National Mutual Life Association of Australasia Ltd v Federal Commissioner of Taxation [1970] HCA 51; (1970) 122 CLR 13 (9 December 1970)

HIGH COURT OF AUSTRALIA

NATIONAL MUTUAL LIFE ASSOCIATION OF AUSTRALASIA LTD. v. FEDERAL COMMISSIONER OF TAXATION [1970] HCA 51; (1970) 122 CLR 13

Income Tax (Cth)

High Court of Australia
Gibbs J.(1)

CATCHWORDS

Income Tax (Cth) - Leases - Deductions - Improvements - Land used for the purpose of producing assessable income - Premium - Assent to the grant of a lease - Income Tax and Social Services Contribution Assessment Act 1936-1963 (Cth), ss. 83, 88.

HEARING

Melbourne, 1970, October 13, 14;
Sydney, 1970, December 9. 9:12:1970
APPEAL under s.187 of the Income Tax and Social Services Contribution Assessment Act 1936-1963 (Cth).

DECISION

December 9.
GIBBS J. delivered the following written judgment: -
This is an appeal by the National Mutual Life Association of Australasia of the year ended 30th September 1964, an accounting period adopted with the leave of the Commissioner under s. 18 of the Income Tax and Social Services Contribution Assessment Act 1936-1963 (Cth) ("the Act"). By the assessment the Deputy Commissioner disallowed claims for two deductions which the taxpayer contends ought to have been allowed under s. 88 of the Act, viz. (1) a claim for 141,806 Pounds ($283,612) being a proportionate part of the amount of expenditure in making, with the written consent of the lessor, improvements not subject to tenant rights on land of which the taxpayer is a lessee situated at Featherstone Street, Wellington, New Zealand; and (2) a claim for 10,746 Pound($21,492) being a proportionate part of the amount of a premium paid in respect of land known as Austral House situated at Basinghall Avenue, London, in the United Kingdom, of which the taxpayer is the lessee. (at p14)

2. The provisions of s. 88 (1) and (2) of the Act are as follows:

"(1) Where a taxpayer has paid any premium in respect
of land, premises or machinery used for the purpose of
producing assessable income, and in the year of income -

(a) he is the lessee of the land, premises or machinery ; or

(b) in the case of a premium paid for the surrender of the
lease, he would have been the lessee had the lease been
transferred to him and he had not been entitled to the
reversion,

a proportionate part of the amount of that premium, arrived
at by distributing that amount proportionately over the
period of the lease unexpired at the date when the premium
was paid, shall be an allowable deduction.

(2) Where a taxpayer, who in the year of income is a lessee
of land used for the purpose of producing assessable income
has, either before or after the commencement of the lease,
incurred expenditure in making improvements not subject
to tenant rights on that land, and such improvements -

(a) have, under an agreement entered into after the
commencement of this Act, been made as consideration for
the grant to him of that lease ; or

(b) are improvements which he was required to make under
the provisions of that lease ; or

(c) have been made with the written consent of the lessor
given after the commencement of this Act,

a proportionate part of the amount of that expenditure arrived
at by distributing that amount proportionately over the
period of the lease unexpired at the date when the expenditure
was incurred, shall be an allowable deduction. In calculating
the deduction under this sub-section, expenditure in excess
of the amount, if any, specified in the agreement for the lease,
or in the lease, or in the lessor's consent, shall not be taken
into account." (at p15)

3. The facts are agreed. The taxpayer, which is a life assurance company within the meaning of Div. 8 of Pt III of the Act, was incorporated in Victoria and during the relevant year of income carried on business (inter alia) in Australia, New Zealand and the United Kingdom. The taxpayer's principal offices in New Zealand and the United Kingdom respectively were in the buildings on the lands at Featherstone Street, Wellington and Basinghall Avenue, London, in respect of which the deductions are claimed. The uses to which these premises were put will later be discussed in a little more detail. The building at Featherstone Street, Wellington, had been erected by the taxpayer upon lands of which it had become the lessee under three separate leases, for different terms, but nothing turns on this fact or on the provisions of the leases. It is not disputed that the taxpayer incurred expenditure in making improvements not subject to tenant rights on the land at Featherstone Street, Wellington, or that the improvements were made with the written consent of the lessor or that the amount claimed represents a proportionate part of the amount of that expenditure arrived at by calculations made as required by s. 88 (2) of the Act. The land at Basinghall Avenue, London, and the building erected thereon had been leased to the taxpayer by the Corporation of the City of London. By a building agreement, dated 9th February 1959, the Corporation agreed to grant to an English company, Wool Exchange and General Investments Ltd., a lease of the land at Basinghall Avenue, London, and of the new building which Wool Exchange and General Investments Ltd. thereby agreed to erect thereon, for a term commencing from the date of completion of the new building to the satisfaction of the City Engineer and expiring on 25th December 2070. By a further agreement, dated 14th October 1959, between the taxpayer and Wool Exchange and General Investments Ltd. (therein called "the vendor"), it was agreed that in consideration of the sum of 950,000 Poundstg to be paid by the taxpayer to the vendor in the manner therein mentioned the vendor would either procure the Corporation to grant to the taxpayer such lease as by the building agreement was agreed to be granted to the vendor, or would, if the Corporation so required, procure such lease to be granted to the vendor in the first instance and would immediately afterwards assign it to the taxpayer. The sum of 950,000 Poundstg. was paid by the taxpayer to Wool Exchange and General Investments Ltd. and on 20th July 1960, after the completion of the building to the satisfaction of the City Engineer, the Corporation granted a lease of the land to the taxpayer as from 8th June 1960 for a term expiring on 25th December 2070. If the sum of 950,000 Poundstg was a premium within s. 88 (1) it is not disputed that the amount claimed represents a proportionate part of that premium calculated in accordance with the subsection. (at p16)

4. Two questions fall for decision in the case. The first is whether the lands at Wellington and London respectively were "used for the purpose of producing assessable income" within s. 88 (1) and (2). The second question, which only arises if the first question is answered in the affirmative in relation to the London land, is whether the amount paid by the taxpayer to Wool Exchange and General Investments Ltd. was a premium within s. 88 (1). (at p16)

5. The first of these questions quite obviously involves a consideration of the purpose for which the lands in question were used during the income year. Both the Wellington and the London lands were in part occupied by the taxpayer and in part let to tenants. The building in Wellington had eleven floors of which about four and a half were let to tenants and the building in London had eight floors of which five were let. The rents paid ($529,336 in New Zealand and $782,000 in the United Kingdom) formed part of the income of the taxpayer but were not assessable income for they were exempt under s. 23 (q) of the Act. In each building the taxpayer issued life policies, received premiums, and dealt with claims and payments under policies and, in addition, dealt with the investment of surplus funds thus generated for the purpose of earning income thereby. The department responsible for such investment was located in the building as also were the local board of the taxpayer and the principal executive officers. The board and the executive officers were primarily concerned with the investment aspect of the taxpayer's business. The investment department, the local board and the executive officers occupied, both in Wellington and London, about twenty-five per cent of the office space of that part of the building occupied by the taxpayer, after excluding therefrom service areas. The balance of the space occupied by the taxpayer was used by the actuary's department and by the departments dealing with the writing of life policies, the receipt of premiums, the renewal of policies, superannuation schemes and payments under and various other transactions relating to life policies. It might be said that in each case less than one-sixth of the premises was used for purposes which were directly concerned with the production of assessable income. In the year of income the taxpayer derived from sources in New Zealand a total income of $21,357,898 but it is not established that all of this income was produced at the premises at Featherstone Street, Wellington. New Zealand premiums (which, of course, are not included in the assessable income of the taxpayer - s. 111 of the Act) totalled $14,474,384. The total assessable income derived by the taxpayer in New Zealand was $688,980 being dividends on shares held in New Zealand. If a proportionate part of the amount calculated in accordance with s. 112A which is not included in the taxpayer's assessable income is deducted from this total the result is $445,554 which, if it matters, is 2.08 per cent of the taxpayer's total New Zealand income. The total income derived in the United Kingdom (which was not necessarily produced at Basinghall Avenue, London) was $15,127,628. United Kingdom premiums amounted to $9,965,350. The total assessable income derived by the taxpayer in the United Kingdom was $3,170,210 being interest on investments and dividends from shares. A deduction of a proportionate amount of the sum calculated in accordance with s. 112A would reduce this sum to $2,050,134, which represents 13.55 per cent of the taxpayer's total United Kingdom income. (at p17)

6. The circumstances that I have mentioned show clearly that both the Wellington and the London land were used for the purpose of producing assessable income, but they further show that this was neither the sole nor the dominant purpose of the use. On behalf of the taxpayer it was submitted that it should be held that the lands were exclusively or chiefly used for the production of assessable income, if that is necessary to satisfy s. 88. It was submitted that the various receipts derived from the use of the land could not be looked at in isolation, that it was necessary for the taxpayer to generate funds in order to make its income from investments and that the purpose of the use of the land was the conduct of the taxpayer's business with the object, inter alia, of the production of assessable income; or in other words, that the lands were used for a single and indivisible purpose, namely the conduct of the business, which involved producing assessable income. I cannot accept this argument. Although it is true to say that the lands were used solely for the purposes of the taxpayer's business, it simply does not follow that they were used solely for the production of assessable income. The fact that they were used for the production of exempt income sufficiently answers this argument but, in addition, they were used for the production of premium payments which by reason of the scheme of taxation adopted in respect of life assurance companies under Div. 8 of Pt III are not assessable. Further it cannot, in my opinion, be said that the lands were used chiefly for the production of assessable income when the amount of assessable income produced was small in comparison with the other receipts derived from the use of the land and the part of the premises directly concerned with the production of assessable income was similarly only a small proportion of the whole. (at p18)

7. The question then is whether the words "used for the purpose of producing assessable income" in s. 88 (1) and (2) on their proper construction apply to land (or in the case of sub-s. (1) to land, premises or machinery) only when it is solely used or chiefly used for the purpose of producing assessable income. The section itself contains no words restricting its operation in that way. If the provisions are literally construed, they apply when the land is used for the purpose of producing some assessable income, even though it is used for other purposes as well. No doubt the application of the section might be excluded if the use of the land for the purpose of producing assessable income was so insubstantial as to call for the application of the principle de minimis non curat lex, but it is unnecessary to consider that situation or those cases where the use of the land may amount to an arrangement within s. 260. (at p18)

8. On behalf of the Commissioner, it was submitted that the provisions of the Act relating to deductions reveal a theme or pattern upon which the legislature has proceeded and against the background of which s. 88 must be construed, viz. that deductions are allowable only when they are related to the production of assessable income. Viewed in this light, it was said, s. 88 will not apply, unless there is a substantial relationship between the payment of the premium or the expenditure on improvements and the activity of gaining assessable income. The Commissioner did not contend that the section requires that the land should be used solely for the purpose of producing assessable income, but submitted that to decide whether the subsections apply, it is necessary to characterize the use of the land by the essential quality of the use. This seems to me another way of saying that what the section requires is that the land must be mainly used for the purpose of producing assessable income. It was immaterial to the Commissioner's contention whether the word "purpose" imports a subjective or an objective test. He submitted that if the test is subjective, the actual intention of the taxpayer in using the lands in the present case was simply to conduct its life assurance business and, unlike the case of an ordinary trading company, the gaining of assessable income was only incidental. On the other hand, he submitted that if the test is objective a consideration of all the uses to which the lands were actually put and of the various receipts derived from the activities conducted on the lands show that the lands were not used for the purpose of producing assessable income but for the general activities of the taxpayer. I am inclined to think that s. 88, when it refers to "the purpose of producing assessable income", is not referring to the intention with which the taxpayer uses the land but to the nature or attributes or complexion of the use (cf. Robert G. Nall Ltd. v. Federal Commissioner of Taxation [1936] HCA 79; (1937) 4 ATD 335, at p 342 ) or, to adopt the words employed by Kitto J. in a different context in Shire of Perth v. O'Keefe [1964] HCA 37; (1964) 110 CLR 529, at p 534 ; [1964] HCA 37; 10 LGRA 147, at pp 149, 150 , to the end which is seen to be served by the use of the premises. No doubt "purpose" connotes an intention but in s. 88 it seems to me to connote an intention which the law imputes. This, however, does not greatly assist in the solution of the problem under consideration. (at p19)

9. The Commissioner not unnaturally compared the words of s. 88 with those of s. 26 (a) which provide that the assessable income of a taxpayer shall include (inter alia) the "profit arising from the sale by the taxpayer of any property acquired by him for the purpose of profit-making by sale . . . .", and which have been held to refer to the dominant purpose actuating the acquisition of the property. However s. 26 (a) speaks of a purpose existing at the time of acquisition, that is an intention as to the way in which the property acquired will be used in the future, whereas s. 88 speaks of a use to which property has actually been put during the income year in question. In the former case there exists room for uncertainty, doubt or confusion as to an unfulfilled purpose, whereas in the latter case the question is to determine what was the purpose which has, in fact, been carried out. Moreover s. 26 (a) has the effect of including within the assessable income of a taxpayer receipts which might not otherwise have been treated as assessable income whereas s. 88 provides for a deduction which would not otherwise be allowable. The two sections are not in pari materia and the authorities on the construction of s. 26 (a) provide no assistance in construing s. 88. (at p19)

10. The only case in which the relevant words of s. 88 have been considered is Adelaide Racing Club Inc. v. Federal Commissioner of Taxation(1964) [1964] HCA 57; 114 CLR 517 where Owen J. said(1964) 114 CLR, at p 523:

"The question then arises whether it is necessary, under
s. 88 (2), that the production of assessable income should be
the sole purpose for which the land is used. I think the
provision should not be construed so narrowly. The subsection
does not speak of the 'sole' or 'exclusive' use for
the purpose specified and, in my opinion, it should not be
construed as thought it did. It is, at least sufficient
if use for the production of assessable income is the chief
purpose for which the land is used (Commissioners of Inland
Revenue v. Forrest
(1890) 15 App Cas 334
) and that requirement is, as it seems to
me, fulfilled in the present case."

I agree with respect with the conclusion that the subsection should not be construed as requiring the production of assessable income to be the sole or exclusive purpose for which the land was used but it was not necessary in that case for Owen J. to go further and consider the question which arises in the present case, whether the section applies if the use for the production of assessable income was not the chief or main purpose for which the land was used. (at p20)

11. The expression "land used for the purpose of producing assessable income" is capable of referring to land mainly used for that purpose, but clearly it may also mean land which has in fact been put to use for that purpose, whether or not that was its main use. In determining which of these meanings the words bear in s. 88, the Act must be construed as a whole, and when the words of s. 88 are read in the light of the context provided by some other sections of the Act that deal with the subject of deductions, they cannot in my opinion be given a meaning that requires the production of assessable income to be the chief, main or dominant purpose for which the land is used. These other sections, to which I shall briefly refer, do not reveal the existence of a uniform principle applicable to all such deductions, but they do show that when the legislature speaks of the use of property for a particular purpose, and wishes to exclude a part of the property that is not so used, or to allow only a partial deduction if the property is only partly so used, or to require that the property should be used wholly and exclusively, or primarily and principally, for the purpose, it employs express words to achieve that result. The relevant sections are introduced by s. 51 which permits losses and outgoings to be treated as allowable deductions, inter alia, "to the extent to which they are incurred in gaining or producing the assessable income" and thus "adopts a principle that will allow of the dissection and even apportionment of losses and outgoings" (Ronpibon Tin N.L. v. Federal Commissioner of Taxation [1949] HCA 15; (1949) 78 CLR 47, at p 55 ). Section 53 (1) allows a deduction for expenditure incurred by a taxpayer for repairs to, inter alia, any premises or part of premises "held, occupied or used by him for the purpose of producing assessable income", but s. 53 (2) goes on to provide that "expenditure incurred upon repairs to any premises or part of premises not so held occupied or used shall not be an allowable deduction". This subsection was apparently inserted to ensure that s. 53 (1) could not be treated as permitting a deduction for expenditure on repairs to premises which were used for the purpose of producing assessable income when the part of the premises to which the repairs were effected was not so used. Section 54 allows a deduction for depreciation on certain property "owned by a taxpayer and used by him during that year for the purpose of producing assessable income". However this section is qualified by s. 61 which provides that where the use of any property by the taxpayer has been only partly for the purpose of producing assessable income, only such part of the deduction otherwise allowable under s. 54 in respect of that property as in the opinion of the Commissioner is proper shall be an allowable deduction. The presence of s. 61 shows in my opinion that property may be "used . . . for the purpose of producing assessable income" within the meaning of s. 54, even though it was neither exclusively nor mainly used for that purpose. Section 57AA, which provides for a special allowance for depreciation to primary producers, is by sub-s. (2) made applicable to units of property in respect of which depreciation is allowable to the taxpayer under s. 54 (which includes "plant" as defined in that section) and which -

"(a) are used during the year of income wholly and exclusively
for the purposes of agricultural or pastoral pursuits,
forest operations or fishing operations; or

(b) being structural improvements -

(i) are situated on land used during the year of income
for the purposes of agricultural or pastoral pursuits
or forest operations; or

(ii) are used during the year of income for the purposes
of pearling operations."

Another section dealing with depreciation, s. 58, is applied by sub-s. (1) (a) to pipe-lines "used, wholly and exclusively for the purpose of transporting petroleum . . . .", and by s. 58 (1) (b) to plant "used, during the year of income, primarily and principally, and directly, in connexion with the operation of such a pipeline . . .". In view of the proximity of these two sections, it would seem impossible to argue that "used" in s. 57AA (2) (b) (i) and (ii) could be construed to mean used either wholly and exclusively, or primarily and principally. In all these sections the legislature has, where necessary, qualified "used" by appropriate express words, or has otherwise expressly dealt with the situation that arises when the property in question is not wholly used for the purpose of producing assessable income. In s. 88 however the words "used for the purpose of producing assessable income" are not qualified by any adverbial expression, and the section does not contain any provision limiting the amount deductible when the land is only partly used for producing assessable income, and this suggests that those words were not intended to be given a restricted meaning, and ought not to be read down to make them accord with a supposed legislative intention, which, if it had existed, could easily have been expressed. If the legislature had meant s. 88 to apply only where the land was chiefly, or in the main, or primarily and principally, used for the purpose of producing assessable income, it would have accorded with the scheme of the earlier provisions if the appropriate words had been included in the section. I conclude that the words of s. 88 should be given the broad meaning which, in their ordinary and natural sense, they are capable of bearing, and should be understood as including a reference to land which has in fact been used for the purpose of producing assessable income whether or not that was the main use of the land. (at p22)

12. I hold therefore that both the Wellington and the London land was "used for the purpose of producing assessable income" within the meaning of s. 88. It follows that the taxpayer's claim to a deduction under s. 88 (2) in respect of the expenditure on the land at Wellington should have been allowed. It follows also that the question whether the claim under s. 88 (1) in respect of the land in London should have succeeded depends on whether the payment of 950,000 Poundstg made to Wool Exchange and General Investments Ltd. was a premium within the meaning of s. 88 (1). (at p22)

13. For the purposes of Div. 4 of Pt III of the Act, "premium" is defined by s. 83 (1) to mean, inter alia -

"a consideration payable in one amount, or each amount of a
consideration payable in more than one amount, where the
consideration is -

. . . . .

(b) for or in connexion with an assent to the grant or
assignment of a lease; . . ." (at p22)

14. There is no doubt that the sum of 950,000 Poundstg was a consideration. The question is whether it was for or in connexion with an assent to the grant of a lease. By cl. 1 of the agreement of 14th October 1959 it was agreed that in consideration of that sum the vendor would either procure the Corporation to grant to the taxpayer such lease as by the building agreement with the Corporation was agreed to be granted to the vendor or would if the Corporation so required procure such lease to be granted to the vendor in the first instance and would immediately afterwards assign it to the taxpayer. In the events which happened Wool Exchange and General Investments Ltd. procured the grant of a lease to the taxpayer. However on behalf of the Commissioner it was submitted that on a proper view of the transaction the whole payment of 950,000 Poundstg was not made as the price of procuring the grant of a lease and that the payment was partly for the building itself. In support of this argument reliance was placed on other provisions of the agreement of 14th October 1959, particularly cl. 2 which speaks of "the estate or interest of the vendor in the property hereby agreed to be sold", cl. 6 (a) which contains a covenant by the vendor to finish the new building in course of construction, cl. 6 (b) by which the vendor agrees to hold for the benefit of the taxpayer the clause relating to defects in the contract made by the vendor for the construction of the new building and any retention moneys referred to in such contract and cl. 8 which incorporates the conditions of a contract for the sale of land. It is in my opinion right to say that the sum of 950,000 Poundstg was the consideration for all the undertakings of the vendor in the agreement of 14th October 1959 but that does not alter the fact that it was the consideration for the agreement to procure the grant of a lease. The other provisions mentioned were merely ancillary to that agreement. For example the vendor's undertakings to complete the building and to hold the defects clause for the benefit of the taxpayer would have been quite useless to the taxpayer if no lease of the land had been granted to the taxpayer. The question then is whether a consideration paid for an agreement to procure the grant of a lease comes within the description of a consideration for or in connexion with an assent to the grant of a lease. On behalf of the taxpayer it was said that an agreement to procure the grant of a lease necessarily involves an agreement to assent to the grant of a lease. In other words, Wool Exchange and General Investments Ltd. could not procure, that is prevail upon or induce, the Corporation to grant a lease without impliedly assenting to the grant, and the procuring by Wool Exchange and General Investments Ltd. of the lease demonstrated its assent to the grant of the lease. These submissions treat "assent" as equivalent in meaning to "consent". However as the Oxford English Dictionary shows, "assent" in its meaning of "the concurrence of the will, compliance with a desire" is archaic and has been replaced by "consent", except when it is used in the following sense: "Official, judicial or formal concurrence of will; sanction; the action or instrument that signifies such concurrence." The ordinary modern sense of the word "assent", namely "agreement with a statement, an abstract proposition, or a proposal that does not concern oneself; mental acceptance or approval", is obviously inapplicable in the context of s. 83 (1). I can see no reason for concluding that the legislature used the word "assent" loosely or imprecisely in the definition of premium in s. 83 (1). In my opinion it is there used in the only ordinary sense which is appropriate, and refers to a formal sanction to the grant or assignment of a lease, such as might be given by a head lessor in a case where the lease requires it. It seems to me that the word is not used as signifying mere agreement or acquiescence. In the present case the taxpayer has not shown that the consideration paid was for or in connexion with an assent to the grant of a lease. The fact that it was consideration for an agreement to procure the grant of a lease and that this involved the acquiescence in or agreement to the grant of a lease is not enough. I hold, therefore, that the taxpayer has not shown that it is entitled to the deduction allowed by s. 88 (1). (at p24)

15. I hold that the taxpayer's claim for a deduction of 141,806 Pound ($283,612) being a proportionate part of the amount of expenditure in making, with the written consent of the lessor, improvements not subject to tenant rights on land of which the taxpayer is a lessee situated at Featherstone Street, Wellington, should have been allowed but that the claim for a deduction of 10,746 Pound($21,492) being a proportionate part of the amount of a premium paid in respect of the land known as Austral House, situated at Basinghall Avenue, London, in the United Kingdom, of which the taxpayer is the lessee was rightly disallowed. (at p24)

16. I allow the appeal with costs to be taxed and remit the matter to the Commissioner so that he may vary the assessment in accordance with my judgment. (at p24)

ORDER

Appeal allowed with costs.

Assessment remitted to Commissioner for adjustment in accordance with reasons for judgment.