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High Court of Australia |
G.J. COLES & COY. LTD. v. FEDERAL COMMISSIONER OF TAXATION [1975] HCA 19; (1975) 132 CLR 242
Income Tax (Cth)
High Court of Australia
Barwick C.J.(1), McTiernan(2), Gibbs(3), Mason(4) and Jacobs(5) JJ.
CATCHWORDS
Income Tax (Cth) - Deductions - Lease - Improvements not subject to tenant rights - Assignment of portion of leased land upon undertaking to erect improvements to the value of not less than a stated sum - Actual expenditure on improvements exceeding stated sum - Written consent of lessor to improvements - Improvements required to be made under provisions of lease - Proportion of actual expenditure deductible - Income Tax Assessment Act 1936- 1968 (Cth), ss. 88 (2), * 83 AA (4).*** Section 88 (2) of the Income Tax Assessment Act 1936-1969 (Cth) provides: "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; (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."
** Section 83 AA (4) of the Act provides: "Where, after the twenty-second day of October, One thousand nine hundred and sixty-four, improvements are made on land the subject of a lease with the written consent of the lessor of that land, sections eighty-five, eighty-seven and eighty-eight of this Act do not apply in relation to those improvements unless - (a) the written consent was given on or before that date; or (b) the Commissioner is satisfied that, on or before that date, the lessor had agreed, whether absolutely or subject to conditions, to give that consent and the written consent was given within a period after that date that the Commissioner, on the joint application in writing of the lessor and the lessee made not later than sixty days from that date or within such further time as the Commissioner allows, has approved (whether before or after the giving of the consent) as reasonable for the purposes of this sub-section."
HEARING
Melbourne, 1975, March 3,4;DECISION
June 13.
2. I quite agree that the appellant was not the lessee of the Crown in right
of Victoria by grant, but was no more than an assignee
notwithstanding the
reformulation of the covenants of the lease by and with the Crown. My brother
Mason has documented the proposition
that at common law a lessee may assign
part of the leased land, and, because of that capacity, also of land held
under the Transfer of Land Act 1958 (Vict.). However, I would observe in the
first place that it would seem to me to be highly inconvenient for such an
assignment to
be both made and registered without the existence of any
mechanism or procedure by which the covenants of the lease including the
covenant for rent can be "apportioned" as between the lessee and the assignee,
and the lessee relieved of so much of what is "apportioned"
to the assignee.
As things stand this can only be done by agreement of the lessee and assignee
with the concurrence of the lessor.
None the less without any such agreement,
and, if there be one, without recording it, a certificate of title to a
leasehold estate
in the assigned portion of the leasehold may be issued, as
was done in this case. This situation, which to my mind is unsatisfactory
and
possibly productive of difficulty or uncertainty deserves, in my opinion, the
attention of legislatures in States which have
the Torrens system of title.
(at p246)
3. My second observation is that where the assignee has covenanted with the
lessor as a condition of the lessor's concurrence in
the assignment, there is
no substantial reason why the application of s. 88(2) should not be extended
to him. There is no relevant difference in substance between his situation and
that of the lessee by grant.
This, though perhaps not a common occurrence, is
worthy of the attention of the Parliament. In any case the technicality that
the
taxpayer is an assignee and not a grantee might well be regarded as
inappropriate to the determination of substantial rights in taxation
which
depend upon the existence of an obligation to execute improvements, an
obligation which can rest on the assignee by virtue
of the assignment. (at
p246)
McTIERNAN J. The facts of this case are fully set out in the reasons for
judgment of the Supreme Court of Victoria (Menhennitt J.)
(1975) VR 260;
(1974) 23 FLR 249 from which the taxpayer G.J. Coles & Coy. Ltd. has appealed
to this Court. (at p246)
2. The question for decision is whether the taxpayer is entitled to a
deduction of $29,170.71 for the year of income 1968-1969 under
s. 88(2) of the
Income Tax Assessment Act 1936-1969. (at p246)
3. Section 88(2) reads as follows:
"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;
(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 p247)
4. The taxpayer was the lessee under a Crown Lease of allotment 13 of section
60 in the City of Port Melbourne. This allotment was
part of land which was
the subject of a Crown Lease to the Standard Motor Company (Australia) Pty.
Ltd. granted on 1st January 1956.
In that lease the lessee covenanted as
follows:
"The lessee to the intent that the obligations may continue
throughout the said term HEREBY COVENANTS with Her said
Majesty -
That the lessee at its own cost in all respects in a substantial and
workmanlike manner and with materials of the best
descriptions of their several kinds conformably to the statutory and
local regulations applicable thereto and in accordance with
plans and specifications to be approved by the Board under its
seal or in writing by its duly authorised agent in that behalf shall
and will by the first day of January 1959 have built erected
constructed or made in the said land buildings (the walls of which
shall be of brick or concrete or other materials approved by the
Board) and/or other permanent improvements to the value of
not less than Two hundred and fifty thousand pounds and of the
said buildings and/or improvements a portion to the value of
not less than One hundred and twenty-five thousand pounds
shall have been built erected constructed or made by the first
day of April 1956. And it is hereby agreed and declared that the
determination by the Board of the value of any buildings and/or
improvements so built erected constructed or made when made
and communicated in writing under the seal of the Board to the
lessee shall be accepted as final and conclusive by it." (at p247)
5. When allotment 13 was assigned to the taxpayer in 1961, the lessor
indicated that it would treat the above covenant as requiring
the erection of
buildings on lot 13 to the value of $150,000 and the taxpayer gave an
undertaking to this end in the following terms:
"... we G.J. Coles & Coy.
Limited hereby undertake to have completed on the said land at our own cost by
a date not later than
four
years from the date upon which settlement is made
of the purchase of the said leasehold with the present Crown Lessee buildings
to
the value of not less than $150,000, such undertaking to construct
buildings being our company's proportion of the building covenant
contained in
the said Crown Lease." The taxpayer claimed a deduction of $29,170.71 based on
the total value of the improvements actually
erected on the allotment, which
were to a value of $1,532,276. (at p248)
6. In my opinion, the Commissioner was correct in his assessment which
allowed a deduction of $2,855 under s. 88 (2) in respect
of the taxpayer's
improvements to lot 13 to the value of $150,000 only. The natural meaning and
intention of s. 88 (2) is that a
deduction should not be allowed in respect of
improvements to a greater value than those which either (a) formed the
consideration
for the grant of the lease; (b) were required to be made under
the provisions of the lease; or (c) were made with the written consent
of the
lessor. That this is the meaning of the section is, in my opinion, made clear
by the last sentence of sub-s. (2): "In calculating
the deduction under this
subsection, 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 p248)
7. I would dismiss the appeal. (at p248)
GIBBS J. I have had the advantage of reading the reasons prepared by my
brother Mason. I agree with those reasons and would accordingly
allow the
appeal. (at p248)
MASON J. This is an appeal by the taxpayer from an order of the Supreme
Court of Victoria allowing an appeal by the Commissioner
from a decision of a
Board of Review upholding a claim by the taxpayer for a deduction in respect
of expenditure amounting to $29,170.71
incurred by the appellant in the year
ended 30th June 1969 for the purpose of producing assessable income in making
improvements
not subject to tenant rights on land of which it was the lessee
(1975) VR 260; (1974) 23 FLR 249 . (at p248)
2. The land in question, together with other lands, was demised on 1st
January 1956 by the Crown in right of the State of Victoria
to The Standard
Motor Company (Australia) Pty. Ltd. ("Standard Motors") for a term of fifty
years. The land the subject of this lease
was approximately seventeen acres
three roods in area, being allotment 8A of section 55F and allotments 13 and
14 of section 60 in
the City of Port Melbourne. By the lease the lessee
covenanted to build or make on the land, by 1st January 1959, at its own cost,
buildings or other permanent improvements "to the value of not less than Two
hundred and fifty thousand pounds". In the latter part
of 1961 the appellant
became the lessee of allotment 13 of section 60 containing eight acres two
roods twenty perches or thereabouts.
At the time, the appellant undertook
under seal to have completed on allotment 13, not later than four years from
the date of settlement
of the transaction by which it became the lessee,
"buildings to the value of not less than $150,000", this amount being a
proportion
of the amount stated in the earlier building covenant. (at p249)
3. In the Supreme Court of Victoria, Menhennitt J. held that the appellant
became a lessee of allotment 13 by assignment from Standard
Motors, a finding
that the appellant challenges for on one branch of its case it contends that
it became lessee of allotment 13 by
grant. The appellant's case is based on s.
88 (2) of the Income Tax Assessment Act 1936-1969. The appellant submits
alternatively
that the facts bring it within pars. (a), (b) or (c) of s. 88
(2), although its primary case is one based on s. 88 (2) (a), namely,
that the
expenditure was incurred in making improvements not subject to tenant rights
on the land and that they were made as consideration
for the grant to the
appellant of the lease. To bring itself within s. 88 (2) (c) the appellant
would need to avail itself of s.
83AA (4). This is a question which I do not
propose to explore as I have reached a conclusion favourable to the appellant
on another
ground. (at p249)
4. After the appellant became lessee, by letter dated 11th November 1964 the
Department of Lands and Survey granted an extension
of time for compliance
with the covenant to expend a sum of not less than $150,000 on buildings and
other improvements. His Honour
held, and there is no challenge to the finding,
that the time so fixed was subsequently extended until the buildings were
erected
in 1967 and 1968. (at p249)
5. Between 4th December 1967 and September 1968, for the purpose of producing
assessable income the appellant incurred expenditure
amounting to
$1,532,276.71 in making improvements in the form of a building and other
improvements on the allotment in conformity
with drawings and specifications
previously approved by the Minister for Lands. (at p249)
6. The sum of $29,170.71 claimed by the appellant in its return of income for
the year ended 30th June 1969 was the proportionate
part of the total
expenditure distributed over the residue of the term of the lease. The amount
so calculated is conceded to be correct.
(at p249)
7. The Commissioner allowed only $2,855 of the deduction claimed, thereby
adding $26,316 to the appellant's assessable income. The
Commissioner's reason
for disallowing the appellant's claim was that the expenditure which the
appellant was required to make in
connexion with the improvements under the
lease was $150,000 and no more. The amount actually allowed by the
Commissioner accords
with this approach. (at p249)
8. At the outset it is necessary to determine the nature of the interest
acquired by the appellant when it became the lessee, for,
as I have observed,
its primary case is that there was a grant to it in 1961 of a lease of Crown
allotment 13. (at p250)
9. The Crown lease dated 1st January 1956 demised to Standard Motors the
larger area to which I have referred for the term of fifty
years to be used as
a site for assembling and manufacture of motor vehicles, tractors, aircraft
and parts thereof and manufacture
of electrical and mechanical equipment and
parts, and unless with the prior consent of the Board of Land and Works for no
other purposes.
The rent stipulated for the first ten years of the term was a
yearly rent of $9,472 by equal quarterly payments in advance, and provision
was made for the payment of reappraised rents during the residue of the term.
The building covenant on the part of the lessee was
by 1st January 1959 to
have built, erected, constructed or made on the land "buildings...and/or other
permanent improvements to the
value of not less than Two hundred and fifty
thousand pounds and of the said buildings and/or improvements a portion to the
value
of not less than One hundred and twenty-five thousand pounds shall have
been built erected and constructed or made by the first day
of April 1956".
(at p250)
10. Negotiations between Standard Motors and the appellant began in 1961. In
a letter dated 23rd August 1961 the solicitors for
Standard Motors informed
the Department of Crown Lands and Survey that Standard Motors "proposes to
sell allotment 13", and went
on to record the writer's belief that it was the
intention of the Department on the issue of a new lease to place thereon a
building
covenant to the extent of $150,000. In its reply dated 25th August
1961 the Department stated that it was prepared to recommend that
"formal
consent be given to an application to transfer", subject to the appellant
undertaking in writing to comply with a proportion
of the building covenant in
the head lease, the proportion to be fixed at $150,000 and the buildings to be
completed within four
years from the date of settlement. The Department stated
that it would be prepared to negotiate for the issue of a new Crown lease
of
allotment 13 after a transfer out of the existing lease had been registered.
(at p250)
11. By a contract of sale dated 7th September 1961 Standard Motors
acknowledged that it had "sold" its leasehold interest in allotment
13 to the
appellant for $240,000. The contract made provision for the building covenant
which the Department had stipulated. An instrument
expressed to be a "transfer
of Land" dated 13th September 1961 was executed under seal by Standard Motors
and the appellant. It recited
that Standard Motors "IN CONSIDERATION of the
sum of One hundred and twenty thousand pounds paid to it by G.J. COLES & COY.
LIMITED...DO
HEREBY TRANSFER" its estate and interest in the land. (at p250)
12. The appellant executed an undertaking under seal in favour of the
Department which recorded that it would have completed on
the land by a date
not later than four years from the date upon which settlement was made of the
purchase of the leasehold "buildings
to the value of not less than $150,000".
(at p251)
13. In this undertaking the appellant indicated that it wished to negotiate
for the issue of a new Crown lease for allotment 13
after the assignment had
been registered at the Titles Office, that the rental for the first ten years
of the Crown lease would be
subject to review but that an allowance would be
made for the unexpired portion of the ten-year period from 1st January 1956 so
that
the company would pay for that period a rental of not more than $4,796
per annum. The undertaking recorded that the use of the land
for the purposes
of a warehouse and general distribution depot was approved by the Department.
(at p251)
14. By a letter dated 3rd October 1961 the Department stated that the
undertaking was satisfactory, that negotiations for a new
lease would be
deferred until after the transfer was registered and that it might be better
to defer it "until Coles have decided
on the ultimate expenditure to be
incurred as possibly this could exceed the $150,000 now undertaken". (at
p251)
15. There was endorsed on the original lease a formal consent dated 4th
October 1961 to the transfer of the relevant part of the
land at a rental of
$4,796 per annum. There was also endorsed on the copy of the original lease
filed in the Titles Office a notification
that a transfer as to part had been
registered on 14th November 1961 and that there was a cancellation as to part.
On the same date
a certificate of title was issued in favour of the appellant
acknowledging that it was the proprietor of a leasehold estate for fifty
years
from the first day of January 1956 of allotment 13. (at p251)
16. No new Crown lease as earlier contemplated by the parties was negotiated
or granted. (at p251)
17. In these circumstances it is my opinion that his Honour was correct in
concluding that the transaction did not give rise to
the grant of a new lease
to the appellant and that it created an assignment of part of the lease to the
appellant. The documents
evidenced initially a proposal by Standard Motors "to
sell allotment 13" to the appellant. The Department responded to the
notification
of that proposal, not by indicating that it would grant a new
lease but that it would recommend that formal consent to a transfer
be given
subject to conditions. Moreover, it spoke of a transfer out of the original
lease and the necessity for a "formal application
for consent to the
transfer". In conformity with these references the contract of sale recorded
the sale of the leasehold estate
in allotment 13. There followed the operative
instrument which was described as a transfer and which was couched in words
appropriate
to an assignment of the lessor's interest in the relevant land.
The indorsements on the original lease and on the copy lease filed
at the
Titles Office referred to a transfer to the appellant of allotment 13.
Although the indorsement on the lease noted that the
original lease was
cancelled as to part, the indorsement makes it clear that an assignment of
part of the lease has been effected.
And the certificate of title which issued
recited that the appellant was the proprietor, not of a leasehold for the
unexpired portion
of the term but of a leasehold which commenced on 1st
January 1956, the date of the commencement of the original lease. (at p252)
18. It is true that in the documents there are references to the possibility
that a new lease may be granted after registration
of the transfer, but at no
stage did the parties agree that Standard Motors should surrender part of the
lease rather than assign
it. The context makes it plain that the parties
contemplated the possibility that a new lease might be granted by way of
substitution
for the assignment of part of the original lease, once the
assignment had taken effect as such and had been registered. Moreover,
the
references speak of "negotiations" for a new lease and these negotiations did
not eventuate. From this it is apparent that the
transaction itself was viewed
as an assignment and not as the grant of a new lease. (at p252)
19. Two matters are relied upon as throwing doubt upon this conclusion. The
first arises from suggested complexities in the application
to the assignee of
covenants contained in the initial lease. However, on examination these
difficulties disappear. At common law
a lessee may assign part of his lease so
as to vest in the assignee his leasehold interest in part only of the land the
subject of
the initial demise. It has been said that the rent payable under
the original lease is apportionable and the lessor may sue the assignee
on the
covenant only for the proportion of the rent attributable to his part (Bliss
v. Collins (1822) 5 B & Ald 876 (106 ER 1411)
; Salts v. Battersby (1910) 2 KB
155, at p159 ; Dooner v. Odlum (1914) 2 Ir R 411 ; United Dairies Ltd. v.
Public Trustee (1923)
1 KB 469, at pp 472-473 ). However, whether the original
lessor can maintain an action for the whole of the rent against the lessee
after assignment of part, was regarded as an undecided question in Whitham v.
Bullock (1939) 2 KB 81, at p 86 . Whatever may be the
true outcome of this
question, its existence has not proved an obstacle to the acceptance in the
decided cases of the proposition
that there can be an assignment of part of
demised premises. Here the apportionment of the rent was actually agreed by
the three
parties. (at p252)
20. The modifications of the building covenant and the covenant as to use
stand in a different position. The alteration in their
terms cannot be
attributed in its entirety to a mere application of the original covenant so
far as it extended to allotment 13.
Nevertheless, these modifications should
be regarded, as the primary judge held, as requirements upon which the lessor
insisted as
a condition of giving its consent to the assignment of part of the
lease. Where a lease contains, as here, a covenant against assignment
without
the consent of the lessor he may attach conditions to his consent and there is
no reason why the conditions so attached should
not extend to a variation or
modification of the covenants under the lease to be performed by the lessee to
the extent to which they
relate to the land which is subject to the
assignment. (at p253)
21. The second objection is based upon the absence of any provision in the
Transfer of Land Act 1958 (Vict.) providing for the assignment of the
leasehold in part of the demised premises. The provisions of div. 7 of the Act
relating
to the registration of leasehold interests are couched in general
terms. Although there is no provision relating to the assignment
of a
leasehold interest in part of demised premises the division contains nothing
inconsistent with the making or the registration
of assignments of that kind.
Section 67 (2) provides that in every transfer of a registered lease
(including a Crown lease) there
shall be implied a covenant with the
transferor
by the transferee binding him thenceforth to pay the rent reserved
and perform all
the covenants contained in the lease and to indemnify
the
transferor against all claims in respect of non-payment of rent or breach
of
covenant. However, I see no difficulty in regarding
the covenant so implied as
one which, in the case of an assignment relating
to part of demised premises,
refers to the rent and other
covenants to the extent to which they relate to
the land the subject of
the transfer. Even if this were not so and the
sub-section
were held to apply only to a transfer of the whole of the demised
premises,
it would not in my view bring about the result that a
transfer of
part is incapable of taking effect or of being registered under
the Transfer
of Land Act. (at p253)
22. Section 88 (2) of the Act provides:
"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;
(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 p254)
23. This brings me to the critical question whether the building erected by
the appellant constituted "improvements" which it "was
required to make under
the provisions of the lease". I state the question in this way because what s.
88 (2) prescribes is an identity
between the improvements required to be made
and the improvements actually made. (at p254)
24. The appellant undertook to erect "buildings to the value of not less
than" $150,000, without reference to the amount of expenditure
to be incurred.
As the sole permitted use was for the purpose of a warehouse and general
distribution depot, it followed that the
building to be erected must
necessarily conform to that character. The relevant requirement, then, was for
the erection of a building
suited to that purpose with a proviso that it
should have a value not less than the amount specified. This requirement was
satisfied
once a building of the requisite type was erected, so long as its
value was $150,000 or more. The parties contemplated that its value
might
exceed this amount. Indeed, the inference is irresistible, having regard to
the character of the buildings required to be erected,
that the value would
exceed this amount. That it did so does not alter the character of the
building as a satisfaction of the lessor's
requirement. To conclude otherwise
would be to deny the appellant any part of the expenditure which it incurred.
(at p254)
25. The essence of the matter is that the sub-section does not direct itself
to the value of improvements made. Subject only to
the qualification which
arises from the last sentence of sub-s. (2), a provision which relates to
expenditure in excess of an amount
specified, par. (b) merely requires an
identity between the improvements required and the improvements made.
Consequently if by a
lease the lessee covenants to build a dwelling-house (no
value being specified) and he complies by erecting a house costing $50,000
he
is entitled to a deduction in that amount. It would not be open to the
Commissioner to reduce this figure on the ground that the
lessee could comply
with the covenant by building a less substantial dwelling-house for $25,000.
The fact is that the expenditure
of $50,000 would be incurred in making the
improvement which was required to be made, the lessee having the power to
decide how much
will be expended. (at p254)
26. The present case stands in no different situation. To say that the value
of the building shall not be less than a specified
figure does not alter the
substance of the requirement; it merely adds a proviso by way of protection
for the lessor which leaves
the lessee at liberty to decide what amount shall
be expended in erecting the building, so long as it results in the erection of
a building having the specified value. (at p255)
27. No amount of expenditure having been specified by the lessor, the last
sentence of s. 88 (2) has no application. However, the
assumption which
underlies the sentence, namely, that but for the provision which it makes, the
whole of the expenditure can be taken
into account, indicates that in the
absence of a similar provision directed to a specification of value, the total
expenditure should
be allowed in this case. (at p255)
28. In the result I would allow the appeal. (at p255)
JACOBS J. It is not necessary for me to set out the facts. They appear, so
far as they need to be stated for the purposes of his
decision, in the reasons
prepared by Mason J. They are extensively set out in the reasons for judgment
of the Supreme Court (Menhennitt
J.) from which this appeal is brought (1975)
VR 260; (1974) 23 FLR 249 . In my opinion the true construction of the
building covenant
is that the lessee would build erect construct or make on
the land buildings and/or other permanent improvements, that they would
have a
value of $150,000 and that the buildings and/or other permanent improvements
might have such greater value as the lessee saw
fit. In all respects the
improvements had to be such that, if buildings, the walls thereof would be of
brick or concrete or other
materials approved by the Board and such that,
whether buildings and/or other permanent improvements, they were built erected
constructed
or made in all respects in a substantial and workmanlike manner
and with materials of the best descriptions of their several kinds
conformably
to the statutory and local regulations applicable thereto and in accordance
with plans and specifications approved by
the Board of Land and Works. (at
p255)
2. Therefore, the improvements are improvements which the lessee was required
to make under the provisions of the lease, of which
it was the part assignee.
In this I agree with the analysis of Mason J. However, upon the construction
which I would adopt, there
was an amount of $150,000 specified in the lease as
the amount which the lessee was required to expend and therefore in accordance
with the concluding sentence of s. 88 (2) expenditure in excess of that amount
specified in the lease may not be taken into account
as expenditure on
improvements which the lessee was required to make. (at p255)
3. However, this last sentence of s. 88 (2) must if necessary be given an
operation distributive among expenditures which a lessee
agrees to make and
which he is required to make and which the lessor consents in writing to him
making. An amount of expenditure
may in a lease be specified as the amount of
expenditure in respect of improvements which a lessee is required to make. A
further
amount of expenditure may be specified in respect of the same
improvements in a written consent of the lessor. Such a consent may
appear in
the lease itself or may appear in a separate written instrument. In either
case if the written consent specifies an amount
of expenditure in respect of
improvements to which written consent is given then the last sentence of s. 88
(2) is applicable. If
no such amount is specified, the last sentence of s. 88
(2) is inapplicable. (at p256)
4. It must therefore be determined whether the improvements, in addition to
being improvements which the lessee was required to
make, were also
improvements made with the written consent of the lessor. If they were, then
no amount was specified as the expenditure
which the lessee should or might
make on improvements regarded as improvements to which written consent was
given. The only amount
specified was that which the lessee must expend in
respect of improvements which it was required to make, and therefore the last
sentence of s. 88 (2) would not be applicable. The construction of the
covenant which I have stated above leads me to the conclusion
that by the
written lease all the improvements were improvements made with the written
consent of the lessor. That consent flows
from the wide terms of the covenant
whereby the lessee was required to make improvements. An obligation imposed on
a lessee to make
improvements implies as a corollary a consent on the part of
the lessor that the improvements may be made. (at p256)
5. I do not think that the relevant consent is in these circumstances to be
found in the ultimate approval of the Board or its successor
to the actual
plans and specifications. A consent in writing by a lessor to the making of
improvements by a lessee may flow from
a written approval of particular plans
and specifications. It does not follow that the written consent to
improvements must flow
from approval of specifications when such approval is
required. The written consent may precede the actual approval of plans and
specifications, as in my opinion it does in the present case. The requirement
of approval does not require that approval to be regarded
as the written
consent to the making of the improvements. It was a provision intended to
ensure that the buildings and/or permanent
improvements were of a physical
standard and quality which satisfied the Board. The Board, even if it was not
the lessor, was the
agent of the lessor. It was not an independent third
party. A refusal to approve upon the ground that the improvements, though
otherwise
satisfactory, were of too high a standard or quality and therefore
too expensive would be a refusal which was unreasonable and which
made
performance of the requirement by the lessee impossible. This would relieve it
of compliance with the requirement. The consent
of the lessor to making the
improvements would remain, because that consent flowed from the terms of the
lease itself. That consent
was given before 22nd October 1964 and therefore s.
83AA (4) does not exclude the operation of s. 88. (at p257)
6. For these reasons I am of the opinion that the taxpayer was entitled to
the deduction claimed and that the appeal should be allowed.
(at p257)
ORDER
Appeal allowed with costs.
Order of the Supreme Court of Victoria (Menhennitt J.) set aside, and in lieu thereof order that the appeal to that Court be dismissed with costs.
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