The Exemption Item analysed
46 It will be noted that the exemption item requires the ship to be "for use" by a person, that person being the person who claims to be entitled to the exemption from sales tax ("the exemption user") "mainly" for "long term leasing" to another (in the present case, the other is Eastsail) where that other person "is to use the ship" in a particular way, namely "mainly in providing regular and scheduled sight-seeing tours". Each of the italicised expressions requires consideration.
47 The words "for use" require an investigation into the use to which the yacht is to be put by the exemption user. While, no doubt, that requires an investigation of purpose, and direct evidence of purpose may be given, the best evidence of purpose will, ordinarily, be found in the use to which the yacht is in fact put. As Fullagar J said in Pascoe v Commissioner of Taxation (1956) 30 ALJR 402, in considering evidence of "purpose" in the context of s 26(a) of the Income Tax Assessment Act 1936 evidence of the object to be pursued, that is to say the state of mind of the person claiming the exemption, will necessarily be the subject of careful scrutiny.
48 It would be a rare case where a claim is made that goods are for a particular use, where that use is not the use to which the goods are in fact put. The present is, if the submissions for the applicants are accepted, such a case. Putting to one side the effect of the document which is said to have been executed on 3 December 1998 and relevant only to the case of Mr McLeod, the case for each of the applicants in essence amounts to the proposition that whatever the documentation entered into, or in the case of Dr Davis, the lack of documentation, each intended a lease to Eastsail of the respective yacht for a term of at least four years for use by Eastsail for the requisite purpose.
49 The only evidence upon which either Mr McLeod or Dr Davis can really rely in support of their case (apart from, in the case of Mr McLeod, the assertion he made in the witness box as to his intention and in the case of Dr Davis his letter of 10 January 1997) is evidence that each was aware of the potential exemption from sales tax available and wanted to claim that exemption. From this evidence they seek to argue that it should be found that they intended to do whatever was necessary to obtain the exemption. I have difficulty with this proposition. The facts are different in each case.
50 I have no doubt that Mr McLeod was aware of the fact that a sales tax exemption was available and wanted to avail himself of it. I am not satisfied on his evidence and notwithstanding the agreement between the parties as to his knowledge, that he was aware of the precise terms of the exemption, so far as the exemption stipulated a minimum term for the lease. It is clear that Mr McLeod relied on advice, either from Mr Goddard, or his accountants, on the question of the sales tax exemption. That reliance was, obviously misplaced.
51 Although Mr Goddard also was aware that a sales tax exemption was available, it seems that the standard lease which he entered into with boat owners was a lease of three years. It may be the case that Mr Goddard believed that three years was the relevant term, and either ignored, or misunderstood the letter mentioning four years which he had received from Dr Davis in January 1997. It is clear to me that Mr Goddard was aware only in general terms that a sales tax exemption was available for leases of yachts in providing regular and scheduled sight-seeing tours to the public and that while no doubt some conversation did occur between Mr Goddard and Mr McLeod in or around August 1996 about available sales tax exemptions that conversation did not specify four years as the requisite period of the lease.
52 As has been noted three years was the term of the lease that Sirise in fact initially entered into with Eastsail in connection with "Yes". It was also the term which his accountants referred to in their request for a ruling that the exemption item was satisfied. Whether Mr McLeod instructed the accountants that the lease was for three years and requested them to seek a ruling, or the accountants merely looked at the term of the lease in the document which Mr McLeod had obviously given them one does not know. It is possible that the accountants were, from the outset, responsible for the mistake and wrongly advised Mr McLeod that the requisite term of a lease to satisfy the sales tax exemption item was three years. However, the fact that the application for ruling was made in connection with a lease for a term of three years is a significant fact in the case and counts against the conclusion that Mr McLeod and Mr Goddard intended from the outset that the arrangement between them was to be for a term of four years.
53 In the case of Dr Davis I am satisfied that he was aware of the need for a four year term, as his letter of 10 January 1997 shows. It is less clear if he knew with any clarity the precise user which qualified for exemption, other than, of course, that there was a need for a schedule and that cruises were involved. Given that he ultimately signed the lease which bears the date 1 July 1997 and the terms of it, it is hard to think that Dr Davis was aware of the need that the long term lease to be entered into had to be mainly for the purpose referred to in the item.
54 There remains the question of the significance of the execution of the second document between Eastsail and Mr McLeod.
55 Counsel for Mr McLeod submitted that the sales tax law had to be seen against the background of the general law, cf MacFarlane v Federal Commissioner of Taxation (1986) 86 ATC 4477 at 4486 and Zobory v Federal Commissioner of Taxation (1995) 129 ALR 484at 486-7. So much may be accepted. But that does not mean that the Commissioner is bound by the legal position "as accepted by the parties" as was then submitted. The parties to an agreement can not effect a change to an agreement retrospectively so that the agreement between them is altered as against the rest of the world. The parties can, no doubt, enter into an agreement, binding as between them, that a prior agreement they have entered into will be construed in a particular way from the moment the prior agreement was entered into. But the original agreement will, so far as the Commissioner is concerned, govern their relationship until the time of its amendment. For example A and B may enter into an agreement which provides, inter alia, that certain income will, for the term of the agreement, be held by A in trust for B. Later the parties may as between them agree to alter the arrangement ab initio to provide that that income will not be held in trust for B, but will always be treated as belonging to A beneficially. The agreement will be binding inter partes, but for income tax purposes the income will, until the date of the agreement, still be treated as beneficially the income of B.
56 The example above noted should be distinguished from the case where parties have entered into an agreement under the mutual mistake that the document they have executed records the terms of their bargain when it does not. In such a case an application could be made to a court for rectification of the written document. But even where an order of a court is obtained to rectify the written agreement, the court order does not operate to alter the past. The order of the court merely recognises what has always been the case, namely that the true agreement between the parties was not that which they have mistakenly executed, but what they in truth agreed upon.
57 As an alternative to an order of rectification the parties could execute a deed rectifying their prior writing. That deed, if truly operating to record that the parties were under a mutual mistake, and also setting out what the parties acknowledge to be the true agreement between them would not, any more than a court order, actually alter the position as between the parties. It would merely record that agreement as it always was. Whether by court order or by deed, rectification requires that there be a mutual mistake, that is to say what is required is that there be a common intention between the parties as to the effect that the instrument they signed would have had which was inconsistent with the effect which the instrument which they executed in fact had: cf Commissioner of Stamp Duties (NSW) v Carlenka Pty Ltd (1995) 95 ATC 4620. Mistake as to the revenue consequences of the agreement would not bring about the same result: Baird v BCE Holdings Pty Ltd (1996) 40 NSWLR 374 at 384.
58 In the present case I am not satisfied that there was a mutual mistake as to the effect of the original agreement. Despite Mr McLeod's evidence as to the terms of the conversation he said took place between Mr Goddard and himself in August 1996 and the admission made by counsel for the Commissioner, I am of the view that it is more probable than not that Mr McLeod knew only in a general way that it was necessary that there be a lengthy lease entered into but that he relied upon Mr Goddard to know what the necessary term was. For whatever reason I think it to be the case that Mr Goddard believed that a term of three years would suffice - this was the term he had ordinarily incorporated in such leases. In other words, both he and Mr McLeod originally intended that there be a lease of three years. There was a mutual mistake, but that was as to the term required to come within the exemption item, not as to the term of lease which they agreed to.
59 It follows that for this reason alone the exemption item was unavailable to Mr McLeod.
60 The next element in the exemption item is the word "mainly". The word appears twice in the item; first in relation to the words "for long term leasing" and second in relation to the provision of regular and scheduled sight-seeing tours. Usually the word "mainly" means "more than half", see eg Fawcett Properties Ltd v Buckingham County Council [1961] AC 636 at 669. Necessarily, the context will be relevant in determining what the word means. Where first used, the word directs attention to the main or substantial use to which the exemption user intends to put the yacht. This will be the main use. Where next used the word "mainly" appears in the context of the contractual arrangement that is required to exist between the exemption user and the lessee of the ship.
61 Section 3(1) of the Sales Tax (Exemptions and Classifications Act) 1992 defines the word "mainly" , unless there is a contrary intention, to mean "to the extent of more than 50%". There is a question whether a contrary intention appears.
62 It was submitted for the Commissioner that a contrary intention does appear and that the word should be given its ordinary English meaning of "chief; principal; leading", the first meaning appearing in the Macquarie Dictionary, 2d edition. Reference to the legislative history supports the view that Parliament did not intend that the word "mainly" as first used was to be used in the defined sense. When the 1992 rewrite of the sales tax legislation was adopted the exemption item with which this case is concerned was rewritten to make it easier to follow, but otherwise, so the Explanatory Memorandum stated, there was to be no substantive change. The prior exemption was item 119 (1A). It spoke of the vessel being used "exclusively or principally". These words were replaced by the word "mainly". This suggests that Parliament contemplated that in the present context the word was intended to signify "principal use" or perhaps the "preponderant use" rather than use just greater than 50%. So, while in my view a yacht would not fall outside the exemption merely because a use other than for sight-seeing tours was permitted, any other use must be subsidiary to the preponderant use. The substantial required use must, however, be that described in the exemption item.
63 I doubt, in any event, whether the difference in meaning of the word "mainly" has any real significance in the present case. This is so because what the item requires is that the relevant main use be that which the long term lease mandates. Actual use, the subject of the evidence which I have recounted, has little relevance to the issue, save so far as it casts light on the use which is required by the intended lease with which the exemption item is concerned.
64 In the case of Sirise the lease executed on or around 2 April 1997 referred to use as being for charter and sailing school purposes. Such a use on no view was a use "mainly" for the relevant purposes. The later (and purported rectification) lease might qualify as a lease which was mainly for the relevant purposes. As we have seen in the case of the boat "Surreal", no lease at all was entered into until a considerable time had elapsed and the Commissioner had commenced investigation. One is thus left in that case then to the letter from Dr Davis to Mr Goddard of 1 November 1996. That letter makes it clear that the vessel was to be placed with Mr Goddard for "regular sight-seeing harbour trips from Rushcutter's Bay" . If that were to qualify as the relevant use for the purposes of the item, then I think it should be taken as the main use which it was intended Dr Davis should be required to undertake. There is reference in that letter to use for some corporate charter work initially, but the context of the letter makes it clear that such was not contemplated as the main use, but rather an incidental use. The stated use is, however, wider than the main use which the exemption item requires.
65 The expression "regular and scheduled sight-seeing tours" was the subject of consideration in the only case which has considered the exemption, namely, Mr Boat Pty Ltd v Federal Commissioner of Taxation (1986) 86 ATC 4689. In that case Lee J of the Supreme Court of New South Wales said:
"the expression "regular and scheduled tours" in my view contemplates that there will be a timetable in the sense that daily operation of the service and the times of departure of the craft are fixed in advance and can be ascertained either from enquiry or from a notice which would be called a timetable."
66 It is submitted for the applicants that the tours conducted by Eastsail were in accordance with what was said in that case "regular and scheduled sight-seeing tours". The Commissioner submits otherwise.
67 In my view the tours advertised and run by Eastsail can be see to be scheduled in the relevant sense, they were scheduled to take place on a daily basis and they certainly included sight-seeing. The Eastsail boats were available to go out on a so-called sight-seeing tour at any time between 9.30 am (or 10 am) and 12 pm - depending upon the time booked in advance. In other words they ran at a set and defined time in the day, which is all that scheduled means. Thus, for the purposes of the case, I am prepared to accept that Eastsail ran tours that were both regular and scheduled, in the sense that if there was a demand (and prebooking) each tour would commence at 9.30 am (or perhaps 10 am) and conclude at 12 pm. I am less convinced that the tours were properly to be characterised as sight-seeing for they had two quite distinct attractions: sight-seeing and sailing. The adventure nature of the experience of sailing, which Mr Goddard's evidence pointed out, meant that each excursion was as much a sailing tour as a sight-seeing tour. However, it is not necessary to form a decided view on this point.