Baxter v Commissioner of Taxation

"ASSESSMENT UNDER SECTION 101 OF SALES TAX ASSESSMENT ACT 1992 In respect of the application to own use of a Swan 60 boat, incorrectly imported free of sales tax, under a quotation of an ED4 to the Australian Customs Services. The boat was listed on Customs entry number 1S82671029E and applied to own use in taxable circumstances on or about the 28th September 1998. Total taxable value (as per attached schedule A) $3,074,065.90 Total amount of tax thereon at 22% $ 676,294.50 Assessment of penalty under section 99 of Sales Tax Assessment Act 1992 $ 202,888.35 (The amount imposable under section 97 Sales Tax Assessment Act 1992 has been reduced pursuant to section 100 of Sales Tax Assessment Act 1992) Total amount due under these assessments $ 879,182.85 Less tax previously paid $ 676,294.50 Amount of tax now payable $ 202,888.35 … SALES TAX: Schedule A Mr M A Baxter The costs of the boat (Molly) are as follows: Customs value $2,411,945.00 Customs duty $ 120,597.00 $2,532,542.00 20% uplift $3,039,050.40 Extras: (Sails) Cost of sales, $ 35,015.50 Sales Tax rate 22% Total Taxable value $3,074,065.90 Total sales tax payable (22% x T.V) $ 676,294.50 ELIGIBLE LONG TERM LEASE The lease arrangement between Mr M A Baxter and Michael Bell Marine P/L is not recognised as an "Eligible Long Term Lease" as defined in SST 4. (See below.) Statutory definition of lease The term lease is defined to mean, in relation to goods, a lease by the owner of the goods and includes the letting or hiring of the goods under a hire-purchase agreement. The definition only refers to leases of goods. The definition ensures that the letting or hiring of goods under a hire-purchase agreement is treated the same as other leases. The definition also means that, to be a lease for sales tax purposes, the lease must be granted by the owner of the goods. A lease granted by a person other than the owner of the goods is not a lease for sales tax purposes, although it may be a lease in the ordinary meaning of the term. A sub-lease granted by a lessee, for example, is not a lease as defined in the legislation. The reference to ownership in the definition restricts who can make an eligible short-term lease agreement with the Commissioner - see Chapter 7 Ordinary meaning of lease The statutory definition of lease adds to the ordinary meaning of lease. A definition of lease is a grant of the exclusive possession of property to last for a term of years or periodic tenancy, usually with the reservation of rent. In distinguishing between a lease and a licence, the High Court of Australia (Taylor J) in Radaich v Smith said the problem may be solved by considering whether the right which is conferred is a right to the exclusive possession of the property in question. While these references refer to leases of land, the references raise the concept of possession. In summary the conditions in the contract between Mr M A Baxter and Michael Bell Marine P/L do not meet the requirements as per the definition of a "lease" listed above, ie (the exclusive possession of property to last for a term…)." 12 On 12 September 2000, the applicant granted MBM a further lease of the yacht. The terms of the new lease were substantially identical to the earlier lease, with the exception of a significant rise in the rent payable to the applicant ($5000 per month, cl 4.1(a)). This lease was extended again on 5 November 2001. 13 On 3 August 2000 the applicant lodged a Notice of Objection Against Assessment under the Assessment Act s 107 and the Taxation Administration Act 1953 (Cth) (the Administration Act) s 14ZU. The critical portion of it was as follows: "1. In September 1998 I imported a Swan 60 (serial number 60-014) sailing vessel ("Yacht"). 2. I entered into an arrangement with Michael Bell Marine Aust Pty Limited (ACN 007 282 529) ("Bell Marine") in relation to the Yacht which arrangement was a "lease AOU" as defined in section 5 of the STAA. 3. The arrangement referred to in paragraph 2 was an "eligible long-term lease" as defined in section 5 of the STAA. 4. In the premises the arrangement referred to in paragraph 2 was not taxable in terms of section 26(a) of the STAA. 5. The arrangement referred to in paragraph 2 is evidenced by a document executed on 24 September 1998 between myself as the lessor and Bell Marine as the lessee, a coy of which document is attached to this notice of objection and marked "A" ("Lease"). 6. When the Lease was executed the Yacht was in Australia and was owned by me. It was on the ship Pegasus Baywhich arrived in Perth on or about 21 September 1998. 7. The Yacht was landed in Sydney on or about 28 September 1998. 8. It was my intention and that of Bell Marine that the Lease: (a) should constitute an application to own use; (b) should constitute an eligible long term lease; and (c) should be for a term equal to the statutory period as defined in section 5 of the STAA. 9. Through abundance of caution should it be suggested that the term of the Lease was less than the statutory period, Bell Marine and I executed a deed of rectification on 10 May 2000 a copy of which document is attached to this notice of objection and marked "B" ensuring that the Lease would, on any view, be for a term equal to the statutory period." There was a deemed disallowance of the objection pursuant to s 14ZYA(3) of the Administration Act. 14 The application lodged in this proceeding on 14 May 2001 seeks variation of the Amended Assessment in the following terms: "(a) reducing the assessment to NIL by reducing the total taxation value (and the tax thereon) to NIL; (b) reducing the penalty purportedly assessed under section 99 of the Sales Tax Assessment Act 1992 ("STAA") to NIL or alternatively to an amount less than $202,888.35. (c) reducing or remitting to NIL any penalty for the later payment under the former section 68 of the STAA or alternatively to an amount less than the amount which has been levied; (d) reducing or remitting to NIL any general interest charge under section 68 of the STAA and section 8AAC of the Taxation Administration Act 1953 or alternatively to an amount less than the amount which may have been levied." 15 It will be seen that the basis upon which the applicant asserted exemption from tax was that the Lease was an eligible long term lease and it was that contention which was rejected by the respondent. I propose to consider that issue first, although, as the case developed, different issues emerged. 16 Section 26 of the Assessment Act provides: "26. A lease AOU is not taxable if: (a) the lease is an eligible long-term lease; or (b) the lease is an eligible short-term lease and the exempt percentage specified in the agreement under subsection 15A(2) is 100%." 17 'Eligible long-term lease' is defined in s 5 of the Assessment Act as: "…a lease of goods that meets all the following conditions: (a) the term of the lease is at least as long as the statutory period; (b) at or before the time of the grant of the lease, the lessor has been given evidence, in a form approved by the Commissioner, of the intention of the lessee or sub-lessee to use the goods, during the whole of the statutory period, so as to satisfy an exemption Item; (c) no part of any tax borne by the lessor on the goods before the grant has been passed on by the lessor to any person." 18 The 'statutory period' in relation to goods is defined as: "the period that starts at the time when the goods are first applied to a person's own use in Australia and ends at the earliest of the following times: (a) the end of 2 years after the time of that first application to own use; (b) the time when the goods are no longer reasonably capable of being used for the purpose for which goods of that kind are ordinarily used; (c) a time that the Commissioner considers to be appropriate in special circumstances." 19 "Assessable dealing" means any dealing covered by Table 1 (s 5 Assessment Act). In relation to imported goods, one of the items in Table 1 is AD13c "AOU by person who obtained the goods under quote". 20 AOU means "application to own use" which includes "granting a lease of the goods, or granting any other right or permission to use the goods". "AOU in Australia" means an application to own use that happens while the goods are in Australia. 21 Exemption items are found in Schedule 1 to the Sales Tax (Exemptions and Classifications) Act 1992 (Cth). The item relied upon by the applicant is Item 59(1) which is: "A ship for use by the person mainly for purposes other than providing any of the following for any person (whether or not for reward): (a) pleasure, sport or recreation; (b) private transport; (c) accommodation." 22 The position reflected in the respondent's assessment was that the Lease was not a lease. That position was defended in argument on the basis that although a lease of goods is technically a misnomer, a lease must grant the right to exclusive possession to the lessee (Radaich v Smith (1959) 101 CLR 209) whereas MBM did not obtain exclusive possession under the Lease, but rather, only a licence to use the vessel. Particular reference was made on behalf of the respondent to the obligation to give reasonable prior notice to the applicant before showing the vessel to, or test sailing with, a potential customer; to the requirement not to remove the yacht from its mooring place, except for promotional or demonstration purposes; and to the restriction on where the yacht might be taken. Reference was made to the distinction between a demise charter and a time charter and it was submitted that only the former would suffice to qualify as a lease. 23 It may be accepted for the purposes of argument that reference in this statute to a lease of personal property would require the "lessee" to have exclusive possession of a kind similar to that explained in relation to real property in Radaich v Smith. It may also be accepted that the label attached to the agreement by the parties does not bind the court. In my opinion the Lease clearly and unequivocally confers exclusive possession in the relevant sense upon MBM. The covenant for quiet enjoyment (cl 6.1) expressly so provides and there is also an obligation upon MBM to retain possession control and custody (cl 5.8). The only right of entry of the applicant is for the purposes of inspection (cl 5.7). Upon expiration or determination of the term, MBM is bound to "surrender and deliver" the yacht to the applicant (cl 5.14). The agreement is for a defined term upon payment of rent. In my view the clauses referred to by counsel for the respondent do not cut down the exclusive possession of MBM in any way. Restrictions on use do not have such an effect. I do not agree that the difference between a demise charter and a time charter is of any significance in exploring the present issue. 24 However, a problem arises from the definition of "statutory period" in s 5 of the Assessment Act which runs from the time when the goods are first applied to a person's own use in Australia and ends (relevantly) 2 years thereafter. The definition of "application to own use in Australia" in s 5 of the Assessment Act means that the AOU must happen while the goods are in Australia. It is accepted by counsel for both parties that, because of the interplay between the Assessment Act and customs legislation, the question of when goods are "in Australia" is to be determined by applying the principles discussed in the decision of the High Court in R v Bull (1974) 131 CLR 203. That case stands for the proposition that goods are not "imported" into Australia until they are unloaded or brought within the limits of a port with the intention of unloading them. In the present case, at the date of the Lease on 24 September the yacht was in transit between Perth and Sydney and was not, in my opinion, "in Australia" at the time. As the term of the lease expired 2 years from that date, the period of lease was not that required as the statutory period, which could only have commenced no earlier than 28 September and so must have expired more than 2 years from 24 September. 25 It is submitted for the applicant that the problem is cured by the Deed. The answer on behalf of the respondent is that whilst such an ex post facto "rectification" may have effect between the parties, it cannot undo an actual historical position that has already had revenue law consequences. It is also submitted that in the present case the evidence does not establish that the writing mistakenly failed to record the common intention of the parties but rather that the mistake was as to the revenue law consequences of the agreement which was made. 26 The decision of Hill J in Davis v Commissioner of Taxation (Cth) (2000) 171 ALR 654 particularly at [54]-[58] in rather similar circumstances provides support for the respondent's argument (see also Commissioner of Stamp Duties (NSW) v Carlenka Pty Ltd (1995) 41 NSWLR 329 and Baird v BCE Holdings Pty Ltd (1996) 40 NSWLR 374 (at 384-385). Even if a deed which rectifies an earlier transaction in accordance with the principles which would be applied in equity in ordering rectification can be effective for revenue purposes, in my opinion, the facts here do not fall within that principle. The parties to the Lease had no common intention that the term of the Lease would be any different to that recorded. No doubt, if they had been told that a later date was required to achieve sales tax exemption, they would have acted accordingly, but they had no such contemporaneous understanding. The case falls squarely within the authorities to which I have referred. 27 It follows that the Lease is not an eligible long term lease. This conclusion makes it unnecessary to consider other arguments presented by the respondent which would lead to the same result. The applicant is not entitled to the exemption provided by s 26 of the Assessment Act. 28 Although the applicant presented its opposition to the assessment as depending upon exemption pursuant to s 26(a) of the Assessment Act, on the hearing the argument was advanced that the Lease was not an assessable dealing as the only item potentially applicable (AD13c) is confined to AOU's which, in the case of imported goods, occur after the goods are locally entered. AD13c is an AOU by a person who obtained the goods under quote. It is common ground that the applicant obtained the goods under quote. In this connection it is to be noted in passing that it is also common ground that the local entry on 28 September is assessable dealing item AD10 but is not taxable by virtue of s 28(1) of the Assessment Act as the local entry was a customs dealing which had been quoted before the dealing. 29 The assessment was based upon an AOU on or about 28 September 1998. In argument it was contended for the respondent that the yacht was applied to the applicant's own use when it was unloaded and motored away. Subject to one matter, this is correct. The definition of application to own use is inclusive, and is a broad concept to be given its ordinary meaning (Max Factor & Co Inc v Commissioner of Taxation (Cth) (1971) 124 CLR 353 at 361-362). However, it is submitted for the applicant that the Lease was in existence on and from 24 September, that the evidence is that the unloading was into the possession of MBM under the supervision of Bell, the principal of that company, and all that happened thereafter was conduct by the lessee, not the applicant. On this basis, the earliest that there could have been an AOU was the grant of a further lease on 12 September 2000. So far as I can see this argument was raised for the first time in oral argument in answer to the contention of the respondent that the AOU was on or about 1 October 1998. As I understand it, the answer of counsel for the respondent was that AD13c only applies to a person who obtained the goods under quote, and the "applier" referred to in column 3 as the person liable must be such a person. In the present case, the applicant rather than MBM or Bell obtained the goods under quote. 30 It is correct that, as counsel put it, columns 2 and 3 of Part B of Schedule 1 are not to be read disjunctively, but this does not seem to me to meet the burden of the argument in the present case. There must be an application for own use by the applier. Assuming that the Lease was effective according to its terms, then the yacht was in the control and dominion of MBM at all times after arrival in the Port of Sydney until expiry of the Lease, and the use and purpose of the lessee is not that of a lessor who obtained the goods under quote. As was said in Max Factor at 362: "The phrase "applied to his own use" is…equivalent in meaning to "employed for his own purposes"… In my opinion a manufacturer may apply goods to his own use…notwithstanding that he gives away the goods to others, provided that the purpose for which the goods are given is a purpose of the manufacturer." 31 Counsel for the respondent submitted that use of the yacht by the applicant for the purposes of his honeymoon during the period 3 November 1998 to 11 November 1998, including two nights during that period, was an application to his own use. In my opinion such transient use is not the kind of application to own use which is the subject of sales tax legislation (c.f. Deputy Commissioner of Taxation v Stewart (1984) 154 CLR 385). 32 In my opinion the Lease must be taken to be effective according to its terms. Despite some comments by counsel for the respondent in the course of submissions, no distinct case of sham was put forward and the relevant witnesses were not cross-examined on that basis. Counsel for the applicant correctly submits that there is no half-way house between sham and an effective transaction (Re Securitibank Ltd (No.2) [1978] 2 NZLR 136). In any event, I accept the evidence of Messrs Bell and Baxter to the effect that the Lease governed the control and use of the yacht during the currency of it. That conclusion is readily arrived at because they were each of the view that the Lease had to govern the control and use of the yacht in order that exemption from sales tax be achieved. There is no evidence of breach of the terms of the Lease. 33 It was contended for the respondent that, nonetheless, s 94 of the Assessment Act was applicable, the provisions of which were as follows: "94. (1) This section applies to a taxpayer if: (a) the taxpayer (or an associate) has been a party to a non-arm's length transaction; and (b) if the transaction had instead been an arm's length transaction, it would have been the case (or could reasonably be expected to have been the case) that: (i) the liability of the taxpayer to tax on the non-arm's length transaction, or any other transaction, would have been increased; or (ii) the entitlement of the taxpayer to a credit in connection with the non-arm's length transaction, or any other transaction, would have been reduced. (2) The liability or credit is taken always to have been the amount that it would have been (or could reasonably be expected to have been) if it had been based on an arm's length transaction instead of on the non-arm's length transaction." 34 It is submitted for the respondent that the transaction was non-arm's length. It was argued that as the intended use of the yacht was mainly for non-exempt purposes, if the transaction had been at arm's length, MBM would have been given a non-exclusive right to use the yacht when the applicant did not need it. If that had been so, the transaction would be (or at least involve) an application to own use and so be a taxable dealing. It is convenient to return to this issue after a somewhat closer examination of the facts in considering the related issue as to whether the exemption provided by Item 59 was applicable as was claimed for the applicant at various points of the argument. 35 Counsel for the respondent pointed to a number of facts which, it was submitted, indicated that the requisite intent for Item 59 was not held. The relevant portion of the written submission was as follows: "44. Prior to the respondent's making initial contact with the applicant in September 1999, the yacht had been used on 5 occasions for demonstration purposes as, against 15 occasions for private transport, recreation etc. 45. Other factors telling against any holding of the requisite intent are, without being exhaustive: (a) The class of policy under which the yacht came to be insured was "Pleasure Craft". (b) Further, whatever interest Mr Bell or his company had in the yacht, it was not noted on the insurance policy. (c) The return on capital offered by the "rental" payable under the so-called "lease" is minuscule, especially having regard to the outlays that the applicant continued to bear. (d) After commissioning, the yacht was moored for the majority of time up to and including September 2000 either at the Royal Price Alfred Yacht Club ("RPAYC") (of which the applicant is a full ordinary member) or at Lovett Bay, near the applicant's residence. It was never moored at or near any place of business of MBM. (e) Neither as so moored nor when sailed did the yacht, unlike others, display advertising. (f) As moored at RPAYC berths, the only indication of Nautor's Swan involvement is on a set of steps indifferently located as between "Molly" and another yacht, "Irish Mist". No contact details are obvious on those steps and it appears that they were only placed there after the respondent displayed interest in the sales tax position. Access to the applicant's Lovett Bay residence is either by private boat or ferry, leaving from Church Point. No road access is available. (g) MBM was not at any material time in the business of selling yachts, particularly Nautor's Swan yachts, and neither was the applicant. Neither held, at any material time, an agency from Nautor's Swan of Finland. Mr Michael Bell, it seems, did have an agency, but the "lease" obliged MBM (when it had the yacht) to keep it in its own possession, custody or control. Michael Bell was not authorised by or under the lease to use the yacht in his own right and for his own purposes. For MBM to permit that would have been in breach of the "lease." (h) In any event, there is an inherent tension in a so-called "lease" which purportedly confers "quiet enjoyment" of the yacht on the lessee and which at the same time forbids its removal, except for demonstration, from the applicant's mooring place, requires the giving of prior notice to the applicant before any such demonstration can occur and then restricts where that demonstration or any other use can occur. (i) The "lease" made provision for the appointment of the applicant as MBM's agent, but he never was so appointed. (j) Paragraph 5.6 of the "lease" cast a maintenance, repair and operating cost obligation onto MBM as lessee, yet the applicant met such costs during the statutory period. (k) The reality over the statutory period was that the applicant treated the yacht as his own and occasionally let MBM or Mr Michael Bell use it. That calls into question whether the "lease" was ever genuine at all." 36 Whilst the factual substratum for these contentions is substantially correct, there are countervailing considerations. I discount the relevance of the mooring at the yacht club. It was a suitable berth from all points of view and I accept that the applicant only joined the club in order to secure that berth. I accept that the applicant did have a genuine interest in becoming involved in the business of sale of Nautor yachts and I accept that there were real business negotiations of one kind or another between Messrs Baxter and Bell during the term of the Lease, although no real detail was given. I accept that the availability of the yacht for inspection and demonstration contributed to substantial sales of Nautor Swan yachts by Bell. I accept that the yacht was displayed at 5 boat shows and inspected by many people at those shows, and was demonstrated to more than 40 potential customers. The applicant only used or visited the vessel on about a dozen occasions during the period of the Lease. In fact the vessel was sailed very little. All in all I am satisfied that the use of the yacht by the applicant for private purposes during the term of the Lease was relatively minor. 37 I have no doubt that it was at all times intended by all parties that the use of the yacht would be such as to answer the description in Item 59 for the period of the Lease in order that it qualify as an eligible long-term lease. However, Item 59 as such is rather different. It is not limited in time, and, in my opinion, looks to the long-term. I am not satisfied that at the time of any possible relevant AOU the applicant had any intention or expectation that the arrangement reflected in the Lease would continue beyond the term of the Lease, which, it was thought, was the statutory period. Indeed, I am satisfied that the main purpose of the Lease was in order to import the yacht without payment of sales tax. The terms of the lease were quite uncommercial. The return on capital was minuscule, there was no substantial business or personal advantage to the lessor, the risk was with the lessor and there were maintenance obligations. The contemporaneous documents relevant to taxation show that the applicant was working on the basis that the Lease would be an eligible long-term lease. I am satisfied that the intention of the applicant was to use the yacht as pleasure craft for his personal use once the statutory period expired. I do not accept that any inchoate and sketchy intentions as to business dealings with Bell were likely to interfere with his use of the yacht in the medium and long term. I place no reliance upon the further leases which have in fact taken place. Firstly, there is no acceptable evidence that they were envisaged at or around the time of import of the yacht. Secondly, the further leases were entered into at a time when the relationship was under known scrutiny by the respondent. It follows that the applicant cannot rely upon the Item 59 exemption as such, if it were relevant to do so. 38 It is convenient to return to the s 94 issue now that there has been further elucidation of the facts. Counsel for the respondent submits that the section is not limited to dealings between parties who are not at arm's length. I have difficulty with that submission, but acknowledge that there is support for it in some of the authorities to which I was referred (Davis v Commissioner of Taxation (Cth) [2000] ATC 4201; Pontifex Jewellers (Wholesale) Pty Ltd v Commissioner of Taxation (Cth) (1999) 99 ATC 5324; Trustee for the Estate of the Late AW Furse No 5 Will Trust (1991) 91 ATC 4007; Granby Pty Ltd v Commissioner of Taxation (Cth) (1995) 129 ALR 503; Copperart Pty Ltd v Commissioner of Taxation (Cth) (1993) 93 ATC 4779). I have particular difficulty in isolating and understanding the nature and characteristics of a non-arm's length transaction between parties who are at arm's length. In the present case, Messrs Baxter and Bell were at arm's length - there was no relevant relationship between them. The Lease had advantages for each, albeit in the case of the applicant they were, substantially, collateral revenue advantages. I have found that the Lease was a genuine transaction. The fact that it was fairly obviously devised in order to obtain a revenue advantage does not, in my opinion, make it a non-arm's length transaction, no matter how widely that concept is construed. It is relevant to note that the respondent has not sought to invoke s 93 of the Assessment Act which deals with tax avoidance schemes. 39 The result is unusual. The basis upon which the applicant worked at or about the time of importation in relation to a taxable dealing (that the grant of the Lease was a lease AOU but exempt as an eligible long-term lease) was incorrect. The basis upon which the respondent assessed (that the Lease was not a lease) was incorrect. The principal exemption item claimed (59) is not applicable. The respondent has not put forward any proper foundation for the assessment, but the applicant has not established any relevant ground for exemption. I am not satisfied without further consideration that s 14ZZO of the Administration Act necessarily results in failure by the applicant (c.f. Vale Press Pty v Commissioner of Taxation (Cth) (1994) 53 FCR 92). 40 In these circumstances I propose to stand the proceedings over to enable the parties to consider these reasons and then make submissions as to the proper order to be made. I certify that the preceding forty (40) numbered paragraphs are a true copy of the Reasons for Judgment of Justice Gyles.

R F Edmonds SC and P M Fraser Counsel for the applicant:

Counsel for the respondent: J A Logan SC and C D Coulsen

Solicitor for the respondent: Australian Government Solicitor

Date of Hearing: 17, 18, 19 June 2002