ZF v Comptroller of Income Tax

Andrew Ang J:

[1] This is an appeal by [ZF] (“the appellant”) against the decision of the Income Tax Board of Review (“the Board”) which held that certain prefabricated dormitories were not “plant” within the meaning of ss 19 and 19A of the Income Tax Act (Cap 134, 2008 Rev Ed) (“the Act”) in the context of the appellant’s trade. The Board’s decision was premised, inter alia, on the following findings:

(a) The appellant did not, for the purposes of its trade, which is the provision of accommodation to workers, require the use of the dormitories to be portable or demountable. The fact that the appellant had assembled the dormitories using prefabricated structures was for its own convenience in the event it was required to vacate the land at short notice. The appellant could have carried on its business of providing accommodation without using prefabricated structures. In other words, it was not a commercial necessity to employ prefabricated structures vis-à-vis the dormitories.

(b) The dormitories were primarily used as workers’ accommodation and remain as buildings or premises used for the conduct of the appellant’s trade or business.

[2] On appeal, the appellant reiterated its case that given:

(a) the nature of its business (ie, the provision of dormitory accommodation); and

(b) the commercial necessity for the easy dismantling of the dormitories for relocation to another site,

the portable and demountable dormitories qualified as “plant” for the purposes of ss 19 and 19A of the Act.

[3] On 1 June 2001, [Z] Pte Ltd (“[Z]”) was awarded a contract to design, build and operate workers’ dormitories (“the dormitories”) at [XXX] Road (“the site”) by [C] Pte Ltd (“[C]”), a subsidiary of [XXX]. The site was owned by the Government of the Republic of Singapore and leased to the Building and Construction Authority (“BCA”). BCA in turn sub-leased the site to [C] for a term of three years from 1 December 2001 (“the sub-lease”). Under cl 7.2.2 of the sub-lease, BCA is entitled to terminate the sub-lease without cause at any time by giving [C] not less than 90 days’ written notice. Upon termination, [C] is required forthwith to peacefully vacate and deliver up the site to BCA. BCA may also, at its absolute discretion, grant a fresh tenancy on such terms as it deems fit. In turn, cl 12 of [C]’s agreement with [Z] provides that the term of operation of the dormitories would be for the period as set out under the sub-lease agreement between [C] and BCA plus any extensions thereto. According to the appellant, the reason for the short notice period was that the site situated at Jurong Industrial Estate was intended for industrial use and the dormitories were intended to be situated on the site temporarily.

[4] Although [Z] was awarded the contract to design, build and operate the dormitories by [C], the dormitories were not built by [Z] as it wanted to put in place a professionally competent team to operate and manage the dormitories. To this intent, [Z] entered into a joint-venture with [F] Pte Ltd (“F”), and the appellant was incorporated. The appellant subsequently engaged its own contractor, [XXX] Pte Ltd, to build the dormitories.

[5] It was not disputed that the appellant used prefabricated material to build the dormitories. Each three-storey dormitory structure (of which there are six at the site) had a concrete foundation base, wooden floors and steel sheet sides and roof. The appellant contended that as a result of the short-term lease and the short notice period to vacate the site, the dormitories had to be installed and dismantled quickly. In addition, the modular nature of the dormitories allows the appellant to re-use such units of prefabricated structures to fit into the size of the next site available for use. It was explained that if the appellant had built the dormitories with brick and mortar, it would lose its considerable investment if the dormitories were to be demolished upon receipt of notice of termination. Given the limited period of the lease and the possibility of termination upon 90 days’ notice, it was commercially necessary (and not merely desirable) that the dormitories possessed those features. On the other hand, the respondent took the position that it was not commercially necessary to adopt prefabricated structures in building the dormitories and that the dormitories were not a “plant” for the purposes of the Act.

[6] The only question before the court is whether, in the circumstances, the dormitories fall within the definition of “plant” in ss 19 and 19A of the Act so as to qualify for initial and annual allowances available thereunder for machinery and plant.

[7] Lindley LJ’s classic exposition in Yarmouth v France (1887) 19 QBD 647 on the characteristics of a “plant” almost invariably prefaces any discussion on the subject. At 658, the learned judge said:

As to the statement’s continuing validity, Lord Lowry observed in Inland Revenue Commissioners v Scottish & Newcastle Breweries Ltd [1982] STC 296 (“Scottish & Newcastle Breweries”) (at 301):

Similarly, in this case, the Board accepted this formulation of “plant” as does the respondent.

“Plant” is not an ordinary English word

[8] It is also important to note from the outset that the courts have consistently held that the word “plant”, in the context of capital allowances, should not be accorded its ordinary dictionary meaning but should be read in light of the decided authorities.

[9] In Munby v Furlong (Inspector of Taxes) [1977] 2 All ER 953, Lord Denning stated (at 956):

[10] There is little doubt that the word “plant”, in the context of capital allowances, is a technical word, the meaning of which has been judicially developed over time. Thus, as Lord Wilberforce observed in Scottish & Newcastle Breweries (at 298):

[11] The proper determination as to whether something is “plant”, however, depends upon the application of various tests. For our purposes, the relevant ones are the “functional” or “business use” test and the “premises” test.

[12] The “functional” or “business use” test was firmly established by the House of Lords, in Commissioner of Inland Revenue v Barclay, Curle & Co Ltd [1969] 45 STC 221 (“Barclay, Curle”) which involved the question whether a dry dock was a plant, where Lord Guest said (at 244):

In the same decision, Lord Reid added that a building or structure, depending on its function, could also be a plant (at 238):

[13] The “functional” test entails an examination of the function of the apparatus in question in the context of the business of the taxpayer. This can be seen from the House of Lords case of Scottish & Newcastle Breweries ([7] supra). In that case, Lord Wilberforce said (at 299):

The words of Lord Wilberforce echoed those of Lord Cameron in the same case in the court below at the Court of Session. Lord Cameron’s dicta (as were conveniently cited by Lord Lowry in the House of Lords) were as follows (at 302):

In other words, whether an asset functions as plant for a taxpayer has to be determined by consideration of that particular taxpayer’s trade and examining the function of the asset in that particular taxpayer’s trade. What is “plant” for one trade, may not be “plant” for another trade.

[14] In this regard, Lord Denning MR in Bridge House (Reigate Hill) Ltd v Hinder (H M Inspector of Taxes) [1971] 47 TC 182, in deciding that sewage pipes laid to carry away effluent from a restaurant were not “plant” observed as follows (at 192):

[15] In Schofield (HM Inspector of Taxes) v R & H Hall Ltd [1974] 49 TC 538 (“Schofield”), the question was whether silos for storage and distribution of grain were “plant” in the taxpayer’s trade of grain importing. The taxpayer company contended that the silos as a whole (and not merely the machinery within) qualified for capital allowances as plant used in its trade. For the Crown, it was contended that the silos were part of the setting in which the trade was carried on and were not plant. The Special Commissioners found, inter alia, that the silos formed an essential part of the overall trade activity, their separate function being to hold grain in a position from which it could be conveniently discharged in varying quantities to customers. Applying Barclay, Curle, they held that the silos were plant eligible for capital allowances. This was upheld by the Court of Appeal of Northern Ireland. Apart from applying Barclay, Curle, Lowry CJ also made reference to a passage in the judgment of Kitto J in Broken Hill Proprietary Company Limited v Commissioner of Taxation for The Commonwealth [1967–68] 41 ALJR 377 where the learned judge said (at 381 and 387):

[16] Applying the reasoning therein, Lowry CJ held that the external walls of the silos were not merely in the nature of a general setting in which a part of the operations was carried on, nor did they merely provide shelter for persons as they work and for the equipment. Rather, the buildings as a whole played a part in the distributive processes of reception, distribution and discharge of the grain. It is significant to note the learned judge’s conclusions, inter alia (at 554):

[17] In John Good ([12] supra) some special internal partitions in a shipping agent’s premises were held to be “plant” even though it could also be said that they provided a “setting” for the conduct of the taxpayer company’s business. The partitions were special in that whilst they were secured to the building structure by screws at the floor and ceiling, they could be easily moved from one position to another as the floor space was re-configured to meet the changing needs of the company. It was common ground that the partitions were not part of the structure of the building although the Crown’s contention was that the partitions were nevertheless part of the building. (This was interpreted by Donovan LJ to mean that, although they were not part of the permanent walls, the partitions when erected were at least a temporary part of the internal walls.)

[18] The Crown’s main contention was that the partitions were simply part of the setting in which the work was carried on, and not something which was used in the operations of the company’s business as shipping agents. In the court below, Pennycuick J had held as follows (at 688):

Donovan LJ, in the English Court of Appeal, held (at 694):

Pearson LJ further said (at 696):

It is noteworthy that both Ormerod LJ and Pearson LJ regarded the case as near the borderline but found no reason to fault the Commissioners’ decision which Pennycuick J had upheld.

[19] In St John’s School v Ward (HM Inspector of Taxes) [1974] 49 TC 524 (“St John’s School”), the taxpayers who ran a school erected two structures on the school grounds using prefabricated panels bolted together on site for use as a laboratory and gymnasium. However, unlike the dormitories in our present case, neither structure was affixed to the ground or to the concrete base on which it stood. The layout of either of them could be changed by re-arrangement of the panels; for example, the laboratory could be divided into two separate laboratories. The General Commissioners rejected the taxpayer’s contention that the component prefabricated parts of the structures were plant and found, inter alia, that the structures were buildings. This was upheld by the High Court where Templeman LJ (whose judgment was unanimously approved by the Court of Appeal) said (at 530–531):

[20] In Benson (HM Inspector of Taxes) v Yard Arm Club Ltd [1979] 53 TC 67 (“Benson v Yard Arm Club”), the taxpayer company bought a second-hand ship and converted her into a floating restaurant. The converted hulk had no means of propulsion or steering. She was attached to a barge (which provided services to it) and together with the barge was moored at a permanent site on the Victoria Embankment. The Revenue disallowed capital allowances for the ship on the basis that the ship was not plant. After several rounds of appeal, the case was heard by the Court of Appeal. It held, dismissing the company’s appeal, that the ship and the barge, although chattels, were the premises where the business was carried on and not the apparatus employed in the company’s business activities. Templeman LJ explained (at 88):

(As was later explained by Oliver LJ in Cole Brothers Ltd v Phillips (H M Inspector of Taxes) [1982] 55 TC 188 (“Cole Brothers Ltd”) at 212, if the ship had been engined and used as a vehicle for gastronomic cruises on the river, it would have served an additional function in a composite business of restauranteurs and carriers.)

[21] Templeman LJ went on to review the authorities and, in particular, John Good ([12] supra) and Barclay, Curle ([12] supra), St John’s School ([19] supra) and Schofield ([15] supra). His Lordship said (at 89):

And at 90:

[22] Templeman LJ concluded his analysis of the decided cases by saying (at 90):

[23] The appellant in the present appeal sought to rely on John Good ([12] supra) drawing parallels between the two cases. Firstly, it was contended that although the dormitories might seemingly be the setting in which the business of the appellant is carried on, they ought to be regarded as plant since they are apparatus with which the business is carried on. Secondly, a parallel was also drawn between the movable internal partitions in John Good and the portable and demountable dormitories. It was argued that just as the partitions could be moved about to divide the office space in different configurations, similarly, the dormitories could be moved from place to place and demounted to form different-sized dormitories in different locations. Finally, the appellant also argued that, in the same way that the flexibility of the partitions was a commercial necessity, likewise the portability and demountability of the dormitories.

[24] It should be noted that whereas it was common ground that the partitions were not part of the building structure in John Good, the same cannot be said of the dormitories. Clearly, the dormitories are the very premises in question. In this connection, it is pertinent to mention that, whereas before the Board the appellant had framed the issue as being “whether the pre-fabricated structural elements which have been installed by the appellant to form dormitory accommodation constitutes ‘plant’ within the meaning of ss 19 and 19A of the Income Tax Act”, in the appeal before me, the subject matter of the appeal is the dormitories. The issue is set out in para 9 of the appellant’s case as follows:

It is right that the shift was made. That a pre-fabricated building should be viewed as one entity as opposed to its component parts was endorsed by Templeman J in St John’s School ([19] supra).

[25] Although superficially the analogy between the partitions in John Good and the portable and demountable dormitories in the present appeal appears plausible, in truth it is untenable. A similar (unsuccessful) attempt at such analogy was made in St John’s School. There it was contended by the appellant that the layout of the laboratory and gymnasium could be changed by re-arrangement of the pre-fabricated panels. Thus, for example, the laboratory could be divided into two separate laboratories. The appellant drew an analogy between the partitions in John Good on the one hand and the component parts of the laboratory and gymnasium on the other. This was disposed of by Templeman J in the following passage (at 532):

In the same way, in the present case, the subject matter of the inquiry is the dormitories, howsoever it may be re-configured.

[26] On the question of commercial necessity, I think it can fairly be said that the use of portable and demountable dormitories was in the view of the taxpayer a commercial necessity. The lease, at three years, was a short one. Although it was renewable, it could also be terminated upon 90 days’ notice. In those circumstances, it was commercially sensible, if not essential, to use portable and demountable structures. The evidence of the appellant’s witness, Yang Tse Pin, supporting this view was not challenged. It was therefore not open to the Board to find otherwise. Nevertheless, that the dormitories are portable and demountable does not alter the fact that the subject matter of the inquiry is the dormitories standing as they are on site in each instance. The portability and demountability are the properties of the dormitories and not the function of the dormitories.

[27] I move on to the appellant’s submission that the dormitories are the apparatus with which the appellant carries on business rather than merely the setting in which the business is carried on. This distinction, borrowed from Lord Reid’s judgment in Barclay, Curle [quoted at the end of [12] above], is apt in the present case. It cannot be gainsaid that the dormitories afford the accommodation which it is in the business of the appellant to provide. Although in Barclay, Curle the dock (which the court held to be plant) did have a mechanical function in getting ships into position and Lord Guest suggested that a plant must serve an active function, I am of the view that it is not a requirement that to qualify as a plant, the dormitories actively perform a function. This was endorsed by Lowry CJ in Schofield (see [16] above).

[28] As was noted earlier, whether an asset functions as plant has to be determined by an examination of the function of that asset in the context of the business of the taxpayer. On that basis, I am of the view that the dormitories satisfy the function test. However, to qualify as plant for the purpose of capital allowances, the dormitories will also need to pass the “premises” test.

[29] Before I turn my attention to the premises issue, I should first address the case of Quarries Ltd v Federal Commissioner of Taxation (1961) 106 CLR 310 (“Quarries”), which, according to counsel for the appellant, stood for the proposition that:

The brief facts in Quarries are as follow. The taxpayer was a company in the business of quarrying and crushing stone. The nature of its business required it to operate at various and frequently remote places. The taxpayer’s equipment was transported from site to site and includes, inter alia, the crushing plant, a mobile crane and portable sleeping units. The duration of operations at each site appears to vary from three months to twelve months (with the average being six months). The sleeping units were provided for the accommodation of the taxpayer’s employees whilst they were engaged in the operations of the concern. Taylor J, sitting in the High Court of Australia, decided that the portable sleeping units were plant. Pertinently, Taylor J expressed the view that the portable sleeping units formed merely part of the “train of equipment” and were not buildings (at 313–316):

[30] In other words, the portable sleeping units in Quarries did not form part of the premises in which the taxpayer’s business was carried out, but rather as part of the taxpayer’s “train of equipment”. On those facts and, unlike the case at hand, the “premises” issue did not arise in Quarries.

[31] This test was enunciated by Hoffmann J in Wimpy International Ltd v Warland (Inspector of Taxes) [1988] STC 149 which was affirmed on appeal where he said (at 172):

The two taxpayer companies in that case operated a chain of “fast food” restaurants. To reverse their declining fortunes caused by stiff competition, they decided to make major changes to the premises and incurred expenditure on the installation of, inter alia, shop fronts, light fittings and wiring, raised floors, floor and wall tiles, wall panels and mirrors, suspended ceilings, decorative brickwork and built-in storage units and dispensers. Revenue rejected the taxpayers’ claim that the items were “plant” for the purpose of capital allowance. This was upheld by the Special Commissioners. The taxpayers’ further appeal to the High Court was similarly dismissed. Hoffman J analysed the famous dictum of Lindley LJ in Yarmouth v France ([7] supra) and gave a highly illuminating review of the cases. I can do no better than to cite relevant passages from his judgment as follows (at 170–172):

[32] Hoffmann J further rejected an argument by the taxpayers that if the improvement served a business purpose such as attracting customers, it was plant. He said (at 174):

The taxpayers’ appeal to the Court of Appeal was dismissed. Fox LJ, in the leading judgment in Wimpy International Ltd v Warland (Inspector of Taxes) [1989] STC 273, rejected an argument of the taxpayers, albeit, based on an observation of Oliver LJ in Cole Brothers Ltd ([20] supra), that the question was whether the subject matter performs simply and solely the function of housing the business or whether as an additional function it performs some other purpose. As to this, Fox LJ said (at 280):

[33] This same approach can be seen in Carr (H M Inspector of Taxes) v Sayer [1992] 65 TC 15 (“Carr v Sayer”) where the question, inter alia, was whether certain expenditure on the construction of permanent kennels by a company in the business of providing quarantine services for dogs and cats brought into the United Kingdom qualified for capital allowance. Sir Donald Nicholls VC held that the permanent kennels were not plant; they were purpose built permanent buildings or structures, used as such, and were the premises in which the business was conducted. At 23, he said:

[34] The premises test was again applied by the UK Court of Appeal in Attwood (Inspector of Taxes) v Anduff Car Wash Ltd [1997] STC 1167. In that case the taxpayer carried on the trade of operating automatic car wash sites and sought to claim capital allowance on the entirety of a wash hall which was a special system housed within a building incorporating washing machinery and control equipment, and surrounded by a tarmac area used for circulation, queuing and parking. The Inspector of Taxes accepted that some of the car wash facilities were plant but not each entire site. Peter Gibson LJ in the Court of Appeal applied the business use test and the premises test and held that the only reasonable conclusion was that neither an entire site nor an entire wash hall (ie, the building housing the car wash machinery) could be regarded as a plant. As both the entire site and the wash hall functioned as premises, they could not be held as plant. What is interesting for our purposes are Peter Gibson LJ’s remarks regarding Carr v Sayer in the following terms (at 1176):

[35] Applying the above to the facts of our case although the dormitories were built to enable the taxpayer to carry out its business activity of providing accommodation, it is also true that the provision of shelter is a typical function of premises. The dormitories are not essentially different from hotel premises where travellers are accommodated. The same reasoning was applied in St John’s School ([19] supra). As explained by Templeman LJ in Benson v Yard Arm Club ([20] supra) at 90, although the gymnasiums and chemical laboratories were constructed and used as such, they were held not to be plant because they were merely part of the premises upon which the business of providing education was carried on. The structures performed no function other than their primary purpose of providing the accommodation for the business of a school. This was to be contrasted with the exceptional cases of Barclay, Curle ([12] supra) and Schofield ([15] supra).

[36] In Barclay, Curle, the dry dock performed the function of a hydraulic lift, raising the ships and holding them in such a position that inspection and repairs could be done to the bottoms and sides of the ships. In Schofield, the silos did not merely serve as storage for grain but held grain in a position from which it could be discharged in varying quantities to customers. In each of those two cases, the structure performed a function other than that of merely providing accommodation for the carrying on of a business.

[37] Although the appellant sought to argue that the portability and demountability of the dormitories was an additional function, in my view that contention was untenable. The portability and demountability of the dormitories were merely the properties of the dormitories and not a function (see [26] and [32] above). In the present case, the dormitories serve only to provide accommodation to workers, this being the typical function of premises. This remains so even if it be said that the dormitories are the structures with which the business is carried on.