Consolidated Metal Products Ltd v Federal Commissioner of Taxation [1962] HCA 33; (1962) 108 CLR 120 (26 July 1962)

HIGH COURT OF AUSTRALIA

CONSOLIDATED METAL PRODUCTS LTD. v. FEDERAL COMMISSIONER OF TAXATION [1962] HCA 33; (1962) 108 CLR 120

Income Tax (Cth)

High Court of Australia
Dixon C.J.(1), Kitto(2), Taylor(3), Menzies(4) and Windeyer(5) JJ.

CATCHWORDS

Income Tax (Cth) - Assessable income - Deductions - Lease - Improvements to leased property - "Tenant rights" - Right to removal of improvements - Income Tax and Social Services Contribution Assessment Act 1936-1958 (Cth), s. 88 (2)*.

HEARING

Sydney, 1962, May 1, 2; July 26. 26:7:1962
CASE STATED

DECISION

1962, July 26.
The following written judgments were delivered: -
DIXON C.J. In my opinion the sum of 527 pounds forming the annual proportion in accordance with the second schedule of the lease and spread over the then unexpired term of the lease was not an allowable deduction under s. 88 (2) of the Income Tax and Social Services Contribution Assessment Act 1936-1958 in the year of income. I reach this conclusion because I am unable to attach a limited or technical construction to the words "improvements not subject to tenant rights" in sub-s. (2) of s. 88. The derivation of the words "tenant rights" or "tenant right" from the law and custom affecting agricultural, rural and perhaps other tenancies in England may assist in understanding the connotation of this very abbreviated expression, but in my opinion there is nothing in the usage prevailing in England which would justify the placing of any such limitation as is proposed by the argument for the taxpayer upon the expression used, as it is, in this Australian legislation. It must not be overlooked that the expression is used in an Assessment Act applying generally throughout the whole Commonwealth and having no specific relation to the law of any particular State or Territory. If it is suggested that a narrow meaning should be given to the expression because it operates in s. 88 (2) to restrict a deduction otherwise allowable to taxpayers, the answer is that in s. 87 (1) the same expression operates to restrict the liability of taxpayers to include an item of notional income in their assessable income: and s. 87 (1) is the leading provision. Indeed as the expression "not subject to tenant rights" operates in s. 87 (1), it is evident that in justice to the taxpayer no restriction is warranted which would expose the taxpayer to a liability not commensurate with the real gain that may fairly be imputed to him and if the tenant can deprive him of the benefit of the improvement a taxpayer can derive little or no gain from the improvement being effected. (at p123)

2. The question in the case stated should be answered No. (at p123)

KITTO J. This is a case stated by the Chief Justice in an appeal pending in this Court under s. 196 (1) of the Income Tax and Social Services Contribution Assessment Act 1936-1957 (Cth) against a decision of a Board of Review given upon an objection by the appellant to an assessment of tax under that Act. The question for determination is, in effect, whether on the facts that are stated a certain sum of 524 pounds was in law an allowable deduction in the assessment of the appellant's tax upon income derived in the year ended 30th June 1958. (at p123)

2. The appellant bases its contention that the sum was an allowable deduction upon sub-s. (2) of s. 88 of the Act and upon no other provision. The sub-section deals with the case of a taxpayer who, in the year of income, is a lessee of land used for the purpose of producing assessable income; and in the year of income here in question the appellant was such a taxpayer, being the lessee under a lease for special purposes, granted pursuant to s. 179 (1) of The Land Acts 1910 to 1953 of the State of Queensland, of a parcel of Crown land in the City of Brisbane, from which at all material times the appellant derived rent under a sub-lease. Where in such a case the taxpayer has incurred expenditure "in making improvements not subject to tenant rights on that land", the sub-section entitles him to an allowable deduction of a proportionate part of the expenditure, arrived at by distributing the amount proportionately over the period of the lease unexpired at the date when the expenditure was incurred, if the improvements fall into any of three classes. Of these classes it is necessary to mention only one, namely improvements which the lessee was required to make under the provisions of the lease. The appellant incurred in the relevant year of income expenditure in erecting on the land the subject of its lease a factory, an office building and fencing; and the sum of 524 pounds is a proportionate part of the amount of the expenditure so incurred, arrived at in accordance with the sub-section. (at p124)

3. The relevant provision of The Land Acts 1910 to 1953 (Q.), contained in sub-s. (1) of s. 179, enables the Governor in Council to issue a lease of any portion of land to any person for certain specified purposes, for a term not exceeding thirty years and upon such conditions as to rent and otherwise as the Governor in Council thinks fit. The lease to the appellant was dated 9th September 1955, and it was for a term of thirty years computed from 1st January 1955. It provided that the term might be determined upon six months' notice in writing by the Secretary for Public Lands, and that in such case the lessee should be entitled to receive the value of permanent improvements made by it on the land. It was subject, moreover, to certain conditions set forth in a second schedule, of which only three need be mentioned. First, the right of resuming the whole or any part of the land upon six months' notice was reserved, and there was added a provision that upon such resumption the lessee should have the right to compensation for improvements only. Secondly, it was provided that no compensation for improvements should be payable by the Crown at the expiration of the term of the lease, but that the lessee should have the right to remove them within a period of three months, provided that all moneys due by the lessee to the Crown on any account whatever should first have been paid. And, finally, there was a provision in these terms: "The lessee shall, within three years from the commencement of the said term, and to the satisfaction of the Minister, expend a sum of not less than 10,000 pounds on buildings approved by the Brisbane City Council and plant on the leased land; the work of construction of buildings shall be commenced within six months from the commencement of the said term and shall proceed at a rate of progress satisfactory to the Minister." (at p125)

4. The expenditure which the appellant incurred in erecting the factory, office building and fencing was made in performance of its obligation under the lastmentioned condition. Whether or not the parties so intended, there is nothing to be found in the instrument to justify an interpretation of the word "improvements", in the second condition of the schedule, which would not include structures built on the land in pursuance of the final condition. The question to be decided now is whether the erection of those structures was or was not, having regard to the provisions of the final condition, the making of improvements not subject to tenant rights, within the meaning of s. 88 (2). (at p125)

5. The submission put on behalf of the appellant is simple. It attributes to the expression "tenant rights" a technical legal meaning, as signifying a right arising either by custom, by contract or by statute, and entitling an ex-tenant to receive from his ex-landlord a monetary compensation for structures erected on the demised premises during the term and remaining unexhausted at its expiration. A right to remove the structures, it is said, falls outside the concept, and accordingly the second condition of the schedule, by denying to the appellant any right to compensation for "improvements" and conferring only a right to remove them, necessitates the conclusion that the structures in question in this case were improvements not subject to tenant rights. (at p125)

6. It will be noticed that in this there is the implicit assumption that a structure which, if the lessee has no right to remove it, would be an "improvement", in the sense in which the Act uses the word, is still an improvement in that sense although it is erected by a lessee whose lease authorizes him to remove it when the term expires. The first observation to make upon the submission (including the assumption) is that if it be correct the Act creates a curious anomaly; for the reason for excluding from the application of s. 88 (2) the case of a tenant who has a right to compensation for improvements which he must leave at the end of his lease is in common sense a reason for excluding also the case of a tenant who has a right after the term to remove what otherwise would remain as improvements. The sub-section should be examined in its context, and particularly in the light of the provisions made by s. 87 and s. 88 (1). Both s. 87 and s. 88 (2) are concerned with "improvements" which have been made either by a person as consideration for the grant to him of a lease of the land, or by a lessee who was required to make them under the provisions of his lease or made them with the written consent of the lessor. To the lessor in the ordinary case - by which I mean the case in which the lessee has no right after the end of his tenancy either to remove or to be compensated for structures which have become, in law, part of the land - the placing of such structures on the land by the lessee may be considered as equivalent in practical effect to an addition to the rent; for the value to the lessor which the improvements will have at the end of the lease is in course of accruing to him throughout the unexpired period of the lease. The Act, in s. 87, regards the lessor's situation in precisely this way. It brings into the lessor's assessable income of each year, from the year in which the improvements are completed to the year in which the lease expires, an equal instalment of such a sum as, with interest on each instalment in the meantime, will amount to that value. The section is expressly limited to the case where the improvements are "not subject to tenant rights"; but unless, either by the use of this expression or by the use of the word "improvements", it excludes not only the case where the lessee has a right to compensation for structures remaining on the land at the end of the term but also the case where the lessee has a right to remove the structures themselves at the end of the term, the lessor will be taxed on a value which is not in course of accruing to him during the residue of the term. The situation of the lessee, on the other hand, is dealt with in s. 88 (2). If the lessee will have at the expiry of the term neither a right of removal nor a right to compensation, his expenditure on improvements bears a close resemblance to a premium paid for the lease, since he acquires nothing by it save the enjoyment of the improvements during the term. His tax situation in respect of a premium is governed by sub-s. (1) of s. 88, which makes a proportionate part of the premium, arrived at by distributing the amount of it over the period of the lease, an allowable deduction in each year of the lease, provided that the land is used for the purpose of producing assessable income. It is not surprising, in view of the resemblance which expenditure on improvements (in what I have called the ordinary case) bears to a premium, to find that such expenditure is dealt with in the same section and is similarly treated. But it would indeed be surprising if the Act did not allow for the fact that the resemblance depends upon expenditure on improvements being confined to expenditure on improvements in respect of which the whole benefit accruing to the lessee will end, as the benefit from a premium would end, when the lessee's interest in the land ceases. And since it is not so confined unless the lessee has neither a right of compensation for improvements nor a right to remove them, there is a strong antecedent probability that the case of a lessee who has a right of removal is excluded, either by the use of the word "improvements" or by the addition of the phrase "not subject to tenant rights". (at p127)

7. No clear instance has come to our attention of the use of "tenant right" or "tenant rights" to include a right to remove structures which have become part of the freehold, though the expressions certainly are used to include a right to remove way-going crops. Doubtless the reason is that the custom of tenant rights arose, and contractual and statutory tenant rights came to be provided for, because of a felt necessity to mitigate by means of compensation the injustice to a lessee which consisted in his losing at the end of his term, by the operation of a well-known principle of the common law, the unexhausted benefit of works which he had carried out on the land. There was no occasion for any such custom or provision where the terms of the lease, by giving a right of removal, prevented the injustice from arising. But it does not necessarily follow that the expressions are incapable of a meaning wide enough to include such a right. In England ever since 1883 (see 46 & 47 Vict. c. 61, s. 34), and since later dates in other jurisdictions, an outgoing tenant in some circumstances has been entitled, even after the termination of the tenancy, to remove fixtures affixed or buildings erected for which he is not entitled to receive compensation (see now 11 & 12 Geo. 6, c. 63, s. 13); and such an addition to his rights might naturally have been subsumed under the general title of "tenant rights". The expression is no more than a label which has been found convenient for a particular category of rights - a label general enough on its face to be still appropriate when the category has become enlarged, either by statute or by agreement, to include rights which, though different, possess the same main characteristics, namely that they are rights of the lessee arising after the term and created for the purpose of modifying the operation of the common law in the interests of fairness. There is thus strong reason for thinking that the Income Tax Assessment Act has picked up the expression "tenant rights" from the vocabulary of legal jargon and used it as a sufficiently self-explanatory description of rights within the enlarged category. (at p127)

8. But suppose that this is not so. If "tenant rights" as used in the Act is to be understood as restricted to the rights of lessees to be compensated for the residual value of improvements remaining unexhausted at the end of their leases, it becomes necessary to consider whether the consequence does not follow that "improvements" as there used refers only to such works as constitute additions to the freehold, enuring for the benefit of lessee and reversioner alike. The class of things intended by "improvements" can hardly, on the assumption made, include tenant's fixtures, chattels so affixed to the land as to be part of the realty but nevertheless removable, according to the common law itself, during the term. Is it not with equal reason to be distinguished from structures which the lessee has a right to remove after his leasehold interest has ceased? The word describes alterations and additions by reference to their effect upon the land considered as a subject of enjoyment, not by the lessee alone, but generally. On the assumption that "tenant rights" has the limited meaning which the appellant would give it, "improvements on the land" seems clearly to connote benefits not confined in point of legal right to the lessee, and therefore to refer only to works which the lessee must leave, without being compensated for them, when the lease falls in. (at p128)

9. The conclusion reached by either path must be, as it seems to me, that the entire expression "making improvements not subject to tenant rights on that land" refers to the erection of structures by a lessee so that they become part of the freehold without any right in the lessee either to remove, or to be compensated for, what remains of them at the end of the lease. Accordingly I am of opinion that the erection by the appellant of the structures mentioned in the stated case was not the making of improvements not subject to tenant rights within the meaning of s. 88 (2), and that the question in the case should be answered: No. (at p128)

TAYLOR J. Whilst I am in general agreement with the whole of the reasoning of my brother Kitto I would prefer to decide this case on the first ground taken by him, that is to say, that the structures erected by the appellant upon the land the subject of its lease were improvements but that such improvements were subject to "tenant rights" as that expression is used in s. 88 (2) of the Act. In the context in which it is used the expression can have no limited and rigid legal significance derived from its historical associations and, in its context, it is just as appropriate to describe a right to remove improvements at the end of a term as a right to receive compensation for their residual value. (at p129)

MENZIES J. I agree that the improvements upon which the appellant incurred expenditure under its lease did not fall within the description of improvements "not subject to tenant rights" and for this conclusion I adopt the reasons given by Kitto J., whose judgment I have had the advantage of reading. (at p129)

WINDEYER J. I have had the advantage of reading the judgment of Kitto J. I agree in his conclusion that the improvements here cannot be said to be "not subject to tenant rights". The expression "tenant rights" seems to have been used originally in England as a description of certain customary rights existing primarily in relation to tenancies from year to year in agricultural counties. Outgoing farmers were at the expiration of their terms entitled, by custom or contract, to be compensated for the presence on the land of certain things they had brought there, or for work they had done in the ordinary course of husbandry, such as spreading manure, the benefit of which would be had by the farmer who would harvest next year's crops from the land. But that a tenant was entitled to compensation for things that he must leave behind him does not mean that the term "tenant right" can refer only to a right to compensation. The term is simply a convenient and abbreviated description of a legal idea. Fundamentally, as it seems to me, the right is not a right to compensation. An entitlement to compensation arises because of rights that the tenant has, in respect of a particular thing or the doing of particular work, as for example in Australia by clearing or timber treatment of Crown lands. Tenant right is thus a tenant's right in things erected by him, or in the results of work done by him of which he would otherwise, on the expiration of his tenancy, lose the benefit and of which the next occupier or the freeholder would get the benefit. If a tenant has by the express terms of his lease a right to remove a structure at the end of the term it seems to me he is quite properly described, for the purposes of the Act with which we are concerned, as having "tenant right" in it. (at p129)

ORDER

Question in Case Stated answered No.

The appellant taxpayer to pay the respondent Commissioner's costs of the Case Stated.