Case W9

Members:
CJ Bannon QC

Tribunal:
Administrative Appeals Tribunal

Decision date: 22 November 1988.

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C.J. Bannon Q.C. (Deputy President)

At the conclusion of the hearing of this application for review, the Deputy President stated orally the terms of the decision intended to be made, and the reasons therefor. Those reasons are set out below.

This case concerns a famous Australian property (``the property''). The property has been in various hands over the years and, eventually, fell into the hands of the large Australian corporation, CSR Limited. On 16 December 1982 CSR entered into an agreement to sell the property.

The actual negotiations were carried out by the taxpayer's father, and the plan was that the property be placed in the name of the son, the taxpayer, but would be leased by the son to a family trust, and be managed by that trust. A copy of the trust deed is Exhibit J in these proceedings, and a copy of the contract for sale under which the taxpayer acquired the property from CSR Limited is part of Exhibit C.

An agreed statement of facts has been prepared in this matter in Exhibit N, hence there is no need for me to now recite all those facts. However, I direct that the matters set out in para. 1 to 8 inclusive of that statement of agreed facts be incorporated in the decision as being facts which I find.

Mr G.L.Herring, the applicant's representative, drew my attention to a document (Exhibit B) which is an Australian Taxation Office document addressed to the taxpayer, dated 8 June 1984, which recognises that the

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taxpayer was a primary producer for the relevant taxation year. In light of that recognition Ms Tsang, on behalf of the Commissioner of Taxation, agrees that no dispute arises in these proceedings about the taxpayer's right to claim, for the relevant tax year, to be a primary producer, on the basis that he complies with the requirements of sec. 157 of the Income Tax Assessment Act 1936 (Cth) (``the Act''). Therefore, it is accepted, for the purposes of these proceedings, that he was, in the relevant year, a primary producer.

The property was, prior to its acquisition by CSR Limited, one of a number of properties owned by a corporation called the Australian Estates Company Limited, which was either a related company or a subsidiary company of CSR Limited. By consent of the parties, income tax returns of the Australian Estates Company Limited for the years 1974 to 1980 became Exhibit 1 in these proceedings. It appears from those income tax returns that over the years the Australian Estates Company Limited had claimed and, indeed, had been granted, claims for deductions from its income tax under sec. 54 of the Act, in respect of depreciation on various expenditures incurred in providing water tanks and bores on the various properties that it owned.

It is not clear from those documents how much of that expenditure, if any, was on the property, and the second document submitted title ``Australian Estates Co. Ltd. Summary Sheet of all water improvement'', Exhibit 2, does not really help elucidate the problem. Through the careful work of the mother of the taxpayer, a document has been prepared which is of great assistance to the Tribunal because it sets out in it the date, or the approximate date, when each of the bores and tanks on the property were completed (see Exhibit H).

I should also indicate that the property appears to include an adjoining property. Both properties are the subject of Crown leases granted by the Queensland Government, or an Authority of the Queensland Government. Those Crown leases form part of Exhibit C. The situation of the bores on the property are set out in a map which became Exhibit E, and there is further information about these bores set out in documents Exhibits F1 and F2.

The crucial question in this matter turns upon the agreement for sale (Exhibit C(1)). Under the agreement for sale, the taxpayer acquired the property for the sum of $1,739,450. One of the provisions of the agreement, cl. 4, provides for the consideration to be apportioned as set out in the third schedule, which indicates the consideration is to be divided into $703,710 for the leasehold land, $605,740 for the plant and livestock, and the sum of $430,000 for buildings, improvements and water improvements. Of that $430,000, $100,000 is for the buildings, whilst the remaining $330,000 is for structural improvements for the purpose of conserving or conveying water. It is in respect of that latter amount that the taxpayer claims a deduction under sec. 75B of the Act.

Section 75B, so far as relevant, provided:

``75B Deduction of Expenditure on Conserving or Conveying Water

(1) In this section -

• `construction' includes manufacture;
• `extension' includes an alteration or addition:
• `plant or a structural improvement' includes a dam, earth tank, underground tank, concrete tank, metal tank, stand for a tank, bore, well, irrigation channel or similar improvement, pipe, pump, water tower and windmill.

(2) Subject to this section, this section applies to expenditure of a capital nature incurred on or after 14 April 1980 by a taxpayer who carries on a business of primary production on land in Australia, being -

• (a) expenditure incurred on the construction, acquisition or installation of plant or a structural improvement for the purpose of conserving or conveying water for use in carrying on that business on that land; or
• (b) expenditure incurred on the construction, acquisition or installation of an extension to plant or to a structural improvement for the purpose of conserving or conveying water for use in carrying on that business on that land.

(3) Subject to the succeeding provisions of this section, whether a taxpayer incur expenditure to which this section applies, the amount of that expenditure is an allowable deduction to the taxpayer in

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respect of the year of income in which the expenditure is incurred.''

The question that is raised is whether or not the sum of $330,000 apportioned in the agreement for sale is expenditure incurred by a taxpayer who firstly carries on the business of primary production, and secondly incurs such expenditure when acquiring a plant, or a structural improvement for the purpose of conserving or conveying water, for use in carrying on that business on that land.

There is, of course, no doubt that the water tanks and bores on the property were constructed for the purpose of using that land for grazing, but they were constructed long before the taxpayer acquired the property. Mr Herring submitted that, for the purposes of the Act, sec. 75B creates a notional differentiation between the property and what I might term, for want of a better expression, the water plant, that is, the tanks and the bores.

I am unable to accept that submission. It is not long ago that the High Court of Australia in the case of
Collins v. Livingstone Shire Council (1972) 127 C.L.R. 477, considered the question of compensation for the acquisition of land on which there was a partly constructed reservoir. We are not concerned with the question of compensation, but as Sir Harry Gibbs, who later became Chief Justice, said at p.495:

``There can be no doubt that the parts of the reservoir and of the fence that were built on the appellants' land were fixed to the soil and had thereby become subject to the ownership of the appellants.''

Although the contract purports to apportion the consideration for the purchase between the land and the water plant, the plain fact is that the water plant was part of the land, and when the land was conveyed, everything was conveyed which was a fixture on that land, and that included the water plant - the tanks and the bores. Hence, whilst the contract is designed to differentiate in its terminology, the real effect of the contract is that the whole property was conveyed for the total consideration of $1,739,450.

Indeed, when Mr Cridland, the accountant, gave his evidence, my recollection of what he said was that there was no other purpose in differentiating the $330,000, except to create a situation in which that money could be claimed for a tax purpose. Of course, there is nothing wrong with that if the law allows it. In the famous taxation case which bears Mr Cridland's name,
Cridland v. F.C. of T. 77 ATC 4538; (1977) 140 C.L.R. 330, the High Court expressly said so, although I do not think Mr Cridland was the person involved because that concerned university students at Sydney University who set themselves up as graziers or primary producers.

The basic question concerns the proper construction of sec. 75B. On behalf of the Commissioner of Taxation, Ms Tsang pointed out to me that the High Court considered the policy behind sec. 75 of the Act in the case of
Southern Estates Pty. Limited v. F.C. of T. (1967) 117 C.L.R. 481. In the course of that case, Taylor and Owen JJ. at p. 491 said this:

``Section 75(1) proceeds upon the basis that at the time when the expenditure is incurred the taxpayer is actually engaged in carrying on the business of a primary producer on the land upon which the improvements are effected.''

Further, Windeyer J., who did not agree in all respects with the other judges of the Court but reached the same conclusion as them, said at p. 492, when speaking of sec. 75:

``Whether a man is `engaged in primary production on any land' within the meaning of s. 75 does not depend simply on the activities carried on by him on that land. It depends rather on the purpose for which he engages in those activities, the end to which they are directed.''

His Honour indicates the need to look to the character of the undertaking. At p. 493 he spoke of the ``real, substantial, primary or dominant purpose'' of the taxpayer and said:

``Section 75 is one of a number of provisions in the Act whereby in determining the taxable income of taxpayers engaged in primary production expenditure of a capital nature or otherwise of a special character is deductible.''

He goes on to say:

``The general purpose and policy of these provisions, it may be assumed, is not simply to relieve primary producers from taxation. It is to do so in order to encourage

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expenditures which increase the efficiency of primary industry.''

If that is the policy behind sec. 75 of the Act, it would be clear that an expenditure in buying land, such as occurred in this case, where cost was simply apportioned between capital improvements on the land and the unimproved land, is contrary to the policy as the money is not spent to encourage expenditure and therefore efficiency in primary industry.

In the case of
F.C. of T. v. Waldeck Nurseries Pty. Ltd. 82 ATC 4014, the Federal Court of Australia was concerned with the construction of sec. 75A of the Act. At p. 4020, in the joint judgment of the Court which then consisted of Bowen C.J., Deane, Morling JJ., their Honours said:

``The majority of the activities specified in the various paragraphs of sec. 75A(1), in the form applicable to the 1977 tax year, have a purposive element in the sense that they either take the form of objectives which can be achieved by direct or indirect means (e.g. extermination of pests, preventing or combating soil erosion or flooding) or are stated in terms which include a purpose or object (e.g. for agriculture, for grazing purposes, for use in carrying on primary production). This tends to support the view that the question whether expenditure has been incurred in one or more of the specified activities is not to be determined by reference merely to whether it in fact achieves the particular result. The reason for incurring the expenditure is of critical importance. Expenditure will, for the purposes of the subsection, properly be said to have been incurred in one or more of the specified activities if the achievement of that activity or those activities constitutes an operative and substantial reason for the incurring of the expenditure (cf.
Mikasa (N.S.W.) Pty. Ltd. v. Festival Stores (1972) 127 C.L.R. 617)''

It seems to me that the observations of that very strong bench of the Federal Court, and the observations of the High Court in the Southern Estates case (supra), apply with equal force to sec. 75B of the Act. When sec. 75B(2) speaks of expenditure incurred, on the construction, acquisition or installation of plant, or a structural improvement for the purpose of conserving or conveying water, for use in carrying on that business on that land it means expenditure by the taxpayer who carries on the business of primary production, and it means that he has to spend the money himself or have it spent to improve the property.

Of course, there are particular provisions in the section to which I need not go, such as sec. 75B(11), which deals with contracts or arrangements entered into by a taxpayer before 14 April 1980, but saving those specific exceptions, it is clear to my way of thinking that sec. 75B(2) requires the taxpayer who is in the business of primary production, to himself incur the expenditure in carrying out the improvements. He cannot rely on expenditure incurred in improving the land by other people who owned the land before him, which inevitably involved him acquiring those improvements. He cannot, by putting a schedule in his agreement which purports to apportion the consideration for the purchase of the land, escape the fact that it was somebody else who spent the money.

The views I have expressed find some support in two decisions of the former Taxation Board of Review to which Ms Tsang has referred me, the first of them being case R78
(1966) 16 T.B.R.D.383. That case concerned the purchase of a farm of which 500 acres were fallowed land. The taxpayer claimed the cost or value of the following was a thousand pounds and that amount was an allowable deduction under sec. 51(1), or sec. 75(1)(d) of the Act as it then stood. I do not need to in any way recite the decision but at p. 384 the Board presided over by Mr Donovan, said:

``Although one may speak loosely of fallow as a thing distinct from the land itself, fallow, in fact, is simply land which has been improved in a certain manner. One may buy land which has been followed, one may buy the right to use land which has been fallowed and one may pay a sharefarmer or lessee for the value of fallowing left by him on the land on the termination of his agreement or lease. But one cannot buy fallow as a thing separate from the land itself.''

And the Board went on to say that:

``Section 75(1)(d) allows the deduction of expenditure incurred in the year of income in the preparation of land for agriculture by a taxpayer engaged in primary production.

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The taxpayer's claim under this head fails because the partnership expenditure was not in the preparation of land for agriculture but in the acquisition of the land (see Case No. C33
(1952) 3 T.B.R.D. 186)''

Now that same view was taken in another Taxation Board of Review decision in 1952, Case C33,Board of Review No. 2, in Adelaide in 3 T.B.R.D. 186.

It seems to me therefore, for those reasons, that notwithstanding the careful preparation of this case by Mr Herring, that I am bound to apply the view that sec. 75B requires purposive element and expenditure by the taxpayer himself on improving the land in the relevant statutory respects, and not just the acquisition of land from somebody else who has already spent that money, and quite possibly, although we are not certain, has obtained tax deductions, whether by way of depreciation or otherwise, in respect of that expenditure. Indeed, it would lead to a result which I believe would not be appropriate in the interpretation of the statute if two different taxpayers could achieve deductions in respect of the same expenditure which, admittedly, was expenditure to improve the land and improve the productivity of the land in Australia simply by means of conveying the land and apportioning the consideration from one heading to another. That, it seems to me, would work a great injustice to other taxpayers who do not have such a liberty, and, in, my mind, such an interpretation of the statute should be avoided if there is another and more reasonable interpretation open upon the terms of the legislation. However, I do not believe there is any ambiguity on the section. I believe it is clear in what it says, and what it intends, and I do not believe this is a case where I can properly uphold the objection of the taxpayer.

While I regret the situation, and the unfortunate circumstances which have affected the mother of the taxpayer and the taxpayer, and I realise the great burdens that face people engaged in primary production, people often do not appreciate that while the properties have great nominal value, they also have great responsibilities and great expenditure to meet - nevertheless, I feel that I must uphold the objection decision of the Commissioner and confirm his ruling.

Accordingly, I dismiss the objection and confirm the decision.