High Court Allows Deduction for Machine Pallets Used in Manufacturing

OUTCOME: Allowed

High Court of Australia [NAME], [NAME] [NAME]) [COMPANY] v Commissioner of Taxation (Cth)

ORDER Order Appeals allowed with costs. Amended assessment for the year 1964-1965 and assessment for the year 1965-1966 remitted to the Commissioner for re-assessment in conformity with reasons for judgment delivered herein this day. [APPELLANT], [NAME]

The appellant is a manufacturer of concrete roofing tiles. These are produced by a [NAME] which is composed of several principal parts. A conveyor carries to a hopper a continuous line of metal forms which are called [NAME] pallets. The upper surface of these forms is in the configuration of the under surface of the concrete tile which the [NAME] ultimately makes. The hopper, towards which the line of [NAME] pallets is moving, contains concrete of the appropriate composition and consistency kept in agitated condition. The metal pallets move under the hopper on a solid base with an intermittent or discontinuous motion so that one pallet at a time comes wholly under the hopper. When the [NAME] pallet is wholly under the hopper the concrete falls on the upper surface of the pallet. No means of escape is provided for the concrete except an aperture at which I might call the leading edge of the pallet formed by the under surface of a fixed block called a slipper and the upper surface of the pallet itself. As the pallet comes wholly under the hopper the concrete is forced under considerable pressure through this aperture. The under surface of this block or slipper is shaped so that the concrete forced under and past it takes the shape of the upper surface of a roofing tile whilst the pallet gives to the concrete the shape of the under surface of the tile. As the concrete is forced through the aperture the pallet moves forward at a suitable pace so that the concrete taking shape as it passes through the aperture becomes a continuous ribbon which rests on the pallet. This continuous strip or ribbon of concrete having the shape of a concrete tile is borne forward on the succession of [NAME] pallets as they move from under the hopper. It remains as a continuous strip or ribbon until a point is reached where a guillotine cuts the concrete ribbon into lengths which correspond precisely with the length of the [NAME] pallet. Thereafter each [NAME] pallet carries the concrete tile in a green state to a point where it is held for curing and, ultimately, when cured and capable of supporting itself, it is dissociated from the [NAME] pallet. The [NAME] pallet is thereafter available for further use in the process I have described.

In the course of its process of tile making and of distribution of roofing tiles the appellant uses pallets of another form which it calls stacking pallets. These have no function in shaping or forming the concrete tile but have to do with the handling of the tile at subsequent stages of its manufacture or distribution.

In making its return of income for the financial year which ended on 30 June 1965 the appellant claimed a deduction under s 62AA of the Income Tax Assessment Act 1936-1965 (the Act) called an investment allowance for an amount spent in the purchase of a number of stacking pallets and for another amount spent in the purchase of a number of [NAME] pallets used by it in its manufacturing business. In his assessment of the appellant's liability to tax in respect of that year the respondent allowed the appellant's claim to these deductions. The officer of the respondent who passed that assessment was called before me. He said, and I believe that although he understood from the appellant's return that there were two classes of pallets, he did not know the real nature of the distinction between the two or of the function of the [NAME] pallet which he took to be of a like kind with pallets normally used in [NAME] in aid of the transport of goods and materials. However, subsequent information as to the nature of the appellant's [NAME] pallets came to his knowledge. As the result of a better understanding of the nature and function of a [NAME] pallet as used by the appellant the officer reached the conclusion that the [NAME] pallets were moulds or articles having a use similar to moulds within the meaning of s 62AA(3)(h) of the Act and that therefore the appellant was not entitled to a deduction in respect of their purchase. In my opinion, the assessment was made as the result of an error of fact.

Accordingly, the respondent, within three years of the date on which tax became due and payable under the original assessment for the year ending 30 June 1965, was entitled to issue an amended assessment (see s 170(3)). He did so disallowing the claim and a deduction in respect of the [NAME] pallets.

Section 62AA(2)and (3)(h) are in the following terms so far as presently relevant:—

"62AA. — (2) [manufacturing [NAME]] Subject to the next succeeding subsection, this section applies in relation to any property being [NAME] or articles owned by the [NAME] that is for use by the [NAME] primarily and principally, and directly— (a) in any part of the operations by means of which—

(i) manufactured goods are derived from other goods (including other manufactured goods) by the [NAME] or by persons on whose behalf the [NAME] performs services involving the use of that property; …"

…

"(3) This section does not apply in relation to— …

(h) blocks, bolsters, core boxes, dies, driers, flasks, gauges, jigs, lasts, matrixes, moulds, patterns, saggars, stereotypes, templets and tooling (including workholding fixtures, working heads and tool holders), and articles of a description, or having a use, similar to that of any of those articles; …"

In its return for the financial year ending 30 June 1966 the appellant made a claim for deductions in respect of amounts spent in the purchase of stacking pallets and [NAME] pallets: that made in respect of the purchase of [NAME] pallets was disallowed. The appellant made appropriate objections to the amended assessment in respect of the year 1965 and to the assessment in respect of the year 1966. Upon their disallowance the appellant requested that the decisions of the respondent be sent to a [NAME]. The [NAME] by majority upheld the respondent's view that the [NAME] pallets were articles within a description in s 62AA(3). It therefore disallowed the appellant's appeals. The appellant has appealed to this Court against the Board's decision in respect of each year, claiming that the [NAME] pallets were within s 62AA as [NAME] or articles owned by the appellant for use by the appellant primarily and principally and directly in a part of the operation of manufacturing concrete roofing tiles and that they were not moulds nor did they have a use similar to that of a mould within the meaning of s 62AA .

The respondent took the preliminary point that the decisions of the [NAME] did not involve any point of law and that therefore the appeals were incompetent. However, after discussion, the respondent's counsel withdrew the objections, conceding that there was a question of law involved in each appeal, namely the proper construction of s 62AA, particularly of subsection (3)(h). The respondent's concession was, in my opinion, rightly made, as it is to my mind quite clear that it is not possible to answer the question whether the [NAME] pallets are within any of the relevant descriptions of subsection (3) without construing the section as a whole and in particular subsection (3) thereof.

Accordingly, I hold that the appeals are competent.

In the hearing of the appeals, which were taken together, I was given the benefit of the evidence of three engineers. Mr [APPELLANT], called for the appellant, had designed the [NAME] in question. He described for me very clearly the various elements of the [NAME] and their respective functions in the process. He said the process of the formation of the tile was a "drawing" process. Mr [NAME] described various of the articles mentioned in subsection (3)(h) and expressed the opinion that the [NAME] pallet was not a mould. Mr [RESPONDENT], called for the respondent, said that in his opinion that process was a moulding process.

I was invited to make an inspection of the [NAME] and to see a colour film of the [NAME] at work. However, I found it unnecessary to accept either of these invitations because I felt that without the assistance of a view or of a film, I had derived from the evidence of the witnesses and the diagrams produced by them a clear understanding of the tile-making process by the use of the appellant's [NAME] and of the function of the [NAME] pallets in that [NAME].

Section 62AA distinguishes between [NAME] and articles. Some of the subsections do so explicitly; both paragraph (h)and (i) of subsection (3) seem to treat the things they describe as "articles". But, beyond making the distinction, there is no indication in the statute as to the criterion or criteria by reference to which a thing can be classified for relevant purposes as either [NAME] or an article. "[NAME]" is somewhat unhelpfully defined as "a unit of property in relation to which this section applies". Articles as well as [NAME] would fall within this description.

A question immediately arises as to whether the two descriptions, [NAME] and article are mutually exclusive, so that if a thing is properly described as [NAME] or as an article it cannot be an article for the purposes of the section. Having studied the list of exceptions in subsection (3), it seems to me that "[NAME]" in the section describes a [NAME] or integration of parts operating as a whole, whereas "article" is a description for the purposes of the section of tools or articles which are not so integrated but have, as it were, an independent use, though that use may be in aid of the manufacture in question. On this footing the [NAME] pallet which I have described is, in my opinion, properly described for the statutory purposes as [NAME] rather than as an article. It has use only as part of the tile-making [NAME]. All the things described in subsection (3)(h) are, in my opinion, articles rather than [NAME]. They may be used in association with [NAME] and in furtherance of the purposes of the [NAME]. But they are, it seems to me, self-contained items having an independent use derived from their own nature. Consequently, if it were necessary, I would be prepared to dispose of these appeals against the respondent on the ground that, being [NAME], the [NAME] pallets are not articles falling within any of the descriptions in subsection (3)(h).

However, I propose to address myself to the question debated before me which was that, being articles, the [NAME] pallets were not within any of the descriptions in subsection (3)(h). The submission by the respondent was that the [NAME] pallets were either moulds or articles having a use similar to that of a mould. the use here spoken of, according to the respondent's primary submission, was a use intrinsic to the article itself. The appellant, on the other hand, submitted that the use to which the paragraph of the subsection referred was a use of the article made by the [NAME] in the manufacturing operations which attracted the terms of subsection (2) of s 62AA. I have come to the conclusion that the appellant's submission in this regard should be accepted. It is the use by the [NAME] in its manufacturing operations which warrants the deduction given by s 62AA. It must be because of some use in those operations that an article, not itself of one of the descriptions, comes outside the benefit of subsections (1)and (2)

But first, is the [NAME] pallet a mould? Of course the process of making the tile of the particular pattern can be described as or as involving a moulding or shaping process. Yet, none of the articles which assist in that process is therefore necessarily a mould. It seems to me that the essence of a mould is that it contains the plastic material introduced into it so that, by that very containment, the material is forced to accept the shape the mould is designed to give it. Dies give shape to material but do not contain it. Flasks contain material but, so far as I know, give it no shape. Matrixes, as in the case of record manufacture, give shape to, but do not contain, the material of which the record is formed. It is quite clear to my mind that used independently as an article, a [NAME] pallet does not contain any material placed upon it nor indeed can it give it shape—certainly not the shape of a roofing tile. It is not, in my opinion, a mould.

Has it, in the operation of the [NAME], a use similar to that of a mould? I have described the process of concrete tile making, from which it appears that the concrete is not contained in or on the [NAME] pallet so as to be thereby given the shape of a roofing tile. Even in the confined space formed by the hopper, its sides, and the [NAME] pallet on its solid bed below the hopper, the roof tile is not formed. A section of the ribbon of concrete is given the sectional shape of a tile as concrete is forced through the aperture I have described. It is the continuous passage of the concrete under pressure through the aperture which enables formation of the roofing tile. The continuity of that process of passage through the aperture and the travel thereafter of the [NAME] pallet in its co-ordinated movement produce what I have called the ribbon of concrete with the profiles, upper and lower of a roofing tile. The process is in a sense unique, but if description is necessary, I think it can properly be described as a "drawing" process, to use Mr [NAME] description. In my opinion, the function of the [NAME] pallet in the appellant's operations is not a use similar to that of a mould. Its function is to assist in forming the aperture through which the concrete is forced so as to form a ribbon of concrete and to bear that ribbon, first as a continuous ribbon, and later as a separate roof tile, until when cured, it is self-supporting.

In my opinion, the [NAME] pallets, regarded as articles, do not fall within any of the descriptions in subsection (3)(h). Accordingly, in my opinion, the appeals should be allowed, the amended assessment and the assessment set aside and remitted to the respondent to be dealt with conformably to these reasons for judgment.