Case N68

Judges:
MB Hogan Ch
P Gerber M
GW Beck M

Court:
No. 3 Board of Review

Judgment date: 21 August 1981.

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M.B. Hogan (Chairman)

My colleague, Dr. Beck, has succinctly summarised the facts relevant to this reference in para. 1 and 2 of his reasons for decision. The primary question which arises is whether the expenditure on insulation and screening has given rise to plant or articles which are ``eligible property'' in terms of the definition in sec. 82AQ(1).

2. By definition eligible property means plant and articles within the meaning of sec. 54 of the Act. In a recent decision ( Case N52,
81 ATC 254 ), I have traced the development of a line of authorities as to what constitutes plant from what is generally accepted as its first legal definition in
Yarmouth v. France (1887) 19 Q.B.D. 647 , divining therefrom a functional test which was applied by Brightman J. in
Dixon v. Fitch's Garage Ltd. (1975) 3 All E.R. 455 . As I perceive this decision to be highly relevant to determining the answer to the question of whether the insulation in this reference constitutes ``plant'', I quote at some length from the decision of Brightman J. at pp. 460-461 ( supra ):

``Counsel for the taxpayer company submitted that the mere fact that something is a building or structure does not prevent its being plant. With that I agree. The silo in question in the Northern Irish case [
Schofield v. R. & H. Hall Ltd. (1975) S.T.C. 353 ] is an example. A windmill might be another example. Also, counsel submitted, the mere fact that the thing in question plays a passive and not an active role does not preclude its being classified as plant. I also agree with that, but I share with others a difficulty in drawing any rational line between a

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ATC 355

passive and an active role. On any basis the role of the canopy in the present case is passive, but that alone would not, in my judgment, rule it out as plant. Counsel also submitted that the court is not entitled to adopt a piecemeal approach in deciding what is plant. One must look, he rightly said, to the thing as a whole - to the dock plus its operating machinery, the pools plus their heating and cleansing systems, the top and sides of the silo plus the machinery and other equipment housed inside. That also I agree. He then submitted that in the case before me the canopy was an essential commercial attribute of a modern self-service filling station necessary to enable petrol to be received by the motorist in the most efficient manner. Petrol, he said, is not delivered in the most efficient manner if the pumps are exposed to the elements and the forecourt is not adequately lighted. The canopy therefore performs an essential function in the operation of a self-service petrol station. He did not seek to say that the canopy considered in isolation would be plant. It was, however, plant in this case because it was an integral part of the apparatus for the delivery of the petrol. On that ground he sought to support the reasoning and conclusion of the General Commissioners.

In my judgment the General Commissioners applied the wrong test and reached the wrong conclusion. The proper test is whether the canopy had a functional purpose to enable the taxpayer company to perform the activity of supplying petrol to motor vehicles. I ask myself, `Does the canopy help to supply petrol, or is it merely part of the setting where petrol is supplied?' To use the words of Lord Reid [
I.R. Commrs. v. Barclay Curle & Co. Ltd. (1969) 1 All E.R. 732 at p. 741; 45 T.C. at p. 239 ], which I have already read, is the canopy part of the means by which the operation of supplying petrol is performed? In my judgment this question admits only of a negative answer. The petrol pumps would deliver petrol to vehicles whether or not there was a canopy overhead. The canopy merely makes the business of supplying petrol more comfortable for motorists and the staff of the petrol station. It does not help to deliver the petrol. It is not part of the means by which it is supplied. This is not like the dock case [ I.R. Commrs. v. Barclay Curle & Co. Ltd. (1969) 1 All E.R. 732] where the dock was useless without its operating machinery and vice versa; or the silo case [ Schofield v. R. & H. Hall Ltd. (1975) S.T.C. 353], where the silo and its contents were totally interdependent. Further, there is a clear thread running through the recent cases, including two Australian cases [
Broken Hill Pty. Co. Ltd. v. F.C. of T. (1968) 41 A.L.J.R. 377 ; F.C. of T. v. Broken Hill Pty. Co. Ltd. 69 ATC 4028; (1969) 120 C.L.R. 240 and
Wangaratta Woollen Mills Ltd. v. F.C. of T. 69 ATC 4095 ] referred to in the silo case [ Schofield v. R. & H. Hall Ltd. (1975) S.T.C. 353], showing that a structure is not plant if its only purpose is to provide shelter and if it plays no part in what may be termed `the commercial process'. That conclusion is, I think, an inevitable result of the application of the functional test. In this difficult area of the law it is, in my view, important to stick to the established tests. In his submissions to me counsel for the taxpayer company sought to introduce a new test: whether the item in question is commercially desirable or necessary to enable the taxpayer to sell his petrol to the best advantage. That, to my mind, is an amenity test as distinct from a functional test, and is not a permissible test. The right test is the functional test. In my judgment this appeal should be allowed.''

3. It appears to me, in the light of the above, that the refined question I must ask myself is - does the insulation have a functional part in the delivery of cold air at a controlled humidity level to the storage area, which is the part of the operations with which the insulation is associated? The evidence of the design engineer who prepared the plans on which the successful tender for installation of the cooling system was based, is the most relevant evidence in seeking to determine the answer to that question. That evidence, so far as it is relevant, is as under:

``... when we sat down to prepare a quote for the actual job, we determined some design parameters to calculate out the actual heat load of the building and this is

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ATC 356

set down and forth and what I have said here is that this is a design information, that the outside conditions was 35-24, the inside conditions 20 degrees C and 50 per cent RH and the total area was 1662 square metres and the ceiling insulation is 50 ml fibreglass batts, the amount of product that was going to be delivered per day and the product temperature and the lighting load and that the western and southern windows would be sealed with asbestos sheet and 30 ml polystyrene asbestos sheet. All those things add - actually determine the heat load of the building so that we can then sit down and select the amount of cooling that is required to offset that heat load coming into the building.''

In my view, that evidence makes it quite clear that the insulation is no more than part of the environment in which the delivery of cooled air with controlled humidity, was to be effected as part of the general storage operations carried on by the company. The balance of the evidence of the engineer indicated the capacity of the machines employed to deliver cooled air to the storage area was determined having regard to an environment which included the installation of insulation - in fact the evidence is that the taxpayer's instructions to the engineer postulated that the insulation would be installed - the insulation was not carried out by the engineer's company in conjunction with installation of the machines (emphasis added). The evidence is that the insulation limited the number of machines to be installed - another, or possibly two more machines would have been required if the insulation had not been installed - but the evidence in my view, confirms that though the insulation served to assist in the delivery in the most efficient way commercially of the cooled air (cf. the canopy in the Fitch's Garage case ( supra )) had, the insulation had no function in the supply of cooled air. The evidence does not establish that the insulation and machinery were linked elements in one large unit of plant, vide Wangaratta Woollen Mills Ltd. v. F.C. of T. 69 ATC 4095, despite the suggestion of the representative of the taxpayer that the whole represented an air-conditioning package.

4. To my mind, the insulation was ``... merely in the nature of a general setting in which a part of (the) operations are carried on'', per Kitto J. in F.C. of T. v. Broken Hill Pty. Co. Ltd. 69 ATC 4028; (1969) 120 C.L.R. 240 at p. 247. Though the observation was made in relation to ``plant'' for purposes of sec. 122(1) of the Act, it is clear from the context that Kitto J. was relying on the precedents then established which flowed from Yarmouth v. France (supra), and indeed, the views quoted above, and his later views at p. 263, have substantially contributed to the line of reasoning adopted in Wangaratta Woollen Mills Ltd. (supra), both cases being adverted to by Brightman J. in Fitch's Garage. Having come to my answer to the question posed, that the insulation has no function in the provision of cooled air at controlled humidity, to the storage area, I must find that the insulation does not constitute ``eligible plant'' for purposes of sec. 82AQ(1) and confirm the Commissioner's decision on objection.