in the High Court in
F.C. of T. v. Broken Hill Pty. Co. Ltd. (1969) 120 C.L.R. 240 at 261 , where his Honour said as follows -

``In each case the nature of the structure demolished, the purpose of the demolition, and the nature of the new structure (if any) was fully explained. I shall not attempt to summarise the detail here. It is sufficient to say that in my opinion the classic exposition by Dixon J. in the Sun Newspaper case (1938) 61 C.L.R. at pp. 356, 360 of the distinction between outgoings in the nature of capital and outgoings on revenue account must lead to the conclusion that the expenditure in question in the present appeals was all of a capital nature. I fully realise that I am considering the business of a very large steelworks, and that in the course of such a business it is to be expected that from time to time demolitions of all seven descriptions will become expedient or necessary. Plant will become obsolete or redundant and need to be replaced by other plant, or got rid of for the sake of safety or in order to provide more free space, or for tidiness and the resulting likelihood of improved general efficiency in the yards. Moreover, it is to be expected that improved techniques or manufacturing procedures will require every now and then some re-arrangement of the lay-out of the premises or some change in the disposition of the plant. Consequently demolitions of one sort or another, while not exactly everyday affairs, are at least naturally and occasionally - perhaps not infrequently, though not regularly - occurring events in the history of an active, well-conducted and progressive steelyards. But they are not events in the working of the yards, as distinguished from the provision or re-organisation of the capital equipment in or by which the profit-earning process is carried on. Each of the structures which have been described to me as having been demolished, and each of the structures that were erected in place of one that had been demolished, was in its nature a part of what Dixon J. described in Sun Newspaper case (1938) 61 C.L.R. at p. 360 as `a great aggregate of buildings..... all assembled and systematised as the material means by which an organised body of men produce and distribute commodities.....'. They were all part of the appellant's profit-yielding subject'.''

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ATC 456

5. It will be seen that the above quotations demonstrate that the profit yielding structure, as distinct from particular pieces of property or other assets may also constitute the capital of a business. The capital of a business is not necessarily to be found in bricks and mortar or in physical property. I have taken the liberty to quote in some detail from the above judgments in view of the proposition put forward by the taxpayer that the expenditure was not of a capital nature, and in a context where the taxpayer maintained that the ``only thing that he got out of'' the whole process was the partitions in the new building. Because of this, he appeared to argue that the expenditure was not of a capital nature. However, it is not necessary that a particular asset should result from expenditure before that expenditure can properly be classified as of a capital nature.

6. As it was put by Menzies J. in
J. Fairfax & Sons Pty. Ltd. v. F.C. of T. (1958) 101 C.L.R. at p. 55 -

``I do not therefore think that this Court should accept the proposition that a payment otherwise within sec. 51(1) is not of a capital nature unless it has resulted in the creation of a new asset or in the addition to an existing asset.''

7. Partitions and fittings, though removeable, may be classified in a sense as of an enduring or lasting nature although they are certainly not everlasting. This is but one of the elements to consider, as it is largely a matter of degree in each case as to what nature should be attributed to the property. See the judgment of Rich J. in
Herring v. F.C. of T. (1946) 72 C.L.R. 543 at 547 , where his Honour emphasied that it is a matter of degree as to how lasting or enduring certain capital assets may be, but they are, nevertheless, classified as of a capital nature.

8. From these general observations on the nature of capital or income payments I may now descend to one or two particular cases in point. The first one in
W. Friedson (H.M. Inspector of Taxes) v. The Rev. F.H. Glyn-Thomas (1992) 8 T.C. 302 . That case dealt with a claim for deduction by an Anglican clergyman in respect of removal expenses from his former curacy to another curacy at another place. Sankey J. who was most sympathetic to the taxpayer, nevertheless, felt, as a matter of law, constrained to decide against him. His Lordship, at p. 305 of that case, put the matter in these words -

``It is perfectly true that in order to take up his duties he had to go there; but I do not think it is possible to say that the expense of removal in order to get there was an expense necessarily incurred in the performance of his duties. There is all the difference in the world between an expense which you have to incur in order to go to a place in order to take up your duties, and an expense incurred in the performance of your duties. I do not think it is possible to say that this is a sum of money which was necessarily incurred in the performance of his duties.''

9. Another authority in point may be found in the case of
Granite Supply Association Ltd. v. Kitton (Surveyor of Taxes) (1905) 5 T.S. 168 , which was a decision of the Scottish Court of Exchequer. That case dealt with a company which had been established for the purpose of buying and selling of granite which moved its business to larger premises and claimed to defray the cost of removal out of revenue. The particular claim for deduction involved the expenses of carting granite from the old yard to the new and of taking down and re-erecting two cranes. It was held that these items were not allowable deductions.

10. Perhaps the case is summed up in the brief but concise judgment of Lord McLaren at p. 171, where his Lordship said -

``I think that the cost of transferring plant from one set of premises to another more commodious set of premises is not an expense incurred for the year in which the thing is done, but for the general interests of the business. It is said, no doubt, that this transference does not add to the capital value of the plant, but I think that is not the criterion. There are costs that would not properly be set against the income of the year, and which yet may not add to the capital value. Suppose a person is imprudent enough not to insure his premises or his goods, which can be insured, and they are burned down, and he

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ATC 457

has to replace the building, he could not be allowed to charge the new building against the income of the year, although the putting of it up does not add to the value of his property, but merely enables it to maintain its original value. I agree, therefore, that the cost of re-erecting the cranes and the cartage of materials, being a thing not done for the benefit of the one year, is not a proper deduction from income.''

11. There have been many cases before Boards of Review on allied topics, where taxpayers, sought to claim as a deduction costs of removal and the like. The decision generally resulted against the taxpayer in that the costs were generally held to be of a capital nature. In the present case, after considering the evidence and the relevant case law, I have come to the conclusion that the expenditure claimed by the taxpayer is of a capital nature and must be disallowed. This is sufficient to conclude the matter, but I desire to make some brief observations on the other arguments put forward on behalf of the Commissioner. It is unnecessary, finally, to decide whether the expenditure satisfies the positive tests under sec. 51(1) of the Act, since I have already held that it is excluded as a deduction because of its capital nature. But extracts which I have quoted in this decision, and other passages in the case law, would incline me, as at present advised, to hold that expenditure such as the present expenditure involving removal to new premises would not of itself satisfy the positive tests of sec. 51(1) as being incurred in gaining or producing assessable income or as being necessarily incurred in carrying on a business for the purpose of gaining or producing such income. I would incline to the view that the expenditure is incurred not in the course of gaining assessable income, and not in the course of carrying on business, but at a point of time prior thereto. See again the above quotation from Sankey J. in the Rev. Glyn-Thomas's case, 8 T.C. at p. 305. However, as I have indicated, it is sufficient to dispose of the taxpayer's claim to hold, as I do, that the expenditure is of a capital nature. I leave these other matters for future decision when they arise.

12. Accordingly, I must disallow the taxpayer's objection and confirm the Commissioner's assessment.