Overseas Telecommunications Commission (Australia) v. Federal Commissioner of Taxation

Judges:
Lockhart J

Court:
Federal Court

Judgment date: Judgment handed down 3 November 1989.

Lockhart J.

The question in these two appeals, being heard together by consent, is whether Overseas Telecommunications Commission (Australia) (``OTC'') is entitled to deductions for investment allowances pursuant to Subdiv. B of Div. 3 of Pt III of the Income Tax Assessment Act 1936 (``the Act'') in respect of OTC's interest in certain segments of the ANZCAN submarine cable (``the ANZCAN cable'').

OTC is a statutory authority established by the Overseas Telecommunications Act 1946 (sec. 8). Division 3 of that Act defines the powers, functions and duties of OTC. Pursuant to sec. 34 OTC is given power to do:

``all that is necessary or convenient to be done for, or as incidental to, in relation to or in connection with -

(a) the establishment, maintenance and operation in Australia by the Commission of cable and radiotelegraph services (whichever means of communication is applicable) for the conduct of public communications between -

(i) Australia and other countries;

...''

OTC is made subject to taxation under the laws of the Commonwealth by sec. 52 of the Overseas Telecommunications Act.

OTC is the sole provider in Australia and its Territories of telecommunication services between Australia and other countries. The services are provided through submarine cables and satellite stations above the earth. This case concerns the ANZCAN Cable which is a

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submarine cable link between Australia, New Zealand, Fiji, Hawaii and Canada.

The ANZCAN cable was constructed in the following five segments:

Segment A between Australia and Norfolk Island;
Segment B between Norfolk Island and Fiji;
Segment C between Fiji and Hawaii;
Segment D between Hawaii and Canada;
Segment E between Norfolk Island and New Zealand.

It is possible to divide each of the segments (A to E) into five sub-segments. To take segment A as an example it may be divided as follows:

Sub-segment A1 is that part of segment A on the mainland of Australia consisting of a cable station at Sydney and the cable route between the cable station and the beach joint. The cable station is at Paddington, Sydney.
Sub-segment A2 is that part of segment A on the mainland of Australia between the ``beach joint'' and the appropriate ``super group distribution frame'' in the cable station at Sydney. This sub-segment includes the cable itself which travels underground, the super group distribution frame, the power feed equipment and the beach joint.
Sub-segment A3 is the submarine cable equipped with submerged repeaters, equalisers and joint housings between the ``beach joints'' located at the landing points on the mainland of Australia and Norfolk Island.
Sub-segment A4 is that part of segment A on Norfolk Island which in effect is a mirror of sub-segment A2.
Sub-segment A5 is a mirror of sub-segment A1.

The sub-segments found in segments B to E mirror these sub-segments.

Segments A, D and E were completed and used for the purpose of producing OTC's assessable income or installed ready for use for that purpose in OTC's year of income ended 31 March 1984. Segments B and C were completed and used for the purpose of producing OTC's assessable income or installed ready for use for that purpose in OTC's year of income ended 31 March 1985. The ANZCAN Cable in its entirety was completed and used for the purpose of producing OTC's assessable income or installed ready for use for that purpose in OTC's year of income ended 31 March 1985.

Some description of the elements and function of this cable is required. The ANZCAN Cable is constructed of an inner high tensile steel core surrounded first by a continuous copper tube which acts as the inner conductor and power supply. This copper tube is coated with low density polyethylene which functions both as a dielectric and an insulant; it is then surrounded by aluminium tape which acts as the outer conductor; this in turn is encased in a tough layer of polyethylene for protection, insulation and waterproofing. As the electrical signals carrying the communications suffer a loss of strength over distance, repeaters are installed in the cable about every 15 kilometres to amplify the signal. Equaliser units are also required along the length of the cable to overcome the effects of water temperature variation and depth pressures on the frequency of the signals.

Electrical signals pass down the cable through the low density polyethylene dielectric between the inner copper conductor and the outer aluminium conductor. The inner high tensile steel core is for strength. A high voltage is applied to the inner copper conductor at the end of each segment to provide power to the repeaters.

The ANZCAN Cable has a finite capacity which is expressed as a number of circuits of a given bandwidth. Each segment other than segment E comprises a bandwidth of 14 MHz, resulting in a capacity of 1,380 voice grade circuits. Segment E has a bandwidth of 5 MHz with 480 voice grade circuits. Bandwidth is an expression used to express a range of frequencies within which the voice grade circuits are carried over the cable. The voice grade circuits are electronically combined by effectively stacking one above the other. In this stacking process, bands of several thousands of hertz are used to separate blocks of voice grade circuits.

A voice grade circuit in a submarine cable is the term given to the electrical transmission

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path over which both ends of a telephone conversation can be carried. One person's speech is carried on one half of the circuit, and the reply over the matching half circuit. When a call is made from Australia to an overseas destination it will be carried over the domestic telephone network of Australian Telecommunications Commission (``Telecom'') and sent to the OTC switching facility located at Paddington, Sydney. At this point a number of alternative routes may be possible depending on the destination of the call and these may include satellite or cable routes. The choice of route is made by computer and depends on a number of factors including congestion, time of day and time of year. Calls that are to be sent via the ANZCAN cable will be placed in the appropriate frequency bandwidth reserved for carrying half circuits between Australia and the country of destination.

The signal will then leave Australia via the beach joint at Bondi Beach and from there travel through the cable to Norfolk Island and beyond to the ultimate destination.

Before any cable is constructed the telecommunications entities who desire to own an interest in a cable agree to share the construction and maintenance costs on the basis of the number of half circuits in the cable which they anticipate as being sufficient to cater for the demand for communications between their respective countries over the life of the cable. The remaining half circuits are effectively underwritten by the original telecommunications entities in the expectation that either other owners will join during the lengthy construction period or other telecommunications operators will gain access to the capacity of the system from the original owners after the cable is in operation by an agreement known as an ``indefeasible right of user agreement''.

The construction of the ANZCAN cable was achieved through the co-operation of various telecommunications entities who own the cable system. Initially, the telecommunications entities primarily involved in the ANZCAN cable entered into a contract (the ``prime contract'') to enable the ANZCAN cable to be designed to provide the appropriate capacity at acceptable standards. It is usual in the telecommunications industry for the ``landfall'' parties, i.e. those telecommunications entities located in the country where the submarine cable reaches sovereign territory, to underwrite the construction of a cable system by entering into a cable construction contract. The landfall parties for the purposes of the ANZCAN cable were the applicant and the telecommunications entities of New Zealand, Fiji and Canada.

Subsequently the landfall parties of the ANZCAN cable entered into a construction and maintenance agreement (``the original agreement'') dated 1 October 1981 with other telecommunications entities who desired to acquire an ownership interest in the ANZCAN cable. I shall refer to the parties to the original agreement as ``the original owners''. The original agreement was revised and replaced by a later agreement (``the revised agreement'') dated 27 June 1983 between the original owners and other telecommunications entities who desired to acquire an ownership interest in the ANZCAN cable. These agreements define the relationship between the owners of the ANZCAN cable. Under the original agreement and the revised agreement the various owners undertook the obligations of the landfall parties under the prime contract. The revised agreement also provides that the ANZCAN cable, except for certain parts of that system within the sovereign territory of the country in which a landfall party operates, is held by the owners as tenants in common (cl. 5(e)). The share of each tenant in common is dependent upon the proportion of the liability assumed by such owner for the various obligations under the prime contract.

The original agreement and the revised agreement envisage that parties other than the original owners may acquire certain rights in the cable. Clause 15 of the original agreement provides that any party may make any of the circuits assigned to it pursuant to the agreement or portions of the circuits available to other parties or to telecommunications entities not parties to the agreement on such basis other than by transfer of rights, obligations or interests in the ANZCAN system as such party and the other parties or telecommunications entities concerned may agree subject to certain provisos.

Clause 22 provides that during the continuance of the agreement a party may assign, transfer or dispose of part or all of its rights or obligations under the agreement or of any interest in the ANZCAN system to certain persons. Clause 23 provides for the admission

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of additional parties. The revised agreement so far as material contains substantially similar provisions to the original agreement.

The term indefeasible right of user (``IRU'') is a standardised term in the telecommunications industry to describe the interest of a non-owner of a cable system in the capacity of that system. The holder of an IRU has access to the capacity of the system which entitles it to have messages transmitted within the cable system, but, by virtue of that IRU interest does not have any right to control or operate, either directly or indirectly, the equipment comprising the cable system; nor does such holder have any right to possession of any of the property which comprises the cable system. Although a specific number of half circuits may be the subject of an IRU agreement, particular specific half circuits cannot be devoted to the exclusive use of the holder of the IRU as such half circuits are only a measure of the capacity of the cable system. As permitted by the revised agreement, OTC entered into certain IRU agreements with respect to the ANZCAN cable.

OTC and the Swedish Telecommunications Administration (``STA'') entered into such an IRU agreement on 26 June 1985. OTC entered into a similar agreement with Teledireketoratet Norway (``Teledireketoratet'') on 1 July 1985. The parties treated the Swedish and Norwegian agreements as being substantially the same, so I shall adopt the same course, but, for reasons of convenience, shall confine my references to the Swedish agreement. It recites that the various segments of the ANZCAN system will be interconnected with other international telecommunications systems as may be appropriate and that:

``Whereas STA desires to acquire from OTC(A) and OTC(A) is willing to grant to STA an indefeasible right of user (IRU) interest in three (3) voice-grade half circuits in segments A, B, C and D...''

Clause 2 of the agreement grants to STA IRU interests in three voice-grade half circuits in segments A, B, C and D. Clause 3 provides that for the IRU interest STA shall pay a proportionate share of the capital operating and maintenance costs. Clause 4 provides that all capital costs incurred as at 1 October 1984 and ``allocable'' to the IRU interest shall be ``billed'' to STA. The clause makes provision for the calculation of STA's proportionate share of those capital costs. Clause 5 provides for an extension or increase in the circuits available if the capacity of the system has increased. Clause 12 provides that the provision, operation and maintenance of terminal equipment in Australia, Norfolk Island, Fiji, Hawaii, Canada and New Zealand or any other location necessary to derive circuit groups or individual circuits in segments A, B, C and D and necessary to connect super groups, groups or circuits between segments A, B, C and D and other telecommunications systems except the terminal equipment necessary between segments of the ANZCAN system shall not be part of the agreement.

OTC derives income both from incoming and outgoing calls. A proportion of the revenue collected by OTC for outgoing calls goes to the administration that receives and distributes the call. Basically the administrations charge and collect fees for calls originating within their own country. They then hold those charges and periodically look at the balance of the revenues and only transfer the balances. The total charge levied in say the U.K. to a U.K. subscriber is divided between U.K. and Australia. A proportion of the charge is allocated as revenue to OTC and OTC passes on some of the revenue for an incoming call to Telecom and retains some itself. Hence OTC earns money both from outgoing and incoming international traffic. OTC does not itself charge subscribers for telephone services; it receives its revenue for telephone services from Telecom which bills subscribers in effect on OTC's behalf and passes the proportion of that charge to OTC after deducting its own charge for reticulating the service from the subscriber to OTC.

OTC claims to be entitled to a deduction under sec. 82AB of the Act with respect to its interest in segments A, D and E of the ANZCAN system in the year of income ended 31 March 1984 and with respect to its interest in segments B and C in the year of income ended 31 March 1985. Alternatively, OTC claims a deduction with respect to its interest in the whole ANZCAN system in the year of income ended 31 March 1985.

The question which arises for determination in this case is whether the Commissioner properly disallowed OTC's claims for those deductions. The resolution of that question involves the interpretation and application of certain sections of the Act which appear

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principally in Subdiv. B of Div. 3 of Pt III of the Act.

It is helpful to briefly explain the statutory scheme relating to investment allowances for which Subdiv. B of Div. 3 of Pt III of the Act makes provision. Subdivision B provides for a special investment allowance deduction in respect of capital expenditure incurred by a taxpayer on or after 1 January 1976 on what is described as ``a unit of eligible property''.

Section 82AA specifies the basic requirements that must be satisfied for property to be within the scope of Subdiv. B. Section 82AA provides, so far as relevant:

``82AA(1) Subject to the following provisions of this Subdivision, this Subdivision applies in relation to a unit of eligible property acquired or constructed by the taxpayer that is -

(a) in the case of any taxpayer, for use by the taxpayer wholly and exclusively -

(i) in Australia ; and

(ii) for the purpose of producing assessable income otherwise than by -

(A) the leasing of the eligible property;

(B) the letting of the eligible property on hire under a hire-purchase agreement; or

(C) the granting to other persons of rights to use the eligible property ; or

...''

I have emphasized the provisions of the section which are material for present purposes.

The term ``eligible property'' is defined in subsec. 82AQ(1) to mean plant or articles within the meaning of sec. 54.

Section 82AB is the operative provision of the Subdivision. It grants a deduction in respect of capital expenditure exceeding $500 incurred by a taxpayer on or after 1 January 1976 in respect of the acquisition or construction by him of a new unit of eligible property if the requirements of sec. 82AA are satisfied. If the unit of property was acquired, it must have been acquired under a contract entered into on or after 1 January 1976 and before 1 July 1985. If the unit of property was constructed by the taxpayer the construction of the property must have commenced on or after 1 January 1976 and before 1 July 1985. Whether acquired or constructed the unit of property must be first used or installed ready for use before 1 January 1988. The deduction is such percentage of the capital expenditure as is prescribed in the section and is allowed in the first year of income during which the taxpayer either uses the property for the purpose of producing assessable income or installs it ready for use for that purpose.

The next relevant provision is sec. 82AG which is designed to safeguard against misuse of the investment allowance deduction. Section 82AG applies where, before the expiration of twelve months after the property was first used or installed ready for use by the taxpayer, the taxpayer, inter alia, leased the property or otherwise granted a right to another person to use the property or the taxpayer used the property outside Australia or for a purpose other than the purpose of producing assessable income. Where it applies, sec. 82AG results in the investment allowance in respect of the property being wholly or partly withdrawn. Section 82AG so far as relevant provides:

``82AG(1) This Subdivision does not apply, and shall be deemed never to have applied, in relation to subsection 82AA(1) property acquired or constructed by a taxpayer, not being property that, in the case of a taxpayer being a leasing company, the taxpayer has leased to another person, if, before the expiration of 12 months after the property was first used, or installed ready for use, by the taxpayer -

(a) the taxpayer disposed of the property or the property was lost or destroyed;

(b) the taxpayer leased the property, let the property on hire under a hire-purchase agreement or otherwise granted a right to another person to use the property; or

(c) the taxpayer used the property outside Australia or for a purpose other than the purpose of producing assessable income.

82AG(2) Where -

(a) a deduction has been allowed, or would but for this subsection be

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allowable, under this Subdivision from the assessable income of a taxpayer of a year of income in relation to subsection 82AA(1) property acquired or constructed by the taxpayer, not being property that, in the case of a taxpayer being a leasing company, the taxpayer has leased to another person; and

(b) before the expiration of 12 months after the property was first used, or installed ready for use, by the taxpayer, the taxpayer disposed of a part of his interest in the property,

so much of the deduction as the Commissioner considers appropriate shall be deemed not to have been, or not to be, allowable, as the case may be.''

Section 82AH is complementary to sec. 82AG and is also designed to prevent misuse of the investment allowance deduction. Section 82AH withdraws the deduction where any one of a number of the events specified in the section occurs after the expiration of 12 months from the time the property is first used or installed ready for use and the Commissioner is satisfied that at the relevant times the taxpayer intended to dispose of the property or grant a right to another person to use it after becoming entitled to the deduction that otherwise would have been available.

Section 82AH so far as relevant provides as follows:

``82AH(1) Where -

(a) a deduction has been allowed, or would but for this sub-section be allowable, under this Subdivision from the assessable income of a taxpayer of a year of income in relation to sub-section 82AA(1) property acquired or constructed by the taxpayer, not being property that, in the case of a taxpayer being a leasing company, the taxpayer has leased to another person;

(b) after the expiration of 12 months after the property was first used, or installed ready for use, by the taxpayer -

(i) the taxpayer disposed of the property;

(ii) the taxpayer leased the property, let the property on hire under a hire-purchase agreement or otherwise granted a right to another person to use the property; or

(iii) the taxpayer used the property outside Australia or for a purpose other than the purpose of producing assessable income; and

(c) the Commissioner is satisfied that, at the time the property was acquired or constructed by the taxpayer, the taxpayer intended to dispose of the property, to lease the property, let the property on hire under a hire-purchase agreement or otherwise grant a right to another person to use the property, or to use the property as mentioned in sub-paragraph (b)(iii), after becoming entitled to a deduction under this Subdivision in respect of the property.

the deduction shall, if the Commissioner so determines, be deemed not to have been, or not to be, allowable, as the case may be.

82AH(2) Where -

(a) a deduction has been allowed, or would but for this sub-section be allowable, under this Subdivision from the assessable income of a taxpayer of a year of income in relation to sub-section 82AA(1) property acquired or constructed by the taxpayer, not being property that, in the case of a taxpayer being a leasing company, the taxpayer has leased to another person;

(b) after the expiration of 12 months after the property was first used, or installed ready for use, by the taxpayer, the taxpayer disposed of a part of his interest in the property; and

(c) the Commissioner is satisfied that, at the time the property was acquired or constructed by the taxpayer, the taxpayer intended to dispose of the whole or a part of his interest in the property after becoming entitled to a deduction under this Subdivision in respect of the property,

then, if the Commissioner so determines, so much of the deduction as the Commissioner considers appropriate shall be deemed not to have been, or not to be, allowable, as the case may be.''

This statement of the relevant provisions of the Act is sufficient to understand the issues in

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the case. Before turning to the submissions of counsel I shall set out the issues as perceived by OTC and stated in a document filed by it titled ``Applicant's Amended Statement of Issues''. The equivalent document filed by the Commissioner expresses a substantially similar perception of the issues by the Commissioner. It is of benefit to state the issues in this abbreviated form because the relevant sections are convoluted and only certain elements of them are relevant to this case.

``APPLICANT'S AMENDED STATEMENT OF ISSUES

FILED pursuant to orders of Mr Justice Lockhart made 28 November 1988.

1. (a) Whether, in respect of the applicant's year of income ended 31 March 1984, the respondent properly disallowed the applicant's claim for a deduction for the investment allowance pursuant to Subdiv. B of Div. 3 of Pt III of the Income Tax Assessment Act 1936 (the `Act') with respect to the applicant's interest in segments A, D and E of the ANZCAN submarine cable (the `ANZCAN Cable').

(b) Whether, in respect of the applicant's year of income ended 31 March 1985, the respondent properly disallowed the applicant's claim for a deduction for the investment allowance pursuant to the aforementioned Subdivision of the Act with respect to:

(i) the applicant's interest in segments B and C of the ANZCAN Cable; and

(ii) the applicant's alternative claim to that referred to in subpara. 1(a) with respect to its interest in segments A, D and E of the ANZCAN Cable.

2. More particularly in respect of the issues raised in para. 1:

(a) Whether each segment of the ANZCAN Cable is a unit of eligible property or whether, in the alternative, the entire ANZCAN Cable is a unit of eligible property for the purpose of the aforementioned Subdivision of the Act.

(b) Whether the applicant's interest in the ANZCAN Cable, and in each segment thereof, was acquired or constructed for use by the applicant wholly and exclusively -

(i) in Australia; and

(ii) for the purpose of producing assessable income otherwise than by the granting to other persons of rights to use the ANZCAN Cable.

(Reference subsec. 82AA(1): subpara. (a)(i); sub-subpara. (a)(ii)(C) of the Act)

(c) Whether, before the expiration of twelve (12) months after the applicant's interest in the ANZCAN Cable, and in each segment thereof, was first used, or installed ready for use, by the applicant, the applicant -

(i) granted a right to another person to use the same; or

(ii) used the same outside Australia.

(Reference subsec. 82AG(1): para. (b) and (c) of the Act.)

(d) Alternatively to para. (c) hereof, whether, after the expiration of twelve (12) months after the applicant's interest in the ANZCAN Cable, and in each segment thereof, was first used, or installed ready for use, by the applicant, the applicant -

(i) granted a right to another person to use the same; or

(ii) used the same outside Australia

and whether it was reasonable for the Commissioner to be satisfied that, at the time the same was acquired or constructed by the applicant, the applicant intended to grant a right to another person to use the same.

(Reference subsec. 82AH(1): para. (a), (b)(ii) and (iii) and (c) of the Act).''

Counsel for OTC first made submissions relating to what constitutes a unit of eligible property for the purposes of subsec. 82AA(1). OTC's first preference was that each segment of the ANZCAN cable was a unit of eligible property. In the alternative it was submitted that the entire ANZCAN cable was a unit of eligible property, or, again in the alternative, that each sub-segment of the cable was a unit of eligible property. Reliance was placed upon my judgment in
F.C. of T. v. Tully Co-operative Sugar Milling Assoc. Ltd. 83 ATC 4495 at p. 4504; (1983) 51 A.L.R. 751 at p. 761. Counsel submitted that it was of little significance which of these particular alternatives was adopted because in the end the deduction would be for the same monetary amount. However, the

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resolution of the issue would affect the timing of the deduction in the sense of determining the particular year or years of income in which the deduction was allowed.

The fact that OTC owns the cable in conjunction with other telecommunications authorities gives rise to the question whether an interest in property short of the full interest can constitute ownership of the property for the purposes of the Act.

Counsel for OTC submitted that it was not necessary for the taxpayer claiming the investment allowance to have the whole interest in the property; that the unit of eligible property is, not just the physical item, but the interest of the taxpayer in the physical item where that interest is not the whole.

In the alternative it was submitted that subsec. 82AA(1) merely says that the Subdivision applies in relation to a unit of eligible property acquired or constructed by the taxpayer and does not preclude acquisition or construction by the taxpayer in conjunction with other persons. The unit of eligible property would not, so it was said, lose its character as having been acquired or constructed by the taxpayer if it is acquired or constructed by the taxpayer and other persons as well.

Counsel for the Commissioner argued that the natural meaning of the words ``unit of eligible property...'' refers to a physical chattel not a legal interest in it. Reliance was placed on the judgment of the High Court in
Rose v. F.C. of T. (1951) 84 C.L.R. 118 which held that sec. 36 and 59 of the Act only applied to disposals of property where the entirety of the ownership in the property is disposed of, not a creation or transfer of an undivided share in the asset.

The second question to which counsel for OTC addressed submissions concerned the use in Australia of the unit of eligible property. Counsel submitted that all use of the equipment takes place within Australia. It is at Paddington, Sydney, where outgoing calls are received via the Telecom network and converted into electrical signals suitable for transmission along the ANZCAN cable and where signals from overseas are received, converted and sent on through the Telecom network. It was argued that the cable itself is not in any operational sense used, being merely a channel along which electrical signals pass.

Counsel for the Commissioner submitted that any use of the cable occurs where the cable is and for the vast bulk of its length the cable is outside Australia so the deduction must be denied. Furthermore, it was argued that if the submission that the only use of the cable was made at the landward end of the cable at Paddington, Sydney and Norfolk Island is correct then the deduction is denied because there would thus be no use by the taxpayer except de minimis. If the cable is not used by OTC it fails to satisfy the initial requirements of subsec. 82AA(1).

The third group of submissions made by counsel for OTC concerned the question whether the agreements with STA and Teledireketoratet constituted the granting to other persons of rights to use the eligible property for the purposes of subsec. 82AA(1), 82AG(1) and 82AH(1).

Counsel for OTC submitted that what OTC contracts to do is what the Overseas Telecommunications Act says it should do, namely, provide a telecommunications service up to a particular capacity. It contracts to receive and convert electrical signals which are sent to it and to convert and transmit signals up to an agreed capacity. This, it was argued, was not a contract for the use of the cable although the signals arrive per medium of the cable, but a contract for the provision of services by OTC. The contracts are silent on what is involved; but looking at the evidence one sees that a part of the capacity is reserved for the other country as part of providing a service whereby telephone calls can be transmitted one way or the other. So the IRU agreements provide for the telecommunications services of other countries which are not themselves part of the system. It is the service of allowing them to communicate with Australia. The agreement is that up to a certain capacity calls will be dealt with by OTC providing all the necessary services in that regard. It is not a right to use the cable in question that the agreement confers. Persons who have the agreements with OTC do not have a right to use the cable but a right to be provided with a service.

Counsel for the Commissioner submitted that what the IRU agreements confer upon STA and Teledireketoratet is what their language

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purports to confer upon them, namely, an indefeasible right of user to be used in conjunction with OTC which has an interest in the matching half circuits for providing telecommunications services.

The first question which arises for determination is whether during the 1984 and 1985 years of income or the 1985 year of income alone OTC incurred expenditure of a capital nature in respect of the acquisition or construction by it of a new unit of eligible property.

The second question, assuming the answer to the first question is in the affirmative, is whether the unit of eligible property acquired or constructed by OTC was for use by it wholly and exclusively in Australia.

Assuming this second question is answered in the affirmative a third question arises, whether OTC acquired or constructed the unit of eligible property for use by it wholly and exclusively for the purpose of producing assessable income otherwise than by the granting to other persons of rights to use the eligible property. Related questions also arise under sec. 82AG and 82AH. The question which arises under subsec. 82AG(1) is whether, before the expiration of 12 months after the eligible property was first used or installed ready for use by OTC, OTC granted rights to STA and Teledireketoratet to use the property or OTC used the property outside Australia. The question which arises under subsec. 82AH(1) of the Act is whether, after the expiration of 12 months after the eligible property was first used or installed ready for use by OTC, OTC granted rights to STA or Teledireketoratet to use the property or OTC used it outside Australia and whether it was reasonable for the Commissioner to be satisfied that at the time the unit or units of eligible property was or were acquired or constructed by OTC, OTC intended to grant a right to another person to use the property.

I shall consider the questions in the above order.

The first question

Ultimately the question of what constitutes a ``unit of eligible property'' is a question of fact generally to be determined with reference to the function or purpose of the particular item:
Ready Mixed Concrete (Vic.) Pty. Ltd. v. F.C. of T. 69 ATC 4038; (1969) 118 C.L.R. 177 per Kitto J. at ATC pp. 4041-4042; C.L.R. p. 184; F.C. of T. v. Tully Co-op. (supra) per Lockhart J. at ATC p. 4504; A.L.R. p. 761.

In the present case the total size in terms of dollars of the available deduction will be the same whether one treats the ANZCAN system as consisting of five functional units with deductions available in two years or as one functional unit with only one deduction. However, the resolution of this issue will affect the timing of the deduction.

The expression ``unit of eligible property'' is not defined by the Act. The words ``eligible property'' are defined by subsec. 82AQ(1) as meaning:

``plant or articles within the meaning of section 54 and includes earth tanks constructed for the purpose of conserving water for use in carrying on a business of primary production;''

The expression ``unit of property'' appears not only in relation to eligible property in Subdiv. B, but in the depreciation provisions of the Act, for example, sec. 55 and 56 relating to the basis and calculation of depreciation of a ``unit of property''. Section 57AA provides for a special depreciation allowance to primary producers for ``units of property'' to which that section applies, e.g. structural improvements for agricultural pursuits. The expression ``unit of property'' appears also in sec. 62AA with respect to the manufacturers' investment allowance and in sec. 62AB which provides a special deduction for primary producers who invest in certain units of property. Section 62AB excludes from what otherwise would be units of property things as diverse as buildings, wharves, fences, dams, wireless receivers and transmitters, cooking appliances, anchors, batteries and tents.

The meaning of the expression ``unit of eligible property'' was considered by each member of the Full Court of this Court in Tully. Fox J. said at ATC pp. 4500-4501; A.L.R. p. 755:

``the term `unit' is not used so much to limit, or require preciseness of definition, as to distinguish between the generality and something more specific, which is capable of being separately regarded and treated. On each occasion the phrase must, of course, be

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construed in its context, but the repetition of it in the variety of contexts to which I have referred certainly suggests that it is not to be understood in sec. 82AB in a narrow or technical sense.

Several items, each of which at some stage could, for presently relevant purposes, be regarded as a unit, can be combined, or linked, or associated together so as to form a larger unit. When one looks to see whether there is a unit, one normally looks to see whether there is a whole something. Whether there is a whole will normally be judged by the intended function or purpose of that which is being looked at. On the other hand, there can be a unit when some part is missing, without which the larger whole cannot function in the intended way. As used in the section (and other sections) the matter is more one of identification than of structure. The provision was intended to confer a benefit on taxpayers by way of giving them a special deduction in respect of new plant acquired or constructed during a stated period, and the benefit should not be defeated by an illiberal approach. Having in mind one submission made on behalf of the Commissioner, I should state that what might otherwise be regarded as a unit, does not cease to qualify as such because it comprises one or more, or many, integers, each of which could, at some stage of the development of the whole, be regarded as a unit.''

I observed in Tully at ATC pp. 4504-4505; A.L.R. p. 761:

``The large number of eclectic and diverse items capable of being `units of property' or `units of eligible property' which vary so considerably as to type, size and function, and the fact that it is the intention of the legislature to confer benefits on taxpayers by giving them a special deduction in respect of new plant, all point to the conclusion that in construing the undefined expression `unit of eligible property' a wide, not a narrow, approach is called for.

The dictionaries provide some help in determining the meaning of the word `unit', but the variety of meanings given by them to it show the impossibility of assigning it an inflexible or precise meaning and likewise the larger expression `a unit of eligible property'. Collins' Dictionary of the English Language, Australian Edition, edited by G.A. Wilkes, Sydney, 1979, contains the most relevant definition of `unit' namely:

`... 1. a single undivided entity or whole. 2. any group or individual, esp. when regarded as a basic element of a larger whole. 3. a mechanical part or integrated assembly of parts that performs a subsidiary function: a filter unit. 4. a complete system, apparatus, or establishment that performs a specific function: a production unit...'

Helpful though the dictionaries are they do not provide much practical guidance in determining the meaning of the expression `unit of eligible property' for present purposes. It is true that ultimately the question what constitutes `a unit of eligible property' depends on the facts of the particular case, but some guidance to the Commissioner and taxpayers is called for. In my view, the nearest one can get to enunciating a test of fairly general application is that it is the function or purpose of the particular item to which one looks to see if it answers the description on the facts of the case of `a unit of eligible property'. It is not necessary that it be functionally operative though in many circumstances this may be called for. For example, if five parts are installed in an assembly line and all that is needed to render the line operative is a sixth part, but until that part is installed no part may function or operate, the functional incompleteness does not necessarily deprive each of the five units of its character as `a unit of eligible property' for the purposes of the Assessment Act. It depends on the facts of the case. Yet, at other times a `unit' may not come into being until all the components have been assembled. For example, a farm fence is made up of a number of posts and rails or wires. It is difficult to conceive of any `unit' coming into being until the fence is erected. A concrete mixer installed on the back of a truck was held by Kitto J. in Ready Mixed Concrete (Vic.) Pty. Ltd. v. F.C. of T. 69 ATC 4038; (1969) 118 C.L.R. 177 to be a `unit of property'. His Honour said (at ATC p. 4042; C.L.R. p. 184):

ATC 5211

`Notwithstanding the mode and degree of annexation, the truck and the mixer are functionally separate and independent units of property. The function of delivery belongs to the truck. The use of the mixer is for mixing, as a step in the production of concrete in the condition required for pouring, and its nature is understated to the point of misdescription by saying that the machine - for that is what it is - is ordinarily used for delivery.'

See also
Wangaratta Woollen Mills Ltd. v. F.C. of T. 69 ATC 4095; (1969) 119 C.L.R. 1.

The difficulty of identifying a `unit of property' for the purposes of the Assessment Act is that sometimes an item may be correctly described as a `unit' when it is one of a number of parts which upon assembly perform a subsidiary function. Sometimes each part may be correctly described as a unit before assembly and at other times after assembly. On other occasions there may not be a unit until a number of parts have been integrated into a complete system. Then the whole may answer the description of a unit. The possibilities and combinations are numerous. But purpose or function must generally be a useful guide to the identification of an item as answering the description of a unit of property in particular cases.''

Fitzgerald J. said at ATC p. 4506; A.L.R. pp. 763-764:

``Without seeking to provide an exhaustive definition, I see no reason to doubt that there is, for present purposes, a unit of property if it is capable of independent existence, not necessarily self-contained, e.g. it may require power from an external source, not necessarily separately used, e.g. it may be incorporated into an operating system such as a machine or complex of machinery in a manufacturing process, but capable either of separate function, or of function in conjunction with different parts, or in a different context, from its current user. See the definition of `unit' in the Oxford Dictionary; cf. Ready Mixed Concrete (Vic.) Pty. Ltd. v. F.C. of T. 69 ATC 4038; (1969) 118 C.L.R. 177 and Wangaratta Woollen Mills Ltd. v. F.C. of T. 69 ATC 4095; (1969) 119 C.L.R. 1.''

The application of these principles to this case leads to the conclusion that upon the completion of each of the five segments there came into existence something which was capable of a separate existence and which could be operated as a functionally distinct unit. In my opinion the units of eligible property with which this case is concerned are each of the five segments (segments A, B, C, D and E) of the ANZCAN cable.

In my opinion the expression ``unit of eligible property'' in Subdiv. B refers to a physical chattel, something tangible, not a legal interest in it. The only reservation I have is that there may be some business conducted by a taxpayer in which the plant or equipment is itself of an intangible nature in which case it may be a ``unit of eligible property''. Subject to that possibility I cannot conceive of a unit of eligible property being other than a physical or tangible object. Furthermore, the Subdivision refers to the ``acquisition or construction'' of a unit of eligible property. The use of the word ``construction'' in particular sits far more easily with an interpretation of the Subdivision which regards a unit of eligible property as being a physical item. This view is supported by Rose v. F.C. of T. (supra) where the High Court held that sec. 36 and 59 of the Act only applied to disposals of property where the entirety of the ownership in the property is disposed of, not a creation or transfer of an undivided interest or share in the asset.

This question also raises issues in relation to the structure of ownership in the ANZCAN cable. In particular, the fact that OTC owns the cable in conjunction with other telecommunications authorities gives rise to the question whether an interest in property short of the full interest is permissible under the Act. The relevant provisions of Subdiv. B (for example, sec. 82AA(1) and sec. 82AB) refer to a unit of eligible property acquired or constructed by the taxpayer or the acquisition or construction by him of a new unit of eligible property. The language of these provisions is apt to include an interest in the property short of the whole interest in it. I do not construe the provisions as precluding acquisition or construction of the unit of eligible property by the taxpayer in conjunction with other persons. This seems to me also to be consonant with the evident purpose of Subdiv. B to allow the special investment allowance deduction in

ATC 5212

respect of capital expenditure incurred by a taxpayer on new eligible property. The fact that a taxpayer acquires or constructs the units of eligible property with other persons as well is plainly within the evident purpose of the deduction. See also
Utah Development Co. v. F.C. of T. 83 ATC 4545.

Section 82AJ provides support for this conclusion. That section contains a number of special provisions relating to partnerships and operates as a safeguard where a partner disposes of the whole or part of his interest in the partnership or in the eligible property within 12 months of the property being first used or installed ready for use by the partnership or in some circumstances after 12 months. Section 82AJ contains special provisions relating to partnership, but the section recognises that deductions are available to a taxpayer who has an interest as one of a number of partners, an interest necessarily falling short in the case of each partner of the full ownership of the property.

Subsection 82AG(2) operates to withdraw so much of the investment allowance deduction that has been allowed to a taxpayer in respect of the property as the Commissioner considers appropriate where a taxpayer, having become entitled to the deduction disposes of part of his interest in the property within 12 months of its first being used or installed ready for use. The section assumes that it is within the competence of the Commissioner to withdraw only part of the deduction which is consistent with the taxpayer retaining only a part interest in the property reflected by the continued availability of the partial deduction.

Subsection 82AH(2) has similar operation to subsec. 82AG(2) where the taxpayer has disposed of a part of his interest in the property after the expiration of 12 months from the time when the property was first used or installed ready for use.

I conclude therefore that OTC incurred expenditure of a capital nature in respect of the acquisition by it of the five segments of the ANZCAN cable, each such segment being a unit of eligible property.

I turn now to the second question raised by subpara. 82AA(1)(a)(i), namely, whether OTC acquired its interests in the segments of the ANZCAN cable for use by it wholly and exclusively in Australia.

Also relevant are sec. 82AG and 82AH. Section 82AG disqualifies a claim for deduction if the taxpayer used the property outside Australia during the first 12 months after the property was first used or installed ready for use. Section 82AH puts the allowance in jeopardy if after the first 12 months the taxpayer used the property outside Australia and the Commissioner is satisfied that when the property was acquired or constructed the taxpayer intended to use it outside Australia.

It is unnecessary for the purposes of the present case to determine questions which arise under customary international law concerning the limit of the territorial sea of Australia. Whether that limit be three, twelve or two hundred miles the issue that arises under the Act remains the same because a substantial portion of the ANZCAN cable is outside any of these limits.

I cannot accept that the exclusive use or intended use by OTC of its interests in the ANZCAN cable and its various segments was wholly within Australia. It is true that it is at Paddington, Sydney, where telephone calls are sent from Australia overseas. OTC's switching facility receives the signal via the Telecom network and converts it to an electrical signal or impulse suitable for transmission through the ANZCAN cable to the ultimate destination. A similar process operates in reverse in respect of incoming calls. It is unreal to regard the ANZCAN cable itself as being merely a channel along which electrical signals or impulses pass and that it is not in any operational sense used by OTC. The use of the cable by OTC takes place partly in Australia by converting electrical signals but largely overseas where the signals then travel along the cable. The use of the cable occurs where the cable is and for the vast bulk of its length it is outside Australia. Although the reception, translation and sending of telephone calls takes place at Paddington, and to that extent the signals which are sent via the cable are used in Australia, it is I think impossible to conclude that the cable itself is not used by OTC. There is a use of the cable outside Australia in addition to the use inside Australia. It is impossible to conclude that the only use of the cable is within Australia without straining the facts of this case to unacceptable limits.

A curious result would follow if OTC's assertion that its only use of the cable takes

ATC 5213

place in Australia at Paddington and perhaps in Norfolk Island (the Act is extended to Norfolk Island by sec. 7A of the Act) because the investment allowance would be calculated with reference to OTC's share of the cable construction costs most of which would be with respect to the cable travelling outside Australia.

Subsection 82AA(1) requires that the acquisition or construction of the unit of eligible property by the taxpayer is for use by the taxpayer wholly and exclusively in Australia. OTC fails to meet that test; hence its claim for the investment allowance must fail.

Even if OTC were correct in its submission that the ANZCAN cable was in fact used wholly and exclusively in Australia, a substantial difficulty arises in relation to the requirement that the property be acquired or constructed for the taxpayer wholly and exclusively for the purpose of producing assessable income ``otherwise than by... the granting to other persons of rights to use the eligible property'' (sec. 82AA(1)(a)(ii)(C)). This gives rise to the third question. Sections 82AG and 82AH also are relevant to this question.

Section 82AG would deny the deduction if, before the expiration of 12 months after each segment of the ANZCAN cable was first used or installed ready for use OTC granted a right to another person to use the cable (para. 82AG(1)(b)).

Pursuant to subsec. 82AH(1) the deduction will not be allowed if, after the expiration of the 12 month period, OTC granted a right to another person to use the same and the Commissioner is satisfied that at the time of the acquisition of the property the taxpayer intended ``to grant a right to another person to use the property''.

As outlined above OTC entered into IRU agreements with STA and Teledireketoratet.

Taking the Swedish IRU agreement as representative of the two such agreements, cl. 2 provides that OTC grants to STA an IRU interest in three voice-grade half circuits in segments A, B, C and D (``the IRU interest'') which shall be used in conjunction with OTC which has an interest in the matching half circuits in segments A, B, C and D for providing telecommunications services between points in or reached via the Australian mainland on the one hand and points in or reached via Canada on the other hand. Clause 3 provides:

``For the IRU interest, STA shall pay, pursuant to paragraph 4 hereof, a proportionate share as determined in accordance with paragraph 6 hereof, of the capital, operating and maintenance costs, as defined by the revised agreement of the ANZCAN Cable system allocable to the IRU interest.''

Clause 4 was summarised earlier.

Clause 5 provides that, if the capacity of segments A, B, C and D is to be increased beyond its initial equivalent capacity of voice-grade circuits, OTC shall give written notice to STA to that effect prior to such increase and STA shall have the option, on payment of its proportional share of any additional capital costs associated with such increase, of having the number of voice-grade half circuits in which it has been granted the IRU interest under the agreement increased in the same proportion as the total number of voice-grade half circuits assigned to OTC in segments A, B, C and D is increased under the terms of the revised agreement. Provision is made for the exercise of the option by the same clause and it concludes with the statement that, if STA elects not to exercise the option, an appropriate proportionate adjustment pursuant to cl. 6 shall be made in STA's payments with respect to the capital, operating and maintenance costs incurred thereafter for the IRU interest.

OTC sought to rely on a decision of a Full Court of this Court:
Kirby v. F.C. of T. 87 ATC 4503; 14 F.C.R. 563 per Ryan J. at ATC p. 4515; F.C.R. 578 where his Honour said:

``The `use' of an item of plant or equipment, on which the statutory scheme outlined above is erected, is an elusive concept. As Gibbs C.J. pointed out in
Tourapark Pty. Ltd. v. F.C. of T. 82 ATC 4105 at p. 4107; (1982) 149 C.L.R. 176 at p. 181, a person may be said to use property for his own purposes by making it available for use by others. In my view, whether another person has the use of, or has a right to use, certain property turns on the aptness of the ordinary meaning of `use' to describe the relation which exists as a matter of fact between that person and the property.''

ATC 5214

In the present case the relationship of STA to the cable is determined and defined by the IRU agreement. What that agreement purports to grant to STA is an ``indefeasible right of user'' (see the recitals earlier mentioned) to be used in conjunction with OTC which has an interest in the matching half circuits for providing telecommunications services. A right to use the cable itself is granted, not merely an undertaking by OTC to provide telecommunications services. This is reflected in the clauses of the agreement itself. Clause 10(a) imposes an obligation on STA to use the circuits in a way which does not damage the circuit or impair the privacy of other users. See also cl. 11. The clauses contemplate that it must be technically realistic and that STA envisages having control of some kind over the power loading in which its calls are sent to Australia. The cable systems depend and their use depends upon the originating signal in Sweden which initiates the call. It means that there is a use being made by STA of its voice-grade circuits.

In these circumstances it is difficult to see how it could be asserted that there was no granting of a right to use the cable to STA. Even though the size of the interest of STA is relatively small, as Gibbs C.J. pointed out in Tourapark Pty. Ltd. v. F.C. of T. 82 ATC 4105 at p. 4108; (1982) 149 C.L.R. 176 at p. 183:

``No provision is made for any apportionment if, for example, the taxpayer granted to another a right to use the property for a short time only, or if for a short time only the taxpayer used the property for a purpose other than the purpose of producing assessable income.''

Similar provisions operate with respect to the Norwegian agreement.

OTC entered into the IRU agreements with STA and Teledireketoratet on 26 June 1985 and 1 July 1985 respectively. The ANZCAN cable was completed and used for the purpose of producing assessable income or installed ready for that purpose in OTC's year of income ended 31 March 1985. At the time of construction or acquisition of the cable and the various segments which comprise it there had been therefore no actual granting of rights of user by OTC. Subparagraph 82AA(1)(a)(ii) however speaks of purpose, so the terms of the original and revised agreements which specifically envisage that rights to use the cable may be granted by the contracting parties to third parties become relevant. It may be that the very existence of such provisions in the original and revised agreements indicate that part of the intended use of the ANZCAN cable was for the production of assessable income by the granting to other persons of rights to use it. In these circumstances the Subdivision could not apply to the cable and OTC would not be entitled to any deduction for an investment allowance in relation to it.

It is not clear from the evidence when in the year of income ended 31 March 1985 segments B and C were first used or installed ready for use by OTC. This is relevant to the determination of whether sec. 82AG applies to deny the operation of the Subdivision in relation to the property in question. That section will apply if within 12 months of the first use or installation ready for use of the property the taxpayer granted a right to another person to use the property: sec. 82AG(1)(b). OTC granted such rights on 26 June 1985 and 1 July 1985.

If in fact those grants of rights occurred outside the 12 month period sec. 82AH becomes relevant. This section would also be the one applicable to segments A, D and E of the cable which were completed prior to the end of OTC's year of income ending 31 March 1984. Given that rights to use the property were granted by OTC, provided the Commissioner was satisfied that at the time of acquisition or construction of the cable by OTC there was an intention of OTC to grant such rights the deduction was properly disallowed by the Commissioner. The terms of the original and revised agreements and the fact of the subsequent grant, in the absence of evidence to the contrary, provide sufficient evidence to found the conclusion that the relevant intention existed. OTC's claim for a deduction of the investment allowance therefore fails on this ground also.

It was conceded by counsel for OTC that sec. 82AO would apply to the amounts paid by STA and Teledireketoratet which were proportionate contributions to the capital cost of the ANZCAN cable.

Section 82AO provides:

``82AO(1) This Subdivision does not apply, and shall be deemed never to have applied,

ATC 5215
in relation to a taxpayer, to expenditure in respect of which the taxpayer is recouped, or becomes entitled to be recouped, by the Commonwealth, by a State, by the Administration of a Territory, by an authority constituted by or under a law of the Commonwealth, of a State or of a Territory or by any other person.

82AO(2) Where a taxpayer receives, or becomes entitled to receive, an amount that constitutes to an unspecified extent a recoupment of expenditure of a capital nature in respect of a unit of property in relation to which this Subdivision applies, the Commissioner may, the purposes of sub-section (1), determine the extent to which the amount constitutes a recoupment of that expenditure.''

However, given the conclusion that OTC is not entitled to a deduction under the Subdivision, this concession is of no practical significance in this case.

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