FEDERAL COURT OF AUSTRALIA

METAL MANUFACTURES LTD

v

COMMISSIONER OF TAXATION

NG668 of 1997

NG669-678 of 1997

[1999] FCA 1712

SUMMARY

In accordance with the practice of the Federal Court in certain cases of importance and complexity, the Court has prepared a brief summary to accompany the reasons for judgment that are to be delivered today, 8 December 1999, by Emmett J.  It must, of course, be emphasised that the only authoritative pronouncement of the Court’s reasons is that contained in the published reasons for judgment.  This summary is intended to assist in understanding the principal conclusions reached by the Court, but it is necessarily incomplete.

8 December 1999

SUMMARY OF REASONS FOR JUDGMENT

GIVEN ON

8 DECEMBER 1999 BY EMMETT J

The applicant, Metal Manufactures Limited (“the Taxpayer”), is, and has for many years been, engaged in the manufacture of energy cables and tubes and pipes, in the business of facilitating the transmission of electronic communications and in the merchandising of electrical, electronic and lighting products.

In 1987, the Taxpayer owned land at Port Kembla, New South Wales.  On land owned by the Taxpayer (and extending onto land owned by a wholly owned subsidiary of the Taxpayer), there were erected factory premises occupied by the Taxpayer.  Various items of heavy plant and equipment (“the Plant and Equipment”) were contained within the factory premises.

In April 1988, the Taxpayer entered into arrangements with the State Bank of New South Wales (“the Bank”) whereby, under a Credit Purchase Agreement, the Taxpayer purported to sell the Plant and Equipment to the Bank and, under a Lease, the Bank purported to lease the Plant and Equipment back to the Taxpayer, in consideration of the payment by the Taxpayer to the Bank of regular half-yearly amounts of Rent. 

In respect of the years of income ended 31 December 1988 to 31 December 1995 inclusive, the Taxpayer claimed the amount of the regular payments of Rent made in these years under section 51(1) of the Income Tax Assessment Act 1936 (“the Act”) as an allowable deduction against its assessable income for those years of income.

The respondent, the Commissioner of Taxation (“the Commissioner”), issued amended assessments disallowing the payments as deductions on several alternative bases.  One basis was that the Commissioner determined, for the purposes of Part IVA of the Act, that insofar as the payments constituted allowable deductions, the deduction would be disallowed because the Taxpayer had obtained, or would but for the operation of section 177F of the Act, obtain, a tax benefit in connection with a scheme to which Part IVA of the Act applies.

The Taxpayer lodged objections against the amended assessments in respect of each year and contended that the assessments should be reduced by the allowance of the deductions claimed.  The Commissioner disallowed the objections.  The Taxpayer has now appealed to the Court against the Commissioner’s decisions disallowing the objections.

The Commissioner’s first contention is that, because the Plant and Equipment consisted of fixtures, the Credit Purchase Agreement was ineffective to vest any title in the Bank.  Therefore, the Lease was ineffective to confer any right in respect of the Plant and Equipment on the Taxpayer.  Accordingly, the payments in question made by the Taxpayer to the Bank cannot be characterised as payments made under a lease for the purpose of securing the right to use property owned by the Bank as lessor.

The sale and lease-back transaction necessarily contemplated that the Plant and Equipment being sold were chattels.  However, weighing up all the relevant factors, the circumstances surrounding the attachment of the Plant and Equipment to the land show that the Plant and Equipment were intended to become part of the land to which they were attached.  Accordingly, they were fixtures as at 19 April 1988.

Although the documents evidencing the sale and lease-back transaction were ineffective to transfer legal ownership of the Plant and Equipment to the Bank, I consider that the transaction documents were effective to create an equitable interest in the nature of property in the Bank.  That equitable interest was sufficient to support the “leasing” by the Bank of the Plant and Equipment to the Taxpayer and the “taking on lease” of the Plant and Equipment by the Taxpayer.

The Commissioner contended that the sale and lease-back transaction should be characterised as a loan, such that the payments of Rent constitute repayments of interest and capital of which only the interest component may be deductible.   I consider that there is no basis for concluding that the payments in question should be characterised otherwise than payments made pursuant to the obligations imposed by the Lease in order to secure to the Taxpayer the right to use the Plant and Equipment free of any risk that the Bank might exercise such rights as it may have to the Plant and Equipment as owner, whether legal or equitable. 

Alternatively, the Commissioner contended that the payments of Rent should be characterised as securing to the Taxpayer the right, from a business and practical point of view, to reacquire the Plant and Equipment for a low residual value at the end of the Lease.  As such, the Commissioner argued that a proportion of the Rent should be characterised as outgoings of capital which would not be deductible under s 51(1).  It is common ground that there was no legal entitlement conferred on the Taxpayer to acquire the Plant and Equipment.  I do not consider that the regular payments to be made under the Lease should be characterised as being attributable to the acquisition by the Taxpayer of the advantage of being able to repurchase the Plant and the Equipment at the expiration of the Term of the Lease for the amount of the residual value.

Finally, the Commissioner contended that if the payments were otherwise allowable deductions under s 51(1), the deductions should be disallowed pursuant to the operation of Part IVA of the Act.  Part IVA operates where it may be concluded, having regard to certain criteria, that the dominant purpose for entering into a scheme was the obtaining of a tax benefit.  At the time of the sale and lease-back transaction, an objective assessment of the financial position of the Taxpayer indicated a need to replace short term debt with medium to long term finance of at least $50,000,000.  At one level, it would be concluded that the purpose of the Taxpayer and the Bank of adopting the sale and lease back form of financing was to ensure that the Taxpayer would obtain the relevant tax benefit.

At another level, however, it would be concluded that the purpose of the relevant persons for the Taxpayer entering into the Arrangements was to ensure that the Taxpayer had access to medium to long term finance to replace its short term borrowings.  I consider that it would not be concluded, after having regard to all of the matters required to be considered, that any of the Taxpayer, the directors of the Taxpayer or the Bank entered into or carried out the Arrangements, for the sole or dominant purpose of enabling the Taxpayer to obtain a tax benefit within the meaning of Part IVA of the Act.  Accordingly, the Commissioner was not justified in making a determination under Part IVA.

It follows then that the appeals should be allowed and the assessments should be set aside.  Ordinarily, the Commissioner would pay the Taxpayer’s costs of the proceedings.  However, the Taxpayer was unsuccessful on the issue of whether the Plant and Equipment were fixtures.  That issue required considerable evidence.  I shall stand the proceedings over to a time convenient for the parties to bring in short minutes to reflect the conclusions that I have reached and to permit the parties to make submissions, if they wish, on the question of costs.

Sydney, 8 December 1999

This judgment is available in full text on the internet at www.fedcourt.gov.au