Hamilton Island Enterprises Pty Ltd v. Federal Commissioner of Taxation [1982] FCA 131

Respondent ORDER JUDGES MAKING ORDERS: Bowen C.J., Deane and Fisher JJ. WHERE MADE: Sydney. DATE: 15 July 1982.

ON APPEAL FROM THE SUPREME COURT OF NEW SOUTH WALES

This is an appeal by Hamilton Island Enterprises Pty. Limited ("the taxpayer") from a decision of the Supreme Court of New South Wales (Rogers J.). That court dismissed an appeal by the taxpayer from a decision of the Commissioner of Taxation disallowing u1ts objection to an assessment in respect of the year of income ended 30 June 1976. At issue 1s the taxpayer's claim to deductions under Part III Division 3 Subdivision B - "Investment Allowance " ~ of the Income Tax

Assessment Act, 1936 ("the Act") in respect of expenditure

It is common ground that the helicopters were new units of eligible property acquired, in the year of income, by a leasing company, Industrial Acceptance Corporation Limited, for use wholly and exclusively in Australia, for the purpose of producing assessable income, by the taxpayer to whom they had been leased. That being so, Subdivision B applied in relation to them by virtue of the provisions of s.82AA unless the application of the Subdivision was excluded by other provisions. It was accepted by the Commissioner that the benefit of any deduction under the Subdivision had been duly transferred to the taxpayer under s.82AD. The Commissioner contended that the application of Subdivision B in relation to the helicopters was excluded by the provisions of s.82AF(2)(£)(i) on the ground that they were, for the purposes of that sub-paragraph, plant or articles for use in amusement or recreation. The trial Judge accepted the Commissioner's contention and dismissed the taxpayer's appeal on that ground. His Honour also indicated that he accepted an alternative submission on behalf of the Commissioner that the claim for deductions also failed by reason of the provisions of s.82AG(3)(d). This alternative submission has also been argued before us.

"@2AA. Subject to the following provisions of this Subdivision, this Subdivision applies in relation to ai unit of eligible property acquired or constructed by the taxpayer that is -

(b) ain the case of a taxpayer being a leasing company, for use wholly and exclusively -

(i) in Australia; and (ii) for the purpose of producing assessable income,

by another person to whom the taxpayer has, on or after 1 January 1976, leased the eligible property under a long-term lease agreement that was entered into by the taxpayer in the course of carrying on business in Australia and was so entered into by the taxpayer and the other person at arm's length.

82AF(2). This Subdivision does not apply in relation to -

82AG(3). This Subdivision does not apply, and shall be deemed never to have applied, in relation to property leased by a leasing company to another person (in this subsection referred to as the ("lessee") if, before the expiration of 12 months after the property was first used, or installed ready for use, by the lessee -

(da) while the lease was in force the lessee entered into a contract or arrangement with another person for the use of the property by that other person; or

The underlying facts, as disclosed by the evidence, were not in dispute and can be shortly stated. The taxpayer on 28 June 1976 entered into two lease agreements whereunder 1t leased a Bell Jet Ranger helicopter and a Hughes 300C helicopter from Industrial Acceptance Corporation Limited. At that time it was intended to use them in general charter work, beach patrol work, flying training and in charter to an associated company, Sea World Pty. Limited ("Sea World"). This company operated a marine and amusement park known as "Sea World" near Southport on the Queensland coast. It was arranged between the taxpayer and Sea World that one or other of the helicopters, when not required for other charter work, would be chartered from time to time, complete with pilot and an assistant to arrange for the embarkation of passengers. The chartered helicopter was to carry the Sea World passengers on scenic or joy flights, and the taxpayer was to receive at least 80% of the proceeds of sale of tickets for such flights. The detailed arrangements between the taxpayer and Sea World appear from Sea World's letter of 3 July 1976 which we subsequently set out.

The taxpayer failed to obtain a contract for the beach patrol operations. Otherwise the operations of the helicopters conformed generally with the initial plans and included a variety of general charter work and the provision of one or other of the helicopters for the joy flights from Sea World's establishment. In all cases the taxpayer

supplied not only the pilot of the helicopter but also fuel,

oil and "all requisites". The evidence is largely silent as to details of individual charters other than that to Sea World. The details of the charter to Sea World are set out

in the letter of 3 July 1976 which was in the following

"Being aware of your intention to purchase two helicopters for the establishment of a helicopter charter operation, I confirm the basis on which we wish to charter same so as to enable us to offer scenic flights to Sea World's customers. Initially we would propose to charge $6.00 for adults and $4.00 for children for an actual time in the air of approximately five minutes so as to allow for approximately 10 turnarounds in the period of an hour.

Sea World's staff will sell tickets for these scenic flights from one of our existing ticketboxes and accordingly we will advertise these scenic flights at appropriate times through our P.A. system.

Until such time as we see how cash returns work out from this operation we will turnover to you on a daily, weekly, monthly basis, all cash received from the sale of tickets, however, initially we will require that 20% of such sum is retained by this company.

In short, we offer you as a charter rate, all moneys collected for the sale of scenic flight tickets less a sum equal to 20%.

Tf it is found that initially the operation is uneconomical from your point of view then we will by mutual agreement reduce the 20% deduction or alternatively eliminate same entirely until such time as the operation is on a firm footing.

I further confirm that you will agree that the Sea World and Bryan Byrt emblems will be placed on both helicopters and that we will ccme to a separate arrangement re the advertising value of same.

I further confirm that in accordance with these arrangements, your helicopters during the period of joy flights have actually been chartered by Sea World and therefore all advertising re same will be in the name of Sea World and whenever we are able to obtain newspaper or other publicity, we will at all times refer to joy flights being operated by Sea World.

Although we would like to operate joy flights on a daily basis we appreciate that other charter work may be more pressing and may be more lucrative to your company and accordingly we will agree to any other more lucrative work taking precedence over our scenic flight operations.

Since the most appropriate location requires the positioning of a floating helipad, we will undertake to meet the cost of construction of same and placing same in position. Such pontoon will be maintained by Sea World, however, we have no objection to the pontoon being used by your company for your company's clients in reference to charter work.

Eventually we will undertake to construct at our own cost, hangars for these helicopters and we will do this because we appreciate the publicity rub-off to this company through the helicopters being based at Sea World.

At the time of writing this letter I cannot guarantee that we will construct such hangars immediately but we would anticipate doing so within a period of two to three years.

I trust that this clearly defines the basis of our proposed charter of your helicopters for joy flight purposes.

KEITH WILLIAMS MANAGING DIRECTOR - SEA WORLD PTY. LTD.

P.S. I neglected to mention that your company will of course be responsible for the provision of Pilots and also for the provision of an assistant to arrange for passengers embarkation."

The trial Judge found that the actual use of the helicopters for Sea World's joy flights or scenic flights was a use in amusement or recreation. The reasoning of

Shepherdson J. in W. Smith v. Federal Commissioner of

Taxation (1982) 82 A.T.C. 4,073), which Rogers J. considered he should follow as a matter of comity, led His Honour to conclude that the helicopters, having been purchased by the taxpayer with the intention that they would, inter alia, be so used, were, for the purposes of s.82AF(2)(f£), "articles... for use in ... amusement or recreation" and therefore excluded from the application of Subdivision B.

After the decision of Rogers J. in the present case, a Full Court of this Court dismissed an appeal from the decision of Shepherdson J. in W. Smith v. Federal

Commissioner of Taxation (supra). The approach of the Full

Court (W. Smith v. Commissioner of Taxation: 4 June, 1982)

differed, however, in some not unimportant respects from that of Shepherdson J. which Rogers J. followed. In particular, the Full Court expressed the view that the various items to which s.82AF(2) refers, including the items referred to in paragraph (f), are identified by reference to the character of the property rather than by intended or actual use by a

"However, there is a fundamental objection to the taxpayer's approach to the interpretation of s.82AF(2)(£). This was the primary answer of Counsel for the Commissioner. While s.&2AA and

s.82AB in Subdivision B are concerned with the conditions to be met by those who are to be entitled to the investment allowance in respect of eligible property, s.82AF is concerned with property which is excluded from the benefit of the Subdivision. Section 82AF deals with this subject by listing various types of property. Some are identified by simple description, e.g. "motor cars" an para (a); some by the use for which they are designed, e.g. "discs ... that are designed to be used for the storage of ... sounds" in para (d); others by the words "for use" followed by a description of the relevant activities, e.g. "musical instruments and equipment for use in conjunction with musical instruments", para (e). Clearly in employing the word "use" in paragraphs (d) and (e) the draftsman was concerned to describe the attributes of the property which he was seeking to identify. He was not concerned with the identity of the person by whom the property might be used or whether it would be used for the purpose of producing assessable income. That was taken care of by ss.82AA and 82AB.

Paragraph (f) is constructed in the same way. The reference to plant or articles for use in or primarily and principally in connexion with ... "(ii) sport" 2s apt to describe the attributes of the property which the draftsman is seeking to identify. It does not in its terms introduce any notion of use by a particular person. Indeed, it is not easy to read into a description of an article by reference to the use for which it is suited a further qualification limiting that use to use by a particular person. In our view paragraph (f) us clearly concerned with the nature of the articles and not the identity of the users."

The above comments of the Full Court should not be read as indicating that the use to which the relevant item of personal property is put will necessarily be irrelevant for the purposes of determining whether, for the purposes of s.82AF(2)(f)(i), the item answers the description "plant or articles for use in, or primarily and principally in

connection with, amusement or recreation". It may, in a

particular case, be common ground that the use to which the

relevant item 1s put corresponds with the use which it is of its character to serve. In such a case, the examination of the actual use of the item could well be decisive of the question whether it was or was not of the designated character. Quite apart from such cases, the use to which an item is actually put will ordinarily be illustrative of at least some aspects of its character.

It is not suggested, in the present case, that either of the two helicopters was specially constructed or adapted for amusement or recreation. They were designed and constructed, with their particular specifications and capacities, as machines which performed a function of utility, namely, supporting and transporting persons and things in and through the air. It is true that the taxpayer at all times intended that they would be used, inter alia, for scenic or joy flights under charter to Sea World and that they were so used. Presumably most of the passengers who purchased tickets from Sea World and ventured forth on such scenic or joy flights did so in the anticipation that they would enjoy them. Sea World could be said, in a general way, to be engaged in a business of providing recreation or amusement and the helicopters were, to a significant extent, used in that business. In the circumstances of the present case, however, we do not think that any amusement of passengers or the nature of Sea World's business governs the character of the two helicopters. They cannot properly be

categorized, for the purposes of s.82AF(2)(£)(i), as plant or

articles for use in amusement or recreation. They may be used in any number of activities and for any number of purposes. They do not change their character according to whether they are used, for example, in saving lives, in herding cattle, in fighting fire, in gathering news, in observing traffic, or in patrolling a beach. Their character as that of machines of utility constructed and designed for use in supporting and transporting people and things in and through the air.

It follows that, in our view, the provisions of s.82AF(2)(£)(i) do not operate to deprive the taxpayer of the benefit of the disputed deductions in the present case.

We now turn to consider whether the provisions of s.82AG(3)(d) apply to deny the deductions claimed. They provide in the present circumstances that an investment allowance 1s not available if the taxpayer, within twelve months after the helicopters were first used, entered into an "arrangement" with Sea World "for the use" of the helicopters by that company. The Commissioner's contention is that by the letter of 3 July 1976 the taxpayer entered into such an arrangement. He was content to rely upon this arrangement without reference to any of the other chartering activities of the taxpayer.

It was not disputed that the contents of the letter constituted an arrangement. The taxpayer's contention was

that the arrangement did not provide for the "use" by Sea

World of the helicopters. It was, so it was said, an

arrangement for the supply by the taxpayer to Sea World of the services of a pilot and his assistant as distinct from a contract of bailment of the helicopters.

of Taxation (1982) 82 A.T.C. 4,105 both Gibbs C.J. and Aickin

Jd. laid stress on the wide ambit of the expressions "right to

use" and "use" by another person in s.82AA(a)(ii)(Cc),

s.82AG(1)(b) and s.82AG(3)(d). Gibbs C.J., at p.4,108 said:

"All these provisions support the view that (except in the case of leasing companies) the Parliament intended that the allowance should not be payable unless the taxpayer kept both the property and the exclusive right to use it and did use it only for the purpose of producing assessable income".

Aickin J. at p. 4,111 put it as follows in relation to

"It seems to me that the purpose of sub-sub- paragraph (C) 1s to operate as a 'dragnet' provision to pick up any other right to use which might be devised or which might arise in the conduct of some particular kind of business".

Later on the same page, Aickin J. commented that sub-sub-

a 'catchall' provision in quite general terms to pick up cases where there 1S no grant of possession but there is a right to use. An example would be the grant of a right to enter an owner's premises and there use the owner's machine tools or other equipment, and the ingenuity of financiers and manufacturers might provide other examples".

An examination of a number of the features of the arrangement set out in the letter of 3 July 1976 supports the conclusion that the taxpayer did grant to Sea World a raght to use, or more correctly "the use" of, the helicopters. The basis of the arrangement was stated by Sea World to be that it would charter from the taxpayer the helicopters "so as to enable us to offer scenic flights to Sea World's customers". It also stated that it would make a specified charge so as to allow for approximately "10 turnarounds in the period of an hour" and that its staff would sell the tickets and that it would advertise the flights. The taxpayer was to be paid, "as a charter rate", all moneys collected less 20% and the Sea World emblem would be placed on the helicopters. The letter reiterated that during the period of joy flights the helicopters were "actually ... chartered by Sea World", that advertising would "be in the name of Sea World", and that, in any newspaper or other publicity, the flights would be referred to as "being operated by Sea World". Sea World also undertook to meet the cost of constructing and maintaining a floating helipad which would be made available for use by the

taxpayer in its other charter work. It also undertook

ultimately to construct, at its own cost, hangars for use

by the helicopters at Sea World. All of these features of the arrangement support the view that Sea World carried on the business activity of arranging and operating joy flights. In the course of that business activity, Sea World used the helicopters made available to it by the taxpayer. Counsel for the taxpayer gave us in the course of argument various examples of activities which he submitted were akin to the arrangement between the taxpayer and Sea World. He mentioned in particular the business of a travel agent arranging flights for a customer and he also referred to the bailment of a chattel and a contract for services. In our opinion these examples are ultimately of no assistance in characterizing the present arrangement.

The conclusion that we have reached is that upon consideration of the overall effect of the arrangement, Sea World was entitled to use in the relevant sense and did in fact use the helicopters in the course of its business activity of arranging and operating joy flights. In our view the provisions of s.82AG(3)(d) operate to deprive the taxpayer of the claimed deductions 1n the present case.