Case G16

Judges: FE Dubout Ch
G Thompson M

N Dempsey M

Court:
No. 3 Board of Review

Judgment date: 27 February 1975.

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N. Dempsey (Member): The taxpayer concerned in these references is a Public Company engaged in business as Merchants and Sawmillers. The claims in dispute relate to the income years ended 30th June, 1970 and 1971. The matter disputed in the year ended 30th June, 1970 is also in dispute in the year ended 30th June, 1971 and in this year the objection contained two further items. However, at the hearing one of these matters was abandoned.

2. The common matter in relation to each year is whether the company is entitled to deductions under sec. 124JA in respect to capital expenditure on ``Sawmill Buildings'' and ``Mill Cottages and Sheds''. The improvements in question are situated on three separate mill sites each of which is located in a country area and there is no dispute as to the cost of the improvements, or should it be held that the section applies, as to the basis of the deductions claimed.

3. The second matter and this concerns the year ended 30th June, 1971 is a claim for the cost of removal of leasehold improvements at the termination of a lease, the improvements in question being on a property leased and used by the company in its operations.

4. For the company to succeed in relation to its claim in respect to the improvements on the sawmill properties it must show that sec. 124JA applies. The relevant part of the section reads -

``124JA. - (1.) Where a person has incurred expenditure of a capital nature (not being expenditure in respect of which a deduction has been allowed or is allowable under a provision of this Act, other than a provision

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of this Subdivision, or which has been or is to be taken into account in ascertaining the amount of an allowable deduction under such a provision) in respect of 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 connexion 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,

deductions in respect of the expenditure are allowable in accordance with this section.''

5. It is not disputed that the improvements are such as would be covered by (a) above and the question at issue is whether the requirements of (b) above are complied with. To comply with these requirements the buildings must be ``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.''

6. The evidence shows that the company whose main activities are carried on in a capital city operates sawmills in country areas. The claims before the Board under sec. 124JA concern three separate mills. To identify each mill I will refer to them as ``N mill'', ``L mill'' and ``B mill''. As the circumstances relating to each mill differ each will have to be considered separately.

7. The mill at N was purchased by the taxpayer in 1960. Although it has no relevance to the matter to be decided it might be mentioned that at the time the case was heard by the Board the mill had ceased operations. The evidence showed that this mill was situated at an unmanned railway siding on land leased from the Railway Department. Apart from the mill there were two farm houses in the vicinity. The nearest country towns of any size were five and six miles distant.

8. The roads connecting the mill to these towns all passed through forest country either privately owned or State forests. The railway siding and the mill were sited in a cleared area and on one side of the mill the State Forest from which logs were obtained was less than half a mile from the mill. Aerial photos of the area were tendered and it seems reasonably clear from these that the mill was in a cleared area and at varying distances around it forests existed. Logs were actually drawn from as far away as 25 miles for milling at the N mill.

9. The claim in respect to L mill contains two distinct elements. The first covers ``Mill Buildings'' and ``Employees' Cottages'' situated at L and ``Employees' Cottages'' situated at a small township C which is about 12 miles by road from L. L is what might be termed a small country village and apart from the ``Mill Buildings'' and ``Cottages'' for employees, there are located at L another small mill, a general store, the remains of an old dance hall, a tennis court and a few other cottages. The railway line passes through L and in 1969/70 there was an attendant there, but the line has since been washed out and there is no attendant there now. The evidence indicates that L is surrounded by forests and the area is very mountainous. Like the mill at N the mill at L is in a cleared area and the forests are from one half a mile to a mill away depending on the direction. Photographs, both aerial and ground, were tendered to assist the Board to gain an impression of the area. The buildings at L were on a ten acre site owned by taxpayer.

10. The small township of C has one hotel, a police station, a general store, a post office and a few cottages. A river is adjacent to the township and on the banks of the river dairy farming is carried on and at varying distances of a half mile to a mile the area is surrounded by forest country. At this township of C there are two cottages owned by the taxpayer and used by employees of the L mill. These represent the second element in the claim in respect to the L mill.

11. The situation in relation to the B mill is somewhat different. This mill is situated in the township of B and this is a township of some one thousand residents. The buildings and employees' cottages comprising the B mill are

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on land owned by the taxpayer. The township of B is supported by a fairly big dairying industry in the district and also banana farms. A small amount of grazing is carried on.

12. In addition to the mill operated by this taxpayer there are two other mills operating at B. The mill operated by this taxpayer and which is the subject of the reference is located slightly out of the township area but still in what would be called the town. Logs for this mill are drawn from forests in the area some coming from distances in excess of 20 miles.

13. Looking at the three mills in a broad manner, it can be said that they are each in an area that could in general terms be referred to as forest country. The mill L is quite a distance from the mills at N and B which are about six miles apart.

14. The matters in dispute so far as these three mills are concerned have to be decided in accordance with the terms of sec. 124JA. Whilst it may not assist in deciding the issue, the meaning of the section has to be discerned from the words used, it is interesting to refer to the explanation of the section given to Parliament at the time it was introduced into the Act.

15. The section was introduced by Bill No.69 of 1963 and is now contained in Part III Division 10A of the Act. More specifically, it is in Subdivision B of Division 10A the Subdivision being headed ``Timber Mill Buildings''. In the Treasurer's Second Reading Speech to the House of Representatives the following appears -

``I turn now to forest operations to which I made a reference earlier in this speech. Plant for use in timber milling was brought within the scope of the investment allowance for manufacturers introduced last year, but up to now persons engaged in a business of extracting timber from a plantation or forest for milling have not generally been regarded as primary producers for the purposes of, among other things, the accelerated depreciation allowances available to that class of taxpayer.

Following a recommendation of the Commonwealth Committee it is proposed by this Bill that persons engaged in the planting or tending of trees for felling or in felling trees for milling or other processing be regarded as primary producers. It is further proposed, again following a recommendation of the Commonwealth Committee, that expenditure on certain mill buildings and housing for employees be deductible on the same basis as expenditure on timber access roads. Broadly speaking, this means that the cost of eligible buildings and housing may be deducted over the period of years they are used for the purposes for which they were constructed or purchased. In the calculation of the deductions a maximum usage period of 25 years will be applied.''

16. Whilst it is evident from the above what the legislation was intended to achieve, this does not assist in deciding the case. However, I feel that it does indicate that a narrow view of the meaning of the words used should not be taken if a wider view is permissible. I refer particularly to what, in my view, are the key words to be interpreted in deciding this case. These words are found in sec. 124JA(1)(b) and are ``situated in a forest''.

17. Amongst the meanings attributed to the word ``forest'' in the Shorter Oxford Dictionary the following is found - ``An extensive tract of land covered with trees and undergrowth, sometimes intermingled with pasture.'' For the purposes of this reference I consider that this is the most appropriate meaning to adopt.

18. Board of Review No. 1 dealt with a case for an allowance under sec. 124JA which is reported as
18 T.B.R.D. 50 Case T11. Mr. Burke, the Chairman, in his dissenting decision said at p. 53 -

``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. (1954) 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

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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 to 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.''

19. It will be seen that Mr. Burke considered that, looked at in a broad sense he thought that in the circumstances of that case the mill should be regarded as being situated in a forest. However, Mr. Smith in his decision said at p. 55 -

``Reviewing the whole of the evidence I am unable to find that the buildings in question are situated `in a forest'. True it is that there are forests surrounding them at various distances but the specific area in which they are situated is, as described by one of the witnesses, `substantially an orchard area' - `This is a big and substantial area.' To find otherwise would lead necessarily to the conclusion that the township of Y was also `in a forest', a conclusion which, in my opinion, cannot be supported.''

Mr. O'Neill adopted a similar view to that taken by Mr. Smith. It is thus clear that taxpayer failed in its claim as the majority considered that though the mill was sited on a substantial orchard area in the confines of a township and the township was virtually surrounded by forests, the mill could not be considered to be situated ``in a forest''.

20. I find myself in substantial agreement with the views expressed in the 18 T.B.R.D. Case T11 supra . I therefore endeavour to apply the reasoning adopted to the circumstances of this case. I now refer to the mill situated at N. This mill as previously stated is situated in a rather remote area and its buildings comprised practically all the buildings in that particular location. It is certainly adjacent to a ``forest'' and the sole question is whether in its location it can be held to be situated ``in a forest''. In my view, the verbal evidence and aerial photographs produced support a view that this mill and associated buildings qualify for the deduction claimed.

21. Turning now to the mill at L as stated earlier the claim in respect to this mill contains two elements. The mill itself is situated in a very small country village and this village is itself virtually surrounded by forests at fairly close proximity. I think it fair to say that this mill and another small mill in the area largely support the small store and the few other cottages in the area. I would also regard this mill as being situated ``in a forest'' and that the mill buildings at L qualify for the deduction claimed.

22. However, the second element of the claim in respect to the L mill relates to cottages situated at the small township C about 12 miles distant from L. The evidence indicates that C is a typical small country town with reasonable facilities and I do not think that the cottages situated there can be regarded as being in a forest and adjacent to where the timber is milled. I would uphold the disallowance of the claim for a deduction in respect to those cottages.

23. The final matter is the claim in respect to the mill at B. This mill is situated in a township of some one thousand residents and the facts in relation to it would seem to be very similar to the facts in relation to the mill dealt with by Board of Review No. 1 in 18 T.B.R.D. Case T11. For the reasons given by the majority in that reference I would uphold the decision of the Commissioner that no amount is allowable in respect to this mill.

24. Summarised, the effect of my decision is to allow a deduction in each of the years ended 30th June, 1970 and 1971 of $2,966 in lieu of the $5,529 claimed and disallowed in each year.

25. A final matter to be dealt with is an objection for the year ended 30th June, 1971 against the disallowance of a deduction in that year of $4,185 claimed as ``Removal Expenses''. The company occupied premises under lease from a Government Board. The lease expired in 1970 and in accordance with its terms taxpayer was required to remove all structures on the land and to leave the land in a

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cleared state. In compliance with this requirement taxpayer incurred the expense of $4,185 claimed as a deduction which has been disallowed.

26. Taxpayer bases its claim on the premise that the expenditure was incurred under a covenant in the lease and was just as much a consideration for the lease as was the rent paid to the lessee. It was an expenditure which the terms of the lease obliged the lessee to incur.

27. This argument of course overlooks that under the terms of a lease a lessee can well be required to incur expenditure which however is of a capital nature. Illustrations would be a lease premium or expenditure on capital improvements which became the property of the lessor on the expiration of the lease.

28. In my view the expenditure on removing structures on the leased land whilst being an outlay required by the terms of the lease is none the less a capital outlay, and falls into the same category as a premium paid for a lease. I believe support for this view is found in the case F.C. of T v. Broken Hill Pty. Co. Ltd. 120 C.L.R. 240 and to the remarks of Kitto J. at pp. 260 and 261.

29. I would accordingly uphold the decision of the Commissioner that the objection against the disallowance of removal expenses $4,185 should be disallowed.

Claims allowed in part