A'Beckett v Federal Commissioner of Taxation [1959] HCA 57; (1959) 104 CLR 508 (30 October 1959)

HIGH COURT OF AUSTRALIA

A'BECKETT v. FEDERAL COMMISSIONER OF TAXATION [1959] HCA 57; (1959) 104 CLR 508

Income Tax (Cth)

High Court of Australia
Windeyer J.(1)

CATCHWORDS

Income Tax (Cth) - Assessable income - Lease - Meaning of "expiry of a lease" - Lessor assessed on estimated value to him of improvements made by lessee - Exception where lease to company by individual who controls voting power - Relevant date at &which control must exist - Operation of taxing provision where lease surrendered in year improvements completed - Income Tax and Social Services Contribution Assessment Act 1936-1953 (Cth), ss. 87 (1), (2)*, 88 (3)**.

HEARING

Melbourne, 1959, October 12, 13; October 30. 30:10:1959
APPEAL under the Income Tax and Social Services Contribution Assessment Act 1936-1953.

DECISION

October 30.
The following written judgment was delivered:-
WINDEYER J. This is an appeal against an assessment of income tax for the and Mr. W. A. K. a'Beckett, are trustees of the estate of the late W. G. a'Beckett. The question arises in connexion with the income of the estate, and concerns the operation of s. 87 of the Income Tax and Social Services Contribution Assessment Act 1936-1953. The Commissioner claims that an amount of 7,756 pounds is by that section to be included in the assessable income of the estate in respect of a lease granted by the trustees. As this does not represent any moneys actually received by the estate which are payable to any beneficiary, the Commissioner assessed the trustees in respect of this amount pursuant to s. 99 of the Act. The taxpayers' contention is that s. 87 has no application in this case. Alternatively they contend that, if it be applicable at all, it has been incorrectly applied, and that upon its proper application the amount to be brought in, as income of the year ended 30th June 1954, would be less than that claimed by the Commissioner. (at p510)

2. The relevant facts, which were agreed upon, are as follows: The taxpayers are, and at the material times were, proprietors of an estate in fee simple of certain premises in Palmer Street, Jolimont, which formed part of the trust estate. By a lease dated 21st April 1952 they let these premises to a company, Cromwell Proprietary Limited (which I shall refer to as "the company") for a term of five years from 1st April 1952 at a yearly rental of 200 pounds payable by equal monthly payments. Various members of the a'Beckett family hold shares in the company, among them Mr. W. A. K. a'Beckett; but the company was not at that date under the control of the trustees in any relevant sense. It was intended that the premises would be altered and improved by the lessee; and to this end plans and specifications had been prepared by an architect. By a document dated 22nd May 1952 the trustees consented to the company carrying out improvements of the leased premises in accordance with these plans and specifications, which were annexed to such consent. These improvements were not, and are not, subject to tenant rights within the meaning of s. 87 of the Act. On 22nd August 1952 the company made a contract with a firm of builders for the work to be done according to the plans and specifications. The work began in September 1952 and went on for nearly a year. The contract provided for the work to be done for its actual cost plus 500 pounds. The company expected the cost of the work when completed would be about 4,000 pounds; but by June 1953, while the work was still in progress, it had become apparent it would cost much more than that. At all material times prior to 17th June 1953 the issued capital of the company was 4,000 pounds, divided into 4,000 shares of 1 pound each, all fully paid up. On 17th June 1953, for the purpose of obtaining further capital for the completion of the work, the company allotted to the taxpayers 4,500 shares of 1 pound each in its capital, which were fully paid for in cash. On the same date one of the two directors of the company resigned his office, and Mr. W. A. K. a'Beckett, one of the trustees, was appointed a director and continued to be one. Since the issue of the new shares on 17th June 1953 the taxpayers have held 4,500 of the 8,500 issued shares in the capital of the company. None of the shares was issued upon any special terms as to voting, so that by the company's articles the members of the company upon a poll have one vote for every share held. In the result, therefore, as from 17th June 1953 the taxpayers, the lessors of the premises, controlled the voting power of their lessee, the company. (at p511)

3. After 17th June 1953 work continued in accordance with the building contract until 3rd August 1953. The company's architect reported the work as having been completed on that date, and he issued his fifth and final certificate to the builders. The total amount paid to the builders by the company pursuant to certificates rendered by the architect was 7,107 pounds 9s. 7d. Of this sum 4,517 pounds 9s 7d., being the total amount of the fourth and fifth certificates, was paid on 17th August 1953. The amounts of the first, second and third certificates had been paid before 17th June. In addition the company paid architects' fees and other charges, making the total cost of the work 7,983 pounds 5s. 8d. The next event was that by deed dated 31st December 1953 the company conveyed and surrendered to the lessors, the taxpayers, "all and singular the hereditaments demised by the . . . lease, to the intent that the term of years granted by the said lease may merge and be extinguished in the reversion expectant thereon". And on the same day the taxpayers granted a new lease of the premises to the company for a term of twelve years from that date at a yearly rental of 240 pounds payable by equal monthly payments. (at p511)

4. Sections 87 and 88 are in Dvi. 4 of the Act, which deals with leases. This Division contains provisions which, speaking very broadly, make premiums and other payments by a lessee to a lessor, and also certain expenditure by a lessee in connexion with leased premises, equivalent to rent payable under the lease. It is unnecessary to consider whether in principle and apart from statute such payments and expenditure would, in relation to either the lessee or lessor, be properly attributable to capital or to income (cf. King v. Earl Cadogan (1915) 1 KB 823) The statute determines the question for the purposes of income tax. A lessee who, by erecting fixtures or otherwise, effects upon the demised land improvements which enhance the value of the reversion confers a benefit upon his landlord; and, when the conditions laid down by the Act are fulfilled, the value of this benefit which the landlord gets is spread over the period of the lease and treated as income of the landlord. (at p511)

5. Sections 87 and 88 are in a sense counterparts or correlatives of one another. But, as was pointed out in argument, there is no exact correspondence between their provisions. The actual outgoings deductible by the lessee pursuant to s. 88 are not treated as receipts by the lessor. That this is not the scheme of the Act need not cause surprise, for on general principle every payment which is properly deductible in computing the income of a payer is not necessarily income in the hands of the payee. The character for a payer of an outgoing - that is whether it be on account of capital or income - does not determine the character in which the benefit of it is received by the payee; and here the two sections in fact operate differently, if not independently. Under s. 88 a proportionate part of any expenditure made by a lessee pursuant to a building lease is an allowable deduction in the year of such expenditure. Much, if not all, of such expenditure must necessarily be incurred before the work is completed. It may be incurred over several years; and it is an allowable deduction when it is incurred. But under s. 87 it is the value which the lessor gains from the expenditure by his lessee which enters into the calculation of his income; and it is not taken into consideration until the work has been completed. Then the value of the work becomes an element in the lessor's income in each year after the completion of the work until the lease expires. (at p512)

6. In the present case it would appear that the company upon its surrender of its lease in December 1953, and the grant to it of a new lease running from the date on which the surrender occurred, became entitled in respect of the year ended 30th June 1954 and later years to a deduction of a proportionate part of the cost, spread over twelve years, of effecting the improvements. This, it seems, is the combined effect of s. 85 (7) and s. 88 (1). But this, whether it be so or not, seems to me to be irrelevant to the present question, although one can understand that this advantage to the lessee attracted the Commissioner's attention to the position of the lessor. (at p512)

7. Mr. Aickin's main argument was that s. 87 (2) made the provisions of s. 87 (1) inapplicable in this case; because he said that at all relevant times - that is to say, during the whole of the year of income, and thus at the date of the completion of the improvements and at the date 30th June at which the income of the year had to be determined - the lessors controlled, and they still control, the voting power of the company. It is common ground that for the purpose of ss. 87 and 88 the lease in question is the five year lease executed on 21st April 1952 and surrendered on 31st December 1953. This must necessarily be so if the sections are applicable at all in the circumstances of this case. I am satisfied that after 17th June 1953 the lessors, the taxpayers, did control the voting power of the company within the meaning of s. 88 (3), notwithstanding some ingenious arguments by Mr. Nimmor to the contrary. Mr. Nimmo's answer to this branch of the argument for the appellant was, however, that at the date the lease was executed and at the time when the lessors consented to the making of the improvements they did not have this control. That is so. But it is not, I think, a decisive factor. Section 87 operates only when improvements were made by a lessee in consideration for the grant of the lease, or were made pursuant to the provisions of the lease, or were made with the written consent of the lessor. These are conditions which must be fulfilled before the section can have any operation (Stone v. Commissioner of Taxation (1954) SASR 304 . But the effect of s. 88 (3) is to render both s. 88 (2) and s. 87 inapplicable when, in the eye of the income tax law, a lessor and lessee are in substance the same person. And in my view this is not a matter to be determined once and for all at the date of the lease or at the date when one of the conditions for the operation of the section occurs. In relation to a lessee's claim under s. 88 (2) for deductions, the relevant date for considering s. 88 (3) would appear to be the date in the year of income when the expenditure claimed as a deduction was incurred. The lessee can claim his deduction when and only when he has incurred expenditure in making improvements. It is not enough that he should have agreed or been authorised to make them. And conversely the lessor is only chargeable with the value of the improvements when they have actually been completed. It is not enough that he has stipulated for or consented to their being made. Therefore the time at which the relations of the lessor and lessee must answer the description in s. 88 (3) for the purpose of making s. 87 or s. 88 inapplicable seems to me to be when events have occurred which give rise to liability under s. 87 or permit deductions under s. 88 - that is, under s. 88 the years of income when the expenditure is incurred; and under s. 87 in the year of income when the improvements are complete. It is in the year of such completion and in subsequent years that the value of the improvements enters into the lessor's assessable income. In the present case the conditions of s. 88 (3) necessary to make s. 87 (1) inapplicable were satisfied during the whole of the year of income in which the improvements were completed. Section 87 was therefore not applicable. It follows that the appeal should be allowed and the assessment set aside on the ground that no part of the sum of 7,756 pounds formed part of the assessable income of the taxpayers. (at p513)

8. It is thus unnecessary to consider Mr. Aickin's alternative argument. I shall, however, do so briefly, for it raised questions which were carefully argued by both sides and the consideration of which threw some light on the main question. (at p514)

9. Briefly the argument amounts to this: Ignore s. 88 (3) and assume therefore that s. 87 does apply; and this is what the Commissioner in fact did. He concedes that par. (a) of s. 87 (1) is not expressed to meet a case where the completion of the improvements and the expiry of the lease occurred in the same year of income. So he turned to par. (b); and he relies upon it to include 7,756 pounds in the taxpayer's assessable income. This sum he estimates to be the value of the improvements at 31st December 1953 - which he says is the date of the expiration of the lease. (at p514)

10. The scheme of s. 87 seems to me to be that par. (a) of s. 87 (1) applies to leases for fixed terms; par. (b) of the same sub-section applies to terms of definite but uncertain duration - such as for a life or lives or determinable on some given future event, for example the end of a war; and s. 87 (3) applies to periodic tenancies of indefinite duration such as tenancies form week to week or month to month. (at p514)

11. If this be the scheme of the section, then I do not think the Commissioner really improves his position by claiming to rely upon par. (b) rather than on par. (a). If a lease expires in the same year as improvements are completed it does not seem appropriate to say that the instalment cannot be satisfactorily determined. It seems rather that, if the calculation required by s. 87 can be made at all, it must be on the basis that instalments are not required and that the whole estimated value of the improvements at the commencement of the year in which the lease expired should be included in the assessable income. To call this one amount a single instalment is an incorrect use of words; but such an application of par. (a) seems to me probably more correct than a resort to par. (b) would be, if the Commissioner be right that the year in which the lease was surrendered and the new lease granted was "the year in which the lease expires". The result however would not be very different. It would mean that the sum to be brought in would be such sum as would, if received on 1st July 1953, have accumulated at the rate prescribed to the sum of 7,756 pounds on 31st December 1953. But this, of course, would be so only if 31st December 1953 was the date when the lease expired. The critical question is when, within the meaning of either pars. (a) or (b), "the lease expires" in the present case. It was contended for the taxpayers that the section, when it refers to the year when the lease expires, contemplates the year in which the term granted by the lease would come to an end, and not some earlier date when by surrender, forfeiture, merger, resumption by the Crown, or in some other way the tenancy is determined. It is an ordinary use of language to say that a lease expires when the term granted comes to an end by effluxion of time, and this it has been said is the natural meaning of the word "expires" in that context (Middleton's Trustees v. Middleton (1955) SC 51, at p 63 ). But Mr. Nimmo brought to my notice the interesting passage in Plowden's report of Wrotesley v. Adams (1558) 1 Plowd 187 (75 ER 287) , where it is said: "And the word (expiration) is properly breathing up, or yielding up his breath, (as the Lord Dyer said) and it is applied to man, or other things animate, and is used to express the death of a man. For when he yields up his breath, then he dies, for without his breath he cannot live. And although it is properly used in relation to things animate which breathe, yet by a similitude it is referred to things inanimate. As in our law we use the word (reverter) which is properly applied to things animate which move of themselves, but sometimes we use it in our law in relation to things inanimate, as we say, when tenant in tail dies the land shall revert to the donor. And so expiration, which is here used by similitude to things living, implies any end whatever. For as we signify by expiration the death of a man, and his last end, whatever way it happens, so the word expiration, being applied to an estate for years, may aptly enough signify the end of it, whatever way it be." (1558) 1 Plowd, at p 198 (75 ER, at p 304) . The facts of that case, which was also reported by Dyer (1560) 2 Dyer 177b (73 ER 391) , were unusual. On this aspect the decision establishes that if a lease be granted to commence on the expiry of an existing term and that term be cut short the new lease takes effect at once. The decision in the Rector of Chedington's Case [1596] EngR 7; (1598) 1 Co Rep 148b, at p 154b [1596] EngR 7; (76 ER 337, at p 347) is to the same effect. Probably all that one can say is that the time of the expiry of a lease may mean the date on which the term granted will come to an end, or it may mean the date when the relationship of landlord and tenant under the lease is otherwise determined. It depends upon the context (cf. Hall v. Comfort (1886) 18 QBD 11 ). Here the Act proceeds on the basis that the period from the year in which the improvements have been completed to the year in which the lease expires can, at the time of such completion, be accurately predicted for the purpose of making the calculations required. Such a prediction could not be made if expiry might occur in any one of a variety of ways at some unpredictable date. But it could always be made in a case where the lease current at the time when the improvements were completed had an unexpired term of fixed duration. The Act perhaps does not really make provision for circumstances such as those of this case. It seems to assume that all leases will in fact run their full course. But if it is to be regarded as applicable at all in this case, then it seems to me that the year in which the lease expires must mean the year ended 30th June 1957 - for the term limited by the lease would have expired on 1st April 1957. On that basis the whole value of the improvements should not have been brought in to the year ended 30th June 1954; but the value to the lessor of the improvements as in 1957 should have been estimated and that amount brought in by instalments until and including the year ended 30th June 1957. On that basis it is said that the amount to be brought into the assessable income for the year ended 30th June 1954 would be 1,322 pounds, not 7,756 pounds. It is however unnecessary for me to find whether this sum be correct; for, as I have said, I consider that s. 87 (1) is rendered altogether inapplicable in this case by the combined effect of s. 87 (2) and s. 88 (3). (at p516)

12. The appeal will be allowed with costs and the assessment set aside. (at p516)

ORDER

Appeal allowed with costs. Assessment set aside.