Sales Tax Ruling

SST 18

Sales tax: when goods become an 'integral part' of property for the purposes of Item 192

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FOI status:

may be releasedFOI number: I 102044

Preamble

What this Ruling is about

1. Broadly speaking, Item 192 in Schedule 1 to the Sales Tax (Exemptions and Classifications) Act 1992 provides sales tax exemption for goods used by a person so that they become an integral part of property (not being goods), where the relevant real property is:

*

owned by an always-exempt person^[F1];

*

leased to an always-exempt person; or

*

being constructed, improved or otherwise prepared for ownership by an always-exempt person.

2. At Appendix A of this Ruling, there is a flow-chart showing how Item 192 is applied. An essential test to be satisfied for exemption under this Item is that the goods are so used that they become an integral part of property.

3. This Ruling sets out the Australian Taxation Office (ATO) view of the meaning of the phrase integral part of property in Item 192.

Ruling

4. Goods become an integral part of property when they become a part of the property such that they become fixtures, and are necessary for the completeness or integrity of the property. As a practical guide, the ATO accepts that these tests will be satisfied if all of the following criteria are met:

Criterion 1

5. The goods become, or become part of, fixtures attached to real property according to the common law doctrine of fixtures, and are not, as a general rule, a tenant's fixture*.

Criterion 2

6. The fixture must form part of the physical setting in which the business is carried on, and not be part of the means by which the business is conducted.

Criterion 3

7. The goods must be physically subsumed in the real property. That is, they must lose their identity as chattels and be more than just simply attached to a building or structure.

Criterion 4

8. The goods become part of the physical property of the always-exempt person or lessor to an always-exempt person.

9. Further to Criterion 1 above, as a general rule, it is not accepted that tenant's fixtures* become an integral part of property. However, it is accepted that there may be limited exceptions to this rule.

*Note: In this Ruling, the term 'tenant's fixtures' should be taken to also include fixtures installed by property owners, and which are in the nature of, and would be regarded as, tenant's fixtures if the property owners were leasing the premises from another owner.

Date of effect

10. This Ruling is effective immediately. It replaces any previous public or private rulings to the extent that they are inconsistent with this Ruling.

11. Nothing in this Ruling may be taken as automatically authorising a refund before the date of effect of the Ruling. Credit claims are considered on their individual merits.

Explanations

Purpose for the introduction of Item 192

12. In interpreting Item 192, it is useful to understand why it was introduced in 1992.

13. The present sales tax legislative scheme was introduced in 1992 as a result of a major review and re-write of the former 1930 scheme. The 1992 scheme introduced to sales tax some significant changes to established concepts, the most important of which, for present purposes, was a change to the concept of 'application to own use'(AOU).

14. AOU is defined in section 5 of the Sales Tax Assessment Act 1992 (STAA). In the definition, the major departure from earlier concepts is contained in paragraph (d), which provides, among other things, that goods are applied to a person's own use when they are used by that person as materials in the course of carrying out construction and repair contracts.

15. Under the 1930 scheme, use of goods as materials in these types of contracts was not regarded as an AOU by the contractor. Rather, subsection 3(4) of the former Sales Tax Assessment Act (No 1) 1930 provided that there was a deemed sale of the goods by the contractor in circumstances such as these. If the person for whom the contract was being performed was a person entitled to sales tax exemption, that person could claim the benefit of the exemption by furnishing an appropriate certificate of exemption to the contractor.

16. The new definition of AOU in the 1992 Bills had the unintended effect of removing access to sales tax exemption in these circumstances. To restore these exemptions, amendments were made to the Sales Tax (Exemptions and Classifications) Bill 1992 during Parliamentary debate. Item 192 was one of these amendments^[F2].

17. For building and construction contracts, Item 192 is more specific than the former subsection 3(4) which had been regarded as unclear^[F3]. Item 192 provides exemption for 'goods', defined in section 5 of the STAA as 'any form of tangible personal property' (and subject to certain exclusions not relevant to this discussion). However, for 'goods' to be considered for exemption under Item 192, they first must be used so that they become an 'integral part of property', such property itself 'not being goods'.

18. The ATO considers that there are two tests to be satisfied before goods are regarded as being an integral part of property for the purposes of Item 192. These tests are:

(i)

The goods must become part of 'property (not being goods)', i.e., not property that is 'any form of tangible personal property', but rather real property and fixtures, typically buildings or structures; and

(ii)

The fixtures in which the goods are incorporated must be an integral part of the real property, not merely attached or affixed for convenience or as part of furnishing or equipping the property.

19. These tests are discussed in turn below.

First Test: 'Part of property (not being goods)' (Doctrine of Fixtures)

20. There is a considerable body of case law on the common law concept of fixtures. While that case law has developed general tests for determining what is a fixture, Drummond J in Eastern Nitrogen Ltd v. FC of T 99 ATC 5163, at 5166; (1999) 43 ATR 112, at 116, pointed out that:

'The modern approach to determining whether a chattel has become a fixture and thus part of the land to which it is attached or on which it stands emphasises the need to have regard to all the relevant circumstances.' (Emphasis added)

21. The main tests for determining what is a fixture are summarised below.

22. What is annexed to the land becomes part of the land, and what constitutes annexation sufficient for a thing to become a fixture, depends on the degree of annexation, and the object of annexation (Blackburn J in Holland v. Hodgson [1872] LR 7 CP 328, at 334).

23. A chattel is a fixture if it is fixed with the intention of remaining in position permanently and indefinitely, rather than fixed in position only for some temporary purpose (Jordan CJ, in Australian Provincial Assurance Co. Ltd v. Coroneo (1938) 38 SR (NSW) 700, at 712).

24. The objective intention existing when an item is placed upon the land, is of particular importance in determining its status as a fixture (Ipp J, in Eon Metals NL v. Commissioner of State Taxation (WA) 91 ATC 4841, at 4845-4846; (1991) 22 ATR 601 at 606-607).

Objective intention

25. The 'objective intention' referred to above was of particular importance in National Dairies WA Ltd v. Commissioner of State Revenue 99 ATC 5155; (1999) 43 ATR 11 (National Dairies). In deciding that items of plant and equipment in a dairy processing factory were fixtures, Murray J stated that:

'As at the time the above items of equipment were respectively placed upon the land and incorporated into the dairy processing factory they were undoubtedly readily removable and might have been removed and transferred to another place, or sold, or otherwise disposed of as required, but in my opinion, they were items which were placed on the land for the purpose of their integration into the factory system into which they were firmly incorporated. They were not placed there for a temporary purpose, but for an indefinite period of time. They were interconnected and incorporated into the factory, although the degree of annexation was variable and generally not otherwise than by the weight of the units. Nonetheless, as photographs reveal, their operative use was in various quite complex ways a part of the way in which the factory was structured. I have no doubt that the items of equipment described above were annexed to the land for the purpose of its better enjoyment or use as a dairy processing plant. When they were sold with the land the sale was of a factory as a going concern. The items of property described above were in my opinion fixtures...' (Emphasis added) (National Dairies at 5163; at 9-20)

26. In the same judgment, Murray J referred to the relevance of the common law principles of tenant's fixtures in considering the purpose or objective intention of original annexation:

'With respect I found most useful in considering this matter [objective intention] the statement of principle by Hill J in Lees & Leech Pty Ltd v. Commissioner of Taxation (1997) 73 FCR 136 at 148-9; 97 ATC 4407, at 4416-4417; (1997) 36 ATR 127, at 137-138. Included in those reasons, as in many other cases, is a discussion of tenant's fixtures...

The issue of removability in that way, as a right afforded by the law which may again confer ownership of the chattel upon a tenant or other limited owner, is, of course, different from the question whether the original annexation of the chattel to the land was of the character sufficient in all the circumstances to make the chattel become part of the land. But it does not follow, and indeed I would think it to be wrong that, as the respondent argues, the physical and economic capacity to remove the object in question and the likelihood of that occurring to enable the object to be used elsewhere is irrelevant to the question whether the degree and purpose of annexation was such as to make it a fixture in the first place. Clearly such considerations will be relevant aspects of the circumstances concerning the degree and object of annexation and will have the capacity to provide the answer to the question whether the objective intention with which the annexation of the object to the land was accompanied was such as to make it a fixture or lead to the conclusion that it retained its character as a chattel .' (Emphasis added) (National Dairies at 5159-5160; at 15-16)

27. This is an opportune stage to mention briefly the ATO view of the application of Item 192 to tenant's fixtures.

Tenant's fixtures

28. A useful summary of the common law concept of tenant's fixtures is contained in the comments of Murray J in National Dairies:

'Briefly put, a tenant's fixture is a chattel which the tenant annexes to the land for purposes of trade or domestic convenience or ornament in such a way that, applying the ordinary tests, the thing becomes a fixture and therefore loses its identity as a chattel and during the period of its annexation is properly to be regarded as part of the land. It will therefore be the property of the owner of the land, subject to the right which may be secured by agreement to the tenant to remove the chattel and thus sever its annexation to the land during or upon the expiration of the term, or within a reasonable time thereafter. That capacity has been developed by the law in mitigation of the strict application of the general rule that what becomes annexed to the land is a fixture to be treated as being part of the land and the property of the owner. The rule is to make severable and again a chattel that which would otherwise be part of the land and incapable of severance as a matter of law.' (National Dairies at 5159; at 16)

29. As a general principle, the ATO does not accept that the attachment of tenant's fixtures generates an entitlement to sales tax exemption under Item 192 (for the reasons discussed in paragraphs 54 to 56 of the Ruling). However, it is recognised that there may be limited exceptions to this general rule.

Second Test: 'Integral part of property'

30. While the general tests help to determine when a chattel becomes a fixture and, thereby, part of real property, they are not determinative of whether the relevant fixture is an integral part of that property. This is a further element that must be satisfied before Item 192 exemption can apply to relevant goods.

31. The word integral is not defined in the sales tax law, so its common meaning is a useful guide to its interpretation in the context of Item 192.

32. Integral is defined in the Shorter Oxford English Dictionary as:

'Belonging to or making up a whole; constituent, component; necessary to the completeness or integrity of the whole, not merely attached ' (emphasis added).

33. The Macquarie Dictionary defines the term as:

'1. of or pertaining to a whole; belonging as a part of the whole; constituent or component: the integral parts of the human body. 2. necessary to the completeness of the whole. 3. made up of parts which together constitute a whole. ...'.

34. The limited case law that deals specifically with the meaning of integral merely confirms the common meaning above.

35. In Deputy C of T v. Academy Plastics Pty Ltd (1956 High Court of Australia, unreported, 22 March 1956) (Academy Plastics) Kitto J considered the meaning of a phrase in the former 1930 sales tax law that has similar connotations to the meaning of integral. The relevant phrase was 'wrought into or attached to so as to form part of buildings or other fixtures'. Kitto J held, in effect, that these words did not apply simply to every article that was affixed to the fabric of a building. A relevant extract from his judgment is as follows:

'Obviously these words ["wrought into or attached to so as to form part of buildings or other fixtures"] cannot properly be applied to every article which is intended to be affixed to the fabric of a building so as to be held in a position which is suitable for its convenient use ... No one would ever think of such a thing, I am sure, except after the building was completed, and as a matter rather of furnishing and equipping the household than of adding to the building as a building ... The degree, manner and object of the attachment are not such that there can properly be said to be an integration of the Rack with the building. The building supports the Rack, it is true, but the attachment is slight, easily terminated, and irrelevant to any function of the fabric'.

36. In Commissioner of Taxation v McDonald's Australia Ltd 99 ATC 5293 (no equiv ATP report as yet) (McDonald's) the Full Federal Court referred to the meaning of integral as it relates to raw materials in manufactured goods (defined in subsection 7(1) of the STAA). In McDonald's, Carr J stated that:

'The authorities in this area show that for materials to become an integral part of other goods it is usually necessary for them to be physically subsumed into the other goods...' (McDonald's at 5304)

37. While this confirms the common meaning, the strength of the phrase 'physically subsumed' lends weight to the view that, for Item 192 purposes, a thing must lose any identity as a chattel before it can be said to be integral with property. Mere attachment or affixation by whatever means is not sufficient.

38. In State Electricity Commission of Victoria v. Commissioner of Taxation; 99 ATC 5007; (1999) 42 ATR 820 (SECV) the Full Federal Court considered (among other things) the application of Item 192 to a transformer substation installed in the grounds of a college. Under the agreement between the power supplier and the college, the transformer remained at all times the property of the power supplier. The Court did not have to decide whether the substation was a fixture in the circumstances, but stated that for Item 192 to apply, it was necessary for the relevant goods to become part of the physical property of the always-exempt person (or property of an appropriate lessor to the always-exempt person for the purposes of subsection 192(2)). It was of no relevance that the power supply was essential to the operations of the college.

39. An ATO view on the meaning of the word integral is discussed in Taxation Ruling SST 5 Sales tax: classification of furniture, timber and joinery, and Taxation Ruling SST 14 Sales tax: building materials.

40. In paragraph 2.17 of SST 5, it is accepted that built-in furniture and shopfittings are exempt as 'raw materials'^[F4] used in the construction and repair of property so as to become an integral part of that property, if they satisfy all of the following guidelines:

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they are purpose built to fit and designed to become permanently affixed to a particular part of a particular building;

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they are never completely finished in the workshop and are not offered for sale as items of freestanding furniture;

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they need to be assembled, adjusted (to some extent) or fitted on the site of the installation; and

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they cannot be easily removed and relocated without either structural modifications or substantial repairs becoming necessary to the building or the built-in furniture or shopfitting.

41. These guidelines are consistent with both the doctrine of fixtures and the meaning of 'integral' as discussed above.

42. In paragraphs 3.12 and 3.13 of SST 14, it is stated that something is said to be integral when it belongs as part of a whole, is necessary for the completeness or integrity of the whole, or forms an intrinsic portion or element as distinct from an attachment or appendage. This view is a reiteration of the common meaning of the word, but it is also derived from the interpretation of integral in Dixon (Inspector of Taxes) v. Fitch's Garage Ltd [1975] 3 All ER 455 (Fitch's Garage case).

43. The Fitch's Garage case dealt with the question whether a canopy and fascia that covered petrol bowsers, was an integral part of the petrol pump complex and thereby an item of plant for income taxation purposes.

44. Brightman J stated:

'The proper test is whether the canopy had a functional purpose to enable the taxpayer company to perform the activity of supplying petrol to motor vehicles. I ask myself, "Does the canopy help to supply petrol, or is it merely part of the setting where petrol is supplied?" ... is the canopy part of the means by which the operation of supplying petrol is performed?' (Fitch's Garage case at 461)

45. This test is referred to as a 'functional test'. It is directed at differentiating fixtures which merely provide the physical setting in which a business is carried on from those that are the means by which the business is conducted.

46. The issue in the Fitch's Garage case was whether something that was already agreed to be a fixture was 'plant', not whether the thing was itself a fixture or an integral part of property.

47. Nevertheless, a functional test of the kind used in that case is regarded as a relevant and practical guide to identifying fixtures that are integral with (real) property and differentiating them from things that, although they are fixed in place by some means or another, are not integral with property. Accordingly, it has been adapted as one of several criteria set out below for determining whether goods are integral with property for the purposes of Item 192.

Criteria to determine whether goods are integral with property

48. As a practical guide, the ATO accepts that Item 192 will apply to relevant goods when all of the following criteria are met:

Criterion 1

49. The goods become, or become part of, fixtures attached to real property according to the common law doctrine of fixtures, and are not tenant's fixtures.

50. It is not possible to lay down guidelines on what constitutes a fixture that can be applied to all cases. Each case has to be considered on its merits according to general principles discussed earlier.

Criterion 2

51. The fixture must form part of the physical setting in which the business is carried on, and not part of the means by which the business is conducted (Fitch's Garage case). Goods (albeit fixtures) that fall into the latter category are, prima facie, tenant's fixtures.

Criterion 3

52. The goods must be physically subsumed in the real property (McDonald's). That is, they must lose their identity as chattels and be more than just simply attached to a building or structure. The comments of Kitto J in Academy Plastics, quoted earlier, are of particular relevance here. Further, the guidelines in paragraph 2.17 of Taxation Ruling SST 5 (repeated at paragraph 41 of this Ruling) are useful for determining if a thing is physically subsumed into property rather than merely attached.

Criterion 4

53. The goods become part of the physical property of the always exempt person or lessor to an always exempt person (SECV).

Tenant's fixtures generally not integral with property

54. Prima facie, tenant's fixtures do not meet the 'integral part of property' test, notwithstanding that they may be affixed to a building, structure or land by some means or another. Generally, tenants would be aware of their rights of removal at the time they install the fixtures. It is considered difficult to argue that tenant's fixtures are installed with the objective intention, at that time, that they become an integral part of the landlord's property for an indefinite period (National Dairies). Further:

*

in most cases, tenant's fixtures are readily removed physically;

*

in the majority of cases, it would be to the economic advantage of the tenant to remove and sell assets prior to lease termination rather than simply surrender them to the property owner. Where the lessee is a company, directors have a fiduciary duty to their shareholders to ensure this is done if to the company's advantage. At the time of installation of the particular tenant's fixture, there is no way of knowing that such an economic advantage would not exist; and

*

the terms of many tenancy agreements require the tenant to return clear possession to the property owner or meet the costs for the owner to do so.

55. However, it is accepted that there may be limited exceptions to this general rule. In those circumstances, taxpayers should provide the full facts to the ATO and request a private ruling. In submitting requests, taxpayers should address the objective intention of the annexation at the time it was done, and in particular provide information on:

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the degree and method of annexation;

*

the physical and economic capacity to remove the tenant's fixtures on termination of the lease;

*

the term of the lease agreement; and

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any terms and conditions that it may contain pertaining to tenant's fixtures.

56. It would be advisable to furnish a copy of the lease agreement with the submission.

Detailed contents list

57. Below is a detailed contents list for this Ruling:

Commissioner of Taxation
1 March 2000

Appendix A

Previously released as STD 98/D1

References

ATO references:
NO T2000/002507

Related Rulings/Determinations:

SST 5
SST 14

Legislative References:
ST(E&C)Act 1935
ST(E&C)Act 1992 item 192 Schedule 1
STAA subsection 3(4)
STAA section 5
STAA subsection 7(1)

Case References:
Australian Provincial Assurance Co Ltd v. Coroneo
(1938) 38 SR (NSW) 700

Commissioner of Taxation v. McDonald's Australian Ltd
99 ATC 5293
DC of T v. Academy Plastics Pty Ltd
(High Court of Australia unreported, 22 March 1956)
Dixon (Inspector of Taxes) v. Fitch's Garage Ltd
[1975] 3 All ER 455
(1987) 18 ATR 619
Eastern Nitrogen Ltd v. Commissioner of Taxation
99 ATC 5163
(1999) 43 ATR 112
Eon Metals NL v. Commissioner of State Taxation (WA)
91 ATC 4841
(1991) 22 ATR 601
Holland v. Hodgson
[1872] LR 7 CP 328
Lees & Leech Pty Ltd v. Commissioner of Taxation
(1997)73 FCR 136
97 ATC 4407
(1997)36 ATR 127
National Dairies WA Ltd v. Commissioner of State Revenue
99 ATC 5155
(1999) 43 ATR 11
State Electricity Commissioner of Victoria v. Commissioner of Taxation
99 ATC 5007
(1999) 42 ATR 820