Jenkinson J

Federal Court

Judgment date: Judgment handed down 3 February 1992

Jenkinson J

Appeals under Part V of the Income Tax Assessment Act 1936.

The applicant refines petroleum on Bulwer Island at the mouth of the Brisbane River. The refinery commenced operation in 1965. Part of the plant at the refinery was called an ultraformer. It consisted of many parts, which had diverse functions, but the ultraformer's principal purpose was to obtain, from petrolic naphtha, high-octane petrol blending stock. The ultraformer was designed also to obtain from the crude oil which was fed into it other commercially useful substances. The ultraformer included four cylindrical vessels in each of which certain chemical reactions between naphtha and hydrogen under certain conditions of temperature and gaseous pressure were induced in the presence of a catalyst, platinum, thereby obtaining from the naphtha high-octane petroleum and other products. From 1966 until 1979 the applicant claimed and was allowed a deduction from its assessable income in respect of depreciation of the plant. If the plant be regarded as the ``unit of property'' for the purposes of the application of the depreciation provisions in s. 54 and the succeeding sections of the Income Tax Assessment Act 1936, the sum of the amounts allowed in assessments for income tax equalled, at the end of the applicant's substituted year of income ending on 31 December 1979, the cost of that unit, which exceeded $1.8 million. If the platinum used as a catalyst in the vessels (called reactors) be regarded as a ``unit of property'' in respect of which deductions for depreciation had been allowed, the sum of the amounts so allowed is $422,378, an amount by $124,264 less than the cost of the platinum, which was $546,642. In 1980 the platinum was sold by the applicant for $1,616,610, an amount by $1,069,968 more than the cost of the platinum. The respondent contends that the application of s. 59 of the Income Tax Assessment Act 1936 was attracted in the year of income ending 31 December 1980 to the plant known as the ultraformer, as ``property of a taxpayer, in respect of which depreciation has been allowed'' and which was ``disposed of... or destroyed... in the year of income''. If that be so, the consideration receivable in respect of the disposal or destruction of that property, $1,616,610, exceeded the depreciated value of the ultraformer at that time, in 1980, that depreciated value being nil. ln the submission of Mr. Davies of counsel for the respondent that excess should, by force of s. 59(2) be included in the applicant's assessable income of the year ended 31 December 1980, the sum of the amounts allowed in assessments for income tax in respect of depreciation of the ultraformer ($1.8 million) being greater than that excess. But the applicant contends that there was not in 1980 any disposition or destruction of the ultraformer, so that the application of s. 59 was not attracted in that year of income to the ultraformer. The applicant further contends that the application of s. 59 was attracted in that year to the platinum as ``property... in respect of which depreciation [had] been allowed [and which was] disposed of in the year of income''. The consideration receivable in respect of that disposal ($1,616,610) exceeded the depreciated value of the platinum ($124,264) by $1,492,346. But s. 59(2) requires the inclusion of that excess in the applicant's assessable income of that year only ``to the extent of the sum of the amounts allowed and allowable in assessments for income tax... in respect of depreciation''. That sum was $422,378. And that was the amount which in the submission of Mr. de Wijn of counsel for the applicant was to be included in the applicant's assessable income of 1980, by the operation of s. 59(2).

It was the ultraformer, not the platinum, which in its income tax return the applicant had identified as a ``unit of property'', in respect of which s. 55 required that the respondent make an estimate of its effective life. And it was in respect of the ultraformer that the estimate was made. The initial quantity of platinum was not the subject of any separate reference in a communication by the applicant to the respondent during the 1965 or the 1966 year of income, unless it be, as the applicant contended, that a document prepared by Price Waterhouse and Co. for investment allowance purposes was at that time sent to the respondent. In that document the cost of the initial quantity of platinum, $382,394, was recorded and described as ``Equipment Miscellaneous'' for the ultraformer. Additional quantities of platinum were purchased for use in the four reactors, and in each of the income years ended 31 December 1967, 1972 and 1975 the cost of those purchases was added in claims for depreciation deductions in respect of the ultraformer. In 1974 a letter and enclosed schedules from a Deputy Commissioner of

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Taxation to the public officer of the applicant establishes that the respondent was then aware that platinum catalyst was part of that which was comprehended by the word ``ultraformer'' in those claims. But it was not until he received the applicant's income tax return in respect of the 1980 year that the respondent had any reason to suppose that the platinum was proposed to be treated for income tax purposes as a separate unit of property.

Mr. de Wijn submitted that the language of sub-section 59(1) - ``any property of a taxpayer, in respect of which depreciation has been allowed... is disposed of, lost or destroyed'' - is apt to apply to property which has formed part only of property depreciated as a unit of property, and that what the sub- section, and sub-section 59(2), require is an application of the provisions to that which has been disposed of, lost or destroyed. If it be a condition of the operation of s. 59 that the property answer the description ``unit of property'', then in Mr. de Wijn's submission the platinum answered that description. In support of the latter submission he relied on the decision of Greig J. in
New Zealand Refining Company Ltd. v. Commissioner of Inland Revenue (N.Z.) 82 ATC 6037 that platinum used in an ultraformer was within the meaning of the expression ``plant or machinery'' in a New Zealand revenue provision allowing a deduction for expenditure of a capital nature on new plant or machinery; and also on reasoning in this court in
Tully Co-operative Sugar Milling Association Limited v. F.C. of T. 82 ATC 4454.

Mr. Davies was not concerned to deny that the platinum would answer the description ``property, being plant or articles'' in s. 54, or that it could have been treated as a ``unit of property'' in application of ss. 55 and 56. His submission was that a consideration of the provisions contained in ss. 54-62 compelled the conclusion that s. 59 applies only to a unit of property in respect of which, as a unit of property, an estimate has in fact been made by the Commissioner in pursuance of s. 55 and depreciation has been allowed accordingly. I accept that submission. Only by compliance with the command expressed in s. 55 and by applying the provisions of s. 56 can effect be given to s. 54. Only a unit of property in respect of which ss. 55 and 56 have been given effect will have a ``depreciated value'', within the meaning assigned to that expression by s. 62(1), in my opinion. Section 62(1) provides:

``In this Division, `depreciated value' of any unit of property at any time means the cost of the unit to the person who owns or owned the property at that time less the total amount of depreciation (if any) allowed or allowable in respect of that unit in assessments of the income of that person, for any period prior to that time, under this Act or any previous law of the Commonwealth.''

Concerning an article, or something answering the description ``plant'', treated, as the platinum was treated until 1980, as part of a unit of property for depreciation under s. 55, it cannot in my opinion be said that there has been allowed depreciation ``in respect of that unit in assessments''. If that be so, no ``depreciated value'', within the meaning of that expression in s. 59, can be assigned to such an article or item of plant when it is disposed of, lost or destroyed, and s. 59 cannot be applied to it.

Mr. de Wijn advanced against the conclusion I have reached an argument derived from the common practice of taxpayers and the Commissioner in administration of the depreciation provisions under consideration. The evidence showed that the applicant habitually in its returns claimed deduction under s. 54, not in respect of a unit of property, but in respect of all units which answered a single generic description, as for example ``office furniture and fittings'', ``marine equipment'', ``office machines''. Mr. de Wijn suggested, and I would be prepared to assume, that such a practice of aggregation was followed by many taxpayers, and that the Commissioner acquiesced in the practice. But what may be a harmless practice in many cases cannot displace the operation of the statutory provisions or, in the circumstances disclosed in this case, influence the proper construction of those provisions, in my opinion. The facts of this case show that in some cases the effect of adopting the construction for which Mr. de Wijn contends will be substantial. Further, the ``effective life'', for the purposes of s. 55, of a part of a unit of property may be quite different from the effective life of that unit.

Another dispute between the parties is whether the ultraformer was ``disposed of,... or destroyed at any time in'' the 1980 year of income. The ultraformer ceased operation in

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about August 1979, being replaced by another ultraformer in which platinum was not used. The platinum was removed from the reactors and sent to the United States of America, for separation from the small pellets of aluminium oxide of which it was a coating while in use as a catalyst. After recovery the pure platinum was sold by the applicants in two lots, one in October and the other in December 1980. Many instruments which had been parts of the ultraformer were put to use in other parts of the refinery, as were other larger parts of the ultraformer. Some components of the ultraformer were not moved, but were put to other uses in the refinery. The four reactors were not moved or put to any other use in the refinery during 1980. In 1981 they were sold and delivered to another petroleum refiner. Much of the work of converting parts of the ultraformer to other uses in the refinery was done during 1980.

Mr. de Wijn submitted that, if the property in respect of which the application of s. 59 was proposed were the ultraformer, then there had not been in 1980 a disposal or a destruction of that property in 1980. He submitted that many parts of the ultraformer had not been disposed of at all, but had been re-used by the applicant, and that the disposal of the four reactors, substantial and important parts of the ultraformer, had occurred in 1981. The application of s. 59 had not been attracted to the ultraformer in 1980, according to Mr. de Wijn's submission.

Mr. de Wijn sought support for his submissions in s. 59(3), which provides:

``Subject to subsections (4) and (6), the consideration receivable in respect of the disposal, loss or destruction means-

  • (a) in the case of a sale of the property - the sale price less the expenses of the sale of the property;
  • (b) in the case of loss or destruction of the property - the amount or value received or receivable under a policy of insurance or otherwise in respect of the loss or destruction;
  • (c) in the case where the property is sold with other assets and no separate value is allocated to the property - the amount determined by the Commissioner;
  • (d) in the case where property is disposed of otherwise than by sale - the value, if any, of the property at the date of disposal.''

If it were suggested that the ultraformer had been destroyed, no ``amount or value received or receivable under a policy of insurance or otherwise in respect of the... destruction'' had accrued, in Mr. de Wijn's submission. The ultraformer had not been sold, nor had the ultraformer been disposed of otherwise than by sale, he said. The terms of the sub-section were said by Mr. de Wijn to support his submission that the operation of s. 59 was attracted to anything which answered the description in sub-section 59(1), whether or not that property had been the subject of separate identification as a unit of property for the purposes of ss. 55 and 56. But sub-section 59(3) was said to support also the submission that the operation of s. 59 had not been attracted in relation to the ultraformer in 1980.

Mr. Davies approached the construction of the words ``disposed of, lost or destroyed'' in s. 59(1) in the light of observations by Williams A.C.J., Webb, Kitto and Taylor JJ. in
Henty House Proprietary Limited (in voluntary liquidation) v. F.C. of T. (1953) 10 ATD 231 at 235-236; (1953) 88 C.L.R. 141 at 150-152. In that case land on which stood a building was compulsorily acquired by the Commonwealth. The taxpayer received a single, unapportioned sum as compensation. Before the acquisition depreciation had been claimed and allowed in respect of plant in the building. The taxpayer objected to the application of s. 59(2) by the Commissioner in respect of that plant. The observations on which Mr. Davies relied are:

``The main argument submitted for the appellant was that not only is the word `lost' as inappropriate to a case of compulsory acquisition by a public authority as is the word `destroyed', but `disposed of' is also inapplicable, because it refers only to a voluntary disposition by the taxpayer. To place so narrow a construction upon `disposed of' would take out of the operation of s. 59 a deprivation of property by any mode of involuntary alienation. A sale, for example, by a sheriff under a writ of fieri facias, or by a liquidator in a winding-up by the court, or by a receiver appointed by the court, would be outside the purview of the section. The suggested distinction would rest upon no logical foundation, for the rationale of the section

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applies as much to dispositions of the kinds just mentioned as it does to dispositions made voluntarily by or by the authority of the taxpayer himself. The apparent object of the section is clear. It is, first, that in the case of property depreciation of which is made by the Act an allowable deduction because of the relation of the property in the taxpayer's hands to the production of his assessable income, the whole of that portion of the cost of the property which the taxpayer fails to recover when the property becomes no longer available to him for the production of assessable income shall be deductible in the assessment of his taxable income; and that to that end, insofar as it is not covered by deductions for depreciation under ss. 54-58, it shall be the subject of a deduction under s. 59(1). And, secondly, the section provides for the converse case: if it turns out, when the property ceases to be available to the taxpayer for the production of assessable income, that his deductions for depreciation have been greater in total than that portion of the cost which he has failed to recover, then the excess amount shall be brought back into assessable income under sub-s. (2). (In the case of a gift, the value of the property is treated as if it had been recovered by the donor.) No distinction in any way material to these purposes can be drawn between a sale by the taxpayer in the market, or an exchange or a gift made by him, and a transfer of the title effected by the act of another to whom the law gives the requisite authority. There is as little reason for attempting such a distinction as there would be for distinguishing between a loss due to the carelessness of the taxpayer and a loss due to theft, or between a destruction by the intentional act of the taxpayer and a destruction by act of God. Nothing but quite intractable language could justify us in placing upon provisions of the character which s. 59 exhibits a construction producing so capricious a result as its inapplicability to cases of involuntary alienation.

But the language used is by no means intractable. No doubt the notion primarily conveyed by the words `disposed of' is the notion of a disposition by the taxpayer; but it is not necessarily so confined, and the use of the passive voice, without specific words of restriction referring to the person by whose act the disposal takes place, leaves ample room for a construction in keeping with the general tenor of the section, and with its place in the scheme which ss. 54 to 62 provide. The entire expression `disposed of, lost or destroyed' is apt to embrace every event by which property ceases to be available to the taxpayer for use for the purpose of producing assessable income, either because it ceases to be his, or because it ceases to be physically accessible to him, or because it ceases to exist. In the context of s. 59 there is ample reason for rejecting a narrower construction. In particular, the words `is disposed of' are wide enough to cover all forms of alienation, as Dixon and Fullagar, JJ. remarked in Federal Commissioner of Taxation v. Wade, (1951) 84 C.L.R. 105, at p. 110; 9 A.T.D. 337 at p. 340, and they should be understood as meaning no less than `becomes alienated from the taxpayer', whether it is by him or by another that the act of alienation is done. Neither the words themselves nor the setting in which they appear afford any support for the view that cases of involuntary alienation fall outside their meaning.''

It must be conceded that the members of the court did not have in contemplation the quite different circumstances of a case such as this. But the generality of their observation, that ``[t]he entire expression `disposed of, lost or destroyed' is apt to embrace every event by which property ceases to be available to the taxpayer for use for the purpose of producing assessable income, either because it ceases to be his, or because it ceases to be physically accessible to him, or because it ceases to exist'', perhaps justifies reliance on it for present purposes. If in s. 59(3) the words ``the property'' is, as I think it should be, understood to signify the ``unit of property'' in respect of which s. 59 is to be applied, this was in my opinion a case of destruction. The ultraformer ceased to exist when the catalyst was removed from the reactors with the intention that there be no further use of the ultraformer as an ultraformer. As an ultraformer it then ceased to be available to the applicant for use for the purpose of producing assessable income. The language of sub-section 59(3), no less than the language of sub-section 59(1), may be thought intractable. But in my opinion the words in

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paragraph 59(3)(b), ``the... value received... in respect of the... destruction'', comprehend the value of those parts of the ultraformer which were not sold, and the words in that paragraph, ``the amount... received... in respect of the... destruction'', comprehend the prices received on the sale of those parts which were sold. The expression ``in respect of'' is wide enough to comprehend a relationship, between the destruction and the receipt of money or value, of the kind here found. It was because the ultraformer was destroyed that the several parts became articles having each a value. They no longer formed part of another piece of property and could each be either put to another use or sold. Professor Parsons in his Income Taxation in Australia (para. 10.199) contemplates a meaning of the words ``disposed of'' wide enough to comprehend the treating of a machine as scrap, but I think the words express a conception limited to change of proprietary interest or ``alienation''.

My conclusion is that there was such a destruction of the ultraformer as attracted the operation of s. 59(2) in 1980. The respondent's decision disallowing the objection should be confirmed.

In the operation of the refinery the applicant had need of hot water in substantial volume. Some of what was needed was obtained by heating water in a furnace which formed part of the ultraformer. When use of the ultraformer ceased the applicant provided itself with another source of hot water by installing in a furnace in another part of the refinery metal conduit pipe in which water was heated by heating the installed piping while water was passed through the piping. Before and after installation of that piping the furnace heated oil by the same technique: heating piping through which oil was passed. The piping was called coils. The furnace was of steel, the inner surface of which was lined with concrete. The base was about 12 feet by about 30 feet. At a height from the base of about 16 feet the longer walls were pitched inwards from the vertical. At a height from the base of about 20 feet those walls reverted to the vertical, they being then about 5 feet apart. From the top of the furnace, at a height from the base of about 28 feet, an exhaust duct led the exhaust from the furnace to a chimney stack. In the lower part of the furnace were the oil coils, which were exposed to both the radiant heat from the burning fuel (oil or gas) and convection heating by the hot exhaust gas rising through the furnace. The water coils were installed above the oil coils at the top of the furnace. The water coils were heated by the exhaust gas as it rose to the exhaust duct. Both oil and water coils were supported by brackets attached to the outer steel walls of the furnace.

The applicant claimed, and the respondent disallowed, in respect of the year ended 31 December 1980 a deduction of the cost of the acquisition and installation in the furnace of the water coils under s. 82AB(1) of the Income Tax Assessment Act 1936. Mr. de Wijn submitted that the water coils constituted plant within the meaning of s. 54 and therefore ``eligible property'' within the meaning assigned to that expression by s. 82AQ(1) in Subdivision B of Division 3 of Part III, within which s. 82AB falls. Entitlement to the deduction claimed would arise if the applicant has ``incurred expenditure of a capital nature... in respect of the acquisition or construction by him of a new unit of eligible property'', and if the 1980 income year was ``the first year of income during which that unit was either used for the purpose of producing assessable income or installed ready for use for that purpose''. In Subdivision B of Division 3 of Part III the word ``new'' means ``not having previously been either used by any person or acquired or held by any person for use by that person, but does not include reconditioned or wholly or mainly reconstructed.'' Mr. Davies submitted that the coils did not constitute, when installed in the furnace, a ``unit of eligible property'' within the meaning of that expression in s. 82AB(1). The expenditure had been in respect of the modification of, and addition to, an existing unit of property, the furnace, to enable it to heat water as well as oil, Mr. Davies said. Heating was the function of the furnace. The function of the coils was merely to carry the water through the furnace so that the heating function of the furnace might be extended beyond oil to water as well. The expenditure was to a substantial extent on structural alteration of the furnace to enable it to accommodate, and securely to hold in place, the coils. Those circumstances strengthened the conclusion that the expenditure was in respect of the pre-existing unit of property, the furnace, in Mr. Davies' submission. Both counsel relied on the reasoning of members of Full Courts of this

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court in
F.C. of T. v. Tully Co-operative Sugar Milling Association Limited 83 ATC 4495 and
Monier Colourtile Pty. Ltd. v. F.C. of T. 84 ATC 4846.

In my opinion the submissions of Mr. Davies attribute to the functioning, and the function, of the furnace before installation of the water coils a significance in determining whether the water coils constituted a unit of eligible property which those circumstances do not deserve. The wholeness of the water coils, and their separateness of function within the larger unit, the furnace, is to be judged, in my opinion, without allowing determinative influence to the circumstance that the furnace had, before installation of the water coils, a function and a mode of operation in relation to oil very similar to its function and mode of operation in relation to water. I think the function of the water coils installed in the furnace was sufficiently separate from that which might be ascribed to the furnace, whether before or after that installation, to justify identification of the water coils as a ``unit of eligible property'' within the meaning of s. 82AB(1).

A wharf in the Brisbane River at the refinery was supported by wooden piles, the substance of which was attenuated by marine organisms over a number of years. The piles were in 1980 and 1981 encased in concrete so that each pile and its immediate environment would become a habitat uncongenial to the organisms, in the hope that their depredations would cease or would be substantially diminished. The depth and thickness of the casing and the jacketing of the casing were not the same for all the piles: the design was changed during the progress of the work. But nothing turns on that for present purposes. The work did not, and was not intended to, have any effect on the damage done by the organisms before the encasement of the piles, and was not intended, or believed, to alter the stability of the wharf or of any of the piles. The purpose of the work, and its anticipated effect, was merely to stop the organisms from further damaging the piles. Mr. de Wijn contended, and Mr. Davies denied, that the expenditure on the work was ``[e]xpenditure... for repairs... to... [a] part of the premises... occupied'' by the applicant, within the meaning of those words in s. 53(1) which provides:

``Expenditure incurred by the taxpayer in the year of income for repairs, not being expenditure of a capital nature, to any premises, or part of premises, plant, machinery, implements, utensils, rolling stock, or articles held, occupied or used by him for the purpose of producing assessable income, or in carrying on a business for that purpose, shall be an allowable deduction.''

Mr. Davies also submitted, and Mr. de Wijn denied, that the expenditure was of a capital nature. It was common ground that the other requirements of the sub-section had been fulfilled.

If repair be thought to be restricted to the restoration of something lost, either function or substance or some other quality or characteristic, it is not easy to see a way in which the word may aptly be applied to what was done in this case. None of the piles, nor the wharf as a whole, can be seen to have regained by the performance of the work anything lost either in substance or function. Perhaps one could say that when the wharf was first built, each newly placed pile had a capacity, in virtue of its being sound timber, to resist for a time the destruction of its own substance by marine organisms. Immediately before the work was done, and for a long time before then, that capacity had been lost, or at least substantially diminished. It might be said that the lost or diminished capacity was restored by the work. But the conception is not only fanciful, it is not true. The lost capacity which the pristine timber of the piles is supposed to have had was not restored. The destructive activity of the organisms was inhibited by keeping them away from the timber, just as it would have been if the encasement of the piles in concrete had been done when the wharf was built.

Mr. de Wijn relied upon observations by Windeyer J. in
W. Thomas & Co. Pty. Limited v. F.C. of T (1965) 14 ATD 78 at 87, 88; (1965) 115 C.L.R. 58 at 72, 74:

``Repair involves a restoration of a thing to a condition it formerly had without changing its character. But in the case of a thing considered from the point of view of its use as distinct from its appearance, it is restoration of efficiency in function rather than exact repetition of form or material that is significant. Whether or not work done upon a thing is aptly described as a repair of that thing is thus a question of fact and degree.

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There are always some difficulties in applying in a strict way the concept of repairs, as limited to those resulting from a taxpayer's own operations, to work such as painting that is periodically done not merely to make good defects but also to prevent defects developing. A stitch in time is as much a repair as would be the nine it saves. And the cost of it may be in the same category as would the cost of nine.''

Those observations indicated, in Mr. de Wijn's submission, that work to prevent anticipated damage may be a repair. Mr. Davies' response may be expressed in the words of Pearson J. in
Day v. Harland & Wolff Ltd. [1953] 1 W.L.R. 906 at 909:

``Broadly speaking, I think that the idea of repair is remedying defects, but I think that it can also properly include an element of the `stitch in time which saves nine'; that is to say, work does not cease to be repair work because it is done to a large extent in anticipation of forthcoming defects, or in rectification of merely incipient defects, rather than in the rectification of defects which have already become serious. I think that some element of anticipation is permitted.''

Only when work in anticipation of forthcoming defects is executed in combination with work of rectification can the anticipatory work be considered repair, according to Mr. Davies' submission.

In my opinion work will not be considered repair unless it includes some restoration of something lost or damaged, whether function or substance or some other quality or characteristic. This work did not in my opinion achieve that. It added something: both the substance by which the piles were encased and the capacity of the submerged parts of the wharf to avoid attenuation by the activities of the marine organisms. What was effected was an improvement, not a repair, in my opinion. And in my opinion the expenditure on the work was on capital account.

The appeals will be stood over so that the respondent may bring in minutes of orders for their disposition.


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