Commissioner of Taxation (Cth) v Baxter

Federal Court of Australia (Full Court)|2003-05-30|Before: Gyles J, Hely JJ

1 In 1997, the respondent, Matthew Alexander Baxter, ordered a Swan 60 yacht from a Finnish company Oy NAUTOR Ab ('the Finnish company'). The Finnish company built the yacht and shipped it to Australia where it was unloaded at the Port of Sydney on 28 September 1998. On 24 September 1998, while the ship was still at sea, Mr Baxter entered into a lease of the yacht to Michael Bell Marine Aust Pty Ltd ('MBM') for a term of two years 2 The appellant, Commissioner of Taxation ('the Commissioner'), assessed the yacht to sales tax under AD13c of Table 1 of Sch 1 to the Sales Tax Assessment Act 1992 (Cth)('the Assessment Act') on the basis that the yacht was 'applied to own use' in taxable circumstances on or about 28 September 1998. It emerged that the Commissioner contended there was an 'application to own use' ('AOU') 'by a person who obtained the goods under quote'. 3 The primary judge (Gyles J) found that the assessment was excessive in so far as it related to the hull and mast of the yacht (the sails were purchased by Mr Baxter in Australia): Baxter v Commissioner of Taxation (Cth) [2002] FCA 1256 and Baxter v Commissioner of Taxation (No 2) [2002] FCA 1351. The Commissioner appeals.

4 Table 1 of Sch 1 to the Assessment Act sets out all the assessable dealings that can be subject to sales tax: s 16(1). If no exemption applies to the assessable dealing then the dealing is a taxable dealing: s 16(2)(a). '[A]pplication to own use' is defined in s 5 of the Assessment Act to include 'any of the following'. There then follows, in par (a) to par (f), certain defined dealings which would constitute an 'application to own use' and, in par (g) to par (i), dealings which would be excluded. Although senior counsel for the Commissioner suggested that par (a), 'consuming the goods', might have been applicable, this possibility was not developed in argument and the main thrust of his submissions was that Mr Baxter's dealing with the yacht fell within the generality of the expression 'application to own use' rather than within any of the specific statutory examples. It was common ground that 'application to own use' is not a technical term of art and is not confined to the specific examples: Max Factor & Co Inc v Commissioner of Taxation (Cth) (1971) 124 CLR 353 at 361-362. 5 The lease of the yacht would have been an AOU by virtue of par (c) of the definition ('granting a lease of the goods, or granting any other right or permission to use the goods') but it was not an 'assessable dealing' because the yacht was not in Australia at the time of the granting of the lease: Note 1 to Table 1. 6 On 28 September 1998, the yacht was entered for home consumption under the Customs Act 1901 (Cth). Under s 68(2) of that Act, the owner of goods that are imported into Australia may, at any time before the ship carrying the goods first arrives at a port in Australia at which the goods are to be discharged, enter the goods for home consumption. Under s 71A(1), an import entry is a communication to the Australian Customs Service ('Customs') of information concerning goods to which s 68 applies that are intended to be entered for home consumption. Under s 71A(6), when an import entry is communicated to Customs and the goods have been imported to the first port in Australia at which they are to be discharged, the goods are taken to have been entered. Under s 71B, where an import entry in respect of goods has been given to Customs, Customs must give an import entry advice to the owner of the goods. An import entry advice must contain a statement to the effect that the goods are cleared for home consumption. Section 71B(4) provides that, where an import entry advice is given and payment is made of any duties, sales tax or other charge or fee, Customs must give the person to whom the advice was given an authority to take the goods into home consumption. 7 Mr Baxter's local entry of the yacht was an 'assessable dealing' because it was a 'local entry': AD10 of Pt B of Table 1. Under s 23 and Table 2 of Sch 1 of the Assessment Act, there is a local entry when goods are taken to have been entered for home consumption under s 71A(6) of the Customs Act. Because it was a local entry, it was a 'customs dealing': see the definition of that term in s 5, which includes AD10. Since Mr Baxter had quoted an exemption declaration for the dealing before the time of local entry, s 28(1) has the effect that the dealing was not a 'taxable dealing'.

8 Mr Baxter, who is now aged 59, has been interested in yachting all his life. He wished to get involved in the sale in Australia of yachts manufactured by the Finnish company. Mr Michael Bell, the principal of MBM, was an old friend and business associate of Mr Baxter. Mr Bell was the agent in Australia for the Finnish company. 9 In June 1997, Mr Baxter and Mr Bell agreed in principle that Mr Baxter would buy one of the Finnish company's yachts as a demonstrator and Mr Bell, or his company, would lease it for that purpose. 10 On or about 10 July 1997, Mr Baxter contracted to purchase a Swan 60 yacht, hull number 60/014, to be built by the Finnish company. Pursuant to the contract, title in the yacht passed to him on 13 August 1998 upon his accepting delivery of the yacht at the company's factory in Finland. The price of the yacht was the equivalent in Finnish currency of some $2.4 million. 11 On or about 13 August 1998, Mr Baxter quoted an exemption declaration to the Commissioner under s 83(1) of the Assessment Act in respect of the yacht. 12 The yacht and its mast were shipped as separate packages under a bill of lading. After transhipment at Hamburg, the yacht arrived at Fremantle on 21 September 1998 on board the MV Pegasus Bay. 13 On 24 September 1998, when the Pegasus Bay was at sea between Fremantle and Sydney, Mr Baxter entered into the lease to MBM already mentioned. The lease recites that Mr Baxter is the owner of a 'newly imported Swan 60 (serial number 60-014) vessel'. 14 By cl 2.1, the lessor hereby leases 'subject to the conditions and terms of this lease' the yacht for the whole of the Term and for the Rental. The Term is defined in cl 1.1 as two years from the Commencement Date which is defined as the date of the lease (24 September 1998). The Rental is $950 per month. 15 By cl 2.2, it is provided that the lessor is only obliged to lease the yacht to the lessee if at the time of the grant of the lease the lessor has been given evidence in a form approved by the Commissioner of Taxation of the intention of the lessee to use the yacht during the whole of the Term 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; and (c) accommodation.

It appears to have been implicitly accepted that this condition was satisfied on 24 September 1998. 16 By cl 3.1, the lessor is to retain full title to the yacht notwithstanding that it is leased to and in the possession of the lessee. By cl 3.2(a), the yacht is to be at the risk of the lessor at all times during demonstration and test sales. That provision does not apply in the event of any claims or proceedings arising as a result of any negligent act or omission or intentional default of the lessee: cl 3.2(b). By cl 5.4, the lessee is not to remove the yacht from its mooring place except for the purpose of promotion or demonstration to potential customers and is to notify the lessor where and how the yacht is to be moored. By cl 5.8, the lessee is to keep the yacht in its own possession, control and custody. 17 Clause 6.1 contains a covenant for quiet enjoyment: that the lessee paying the Rental and observing the stipulations and provisions contained in the lease will quietly occupy and enjoy the yacht during the Term without any interruption by the lessor or any person lawfully claiming under or in trust for the lessor. 18 On 28 September 1998, the Pegasus Bay berthed at Botany in the Port of Sydney. Mr Bell attended to arrange for the unloading of the yacht. Mr Baxter was also present. The yacht was unloaded on to the water on 1 October 1998. Mr Bell then motored the yacht to the mooring of Noakes Rigging Pty Ltd. Between 6 and 8 October 1998, the mast and rigging of the yacht were fitted. A team of three representatives from the Finnish company came to Sydney to assist in this process. On 10 October 1998, the yacht was taken for her first test sail. Mr Baxter was present. On 12 October 1998, the Finnish company's team left Sydney. Following the importation of the yacht Mr Baxter purchased sails from Hood Sailmakers (Aust) Pty Ltd. 19 For a short time the yacht was moored at the Cruising Yacht Club of Australia at Rushcutters Bay. On 16 October the yacht was delivered to a mooring at Lovett Bay within sight of Mr Bell's home. Mr Bell subsequently arranged for a temporary berth of the yacht at the Royal Prince Alfred Yacht Club at Newport. The berth was visible from Mr Bell's business premises. Mr Baxter was not then a member of the Royal Prince Alfred Yacht Club, although he did join on 16 April 1999. 20 The yacht did not receive a great deal of use during the term of the lease. Mr Bell took it to some boat shows and for demonstrations. Mr Baxter only used or visited the vessel on about a dozen occasions during the period of the lease including between 3 and 11 November 1998 when he spent part of his honeymoon on board.

21 By the time the hearing of the appeal had concluded some of the issues that were before his Honour had disappeared from the case. It will not be necessary to refer to them. 22 His Honour found that the lease must be taken to be effective according to its terms. No case of sham had been advanced by the Commissioner. His Honour accepted the evidence of Mr Bell and Mr Baxter to the effect that, during its term, the lease governed the control and use of the yacht. There was no evidence of breach of the terms of the lease. Accordingly, his Honour found that the yacht was in the control and dominion of MBM at all times after arrival in the Port of Sydney until the expiry of the lease. The use and purpose of the lessee was not that of the lessor who obtained the goods under quote. His Honour made that finding in the context of a passage from the judgment of Gibbs J 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.' 23 His Honour considered that as far as the honeymoon of Mr Baxter was concerned, such 'transient use' was not the kind of application to own use which was the subject of sales tax legislation.

24 The argument of senior counsel for the Commissioner can be encapsulated in his proposition that it does not matter if, in respect of dealings with the yacht when it arrived in Sydney, there were ends helpful to Mr Bell or MBM as long as there were also ends helpful to Mr Baxter. More specifically, senior counsel contended that one or more of the following amounted to an AD13c assessable dealing: (a) receiving permission from Customs following the entry for home consumption of the yacht hull and mast to deal with them in accordance with that entry; (b) 'handing over' of the yacht hull and mast by Mr Baxter to Mr Bell on or about 28 September 1998 after Mr Baxter had received that permission from Customs; (c) unloading of the yacht hull and mast from the ship and subsequent motoring away of the yacht to the mooring of Noakes Rigging; (d) fitting out of the yacht at Noakes Rigging's mooring, including fitting the sails; (e) use of the yacht on Mr Baxter's honeymoon in November 1998.

25 In essence, the Commissioner's contention was that the subject matter of the lease was a yacht capable of use as a yacht. In its state on 24 September 1998, when the lease was entered into, the two packages on board the Pegasus Bay were incapable of use as a yacht. It was necessary that the hull be placed in the water, that the mast be stepped and that the yacht be rigged and fitted out. Accordingly, so the Commissioner contended, Mr Baxter's obligations under the lease extended to entering the yacht for home consumption, obtaining authority from Customs under s 71B(4) of the Customs Act to take it into home consumption, unloading it from the Pegasus Bay, stepping the mast and rigging it and fitting it out. Only then was Mr Baxter in a position to deliver a yacht to MBM. The Commissioner contended that the actions that occurred after the Pegasus Bay arrived in Sydney were actions of Mr Baxter to satisfy his obligations under the lease and therefore constituted applying the yacht to his own use. 26 Like his Honour, we consider that the lease, accepted to be genuine and not a sham, is largely determinative of this case. None of the events relied on by the Commissioner, singly or in combination, amount to an application by Mr Baxter of the yacht for his own use. The obtaining of the Customs clearance and the physical work on the yacht (in so far as Mr Baxter had anything to do with that) was for the use of MBM which, upon entry into the lease, became entitled to possession of the yacht against all the world, including Mr Baxter. 27 Mr Baxter's local entry of the yacht does not assist the Commissioner because, as explained in [7] above, the legislation specifically provides that where, as here, there is a quote of an exemption declaration for a customs dealing, the customs dealing is not taxable. 28 Moreover, once the grant of a lease is specifically excluded (see [5] above), any act of Mr Baxter qua lessor granting a lease (for example putting the yacht in condition for sailing by fitting her with mast, rigging and sails) would seem to be necessarily excluded also, although it was Mr Bell who attended to these matters (see Appeal Book at 76). 29 All the acts of Mr Bell after the yacht arrived in Sydney were done by him on behalf of MBM, which was the lessee and entitled to possession of the yacht. Mr Bell was not acting as the agent of Mr Baxter. It was put to Mr Bell in cross-examination: 'Q You were involved in the commissioning of the vessel? A Yes. Q At Mr Baxter's request? A There would be no request, it was my obligation as the sales agent for Swan that any boat that arrives, I am involved in the commissioning of the boat.' This answer was not further challenged and there was no reason why his Honour should not have acted upon it. That is particularly so given Mr Baxter's evidence in cross examination that Mr Bell was in complete control of the yacht during the fitting out phase. It was Mr Bell who organised the customs clearance and organised the yacht coming off the Pegasus Bay (see Appeal Book at 69) and the fitting out work: 'Mr Bell was handling it all' (see Appeal Book at 76). 30 As to the honeymoon use, there is no evidence as to the right relied upon by Mr Baxter for such use but in the context of MBM's rights under the lease the reasonable inference is that it was under licence from MBM as lessee. Mr Baxter's evidence was that when he wanted to use the yacht he asked Mr Bell if he could do so, and on some occasions, he was told it was not convenient (see Appeal Book at 70).

31 The appeal will be dismissed. There will be an order that the appellant pay the respondent's costs. I certify that the preceding thirty one (31) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Court.

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

Solicitor for the Appellant: Australian Government Solicitor

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

Customs Act 1901(Cth)ss 68, 71A, 71B

Sales Tax Assessment Act 1992(Cth)ss 16, 23, 28, Sch

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