Bla CATCHWORES INCOME TAX - Allowable deductions - Investment allowance - Exvenditure on wallets used in 112 making process and twa-way radio system - Meaning of unit cf croperty - Tmeortance of Function - Whether batch 23€ callets a simagls uni of praperty - Whether radio system a single unit cof property. Income Tax Assessment Act 1336. s.S32AB MONTER COLOURTILE PTY. LTD. v. THE COMMISSIONER OF TAMATICN OF SOPAM: McGreaor, Fisher and Neaves JJ. DATE: 9 November 1984 PLACE: Canberra IN THE FEDEPAL COURT OF AUSTRALIA ) } NEW SOUTH WALES DISTPICT REGISTRY ) No. G217 of 198? y GENERAL DIVISION ) ON APPEAL FPOM THE SUPREME COURT QF NEW SOUTH WALES BETWEEN - MONIER COLOURTILE PTY. LTD ~ LTD. Acreilant ANC. THE COMMISSIONER OF ALAATIUN OF THE OMMCNWEALTH ¢r AUSTRALT: Rescondent JUDGES MAKING GRCER : McGreair, Fisher and Neaves Jo. DATE OF ORCEP : 9 November 13284 WHERE MADE ' Canberra THE COURT ORDERS THAT: 1. The appeal be dismissed. 2. The appellant vay the respondent's costs of the apreal. IN THE FECERAL COURT OF AUSTRALIA ) a z in oO = j Ba >i m7 tn iJ t4 io7]ve] ha fe] ty 'n ty QO r4 n t3 Bs) ms pe a oa (2 Jmh vr w D us GN_APPEAL FROM THE SUPPEME COURT OF NEW 23TH WALES BETWEEN: MENTER TOLOUPTILE PTY. LED Arpeilant AND: THE COMMISSIONER VE TAXATION OF THE TOMMONWEALTH OF AUSTPALIA pn Pesrendent ZORAM: McGregor, Fisher and Neaves Jd. BATE: 9 November 1584 REASONS FOR JUDGMENT THE COURT: This 1s an appeal by Monier Colourtile Pry. Ltd. '"the taxpayer") from a decision of the Supreme Court of New South Wales wherebv that Court dismissed an appeal against the disallowance of the taxpayer's rotice of obtectior to an assessment to income tax. The Commissioner of Taxation of the Commonwealth of Australia '""the Commissioner') had bv his assessment rejected certain claims by the taxpayer for investment allowances under sub-division B of Division 3 of Part III of the Income Tax Assessment Act 1936 ("the Act"). The taxpayer claimed in resvect of the vear of income erding 30 Tune 1379 allowances for expenditure made by 10 on plant acquired during that year. The disputed expenditure rerated in tiie naking for a oy + uw c u B) yu to the— surchase of 5,150 val total cost of $29,174 ard the leasing of a two-way radia system. This system initially tomprised a base station and 14 mobile out-staticns. The taxpayer ther ieased 2 aiditionai out-stations and an executive handset. The first i¢ omebile stations crst $565 each and the 2 additional tl stations $540 each. The base starion cost $1,962. The cast or the handset was not stated. The claim for investment allowances on these acwuilsitions was made under s.82AB of the Acc. the relevant portions of which are as follows: "(1) Subject to this Subdivisicn, where - (a) onor after 1 January 1376, a taxpayer has incurred expenditure of a capital nature (in this section referred to as 'eligible expenditure') ain resvect of the acquisition ... by him of a new unit of eligible property in relation ts which this Subdivision apolies; (b) the eligible expenditure exceeded $500; (c) the eliaible expenditure was incurred - (1) ain respect of a unit cf vroperty acquired by the taxpayer under a contract entered into on or after 1 January 1976 and before 1 July 1985; or (11) ~». and ts Le) wa 'd) tne unit of property was first used or installed ready for use before 1 Juiv 1986, there shall be allowed as a deduction frou the taxpayer 5 assessable income of the Cirst year of imcome during which that unit was either used for the ourpose of roroeducing assessable income. or installed ready for use for that purpose, an amount 'in this section reterred to as the 'relevant amount') ascertained in accordance with the following provisions of this section. Where the eliaible expenditure was incurred- (a) im respect of ai unit of property acaulrred by the taxpayer under a montract entered unto before 1 July 1978; or me) nee ard was so incurred in respect of a unit oft property that was first used or installed ready for use before 1 Julv 1379 the relevant amount is such percentage of the amount of the 2liaible expenditure as 1s orescribed Dv sub-section (3). For the purposes of sub-section (2), the prescribed percentage in relation to an amcunt 72f eligible expenditure 1s - fa) where the eligible expenditure 1s less than $526 - 2 per centum (b) where the eligible expenditure 1s no less than $526 but is less than $976 - per centum increased by 2 per centum fo each whole $25 by which the amount of the eliqible expenditure exceeds $501; or trv 'c) where the eligible expenditure 1s) not less than $976 - 40 per centum " Section 82AQ defines ""eiirdible oroeerty" but there definition of "unit of property". Eligible property means 'plant or articles within the meanina of section 54" and 1t was common agrourd that the pailets and the two-way radio system were "plant or articles" within that section. In respect of the 5,150 pallets the taxpayer arques that as the total purchase price was $29,174 1t was entitled to a deduction of 40% of this amount pursuant to sub-section 2AB(3)1c)}. Te based tnis claim on its contention that the entire batch of 5,150 pallets was ome "new unit of eligible property" within sub-section 872AB:1)'a:. The Commissioner's view was that each pallet was secarately a "new unit of eligible property" and the cost cf each being $5.55, there was nce entitlement to an allowance because sub-seztisn QS2AB(1L)(b) worescribed 3500 as the minimum expenditure for oa u Cc oe 1] a ca oO ns oO co ae a Tw ny fe Fe) each unit of eligible property. Tne 1 judge on this aspect of tne appeai was therefore whether the 5,150 pallets were to be treated as one unit or 5,150 units of eliqible property which issue he decided in favour of the Tommissioner. Against this decision the taxpayer appeaied to this Court. The trial judage's description of the pallets and wh the function they perform in the tile makina process was, with one exceotion, accepted by the parties. It 41s carefully set out in his reasons for tudament where he adopted as an accurate description of the process of tile making the words of Barwick C.J. in Pedland Tiles Pty. Limited v. Federal Commissioner of Taxation '1971) 4055 (Redland Tiles: at rvage 4057 which we need net rereat. Briefly 1t as sufficient tc note that the pallets are of aluminium, 42.5 cms x 32.5 cms in 31ze and are an integral part of the process of tile making. The trial judge stated that the function of each pallet was to carry concrete through the various stages of tne producrcion line to the coint where the completed tile was produced and separated from the pallet: the upwer surface of the pallet whith received the concrete as 1% passed threugh the moulding machine was shared to form the underneath of the tile and the tile machine impressed the surface of the concrete with the shape of the upper surface of the tile. This vrocess was described in areat detail by Barwick C.J. ain Rediand Tiles. The trial judge described the subsequent operations whereby gach tile in its "green state was carried to an automatic racking machine. This machine consisted of a vertical circuit of crates into each of which a pallet and green tile were pushed, thereby discharging a cured tile and pallet. The cured tiles together with their rallets continued on the conveyor to the back thereof where the tiles were removed from the pallets. These pailets then continued on the circuit back to the moulding machine, where each received a further extrusion of concrete. The trial judge stated that at all stages of the process the pallets remained separate independent units, oO separate from each other and capable of being replaced by other single pallets. Before us counsel for the taxpayer contended that in this reqard the trial adudge was not torrect in that the pallets were, he said, vart of the tile makina machine at the time the concrete was extruded, that she machine could not work without the pallets and could not work properiyvy a1f some were removed. The pallets and the other voarts of the machine, he said, work together asa Single entity. We do not see these contencions as casting any doubt upon the conclusion of the crial ?tudde. It was open to him, assisted as he was by a view of a similar plant, fo conclude that the pallets were separate independent units. The 'rial judge adopted and applied th t of 1) r rg w Thomas J. in Tuliy Co-operative Suaqar Milling Association Ltd. v. Federal Commissioner of Taxation (1982) 82 A.T.C. 4454 at page 4459. After referring to McTiernan J.''s remarks in Wangaratta Woollen Mills Limited v. Federal Commissioner of Taxation (1969) 119 C.L.R. 1 at page 13 Thomas J. said: "In my opinion a component may be a unit of property for the purposes of s.82AB in the context of a manufacturing system, 1f 1t can be shown to perform a discrete function, or 1f it can be shown to vary the performance of that system." Shortiyvy after She trial judge delivered his judgment ain this matter the Full Court of this Courc dismissed an appeal against the decision of Themas J. 'Federal Commissioner of Taxation v. Tully Co-operative Sugar Mililirag Associration Limited (1983) 83 A.T.C. 4495 (Tully)). Each of the members of the Full Tourt adopted what can be termed the "functicn or purpose test". Fox J. ceviewed cther sections of the Act, as did the triai judde in this matter. There ts mo need for us to repeat that review. At page 4500 Fox J. said of rhe ohrase "unit of eroperty" - "There ar€ many other uses of the phrase in the Act. Those which i have examined suaqest that 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 2S capable of being separately regarded and treated." Later on the same page he said: "When one looks to see whether there 1s a unit, one normally looks to see whether there 18s a whole something. Whether there 1s a whole will normally be judged by the intended function or purpese of that which 1s being looked at. ... As used in the section (and other sections) the matter 1s more one of identification than of structure." Fox J. accepted that the findings of the trial judge on this aspect were generally "findings of fact" and he saw, as did the other two iudges, no reason to disturb them. Lockhart J. adopted tne same t23% and made comments which are of particular relevance when applied to tne facts i) of this matter. At page 4594 he said: "Te aus true that ultimately the question wnat renstituted 'a unit of eliaible property depends or the facts of the particular case. but some guidance t2 the Commissioner and taxpayers us called for. In my view the nearest sn? tan qet fo enunciating a test of fairly yeneral apolicaticn is chat 1t is the function or purpase of the voarticular item to which one looks te see 1f it answers the description on the facts of the case of 'a unit of eligible property' It is net necessary that it he functionally operative though in many circumstances this may be called for. For example, if five parts are installed in an assembly line amd all that :s needed to render the line operative 1s a sixth part, but until that part 1s installed no part may function or orerate, the functional incompleteness dce¢ not necessarily deprive each cof tne five units of 1ts character as 'a unit of eligible property' for the purposes of the Assessment Act. Tr depends on the facts of the case." Fitzgerald J. at sage 4506 said: "In the present case, the Judge recognized that questions of fact and degree were involved. He concluded, with the assistance of uncontroverted expert evidence, that the relevant units were che discrete sections of the milling system and that each had been constructed by the taxpayer. He was clearly entitled, in my opinion, to conclude that the sections of the milling process constituted units of property. Without seeking to provide an exhaustive definition, I see mo reason to doubt that there 1s, for present purposes, a unit of property 1f it is capable of independent existence, not necessarily self-contained, e.g. ait may be incorporated into an operating system such as a ve) machine or complex of machinery in a manufacturing process, but capable e1ther o2f separate function, or of function in conjunction with different parts, or in a different context, From its current user." Counsel for the taxpayer accepted that the trial judge adopted the appropriate test but contended cthak the number of pallets purchased shculd De regarded as a single unit because they were purchased fcr the express purpose of increasing production. Be sali that any number purchased for this purpose, whether it be 190, 1,909 or 5,C0O0 would constitute a single umit, as the taxpayer was. in counsel's words, ""entitied to select the level of generality". dis contention was that the number purchased came within the fest in that they were purchased for a particular purpose or function, mameiv the purcose of increasing capacity by increasing the speed of operation. This increase in the speed of operation of the tile making system, he said, amounted to a variation cf tne performance of that system. The trial jaudae did not accept this submission and, 1n our opinion, rightly rejected it. There was in consequence of the purchase no alteration or variation in the cperaticn of the system, 1 remained exactly as before except that the increase in the speed of operation enabled the production of more tiles. Moreover the number of additional pallets necessary to increase the speed of operation bore no relationship to the nmumber of pallets vourcnased. In cur spirzar, che trial qudze, or the avidencte before aim, vas antitied ta sonctlude that eacn of the callers curcnase: was a ePparanta roam oF" entity capable of werforming a discrete and identifiable function could chey have been related to the requirement that 457 ealilets were <seaquired tc be or nand at all material Cimres In fact the taxvaver had 12,500 paltets on hand am the time of the surchase. Whilst it nay be salad that the subrective purpose cf the taxpaver at the time of acquirsi rerelevant the trial dudqe in cur opinion correctly applied "st the pursose and function test in rerzecting this submission. There is therefore no reason to disturb this finding whicr. aqdain wat one of fact. Qn the basis of the findings of fact of the trial judge, the taxpayer 1s not entitied to any deducticn unser s.82AB of the Act as the amount expended on each unit (12. Ww 5.66) was less than the minimum qualifying expenditure ver unit (viz. $500). In relation to the lease of a base station, 16 mobile stations and an executive handset, there was again no suagestion that the trial juda2 had applied the wreng test. It follows that, as Fitzgerald J. put it an Tully, the ultimate fanding is a matter of fact and dearee. The taxpayer contended that the whole of the equipment leased constituted a "new unit" of ealizyible rrorerty for whith if was entitled to a 40% allowance of the cotal amount expended. The Commissioner's 'view was that the base station and the executive handset and each of the 16 mobile stations was a separate unit of eligible property. On this basis he allowed deductions of eligible expenditure as follows: 40% on the base station (sub-s.82AB(3)(c)) 6% on each mobile station which cost $565 (sub-s.82AB(3)(b)) 4% on each mobile station which cost $549 (sub-s.82AB(3)(b)). The trial judge found as a fact that each of the mobile stations was functionally complete in itself and each had a separate independent existence. He noted that it was stressed by the taxpayer that the base station was useless without one or more mobile stations and vice versa. Whilst he acknowledged that this was true in a commercial sense as far as the user was concerned, he regarded this circumstance as no basis for a conclusion that the entirety was to be purposes 2f ».dzZARB. Ir fis Y > regarded as ome unit view each was capoabie operation acquired the nf operation alithoudn such for which the taxpayer chere 15 no reason co itisturb this ub AY ww ko zg H cr ty a a ul ow i) I certairty that this and the preceding li paves are a true copy of the Reascns for Judgement herein of their Honours Mr Justice McGrecqar, Mr Justice Fisher and Mr Justice Neaves. Z an fOr = Aas7z 1ahe