The Commissioner of Taxation of the Commonwealth of Australia v Australian Airlines Ltd [1996] FCA 935

CATCHWORDS

SALES TAX - exemptions - whether flight training centre within Item 63A, First Schedule, Sales Tax (Exemptions and Classifications) Act 1935 - whether flight training centre a ‘school conducted by an organisation not carried on for the profit of an individual’ - meaning of the term ‘school’ - the word ‘school’ should be given its ordinary and natural meaning: a place where people come together for the purpose of being instructed in an area of knowledge or activity - a school may be conducted by a profit-making organization - derivation of profit by the conduct of a school should not bar enjoyment of exemption if profit gained not for any one or more individuals, but for an unidentified plurality of persons.

Civil Aviation Act 1988

Sales Tax ( Exemptions and Classifications) Act 1935

Cromer Golf Club Limited v Downs (1973) 47 ALJR 219

Genex Corporation Pty Limited v Commonwealth of Australia (1991) 30 FCR 193

Lawrence v South County Freeholds Limited [1939] 1 Ch 656

Federal Commissioner of Taxation v Leeuwin Sail Training Foundation Limited (1996) 96 ATC 4,721

THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA v AUSTRALIAN AIRLINES LIMITED

VG 220 of 1996

LOCKHART, SUNDBERG and MERKEL JJ.

26 NOVEMBER 1996

MELBOURNE

IN THE FEDERAL COURT OF AUSTRALIA)

)

VICTORIA DISTRICT REGISTRY ) No. VG 220 of 1996

)

GENERAL DIVISION )

ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA

BETWEEN: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

Appellant

AND: AUSTRALIAN AIRLINES LIMITED

Respondent

COURT: LOCKHART, SUNDBERG and MERKEL JJ.

DATE: 26 NOVEMBER 1996

PLACE: MELBOURNE

MINUTE OF ORDERS

THE COURT ORDERS THAT:

1. The appeal be dismissed.

2. The appellant pay the costs of the respondent of the appeal.

NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA)

)

VICTORIA DISTRICT REGISTRY ) No. VG 220 of 1996

)

GENERAL DIVISION )

ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA

BETWEEN: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

Appellant

AND: AUSTRALIAN AIRLINES LIMITED

Respondent

COURT: LOCKHART, SUNDBERG and MERKEL JJ.

DATE: 26 NOVEMBER 1996

PLACE: MELBOURNE

REASONS FOR JUDGMENT

LOCKHART J.

Introduction

The question in this appeal from the judgment of a judge of the Court (Jenkinson J.) is whether a flight training centre conducted by the respondent is a 'school conducted by an organization not carried on for the profit of an individual' within the meaning of that expression in Item 63A of the First Schedule to the Sales Tax (Exemptions and Classifications) Act 1935 ('the Act'). His Honour's judgment is reported: (1996) 96 ATC 4,324.

The respondent brought this proceeding in the original jurisdiction of the Court, claiming a refund of sales tax related to goods imported into Australia in February 1989 for use, and not for sale, by its flight training centre. The
goods were spare parts for aircraft simulators. The respondent asserted that the centre was a 'school' within the meaning of that word in item 63A and that the organization by which the respondent conducted the school was 'not carried on for the profit of an individual', but for the profit of the Commonwealth of Australia as the beneficial owner of all its shares.

The learned primary Judge upheld these submissions of the respondent, allowed its appeal, set aside the appellant's decision on the respondent's objection, remitted the matter of the objection to the appellant to be dealt with according to law, and ordered the appellant to pay the respondent's costs of the appeal. The appellant appealed to the Full Court from the judgment and all the orders of the primary Judge.

The appellant contended that the respondent's flight training centre is not a 'school' within the meaning of Item 63A because the rationale for its existence is not for the purpose of imparting knowledge and instruction, but as an integer of a broader commercial organization. It was argued that the respondent is a trading company that makes a profit from operating aircraft, and that the instructions which it gives and the tests which it applies to its pilots and flight attendants at the flight training centre are necessary incidents of carrying on its profit-making business.

The appellant also contended that the respondent carries on business for the profit of its individual shareholders, so not being 'an organization not carried on for the profit of an individual'. It was argued that the fact that the beneficial holder of all the shares in the respondent is the Commonwealth of Australia does not detract from this conclusion; the expression 'organization not carried on for the profit of an individual' was said to describe a non-profit-making organization as contrasted with a profit-making organization.

On the other hand, it was contended on behalf of the respondent that the respondent's flight training centre falls within the ordinary meaning of the word 'school', because it is a place where people assemble for the purpose of being instructed in a relevant area of knowledge or activity, namely, flying skills. It was argued that the flight training centre has for all practical purposes a separate identity which has as its purpose instruction in flying skills and related matters. Whether the centre is a 'school' is determined by its characteristics and purposes, not the circumstance that the organization that conducts it is the respondent which carries on other business activities; the fact that the respondent exists to make a profit does not mean that the centre cannot be a 'school'.

It was also contended by the respondent that the Commonwealth of Australia is not an 'individual' within the
meaning of Item 63A, with the result that the exemption afforded by that item is available to it.

The regulatory regime

Section 5(i) of the Act provides that sales tax shall not be payable upon the sale value of any goods covered by any item in the first column of the First Schedule, under any Act specified in the second column of the Schedule opposite that item. Item 63A is such an item and the Sales Tax Assessment Acts (Nos. 1 to 9) (being the relevant Acts in force at material times) are the Acts to which the exemption applies.

Item 63A reads as follows:

'Goods for use (whether as goods or in some other form), and not for sale, by a university or school conducted by an organization not carried on for the profit of an individual.'

The history of Item 63A goes back to the original Sales Tax Exemption Act 1935 (No 60 of 1935) where one exempt item was Item 63, which appeared in the following form:

'63. Goods for use in universities and schools, viz.:-

(1) Scientific instruments and scientific apparatus (and parts therefor), and materials for use therewith

(2) Charts, wallsheets and diagrams

(3) Examination papers, and direction sheets and envelopes for use therewith'

Exemption was also afforded to goods covered by Item 75 in the 1935 Act, namely:

'75.Goods which are for official use (whether as goods or in some other form), and not for sale, by a technical school the expenditure of which is wholly or partly borne by the Government of the Commonwealth or the Government of a State'

Item 63 was omitted from the Act by the Sales Tax (Exemptions and Classifications) Act 1940 (No 76 of 1940, s. 9); but was reinserted as item 63 by s. 3 of the Sales Tax (Exemptions and Classifications) Act 1942 (No 6 of 1942).

The Sales Tax (Exemptions and Classifications) Act 1944 (No 31 of 1944) (by s. 3) added sub-paragraph (2) to Item 75 in the following terms:

'(2)Tools, implements, apparatus and parts therefor and materials for use exclusively for the purposes of technical instruction in woodwork, metal work or any other manual trade course by a school not carried on for the profit of an individual'

The Sale Tax (Exemptions and Classifications) Act 1946 (No 12 of 1946) (by s. 3) inserted Item 63A in these terms:

'Goods for use (whether as goods or in some other form) exclusively for the purposes of tuition, by a university or by a school conducted by an organization not established or carried on for the profit of an individual, but not including any goods for sale, or equipment, apparatus or accessories of a kind used exclusively, or primarily and principally, in indoor or outdoor sports or games, gymnastics, athletics or physical culture'

Section 3 of the 1946 Act also added sub-paragraph (3) to Item 75 in these terms:

'(3)Goods for use (whether as goods or in some other form), and not for sale, by a society, institution or organization which is established and carried on exclusively or principally for the promotion of the interests of a university, or of a school which is conducted by an organization not carried on for the profit of an individual'

Finally, the Sales Tax (Exemptions and Classifications) Act (No 44 of 1952) (by s. 4) omitted Item 63A and Item 75 and inserted Items 63A and 63B. Item 63A, the terms of which have previously been set out, remained as inserted by the 1952 Act at relevant times. Item 63B, as inserted, reads as follows (like Item 63A it was still in force at relevant times):

'63B(1) Goods for use (whether as goods or in some other form) and not for sale, by a society, institution or organization established and carried on exclusively or principally for the promotion of the interests of a university or school conducted by an organization not carried on for the profit of an individual

(2)(2) Goods for use (whether as goods or in some other form) and not for sale, by a society, institution or organization established and carried on exclusively or principally for the promotion of competitive sport among the students of universities or schools conducted by organizations not carried on for the profit of an individual.'

The scheme of the sales tax legislation is discussed by Hill J. in Genex Corporation Pty Limited v Commonwealth of Australia (1991) 30 FCR 193 at 196-201; so I need not pause to discuss it myself.

A new regulatory sales tax regime was introduced in 1992 by the Sales Tax Assessment Act 1992. It relates to sales tax on dealings with goods which have been manufactured in Australia, or imported into Australia, and related purposes. The scheme employing separate assessment Acts has now been abandoned because the doubts that previously existed about the validity of the legislation have been resolved. The new legislative scheme has operated since 1 January 1993; it proceeds essentially upon the same philosophy as did the earlier legislation (with which this case is concerned).

Findings

We were referred in argument by counsel for the appellant to a portion of the Second Reading Speech in the House of Representatives by the then Treasurer of the Commonwealth, Sir Arthur Fadden, to the Bill which became the Sales Tax (Exemptions and Classifications) Act 1952. The Treasurer observed (Hansard, House of Representatives, 6 August 1952, p100):

'In addition to these reductions of rates, it is proposed to exempt some further categories of goods from sales tax. The most important is the category of goods for the use of universities and schools which are not established or carried on for profit. At present, complete exemption is enjoyed only by government schools. Universities and other non-profit schools have a limited exemption of scientific equipment and goods for use exclusively for the purposes of tuition. Tax has been payable on their purchases of ordinary furnishings and sporting equipment, and the effect of the limitation of the exemption has been more burdensome since sporting equipment has been subject to the rate of 33_ per cent. The position has been further complicated by the fact that associations of parents and friends established to assist schools have been able to purchase all kinds of goods free of tax for donation to the schools. It is considered that this inconsistency should be removed, and that the complete exemption now granted in respect of goods for the use of these institutions will eliminate confusion and be of material assistance to them. Tax will still be payable in respect of any goods acquired by them for re-sale, except when the goods are of kinds which are exempt in all circumstances, such as text-books.'

The primary Judge observed, and I agree, that the Treasurer's observations might be thought to confirm that the word 'school' in Item 63A was intended to bear the same meaning as was attributed to it by Simonds J. in Lawrence v
South County Freeholds Limited [1939] 1 Ch 656 at 671 (in a different statutory context), where his Lordship said that 'school' bears 'its primary and natural meaning - namely, a place where boys and girls receive instruction and discipline'.

The definition of 'school' in the Oxford English Dictionary, 2nd ed, 1989, is as follows:

'I. Place or establishment for instruction.

1. An establishment in which boys or girls, or both, receive instruction.

...

3. An institution in which instruction of any kind is given (whether to children or adults). Often with defining word indicating the special subject taught, as dancing, music, riding school.

4(a)A place, environment, etc., where one gains instruction or training in virtue, accomplishments, or the like; a person or thing regarded as a source of instruction or training.'

The Macquarie Dictionary defines 'school' as including the following:

'1. A place or establishment where instruction is given, esp. one for children.

2. The body of students or pupils attending a school.

...

8. An instructive place, situation, etc.'

And the meaning of the word 'school' was considered by the High Court (Barwick C.J., McTiernan and Stephen JJ.) in a different context to the Sales Tax (Exemptions and Classifications) legislation, namely, the Public Works Act 1912 (NSW), in Cromer Golf Club Limited v Downs (1973) 47 ALJR 219. Section 40(1)(c) of that Act made provision for the acquisition or resumption of land whenever, in the case of work, the Governor had sanctioned the acquisition of any land for school sites. A notification of resumption of land adjoining the site of the then existing National Fitness Camp at Narrabeen Lakes identified the public purpose of the resumption as 'a national fitness camp at Narrabeen Lakes'. Barwick C.J. (with whose reasons for judgment McTiernan and Stephen JJ. agreed) said at 221:

'One of the sites which may be the subject of acquisition by the use of the power given by s. 40(1)(c) is a school site. It is quite evident that in this paragraph the reference is not exclusively to a public school. Not only is the word "public" not present in the description of school and present in the description of offices and buildings in the paragraph but the limitation of the Public Instruction Act as to the nature of schools falling within its terms, which is found in s. 41(e), is not imported into par. (c) of s. 40(1).

The question in the appeal therefore is whether a site for a national fitness camp is a school site within the meaning of par. (c) of s. 40(1). ... It would clearly have been advisable that the notice stated that the acquisition was for a site for a school, namely, a national fitness camp. But, although no express reference is made to a school the description, "national fitness camp", in my opinion, is not meaningless, even if not to be judicially comprehended without evidence. That to which it refers or describes may therefore, in my opinion, be established by evidence. Thus, in my opinion, evidence was rightly admitted to describe the activities of a national fitness camp as a means of identifying the stated purpose of the acquisition. The evidence which was admitted included a description of the activities of such a camp as was carried on at Narrabeen at the relevant time. ... It is clear from the evidence that the land the subject of the notice of resumption was to be used in conjunction with the existing land and buildings of the National Fitness Camp. There was no use indicated which diverged from the general purposes of that camp. It might be remarked in passing that both a residential building for adolescent students and a building for use by adults in connection with physical fitness were proposed by the director of the camp to be placed on the subject land if the proposals made by him were, in fact, accepted and implemented by the government. ...

I have already pointed out that the word "school" in par. (c) of s. 40(1) is not limited in its meaning to that of a school as in and under the Public Instruction Act; in particular, that it is not a public school under the Public Instruction Act which is necessary in contemplation in that paragraph. ...'

The Chief Justice then said in the following important passage at 221-222:

'It seems to me that a "school" is a place where people, whether young, adolescent or adult, assemble for the purpose of being instructed in some area of knowledge or of activity. Thus there are drama schools, ballet schools, technical schools, trade schools, agricultural schools and so on.

In my opinion, the activities of the National Fitness Camp at Narrabeen as described in the evidence predominantly involved the instruction of young and adolescent people in the care and improvement of the body, broadly an area of knowledge and expertise generally described as physical fitness. The form of the instruction no doubt varies and includes demonstrations and practice, but the character of the camp as so evidenced is, in my opinion, that of a place to which young and adolescent people resort in considerable numbers for the purpose of being instructed. That, it seems to me, makes the camp predominantly a school within the meaning of s. 40(1)(c) of the Public Works Act.'

The meaning of the word 'school' in the context of the Sales Tax (Exemptions and Classifications) Act 1992, Schedule 1, Item 109, was considered by a Full Court of this Court (Northrop, Carr and Finn JJ.) in Federal Commissioner of Taxation v Leeuwin Sail Training Foundation Limited (1996) 96 ATC 4,721. The judgment of the Full Court was given on 25 July 1996, after the judgment of Jenkinson J. was given in the present case (1 April 1996).

The issue in Leeuwin was whether the Leeuwin Sail Training Foundation Limited was entitled to sales tax exemption in respect of a quantity of rope which it had purchased on one or both of two grounds, only one of which is presently relevant, namely, that the activity conducted on the square-rigged ship the 'STS Leeuwin' was that of a 'school' for the purposes of Schedule 1, Item 109 of the 1992 Sales Tax (Exemptions and Classifications) Act.

Item 109 reads as follows:

'Item 109: Non-profit university or school

Goods for use by a university, or school, that is conducted by a non-profit body.'

It was conceded In Leeuwin that the respondent was a non-profit body.

Northrop and Finn JJ., in a joint judgment, rejected the primary submission of the appellant which was that, when juxtaposed with the word 'university', the word 'school' signified a particular type of educational institution in the broader universe of educational institutions, namely, an institution which promotes learning through a set curriculum taught by a professional body of teachers and subject to formal assessment, encompassing the notion of regular attendance over a substantial period of time. The submission made on behalf of the appellant was that the collocation of the words 'university' and 'school' in Item 109 suggested that the meaning of the latter was what (as mentioned earlier) Simonds J. had called in Lawrence the primary and natural meaning of 'school', namely: 'a place where boys and girls receive instruction and discipline'.

It was argued on behalf of the appellant in Leeuwin that Cromer was distinguishable from Leeuwin on the basis that the High Court in Cromer was not concerned with the ordinary meaning of the term 'school', but rather with a specific and contextually confined statutory meaning.

Northrop and Finn JJ. said in Leeuwin at 4,726:

'The point of departure of these respective submissions is, essentially, as to the effect (if any) to be given to the collocation of the words "university" and "school". Unless this in some way contrives and narrows the meaning to be attributed to "school", there is not in our view any answer to the respondent's submissions. We put the matter this way because (a) the dictionary definitions we have noted would clearly encompass the instruction provided by the respondent; and (b) it is not open to serious argument that the definition given by Barwick CJ in the Cromer Golf Club case was intended to be other than its ordinary meaning and has been so regarded subsequently: see Australian Airlines Ltd v FCoT, ... [96 ATC 4324] at 4328 ... We would add, in light of the Cromer Golf Club definition, the so-called "primary meaning" of "school" divined by Simonds J in Lawrence v South County Freeholds Ltd, ... and referred to earlier in these reasons, does not provide any particular illumination of the issue before us. In any event the observations of Simonds J were made in the context of construing an exception to a restrictive covenant where, as the judge himself noted, the "words ... must be strictly construed": [1939] Ch at 672.

We turn now to the effect of the collocation of the words "university" and "school". Even if the word "university" is suggestive of one particular type of educational institution performing a relatively accepted core function in the
educational arena (i.e. the provision of a range of tertiary qualifications to students and the conduct of the search), we are unable to accept that the consequence should follow that in construing Item 109 we should strive to isolate an activity or function more narrow than is suggested by the dictionary/Cromer Golf Club definitions to which we have referred for no more obvious purpose, it would seem to us, than to give a meaning to the two words which overall would describe little if anything more than the traditional primary, secondary and tertiary institutions of educational instruction in this country.

It has not been suggested to us that there is something inherent in the purpose of this particular exemption from sales tax which should incline us to such a view. It is not at all apparent why in any event we should seek to dissect in an arbitrary way the types and forms of educational instruction provided by what are "schools" in the sense in which that term is used in the OED and Cromer Golf Club.

If Parliament had intended that the beneficiaries of the Item 109 exemption in the educational sector were to be constituted only by universities and by schools having particular attributes, it could have said so. It has not. We see no reason why we should give the term a meaning here which truncates what we - and the Tribunal - considered to be the ordinary and, in this context, the appropriate meaning of "school".'

The principal object of the Leeuwin Foundation was to promote the education and character of young people by the provision of an adventure sail training scheme. It operated a square-rigged ship for this purpose in a number of training programmes: (1) personal development; (2) corporate team building; (3) disabled use; (4) school maritime studies; and
(5) what was described as 'eco adventure'.

Carr J., in separate reasons for judgment, reached substantially the same conclusions as the other two members of the Full Court.

Finally, I refer to the decision of the Administrative Appeals Tribunal in Re Qantas Airways Limited and Collector of Customs (NSW), 3 October 1984, 6 ALD N261, a decision to which the primary Judge referred. The Administrative Appeals Tribunal was constituted by Neaves J., Presidential Member, A N Hall Deputy President, and Sir Ernest Coates, Member. Qantas sought a refund of customs duty paid in respect of Boeing 747 flight simulators and component parts. The refund was sought under s. 163 of the Customs Act 1901 and reg. 126 of the regulations on the basis that the duty had been paid 'through patent misconception of the law'. The goods were entered for home consumption under Item 85.05 in Schedule 1 to the Customs Tariff Act 1966 as 'ground flying trainers' and duty paid accordingly. Qantas claimed that the goods were covered by the customs by-law under Item 22 in Schedule 2 to the Customs Tariff. To qualify for this, the flight simulators would have to be describable as goods 'for instructional purposes in a university, college, school or other educational institution'. Evidence was before the Tribunal concerning the nature of the flight operations training centre run by Qantas, it being the place at which the relevant goods were located and used. The evidence established that Qantas's flight crews were required to be trained and periodically checked or monitored for competence. This training involved use of the relevant goods. Other airlines and the RAAF also made use of Qantas's training centre. Qantas argued that its centre was either a school or an educational institution. The Tribunal dismissed the application of Qantas. They construed the by-law, though not easy to define in precise language, as requiring that the relevant body must exist for the dominant or primary purpose of imparting knowledge as an object or end in itself. And the Tribunal found that Qantas's flight operations centre did not fall within that description; rather it was an integral and essential part of a large commercial undertaking. The function of the centre could not be characterized separately from the wider organization of which it formed part.

The primary Judge said that in all respects relevant to the determination of the present matter, the activities in the flight training centres and the relevant legislative provisions in the Qantas case were indistinguishable from those activities and provisions under consideration in the present matter. However, his Honour accepted as correct the submission of counsel for the respondent that integration of an institution existing to impart instruction within, and as part of, an institution or organization existing to attain quite different objectives does not necessarily take the
integrated institution outside the ordinary meaning of the word 'school'. His Honour gave as an example a school for the general education of choir boys conducted by the Chapter of a Cathedral, which is a school in ordinary parlance; and so too would be a trade school for employees of a manufacturing or trading company conducted by the company.

I respectfully agree with the primary Judge's observations with respect to the decision of the Tribunal in Qantas.

In my opinion the following are the critical principles upon which the present case turns concerning the meaning of 'school' in Item 63A:

1. The word 'school' in Item 63A should be given its ordinary and natural meaning. The collocation of the words 'university' and 'school' does not signify any narrowing of the ordinary meaning of 'school'. I apply the reasoning of the High Court in Cromer and the Full Court of this Court in Leeuwin, the latter in a statutory context which is not distinguishable from the statutory context in the present case.

2. The first question here is whether the flight training centre operated by the respondent is within the ordinary meaning of the word 'school', namely, a place where people come together for the purpose of being instructed in an area of knowledge or activity (namely here, flying skills).

3. It is important not to confuse the general purposes of the organization that runs the body which the organization asserts is a 'school', and the activities of the 'school' itself. In other words an organization may carry on a number of diverse activities, only one of which is the conduct of a body or institution where people receive instruction in some recognized area of knowledge or activity, such as flying skills. The business activities of the broader commercial organization do not exclude the characterization of one of its institutions or scions as a 'school' within the meaning of Item 63A if the 'school' can be identified as an institution which is conducted for the purpose of imparting knowledge and instruction in an area of knowledge or activity.

4. The fact that the respondent exists to make a profit does not mean that its flight training centre is not a 'school'. Indeed, the very structure of Item 63A itself, and the language in which it is cast, recognize that a 'school' may be conducted by a profit-making organization. It is only where it is conducted by an organization not carried on for the profit of an individual that the exemption applies.

It is important to examine the regulatory regime in which the respondent's flight training centre operated at relevant times.

The Civil Aviation Act 1988, regulations made thereunder and orders made under the regulations, prescribe the necessary procedures to ensure the safety of civil air operations in Australia. In furtherance of that aim they lay down procedures for ensuring the safe and efficient operations of regular public transport services by the flight crews which operate the aircraft. As the primary Judge observed, these latter procedures include prescription of syllabuses of training, licensing of instructors, testers and examiners by the Civil Aviation Authority (as it was at relevant times, now being the Civil Aviation Safety Authority, and referred to in these reasons as 'the Authority'), and the prescription of examinations and of periodical testing of proficiencies. His Honour noted that at the relevant times each of the three Australian operators conducted its own 'training and checking organizations' in compliance with reg. 217.

The Authority is responsible for the safety regulation of civil air operations in Australia, in particular for establishing and maintaining standards for the flight crew engaged in operating aircraft. For this purpose a licensing framework is established by Part IV of the Civil Aviation Regulations and by the Civil Aviation Orders made under the regulations. The essential elements of the system are as follows. No duties essential to the operation of an Australian aircraft during flight may be performed without the appropriate licence (regulation 44A). The Authority has the functions of granting and endorsing licences (regulation 55B). Flying schools are licensed to give practical and theoretical instruction in those subjects in which an applicant for a licence must qualify in order to obtain a licence.

The Authority makes the initial issue of an airline transport pilot's licence. The respondent is the delegate of the Authority for the purpose of granting license renewals and license endorsements for aircraft types, instrument ratings and so on. At the relevant time any person wishing to obtain an airline transport pilot license in Australia had to attend a training school operated by one of the airlines. In addition to the centre, training schools were operated by Qantas and Ansett Airlines Limited. There was no training school in Australia which existed independently of the airlines. It appears that the only country in the world where training for commercial airline pilots existed outside the major airlines themselves was the United States of America, which had independent flight safety organizations equipped with simulators.

Licences are issued in respect of particular aircraft types. Hence, a person seeking endorsement to fly a particular aircraft type must undertake the necessary training with an airline operating that type of aircraft. For example, the respondent is the only operator of A300 aircraft and has the only A300 simulator in Australia; hence a person wishing to qualify on that aircraft must undertake a course at the respondent's centre or go overseas. At relevant times the respondent's centre was also the sole institution able to provide the training and qualification necessary for the DC9 aircraft.

The respondent has conducted an aviation training school since it came into existence as Trans-Australia Airlines in 1946. It has been known as the flight training centre since 1964, but its functions have been essentially the same since 1946.

Regulation 217, previously mentioned, is of some significance. It relevantly provides as follows:

"217(1) An operator of a regular public transport service, an operator of any aircraft the maximum take-off weight of which exceeds 5,700 kilograms and any other operator that the Authority specifies shall provide a training and checking organisation so as to ensure that members of the operator's operating crews maintain their competency.

Penalty: $5,000.

(2) The training and checking organization shall include provision for the making in each calendar year, but not at intervals of less than four months, of two checks of the nature sufficient to test the competency of each member of the operator's operating crews.

Penalty: $5,000.

(3) The training and checking organization and the tests and checks provided for therein shall be subject to the approval of the Authority ...'

The flight training centre with which this case is concerned is an organization for training and checking provided by the respondent in compliance with regulation 217.

I agree with the submission of counsel for the respondent that regulation 217 does not require the respondent to establish the flight training centre. It only requires it to have a training and checking organization to ensure operating crews maintain competency. The respondent's flight training centre also performs other training functions, as mentioned earlier.

The primary Judge summarized the functions of the respondent's training centre. I shall state what those functions are and in doing so shall rely upon the findings of the primary Judge (they were not challenged on appeal); I shall also elaborate them a little by reference to other evidence which is not disputed by either party.

The respondent's flight training centre is housed in the building complex specifically designed for its use as such a centre in Essendon, Melbourne. It was established for the primary purpose of instructing trainees and has its own administration for this purpose. The buildings house aircraft flight simulators which are structures each of which houses an imitation of the cockpit of an aircraft of a type in the respondent's regular public transport service. Each simulator is mounted on hydraulic hoists capable of tilting and lowering and raising the cockpit to simulate the changing orientation of the cockpit of an aircraft in flight. By the operation of computer programs, a pilot's operation of the aircraft controls and instruments in the flight simulator have the apparent effects which would result from operation of the same controls and instruments in a real aircraft of that type. The visual and auditory impressions of flight are simulated, so that a landing or take-off at a particular Australian or foreign airport can be experienced. Abnormal conditions of the environment, or one or more the aircraft's control or flight systems, can be simulated.

In other parts of the building there are facilities for instruction similar to classrooms, some with computer terminals, and a substantial library of videotapes, instruction and testing materials. There are structures which simulate the passenger compartments of large commercial aircraft and structures which simulate the exterior of such
aircraft from which emergency evacuation of passengers is conducted into life rafts or to the ground. Flight attendants are also trained at the centre. They are instructed in emergency procedures and in their co-operation with flight crew by instructors responsible to the flight operations manager of the respondent, who controls flight crew training, as well as attending to other duties with the respondent. Other training of flight attendants is by instructors responsible to the manager of flight attendant training.

The centre provides defined syllabuses for each course of instruction. It is accessible to any person seeking to obtain relevant qualifications. The qualifications achieved at the conclusion of the training courses at the centre are transferable.

Most trainees are employees of the respondent who are, or who aspire to be, flight crew members, whether pilots or engineers. Others are employees of foreign airlines, most of which are based in countries surrounding the Pacific and Indian Oceans, and officers of the Authority. There is evidence that any suitably qualified pilot who seeks to be trained at the centre is likely to be accepted, but that suitable qualification is a licence which it is unlikely that a person not engaged in commercial aviation would hold. Almost all trainees who enter upon a course of training at the centre hold a senior commercial pilot licence or an airline
transport pilot licence.

The respondent's flight training centre is certified by the New Zealand Civil Aviation Authority as an approved training institution. Organizations such as Garuda Airlines, after initially assessing and approving the centre, send a representative each year to inspect the centre and renew its approval as a training institution.

Flying qualifications obtained in Australia are accepted by most overseas countries, subject to a pilot satisfying additional local requirements, usually including examinations on the local flight rules and procedures and the provisions of the applicable air navigation legislation. The substantive flight training does not have to be repeated.

The respondent charges fees for providing its services at the centre which are intended to return a profit. The fees which the respondent charges another airline in respect of the training of its employees are, if the respondent's instructors are involved, greater than if, as is frequently the case, the instructors are employees of that other airline.

Use of the facilities at the centre is extensive. In addition to flight crew training, testing and checking, licensed aircraft maintenance engineers undergo training in the aircraft flight simulators. Educational courses for the
public are organised by the Women's Pilots' Association and are conducted at the centre, mainly by the instructors employed at the centre. Some conferences or classes of airline employees and educational demonstrations by manufacturers of aircraft and aircraft equipment are held at the centre. Many of the functions of the Authority concerning testing and checking of flight crew proficiency are delegated to employees of the respondent, including some of those who are engaged in instructing trainees at the centre.

There is an absence of evidence concerning the funding of the centre, including whether the centre is treated for accounting purposes as separate from the other activities of the respondent, whether its books and accounts are separately maintained, and matters of this kind; but this leaves the position neutral.

In my opinion the primary Judge correctly concluded that the respondent's flight training centre answered the description of a 'school' within the meaning of Item 63A. It existed for the purpose of instruction in flying skills and related matters of pilots, engineers and flight attendants engaged by the respondent and other airlines, and of officers of the Authority. The fact that the respondent exists to make a profit does not militate against the conclusion that the flight training centre was a 'school' at relevant times.

The flight training centre was a 'school' conducted in order to comply with the respondent's statutory obligation to have a training organization to ensure that operating crews maintained competency. It is not correct that the activities of the centre were directed specifically to the commercial ends of the respondent. Certainly the respondent would not have conducted the centre if it had not carried on its ordinary airline operations; but this fact does not determine the true nature and character of the activities of the centre.

That leaves the second limb of the question, namely: whether the respondent which conducted the 'school' is an organization 'not carried on for the profit of an individual'. This is in my opinion the nub of the case. The reference in Item 63A to 'not carried on for the profit of an individual' is, in my view, to the organization which conducts the 'school', not to the school itself.

The primary Judge held that the word 'individual' where used in Item 63A is limited in its denotation to human beings and that the use of the word 'individual' was intended as a means of comprehending the diversity of persons and associations of persons who conduct schools in this country and to ensure that the derivation or the seeking of profit by the conduct of a 'school' should not bar enjoyment of the exemption granted by Item 63A if the profits gained or sought were not for any one or more individuals, but for an unidentified plurality of persons, such as present and future scholars of the school, or those who should have to pay their fees, or those who should in the future be asked to donate money to enable the school to expand or to continue, or those who should from time to time benefit by distribution of such profits for charitable purposes.

In my opinion 'an individual' within the meaning of the exemption of Item 63A comprehends only natural persons: see Acts Interpretation Act 1901, s. 22(1)(aa) (there is no contrary intention discernible in Item 63A). It is not a bar to eligibility to the exemption that an organization is carried on to make a profit. If profits are ploughed back into the school for the benefit of future generations or to enhance the future growth of the organization, it is not carried on for the benefit of an individual. But if the profit goes directly or indirectly to identifiable persons then the exemption is not available. The Commonwealth as the beneficial owner of all the shares in the respondent and the holder of all but five of the shares, does not answer the description of 'an individual'. It is the Commonwealth of Australia as a body politic; and indirectly the people of Australia are the ultimate beneficiaries of any profit made by the respondent. They do not answer the description of an individual for the purposes of Item 63A.

I would dismiss the appeal with costs.

I certify that this and the preceding twenty-nine (29) pages are a true copy of the reasons for judgment herein of the Honourable Justice Lockhart.

Associate

Dated: 26 November 1996

IN THE FEDERAL COURT OF AUSTRALIA )

VICTORIA DISTRICT REGISTRY ) No VG 220 of 1996

GENERAL DIVISION )

BETWEEN: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

Appellant

AND: AUSTRALIAN AIRLINES LIMITED

Respondent

COURT: Lockhart, Sundberg and Merkel JJ

DATE: 26 November 1996

PLACE: Melbourne

REASONS FOR JUDGMENT

SUNDBERG and MERKEL JJ:

The issue

The issue raised in this appeal is whether sales tax is payable on goods acquired by the respondent for use in its flight training centre. Tax is payable only if the centre is a "school conducted by an organization not carried on for the profit of an individual".

The flight training centre

At all times relevant to this appeal the respondent was a company limited by shares, all of which were beneficially owned by the Commonwealth. The respondent operated an airline service. Regulation 217 of the Civil Aviation Regulations required airline operators to "provide a training and checking organisation so as to ensure that members of the operator's

operating crews maintain their competency". In compliance with the regulation the respondent established a "flight training centre". The centre was also used to train those who wished to acquire the level of competency necessary to obtain licences to act as pilots in regular public transport services.

The centre was in a complex specifically designed as a flight training centre. It contained, amongst other things, aircraft flight simulators. Each simulator housed an imitation of the cockpit of an aircraft of a type used in the respondent's service, and was mounted on hydraulic hoists capable of tilting the cockpit and lowering and raising it to simulate the changing orientation of the cockpit of an aircraft in flight. A pilot's manipulation of the controls and instruments in the flight simulator mimicked the effects which would result from the operation of the equivalent controls and instruments in a real aircraft. Visual and auditory impressions of flight were simulated, so that landing or take-off at a particular airport could be "experienced". Abnormal conditions of the environment and irregularities in function of one or more of the aircraft's control or flight systems could be replicated.

In other parts of the complex there were areas for instruction similar to classrooms, some containing computer terminals. Other facilities included a substantial library of instructional videotapes and testing material. There were structures replicating both the passenger compartments of large commercial aircraft and the exterior of such aircraft. These were used in the training of flight attendants with respect to in-flight service and in the emergency evacuation of passengers.

Most trainees were employees of the respondent who were, or who aspired to be, pilots or engineers. Others were employees of foreign airlines and officers of the Civil Aviation Authority. Nearly all trainees held a senior commercial pilot licence or an airline transport pilot licence. The centre was also used to train flight attendants in emergency procedures, co-operation with flight crew, and in other duties.

The respondent charged fees for the provision of services at the centre. The fees it charged other airlines in respect of the training of their employees were greater if the respondent's instructors were involved than if, as was frequently the case, the instructors were employees of the other airline.

Many of the functions of the Civil Aviation Authority in respect of testing and checking flight crew proficiency were formally delegated to employees of the respondent, including some of those who were engaged in instructing trainees at the centre.

Use of the facilities at the centre was extensive. In addition to flight crew training, testing and checking, licensed aircraft maintenance engineers underwent training in the aircraft flight simulators. Educational courses for the public were conducted. Conferences of classes of airline employees, and educational demonstrations by manufacturers of aircraft and aircraft equipment, were held at the centre.

The proceedings below

Section 5 of the Sales Tax (Exemptions and Classifications) Act 1935 ("the Act") exempted from sales tax the items listed in the First Schedule. Item 63A read:

Goods for use (whether as goods or in some other form), and not for sale, by a university or school conducted by an organization not carried on for the profit of an individual.

In February 1989 the respondent imported into Australia goods for use by the centre. It applied for a refund of the sales tax relating to the goods. It claimed the centre was a "school" within the meaning of item 63A, and that the organisation which conducted the centre, namely the respondent, was not carried on for the profit of an individual, but for the profit of the Commonwealth, the beneficial owner of all the shares in the respondent. The appellant refused the refund and disallowed the respondent's objection against that decision. The respondent's appeal to this Court was allowed by Jenkinson J, who set aside the appellant's decision on the objection and remitted the matter to the appellant to be dealt with according to law. The appeal is from that decision.

Primary judge's reasoning on "school"

Jenkinson J was of the view that in its ordinary meaning the word "school" comprehends an institution in which instruction in some area or areas of knowledge or activity is imparted, whether to children or adults, by persons professing the capacity to give that instruction, the institution having as its reason for existence the imparting of that instruction. His Honour accepted the present respondent's submission that integration of an institution existing to impart instruction within, and as part of, an organisation existing to attain quite different objectives, does not take the institution outside the ordinary meaning of the word. He continued:

A school for the general education of the choir boys conducted by the chapter of a cathedral is a school in ordinary parlance. So, too, I think, would be a trade school for employees of a manufacturing or trading company conducted by the company. A school does not lose that appellation by reason of its being conducted for the profit of those who conduct it, as the legislature recognised by concluding item 63A with the words "conducted by an organization not carried on for the profit of an individual". An institution may in my opinion be said to have as its reason for existence the imparting of instruction, notwithstanding that laws requiring employees
engaged in a particular activity to gain and maintain competence in the subject of instruction, and requiring their employer to provide an organisation for that instruction, have also been the reason for the existence of the institution as an integral part of the business in which that activity is carried on.

The fact that the activities in the centre involved air crews demonstrating their continued competence (as well as instructing others wishing to acquire competence) did not, in his Honour's view, prevent the centre being a school. The periodic testing and checking sessions provided occasions for instruction and training in respect of new developments in aircraft equipment and operation, and the evaluation of a trainee's performance was a technique of instruction by which any need of further training was disclosed. His Honour thought that school premises can occasionally be put to uses unconnected with schooling the pupils without the institution ceasing to be a school. He was also of the view that rare or expensive facilities or equipment in a school may be made available for use by those who do not receive instruction from the school's teachers without casting doubt on the institution's character as a school.

What is a school in item 63A?

The meanings of "school" given in the second edition of the Oxford English Dictionary include these:

1. Place or establishment for instruction.

...

3.a. An institution in which instruction of any kind is given (whether to children or adults). Often with defining word indicating the special subject taught, as dancing, music, riding school.

...

4.a. A place, environment, etc, where one gains instruction or training in virtue, accomplishments, or the like ....

In Cromer Golf Club Ltd v Downs (1973) 47 ALJR 219 the High Court considered whether the resumption of land for a "national fitness camp" was a resumption for a "school site". Barwick CJ, with whom the other members of the Court agreed, said:

the word "school" [in the resumption legislation] is not limited in its meaning to that of a school as in and under the Public Instruction Act; in particular, ... it is not a public school under the Public Instruction Act which is in contemplation in that paragraph.

...

It seems to me that a "school" is a place where people, whether young, adolescent or adult, assemble for the purpose of being instructed in some form of knowledge or of activity. Thus there are drama schools, trade schools, agricultural schools and so on.

In Federal Commissioner of Taxation v Leeuwin Sail Training Foundation Ltd (1996) 96 ATC 4721 a Full Court of this Court considered whether the Foundation was a school for the purpose of item 109 of the First Schedule to the Act which exempted "Goods for use by a university, or school, that is conducted by a non-profit body". Northrop and Finn JJ, at 4726, said:

The point of departure of these respective submissions is, essentially, as to the effect (if any) to be given to the collocation of the words "university" and "school". Unless this in some way contrives and narrows the meaning to be attributed to "school", there is not in our view any answer to the respondent's submissions. We put the matter this way because (a) the dictionary definitions we have noted would clearly encompass the instruction provided by the respondent; and (b) it is not open to serious argument that the definition given by Barwick CJ in the Cromer Golf Club case was intended to be other than its ordinary meaning ...

...

We turn now to the effect of the collocation of the words "university" and "school". Even if the word "university" is suggestive of one particular type of educational institution performing a relatively accepted core function in the educational arena (ie the provision of a range of tertiary qualifications to students and the conduct of research), we are unable to accept that the consequence should follow that in construing Item 109 we should strive to isolate an activity or function more narrow than is suggested by the dictionary/Cromer Golf Club definitions ... for no more obvious purpose, it would seem to us, than to give a meaning to the two words which overall would describe little if anything more than the traditional primary, secondary and tertiary institutions of educational instruction in this country.

Carr J expressed similar views at 4732.

The activities carried out at the centre qualify it as a school within the dictionary and the Cromer definitions. But the appellant contended that in item 63A a school comprehends an instructional institution or establishment where the process of instruction and learning is the sole or predominant purpose of the institution or establishment. It was submitted that where a trading corporation, such as the respondent, gives instruction to its employees as a necessary incident of carrying on its business activities, the place where that instruction is given is not a school.

In support of this proposition the appellant relied on a decision of the Administrative Appeals Tribunal, constituted by Mr Justice Neaves, Deputy President Hall and Sir Ernest Coates, in Qantas Airways Ltd v Collector of Customs (NSW) (1984) 6 ALN N261. That case concerned a flight training centre conducted by Qantas Airways Ltd, and the question was whether goods imported for use in the centre were "goods ... that are for use for instructional purposes in a university, college, school or other educational institution" within item 22 of Part I of the second Schedule to the Customs Tariff Act 1966. The Tribunal held that the centre was not a school or other educational institution. It said:

The collocation of expressions ... convey, in our opinion, a definite impression that the special, and lower, rate of duty is to apply where the goods are to be used for instructional purposes in a body or institution that exists for the dominant or primary purpose of imparting knowledge as an object or end in itself.

...

[Each of the expressions university, college, school and other educational institution refers] to institutions or bodies that can be seen as part of the general educational system.

...

We are in no doubt that the flight operations training centre has, as part of its objects, the imparting of knowledge in a variety of subjects including aircraft performance, operational requirements and safety and emergency procedures .... But the imparting of knowledge is not, for the centre, an end in itself. The centre is but an integral and necessary part of a large commercial undertaking carrying on an international airline service. We cannot think that the function of the centre can be characterised as if it were separate from the wider organisation of which it forms part. Looked at in this context, its dominant or primary purpose is to give training and instruction for the purpose of maintaining the level of skills for specific duties that employees of the applicant already perform in the conduct of the applicant's business or for the purpose of enhancing those skills to fit those employees for the carrying out of other duties that may be assigned to them within that business.

No reference was made to Cromer. Item 22 does not distinguish, as does item 63A, between the educational institution itself and the organisation that conducts the institution. The Tribunal was thus able to say that the function of the centre could not be characterized as if it were separate from the wider organisation of which it formed part. Because item 63A does distinguish between the school and the organisation which conducts it, that which is claimed to be a school must be characterised in its own right.

In any event, whatever may be position with item 22, item 63A looks, in our view, to what the educational institution in fact does, and not to the purpose for which it was brought into
existence. On the evidence before the primary judge, the centre was plainly a school in the sense described in the dictionary, in Cromer and in Leeuwin. It had defined syllabuses for each course of instruction provided. It had defined programs of instruction and qualified instructors. There was external certification by the Civil Aviation Authority of the syllabuses, the training exercises, the instructors and the equipment. The centre had a physically identifiable location, its own administration, and was established for the sole purpose of instruction. Qualifications obtained at the conclusion of training were portable - within Australia, a pilot could, without further qualification, work with any domestic airline operating aircraft of the type in respect of which the qualification was obtained. The flight training centre conducted by the respondent was therefore a school within item 63A.

Primary judge's reasoning on "profit of an individual"

His Honour was of the view that "individual" comprehended only a human being. The appellant was carried on for the profit of the Commonwealth, the beneficial owner of all its shares. The profit gained by the Commonwealth did not pass to any identified human being, but was held for the benefit of the unidentified people of the Commonwealth for the time being. Accordingly the appellant was "an organization not carried on for the profit of an individual" within item 63A.

Profit of an individual?

The appellant submitted that the words "an organization not carried on for the profit of an individual" comprehend an organisation which does not derive profit for the benefit of its individual members. The respondent carries on business for the profit of its individual shareholders. Accordingly, it was said that it is not "an organisation not carried on for the profit of an individual". It was also submitted that that expression described a profit making organisation as opposed to a non-profit making organisation, and that the addition of "an individual" does no more than express or re-iterate this.

The respondent submitted that it was carried on for the profit of the Commonwealth as beneficial owner of all the shares, and that the Commonwealth is not "an individual".

The ordinary meaning of the word "individual" is "natural person". We see no reason to treat the word as having a different meaning in item 63A. In any event the meaning is put beyond doubt by s 22(1)(aa) of the Acts Interpretation Act 1901, which provides that "individual" in any Act, unless the contrary intention appears, means a natural person. We can discern no contrary intention.

In our view the "profit of an individual" is not limited to direct profit, but includes indirect or ultimate profit. We would regard an organisation as being carried on for the profit of an individual notwithstanding that one or more corporations are interposed between the organisation and an individual. Thus, if the profit of an organization is distributed directly or indirectly to one or more natural persons, the organization is carried on for the profit of an individual within the meaning of item 63A.

In the present case the profit of the respondent is not distributed in the manner described above. The only entity which profited from the activities of the respondent was the Commonwealth. The Commonwealth is a body politic and not a natural person. The individual shareholders, who held their shares on trust for the Commonwealth, did not derive any profit from the shares. Accordingly the respondent is an "organization not carried on for the profit of an individual".

It follows that sales tax is not payable on the goods acquired by the respondent for use in its flight training centre. We would dismiss the appeal.

The respondent is therefore entitled to the exemption in item 63A, and the appeal must be dismissed.

I certify that this and the preceding ten pages are a true copy of the reasons for judgment of the Honourable Justices Sundberg and Merkel

.................................................

Associate

26 November 1996

Counsel for the Appellant: A H Goldberg QC, G J Davies and H M Symon

Solicitor for the Appellant: Australian Government Solicitor

Counsel for the Respondent: A J Myers QC and C M Maxwell

Solicitors for the Respondent: Phillips Fox

Date of Hearing: 7 October 1996

Place of Hearing: Melbourne

Date of Judgment: 26 November 1996

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