FEDERAL COURT OF AUSTRALIA

Hostess Marine Pty Limited (ACN 085 685 589) v Commissioner of Taxation

 [2006] FCA 1651

HOSTESS MARINE PTY LIMITED (ACN 085 685 589)  v  THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

VID 85 of 2004

RYAN J

30 NOVEMBER 2006

MELBOURNE

THE COURT ORDERS THAT:

1.         The applicant’s appeal against the objection decision be allowed.

2.         The respondent’s decision and assessment made 19 February 2001 be set aside. 

3.         The respondent pay the applicant’s costs of the application, including any reserved costs, such costs to be taxed in default of agreement.

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

REASONS FOR JUDGMENT

1                     The applicant (“Hostess Marine”) was incorporated on 23 December 1998 with Mr Robert Ungar (“Ungar”) and his wife, Rosemary, as the only shareholders.  Their son, Stephen, was the sole director until 7 September 2000 when Ungar was appointed a co-director.  Ungar had successively been engaged in various businesses connected with the book trade to which his father had introduced him upon Ungar’s leaving school.  Later, he ventured into publishing “character-based” products and, in 1988, sold that business to Reed International for about $10 million.  He remained with that business as a consultant but, between 1990 and 1995, invested in several other ventures including the manufacture of a tennis ball machine, the production of safety rails for roofing and production of a script for an Australian movie film.  His business interests extended to the ownership of a group of warehouses in Nunawading.  In about 1995, he commenced a business under the name “Hinkler Books” specialising in paperback novels and adult reference titles which later moved into selling children’s books.  When Reed International decided to move out of consumer publishing, Hinkler Books took possession of the Dingley warehouse which had been occupied by Reed International and which remained in the ownership of Ungar’s interests.  By 1998, Hinkler Books had been operating successfully and, at the end of that year, Ungar incorporated Hostess Marine.

2                     From the early 1970s, Ungar and his wife had been motor yachting enthusiasts as members of the Beaumaris Motor Yacht Squadron and acquired successively larger vessels until, by about 1988, they became the owners of a 35 foot “Ranger”.  To accommodate that vessel, they joined the Sandringham Yacht Club and later changed up to a 39 foot “Ranger” which was better adapted to ocean cruising.  That vessel was also moored at the Sandringham Yacht Club.  With the development of new marinas in Victoria and Tasmania, Ungar perceived an upturn of interest in those States in larger cruising motor yachts.  In the meantime, in 1997, he had been introduced by a friend, Mr Lesser, to Kha Shing Boatbuilding Company (“Kha Shing”) in Taiwan.  Mr Lesser was, at that time, having a 65 foot vessel built for him by Kha Shing.  On his first visit to Kha Shing in Taiwan, Ungar was accompanied by Mr Lesser and Mr Bates, the principal of Monte Fino Australia Pty Ltd (“MFA”) which was the Australian distributor for Kha Shing’s “Monte Fino” range. 

3                     About ten months later, Metro Marine, a Sydney-based shipbroker employed by MFA, sent to Hostess Marine a facsimile message enclosing a copy of Sales Tax Exemption Item 59(1) and a copy of the Australian Taxation Office (“ATO”) publication “Sales Tax News and Views (Vol 3-Org/Oct 1993).”  Ungar was attracted to the idea of acquiring a “Monte Fino” motor yacht as part of a demonstration sales business.  That interest was prompted by five reasons which he articulated as follows in par 16 of an affidavit sworn 24 December 2004;

‘(a)      My first impressions were that the Monte Fino product was good value (good quality for a good price).

(b)       Kha Shing would customise its basic design to my requirements for a price that was still reasonable.  This was a critical element.

(c)        I believed that motor yachting in the Southern States was set for expansion and that with my contacts in the industry, the business could take off.

(d)       I was reasonably confident that a good re-sale price would underwrite a large part of the financial risk, if the yacht was specified properly, purchased at a good price and well maintained (which proved correct).

(e)        Tax savings were available if the motor yacht was used in the correct manner as part of a business.  This reduced the financial risk associated with the investment.’

4                     Eventually, Ungar returned to Taiwan in August 1998 to investigate the purchase of a vessel and the possibility of acting as an Australian agent or distributor for Kha Shing.  The results of that visit have been described as follows by Ungar in pars 17-19 of his affidavit;

‘17.      … … It transpired however that Kha Shing were prepared to sell a motor yacht to me, though I later became aware that Vic Bates believed that the sale should have been through MFA (under its distribution agreement with Kha Shing) and not direct.  It also transpired that Kha Shing were prepared to allow me to represent Kha Shing in Victoria and Tasmania, though I later became aware that Vic Bates believed that this also was in breach of the distribution agreement.

18.       Things eventually resolved by Kha Shing appointing the Applicant company a joint distributor with MFA in the States of Victoria and Tasmania.  As well, the Applicant company and MFA negotiated to split the duties and the profits on motor yachts sold in a way that left MFA physically and contractually supplying any yacht sold and the Applicant company earning a commission representing approximately one third of the profit on the sale for introducing sales to MFA.  I will describe these arrangements further below.

19.       These arrangements had mutual benefits:

(a)       The 55 foot Monte Fino would be the first in Australia which would give us a marketing angle and impetus.  It would assist MFA to have an example of this vessel in the country from which to market.

(b)       MFA did not have a current model Monte Fino yacht to exhibit at Boat Shows and demonstrate.

(c)        If we succeeded in getting sales in Victoria and Tasmania, MFA would make some profit too.

(d)       Also MFA’s marketing activity should assist us just as ours would assist MFA’s business.

(e)        It did not seem wise to replicate the infrastructure to physically import and re-supply motor yachts that already existed in MFA.  It appeared more efficient to place sales we generated in Victoria and Tasmania through MFA, in return for a commission.’

5                     Ungar then decided to commission the construction by Kha Shing of a 55 foot motor yacht based on the “Monte Fino” design with modifications conceived by Ungar to adapt the vessel to Australian conditions.  He intended that some of the modifications would be carried out in Australia after the vessel had been built in Taiwan. 

6                     By early December 1998, Ungar had agreed with Kha Shing and MFA that Hostess Marine would become a joint distributor with MFA of “Monte Fino” vessels in Victoria and Tasmania and would purchase a boat from Kha Shing built to Ungar’s specifications.  A written contract between Hostess Marine and Kha Shing was executed on 29 December 1998.  It was critical to Hostess Marine’s and MFA’s marketing strategy that the boat be completed in time for exhibition at the Sydney Boat Show to be held from 23 to 27 July 1999.  To that end, Ungar and Bates, the principal of MFA, pressed Kha Shing for timely completion of the vessel and Bates sent Kha Shing a facsimile message dated 31 May 1999 which recited;

‘I’M MOST CONCERNED & DISAPPOINTED TO RECEIVE YOUR FAX AFTER PROMISES AS LATE AS LAST WEEK FROM JASON THAT DELIVERY WOULD BE ON SCHEDULE.

PLEASE CONSIDER THE FOLLOWING EFFECTS UPON KHA SHING, MR UNGAR & MONTE FINO AUSTRALIA IF DELIVERY CANNOT BE MADE AS PROMISED & CONTRACTED.

1.            OUR WHOLE PROMOTION FOR NEXT YEAR WAS BASED UPON MUCH MORE SOUGHT AFTER SIZE OF 55’, ALREADY TV & PRESS COVERAGE BOOKED FOR RELEASE OF NEW PRODUCT LAUNCH AT SYDNEY BOAT SHOW.

2.            ALL BUYERS WITH ANY INTEREST IN A NEW BOAT NEXT YEAR WILL ATTEND SYDNEY BOAT SHOW.

3.            ALL OUR HOPES FOR FURTHER SALES NEXT YEAR WILL DEPEND UPON SYDNEY BOAT SHOW.

4.            MR UNGAR WILL HAVE SERIOUS TAX PROBLEMS IF HE IS NOT SEEN TO BE ACTIVELY PROMOTING THE SYDNEY BOAT SHOW.

5.            SPACE IS ALREADY BOOKED AND PAYED FOR IN SUM OF $3,640 WHICH IS NOW NON-REFUNDABLE, WHO BEARS THIS LOSS?

SURELY WITH THE ADVERSE EFFECT OF NOT BEING ABLE TO DISPLAY AT THE SYDNEY  & YOUR LOSS OF POTENTIAL SALES SHOULD MAKE IT ESSENTIAL ENOUGH TO EITHER PUT ENOUGH WORKMEN ON THE BOAT TO COMPLETE, OR TO PAY EXTRA FOR OVERTIME FOR ADDITIONAL HOURS TO BE WORKED DAILY & OVER WEEKENDS TO ENABLE COMPLETION IN TIME.

PLEASE RECONSIDER & ADVISE.’

7                     To assist with Hostess Marine’s proposed marketing activities, Ungar engaged Currie Communications to prepare a marketing plan and implement a public relations campaign, the launch of which was to coincide with the Sydney Boat Show.  The marketing plan, as it had evolved by March 1999, incorporated the following objectives, strategies and tactics;

‘OBJECTIVES

Following are the key objectives of the marketing plan for Monte Fino:

1.         To achieve sales of one (1) motor cruiser, or A$1 million in sales revenue per year.

2.         To personally show the Monte Fino ^-motor cruiser to between 30 and 50 eminent potential customers per year.

STRATEGIES

In order to achieve the above objectives, the following strategies will be implemented:

1.         The Monte Fino motor cruiser will be exposed to the widest possible base of potential customers via boat shows and personal showings of the vessel.

2.       A high profile personality/opinion leader will be sought who would be willing to endorse the Monte Fino cruiser and lend his or her name and profile to the marketing campaign. This will provide a credible, third party endorsement for the product.

3.       A direct mail campaign will be undertaken in the first instance, to market the Monte Fino brand direct to the key list of target customers.

4.       An advertising campaign will be devised to generate awareness of the fact that the Monte Fino brand is now available in the southern states of Australia, and spread word of mouth endorsement for the product and its benefits.

5.       A public relations campaign involving magazine publicity will be devised to support the advertising, and provide credibility and possible third party endorsement of the Monte Fino motor cruiser and its benefits.

TACTICS

The following activities will be undertaken to implement the above strategies:

1.         A list of key target customers (names and contact details) will be compiled in the first instance, which will form the basis of the direct mail campaign and future personal contact and follow-up.

2.       A high quality direct mail package will then be designed and compiled which will inform the target customer group of the fact that the Monte Fino brand of cruisers is now available in Victoria/Tasmania, and invite them to see the cruiser at first hand. This direct mail piece will be of an extremely high level of perceived value, in keeping with the image of the brand. It may include original photographs (showing the exterior and interior of the cruiser), people enjoying a cruise etc. which would be bound into a photo album, or a glossy brochure, together with a personalised letter.

3.         Personal follow-up would then be undertaken of the target list, to invite customers for a visit to the Hostess Marine cruiser for a personal showing.

4.         A log of all personal showings and cruises will be maintained, and will be used as a record for agency purposes, and for marketing follow-up.

5.         An advertising schedule will be devised for regular advertisements in Trader Boat magazine, which is the most widely read boating magazine and the primary source of information on new boats for potential customers.

6.         Hostess Marine will endeavour to identify and secure the endorsement of a well-known personality/opinion leader who will lend his or her support for the product in advertising and publicity. He or she may also take part in cocktail party cruises on-board the Hostess Marine cruiser for small groups of invited guests identified from the target customer list.

7.         Publicity will be sought wherever possible in boating magazines and the wider general press (eg. Herald Sun, BRW, Financial Review, The Australian etc.) to support the marketing campaign. In particular, whenever advertising is placed, Hostess Marine will endeavour to obtain supporting editorial, particularly in the early stages of the brand’s launch in the southern states.

8.         Hostess Marine will show the Monte Fino cruiser at Boat Shows including:

«         Sanctuary Cove, May 2000 and May 2001

«         Sydney, July 1999 and July 2000

«         Melbourne, June 2000 and June 2001

9.                  Hostess Marine will undertake advertising in the Yellow Pages.’

8                     It was contemplated that the business of Hostess Marine would become cash flow positive in the second year of its operation on the assumption that two vessels would be sold in that year and would, in the third year, generate a profit, after depreciation, assuming sales of four vessels in that year.

9                     The distributorship agreement between Kha Shing and Hostess Marine was executed on or about 29 December 1998.  It contained, amongst others, the following provisions;

‘KHA SHING ENTERPRISES CO. LTD. (HEREINAFTER CALLED KHA SHING) HEREBY APPOINTS HOSTESS MARINE PTY LTD. 3820 POINT NEPEAN RD. PORTSEA VICTORIA 3944. AS JOINT ORGANIZATION AUTHORIZED AS DISTRIBUTOR FOR THE MARKETING OF KHA SHING MONTE FINO RANGE IN THE STATES OF VICTORIA AND TASMANIA TOGETHER WITH MONTE FINO AUSTRALIA PTY. LTD.

1)            THIS APPOINTMENT COVERS THE STATES OF VICTORIA AND TASMANIA OF AUSTRALIA

2)            IMPORTER AGREES TO USE IT’S BEST EFFORT IN MARKETING THE KHA SHING MOTOR YACHT RANGE, IN ORDER TO MAINTAIN THIS AGREEMENT.   IMPORTER MUST PURCHASE AT LEAST TWO UNITS OF REPRESENTED PRODUCTS IN ADDITION TO 55-806 WITHIN THE VALID PERIOD OF THIS CONTRACT.

3)            THE AGREEMENT FOR MONTE FINO LINES COULD BE TERMINATED FROM 30/6/2002 AT THE SOLE DISCRETION OF KHA SHING SHOULD IMPORTER FAIL TO ACHIEVE THE MINIMUM PURCHASE QUANTITIES AS SPECIFIED IN PARA 2 BY 30/6/2002.

4)            IN CASE THAT DISTRIBUTOR COULD NOT ACHIEVE THE MINIMUM PURCHASE QUANTITIES, AND KHA SHING USES THE RIGHT TO TERMINATE THE AGREEMENT OR TO REDUCE THE TERRITORIES, BOTH PARTIES AGREE THAT NO PENALTY COULD BE CLAIMED FROM BOTH PARTIES.

5)            KHA SHING AGREES NOT TO SUPPLY OR SELL ANY OF THE ABOVE SAID YACHT TO ANY OTHER PARTY IN THE DEFINED TERRITORIES, SO LONG AS DISTRIBUTORS IS IN CONFORMITY WITH TERMS OF THIS AGREEMENT.  FOR THE SAME CONSIDERATION, DISTRIBUTOR AGREES NOT REPRESENT OR PROMOTE THE COMPETITIVE BOATS FOR ANY OTHER TAIWAN SHIPYARD IN THE AUTHORIZED TERRITORIES.

6)            THE PAYMENT TERMS AND QUOTATION BASIS ARE ACCORDING THE REMARKS OF PRICE LISTS AS SUPPLIED.

………

10)         KHA SHING AGREES TO EXTEND THE AGENCY AGREEMENT FOR 1 YEAR AT THEIR SOLE DISCRETION SHOULD IMPORTER FULFIL THIS AGREEMENT HOWEVER, THE MINIMUM PURCHASE QUANTITIES FOR PERIOD UP TO 30/6/2002 SHOULD BE DISCUSSED FURTHER TO MEET THE MARKETING SITUATION AND KHA SHING’S SATISFACTION.

11)         THIS AGREE SHOULD BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE REPUBLIC OF CHINA, SUPERIOR COURT OF KAOHSIUNG DISTRICT, TAIWAN.

12)         THIS AGREEMENT BECOMES VALID FROM THE DATE KHA SHING RECEIVE THE DEPOSIT OF IMPORTERS FIRST ORDER – HULL NUMBER ASSIGNED AS 55-806.’

10                  The arrangement between Hostess Marine and MFA was also reduced to writing in the form of a facsimile message from Hostess Marine to Mr Bates of MFA dated 28 June 1999, which recited;

‘Dear Vic,

Further to our recent conversation, I am pleased to advise that Kha-Shing Shipping has appointed Hostess Marine as Montefino’s selling agent for Victoria and Tasmania, in association with Metro Marine and Montefino Australia. This agreement is for an initial period of two years (copy attached).

Under this agreement, it is my understanding that with any enquiries emanating from my contacts in Victoria and Tasmania, which result in a sale for any Montefino model, a $60,000 flat fee will be paid on final settlement of the deal.

Montefino Australia will be responsible for the ordering, production, shipping, delivery, warranties, guarantees and all administration details involved with the sale.

Hostess Marine will make the current Montefino 55-806 model available for the Sydney and Sanctuary Cove Boat Shows and will assist in selling during these shows. Montefino Australia will pay for the entry fees to these Boat Shows and be responsible for reserving the space.

The period of this commitment is for the term of the agreement, i.e. two years. The boat will be detailed and ready for presentation at Hostess Marine’s expense.

Furthermore, for the forthcoming Sydney Boat Show (22^nd-27^th July, 1999) we will organise a Montefino PR campaign at a cost of approximately $5,000 to $6,000. Hostess Marine will pay one-third as their contribution, and Montefino Australia and Metro Marine will each pay one third. In addition to this campaign, we will organize the printing of colour sales brochures for the 55 and 65 Montefino models. These costs to be borne by Montefino Australia.

I can confirm that the Montefino 55 will be kept at the Sandringham Yacht Club, Victoria, and available for demonstrations and for viewing. This will be supported by ads in trade magazines at Hostess Marine’s cost.

I am pleased also to enclose a copy of Hostess Marine’s marketing and business plans for your perusal.

Could you please confirm that the above meets with your approval.’

11                  On 23 June 1999, Ungar conferred with Mr Jones and Ms Stephens of Currie Communications.  The report of that conference recorded, amongst other things, that;

‘The purpose of the meeting was to discuss the public relations launch of the new 55 ft Monte Fino at the Sydney International Boatshow and brochures.

1.         Brochure for 55 ft motor cruiser

The 55 ft Monte Fino will arrive in Australia on 10 July, and there will be a small window of opportunity to take photographs of the cruiser. In view of the difficulty in producing a quality four or six page colour brochure in time for the Boatshow, it was agreed that a smaller brochure should be produced to cover the requirements for media and others at the Boatshow. This would be followed by full brochure production after the event when there will be more time for a proper photographic shoot. To this end it was agreed as follows:

A one page, single sided flyer in full colour would be produced including:

-        masthead like a newsletter or “stop press” bulletin from Metro Marine eg.Metro News

An information bulletin from Metro Marine

-        one or two copy paragraphs providing the key selling messages

-        pointers on key features

-        colour photograph

-        specifications and drawings on reverse side

-        baseline with address and contact details for both Metro Marine and Hostess Marine as Vic/Tas selling agent

………

2.         Launch at Boatshow

The following was discussed and agreed:

(1)       Media giveaway/information kits

Kits will be compiled including the following:

-        introductory welcome letter from Greg Muldoon

-        media release on the new motor cruiser

-        photograph of the vessel

-        cap with Monte Fino logo

-        jacket with Monte Fino logo

-        written information in kit folder

-        all boxed in plastic presentation box’

12                  At about the same time, Ungar arranged a Yellow Pages listing for Hostess Marine under the category “Boat and Yacht Sales” and had business cards produced designating himself as representative of Hostess Marine.  He also arranged for the publication in the December issue of “Club Marine” of an illustrated article featuring the “Monte Fino 55”.  The article was profusely illustrated by colour photographs and recounted how Ungar came to commission the construction of the vessel in Taiwan by Kha Shing.  At the end of the article it was indicated;

‘For more information:  contact Robert Ungar at Hostess Marine.  Tel:  0418 317 129 or the Australian Distributor, Greg Muldoon at Metro Marine in Sydney.  Tel:  (02) 9968 3366.’

13                  In about July 1999, Ungar advised his insurance broker, Mark Crockford, of Club Marine that he, Ungar, had sold his previous boat, a 39 foot “Ranger” and was acquiring the “Hostess”.  He requested that the insurance cover be transferred from the previous boat to the “Hostess” and increased to $1,200,000.  That resulted in an increase of $2,216 in the premium.  As the previous yacht had been used only for private purposes, the Schedule to the insurance policy recited that the vessel insured, including after July 1999 the “Hostess”, was for “private use only”.  When Ungar became aware (after the question had been raised by officers of the ATO) of the specification in the “General Conditions” of the policy, he arranged for Crockford to endorse on the policy a “Special Note” that “vessel is used for demonstration and viewing purpose.”  That endorsement was made on 23 November 2000. 

14                  Hostess Marine’s “Monte Fino 55” had been shipped to Australia on about 24 June 1999 at a total landed cost of AU$1,086,480.  After arrival in this country on 7 July 1999, she was named “Hostess” and, after sea trials with Ungar, his wife and Bates on board, some minor repairs and adjustments were made to ready her for the Sydney Boat Show.  To aid in the promotion, Currie Communications was retained to issue invitations to some 32 journalists from the general print media and specialised boating magazines.  A media release was prepared and catering arrangements were made for the launch of the “Monte Fino 55.”  Currie Communications also worked in liaison with the Boat Show’s marketing manager to facilitate the launch.  Media kits, include plastic presentation boxes, were produced for use in the launch.  As well, Hostess Marine commissioned the production of polo shirts, windcheaters, peaked caps, stubby holders and business cards bearing the company’s logo.  The cost of producing those items was $4,120.00.  Hostess Marine’s total advertising budget for the year ended 30 June 2000, presumably including the $4,120 spent on promotional items, was $31,044.67. 

15                  The “Hostess” was extensively displayed and promoted during the five days of the Sydney Boat Show.  That involved cleaning, controlling admissions to the boat and explaining her specifications and workings to prospective purchasers.  The work was undertaken by Ungar and Bates and their respective wives with assistance from a Peter Guy and occasional help from Greg Muldoon of Metro Marine.  None of those persons stayed on board overnight during the Boat Show.  The media event to launch Hostess Marine’s business and the “Monte Fino” range of vessels took place on the morning of Friday 23 July 1999 which was the second day of the Boat Show.  That event generated reviews or articles in four different specialist boating journals.  Among the two hundred or so people who inspected the “Hostess”, about 17 were recorded in her log book as having shown “great interest”, presumably as prospective purchasers of vessels in the “Monte Fino” range. 

16                  After the 1999 Sydney Boat Show had ended, the vessel was sailed to Newport in New South Wales close to Sydney for a final electrical fit-out.  Those on board were Ungar, his wife, Bates, Greg Muldoon and a Mr Puglisi, a prospective purchaser from South Australia and his skipper.  Mr Puglisi ultimately ordered a “Monte Fino 55” through MFA.  Although he resided outside Hostess Marine’s distributorship territory of Victoria and Tasmania, MFA paid Hostess Marine half the agreed commission of $60,000 in recognition of the contribution which Hostess Marine had made to procuring the sale.  After deducting $6,500 for Hostess Marine’s share of the cost of advertising and promotional material, MFA paid Hostess Marine $23,500 which Hostess Marine returned as income in its return for the tax year ended 30 June 2000. 

17                  While waiting for a berth to become available at the Newport marine area, Ungar spent about four days with his wife cruising the Pittwater and Hawkesbury River area in the “Hostess”.  The work undertaken at Newport was mainly electrical.  It occupied about six weeks to 14 September 1999 and cost in excess of $100,000. 

18                  On 15 September 1999, Ungar, his wife and two friends began to sail the “Hostess” from Sydney to Melbourne.  After delays due to bad weather, she was berthed at the Sandringham marina on 23 September 1999.  Although a member and Past Commodore of the Sandringham Yacht Club, Ungar lived at Portsea more than 100 kilometres away and was not always able to travel to attend the vessel.  He therefore arranged for a local Sandringham boat-broker, Jackson Marine, to display a stock of brochures related to the “Monte Fino” range and to receive enquiries from prospective purchasers of the “Monte Fino 55” or other vessels in the range.  Ungar accepted that Jackson Marine should share in the commission on any sale which might be generated by this activity but no amount or proportion had been specified.

19                  On 2 October 1999, the “Hostess” was used as the flagship for the annual open day of the Sandringham Yacht Club.  On the morning of that function, she was open to the public.  On 10 October 1999, the vessel attended a similar function at the Beaumaris Yacht Club and was again open for inspection before the “sail past” where she remained at anchor with a number of dignitaries on board.  She was used in a similar way, and as the flagship, at the open day and “sail past” of the Royal Geelong Yacht Club on 23 October 1999. 

20                  In December 1999 and February 2000, the vessel was demonstrated and open for inspection at Sorrento to members of the Portsea Golf Club, at the Royal Victoria Motor Yacht Club in Williamstown, at the Blairgowrie Yacht Club and on the same day at the Sorrento Pier to members of the Sorrento Golf Club.  She was then sailed to Pier 35, a new floating marina on the lower reaches of the Yarra River at the head of Port Phillip Bay, and shown to the owner, Des Jackson, and his staff.  For all of the functions and inspections detailed at [18]-[20] of these reasons, the “Hostess” was skippered by Ungar and crewed by John Blackett-Smith.  According to Ungar, they generated a high level of interest from prospective purchasers of vessels in the “Monte Fino” range.

21                  The brochure on the “Monte Fino 55” prepared by Hostess Marine was sent to numerous potential purchasers.  One person, Gunther Gshwenter, to whom the “Hostess” was demonstrated, ultimately ordered a “Monte Fino 96” but Hostess Marine did not derive from MFA any commission on that sale, apparently because it had not introduced Mr Gshwenter and had gone out of business before the sale was completed.

22                  The only use in 1999-2000 of the “Hostess” for purposes unconnected with its role as a demonstration vessel was at a New Year’s Eve function at the Sandringham Yacht Club when Ungar and his wife slept on board rather than return home to Portsea. 

23                  In order to participate in a boat show at Sanctuary Cove in late May 2000, and the 2000 Sydney Boat Show in July 2000, Hostess Marine engaged a professional skipper, Mike Percy, and a crewman to sail the “Hostess” north from Sandringham.  That occurred between 9 and 22 May.  The vessel was berthed from 23 May at the Sanctuary Cove Marina where she remained until the boat show there ended on 28 May 2000.  The presentation and display of the “Hostess” at Sanctuary Cove was similar to that at the Sydney Boat Show in 1999.  The work of cleaning and conducting inspections was carried out by Ungar and his wife, Bates, and the employed skipper and crewman.  Only the skipper and crewman lived on board.  Demonstration trips were left to the end of the Boat Show.  Approximately 120 people were shown over the “Hostess” during the Sanctuary Cove Boat Show.  In the course of the show, Ungar renewed an acquaintance with Mr Pec, a distribution agent for the “Princess” range of boats with whom he later mounted the Hobart Boat Show described at [26] below.  As a result of the Sanctuary Cove show, publicity was achieved in an issue of “Club Marine” magazine which reported that a “Monte Fino 60 [sic] was cruised up from Melbourne.”

24                  In the seven weeks between the end of the Sanctuary Cove Boat Show and the commencement of the 2000 Sydney Boat Show, the “Hostess” was used for recreational purposes by Ungar and his wife from 4 June to 1 July 2000.  She had been taken to Airlie Beach for that purpose by the employed skipper and crewman.  Ungar and his wife used the vessel to cruise around Hamilton Island and the Whitsunday Islands and she was then taken to Sydney by the employed skipper and crewman.  That voyage occupied the period between 2 and 14 July 2000 and, over the next six days, the “Hostess” underwent mechanical checks and cleaning in preparation for the Sydney Boat Show which took place between 20 and 25 July.  As for the previous Sydney Boat Show, the vessel was manned by Ungar and his wife, Bates and his wife and Peter Guy.  Assistance was also provided by the employed skipper and crewman who were the only persons connected with the vessel who lived on board.  About 200 people inspected the “Hostess” during the 2000 Sydney Boat Show and those regarded as the more likely prospective purchasers were followed up by telephone and mail.  At about the same time, a full page advertisement featuring colour photographs of the “Hostess” had been inserted in the “Club Marine” magazine.  It showed MFA as “Australian Distributor” and Hostess Marine as “Vic and Tas Agent”.

25                  After the Sydney Boat Show, the vessel was taken to Newport on Pittwater where she was slipped for propeller and engine alignment tests and general maintenance and repairs.  That work was undertaken between 26 July and 22 August 2000 and the vessel was then sailed back to Melbourne with Ungar as skipper and the employed skipper, Ungar’s daughter and a friend of hers as crew.  The “Hostess” tied up at Sandringham on 29 August 2000 where she remained until 30 January 2001.  During that time, she participated in various yacht club open days and was available for inspection, as required, through Jackson Marine.

26                  The “Hostess” was then taken to Hobart with a crew comprising Ungar as skipper, his wife and a Mr L Marshall.  The voyage took about six days which included a stop at Triabunna for repairs to the steering.  The Boat Show at Hobart had been arranged through the Motor Yacht Club of Tasmania.  The initial approach to that Club had been made by Hostess Marine which indicated that the event would be staged to promote sales of both the “Monte Fino” range and the “Princess” range of boats for which Mr Pec was the Australian agent or distributor.  The two ranges were regarded as complementary to each other as they appealed to different potential users and were sold to different markets.  A colour brochure was produced for use in connection with the Hobart Boat Show which featured both the “Hostess” and the “Princess” which was described as a “sleek UK manufactured 56 foot” vessel.  After a preview for members of the Motor Yacht Club of Tasmania on Friday 9 February 2001 to which journalists were invited but did not attend, the “Hostess” was cleaned and opened to members of the public at about 9.00 am on 10 February.  Over 200 people inspected her over the weekend of 10 and 11 February.  Sea trials were also conducted at the end of the show.  The more likely prospective purchasers were followed up.  One such follow-up letter to a Ricky Pfeiffer was sent by MFA and, after providing some information about the “Monte Fino” range, invited Mr Pfeiffer to advise either Ungar or Bates if he required further information. 

27                  After the Hobart Boat Show had finished, the vessel was taken to Launceston where she underwent extensive modifications to the bow to conform with the shape of the latest “Monte Fino” boats.  It was necessary to engage the professional skipper, Mr Percy, to assist on the voyage to Hobart from Launceston because Ungar’s wife had injured her hand and been compelled to return to Melbourne by air.  The modifications in the Launceston shipyard occupied the period from 24 February 2001 to 7 July 2001 and cost $77,642.  Ungar considered them necessary to keep the appearance of the vessel consistent with that of new models being produced by Kha Shing and to maintain the resale value of the “Hostess”.  The time taken by the modifications prevented the “Hostess” from being exhibited at the 2001 Sanctuary Cove Boat Show but she was taken by Mr Percy and an employed crewman from Launceston to Sydney for the 2001 Sydney Boat Show which commenced on 26 July 2001.  The employed skipper and crew lived on board the vessel for the duration of the show.  Inspections were conducted much as at previous Sydney Boat Shows although Ungar was present on only two or three days.  About 200 people inspected the vessel and the names of those considered more likely prospective purchasers were recorded.  A full page colour advertisement appeared in the issue of “Club Marine” magazine for about the same time.  It featured photographs of the “Monte Fino 60”, “Monte Fino 65” and “Monte Fino 96” and nominated MFA as “Australian distributor” and Hostess Marine as “Victoria & Tasmania Agent.”

28                  Towards the end of 2001, Ungar decided to close Hostess Marine’s business and the steps necessary to achieve that were completed by early February 2002.  That decision was prompted partly by an unsolicited offer in January 2002 to purchase the “Hostess” for $1,675,000 which was accepted and partly by the realisation that the vessel had aged and the volume of sales had not been as high as Ungar had originally expected.  In the period between January 2002 and 15 April 2002 when the sale was completed, Ungar and his wife used the “Hostess” for three weeks of recreational cruising around Tasmania. 

The Commissioner’s decision

29                  This was an appeal against an objection decision made by the respondent (“the Commissioner”) under s 101 of the Sales Tax Assessment Act 1992 (Cth) (“the STAA”) dated 19 February 2001.  The Commissioner assessed Hostess Marine to sales tax of $300,148 and imposed a penalty pursuant to s 99 of the STAA of $90,125 which was equal to 30% of the penalty which, but for the remission, would have been imposed by s 97(2) of the STAA in an amount double the sales tax which should have been paid.  Hostess Marine was notified on 3 December 2003 that its objection to the assessment of sales tax payable on the importation and application to own use of a yacht had been disallowed.

30                  Hostess Marine asserted that the importation was exempt from sales tax on the basis that the main use of the “Hostess” was to demonstrate her for business purposes to achieve sales to the public thereby deriving a commission or share of the profit on each sale and that it therefore fell within exemption Item 59(1) of the Sales Tax (Exemptions & Classifications) Act 1992 (Cth) (“the ST(E&C) Act”) the effect of which is set out at [31] below.

Legislation

31                  Both parties agree that the relevant law was correctly stated as follows by the Commissioner in his reasons for decision;

‘Section 16 of the STAA provides that Table 1 of the STAA sets out the assessable dealings that can be subject to sales tax.  Where no exemption applies to an assessable dealing then:

(a)       the dealing is a taxable dealing;

………

(c)               the tax becomes payable at the time of the dealing, as specified in column 4;

(d)       the tax is due for payment at the time that applies under Division 2 of Part 5.

Table 1 in Schedule 1 of the STAA sets out assessable dealings for goods that have been manufactured in Australia and goods that have been imported.

Assessable dealing AD13c applies to imported goods applied to own use by a person who obtained the goods under quote.  The time of the dealing is the time the goods are applied to own use and the person applying the goods to own use is liable for the tax.

The ST(E&C)A provides for exemptions from sales tax and for the classification of goods for the purpose of applying different rates of sales tax.

Section 25 of the STAA provides that a non-lease AOU (“application to own use”) is not taxable if the applier, at the time of the AOU, intends to deal with the goods so as to satisfy an exemption Item that is in force at the time of the AOU.

If the requirements of an exemption Item are satisfied at the time of the AOU, then the dealing is not taxable because of the operation of section 25 of the STAA and the satisfaction of the use requirement in the Table in section 5 of the ST(E&C)A.

Item 59(1) in Schedule 1 to the ST(E&C)A provides exemption for a ship for use by a person mainly for purposes other than providing any of the following for any person (whether or not for reward):

(a)       pleasure, sport or recreation;

(b)               private transport;

(c)               accommodation.

By the operation of s 5 of the ST(E&C)A, the exemption of the vessel in question is to be determined at the time of the AOU and the use requirement in Item 59 in Schedule 1 is to be determined on the basis of intended use by the applier during the whole of the statutory period.  As far as is relevant, s 5 of the STAA defines the “statutory period” as the period that starts at the time when the goods are first applied to a person’s own use in Australia and ends at the end of two years after the time of that first application to own use.’

The Applicant’s submissions

32                  It was submitted on behalf of Hostess Marine that the “Hostess” was exempt from sales tax because Hostess Marine’s intention as to the use of the vessel satisfied the requirement for exemption in Item 59(1) of the ST(E&C)A as summarised at [31] of these reasons.  Counsel for Hostess Marine contended that the Explanatory Memorandum in relation to Item 59 indicates that the only ships that are not exempt are those used mainly for the purposes of pleasure, sport or recreation, private transport or accommodation.  It was further said that the requirements of Item 59(1) had been confirmed in the Commissioner’s publication “Sales Tax News and Views” (Volume 3 – Aug/Oct 1993) which recited;

‘To qualify for exemption under Item 59, goods must be intended for use for the whole statutory period.  If a boat is to be used for genuine demonstration purposes for two years it will be accepted as qualifying for exemption under Item 59.’

(i)        Relevant use is “intended use”

33                  Counsel for Hostess Marine went on to submit that the relevant use for the purposes of s 25 of the STAA is the intended use at the time of the application to own use (that is, the time of delivery).  Accordingly, so the argument went, the availability of the exemption is to be tested by reference to the intention of Hostess Marine at the time of the application to own use rather than by reference to the actual use of the vessel throughout the statutory period.  Support for this argument was said to be derived from the Explanatory Memorandum which accompanied the Bill which became the ST&CA (“the Explanatory Memorandum”) and Taxation Ruling No STN53 Sales Tax “Use” in Sales Tax Legislation (“the Use Ruling”).

34                  The Explanatory Memorandum recited in its “Glossary of Terms”;

‘Statutory Period: If an exemption Item has a use requirement, goods will only be exempt if the exemption user intends, at the time of the dealing, to use the goods in accordance with the use requirement for the whole of the statutory period’.

35                  According to the Use Ruling at par 3.2;

‘Liability for sales tax ordinarily arises when the last wholesale sale occurs, a time which may be well before the use spoken of by an exempting item.  Therefore exemption must be determined according to what the purchaser intends to do with the goods in the future.  For example, when a farmer claims exemption on ordering a new tractor (subitem 1(48)), he is assuring the vendor (and the Taxation Office) that he intends to use it in his farming activities in the future and exemption applies on the basis of that assurance’.

36                  Hostess Marine’s contention was said to be further supported by the fact that notification of assessment had predated the end of the statutory period by five months, an illustration that the intended use of an item is to be determined at the time when it is applied to own use and not by reviewing its use throughout the statutory period. 

37                  The corollary of that argument is that a change of intention after the application to own use will not disqualify the goods from exemption.  That corollary was said to find support in the Explanatory Memorandum which recites at 3.24;

‘A change of intention or change of use after the time of application to own use will not disqualify goods from exemption, if the intention at the time of the assessable dealing was to satisfy an exemption Item for the whole of the statutory period.  If, for instance, a manufacturer applied a machine to own use in a manufacture-related activity, intending at that time to use the machine in that way for 2 years but after 1 year was forced out of the market by declining demand and sells the machine, it would not become taxable.’  (emphasis added)

38                  Similarly, Counsel for Hostess Marine invoked par 3.3 of the Use Ruling which states that;

‘In most cases the intended use of the goods will reflect what actually happens to them.  However, it is possible that the intention may never be given effect without exemption being lost.  Thus, the equipment may be exempt as for use by a hospital (item 81) although it goes into storage immediately after purchase and eventually becomes obsolete before it is able to be used.  The fact that the equipment was not actually used by the hospital in this example would not affect the entitlement to exemption, as it was purchased with the bona fide intention that it would be so used.’ (emphasis added).

39                  In Hostess Marine’s contention, therefore, the only relevant enquiry is “what was the intention at the time of the application to own use?”

(ii)       “Mainly” does not mean that other uses are not permitted

40                  In a related way, it was submitted that the term “mainly” means that an applicant may intend to use the goods in a non-exempt fashion for part of the time.  This submission is supported by par 4.9 of the Explanatory Memorandum which recites that “In most cases, it will not be necessary that the goods be intended to be used solely in the specified way in order to qualify for exemption” and by that part of the Explanatory Memorandum directed to Item 59, in particular, which explains that exemption as applicable to “Ships but not including those used mainly for purposes of pleasure, sport or recreation, private transport or accommodation.”

41                  Counsel for Hostess Marine acknowledged that s 3(2) of the ST(E&C)A defines “mainly” to mean merely “to the extent of more than 50%”.  They submitted, however, that “mainly” is similar in meaning to “primarily” or “principally” as explained in the note to paragraph 4.11 of the Explanatory Memorandum.  It was also noted that Hill J had held that the word “mainly” in Item 59(1) in Schedule 1 means “principal use” or “preponderant use” rather than just a use greater than 50%.  In Davis v Federal Commissioner of Taxation 2000 ATC 4201 his Honour noted that s 3(1) in the ST(E&C)A defined the word, unless there was a contrary intention, to mean “to the extent of more than 50%”.  In considering whether such a contrary intention did appear, his Honour referred to the wording of the previous exemption item 119(1A) which spoke of a vessel being used “exclusively or principally”.  Those words had been replaced by the word “mainly”.  His Honour continued at 4212, [62];

 ‘ … 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% …’

The evidence

42                  It was submitted on behalf of Hostess Marine that the facts disclosed by the evidence in the present application support the conclusion that Hostess Marine’s intention at the time of taking possession of the vessel and quoting for its exemption was to use the “Hostess” in its business of deriving sales commissions by procuring sales in Victoria and Tasmania of the “Monte Fino” range of motor yachts.  It was intended that the “Hostess” be used principally to promote and to demonstrate that range of motor yachts in advertisements, brochures and articles, exhibitions such as boat shows and in sea-going demonstrations like those conducted at the end of each boat show and at the events organised in Victoria.

43                  The evidence, according to Hostess Marine, supported a finding that it intended to conduct the business over at least the two years of the statutory period to meet the requirements of the Item 59 ruling and the terms of Item 59(1) which had been brought to its attention and been confirmed in a legal opinion before it entered into any relevant assessable dealing.  That intention was said to be corroborated by, amongst other things, the fact that Hostess Marine had entered into both an agency agreement with Kha Shing and an agreement with MFA as its joint distributor for an agreed sales commission and had confirmed the latter agreement in writing before taking possession of the “Hostess” or applying for the exemption.

44                  Further support for this intention sought to be imputed to Hostess Marine was derived from its efforts to have the “Hostess” delivered in time for the 1999 Sydney Boat Show and from the expenditure incurred in the publicity launch of the Hostess Marine business and the new “Monte Fino” (55’) model at the Sydney Boat Show.  The Court was likewise invited to draw an inference in favour of the exemption from the sale of the “Hostess” once the applicant had decided that the business would not be viable within an acceptable time frame.  That was said to indicate an intention at the relevant time to meet the requirements of Item 59(1) even though the sale occurred after the statutory period had ended.

45                  It was next submitted that, so far as it is relevant, Hostess Marine used the vessel mainly for business purposes during the statutory period by demonstrating the “Hostess” to potential customers, the media and other relevant persons both at sea and at moorings.  Use incidental to that principal use included, for example, sailing the “Hostess” to and from demonstration venues and carrying out work on the “Hostess” by way of maintenance, repair and improvement (including sailing her to and from contractors’ moorings and other places where such work was undertaken).  Those works, it was submitted, allowed Hostess Marine to continue to use the “Hostess” as a demonstration vessel, improved the vessel’s attractiveness as a demonstration vessel and maintained or improved her resale value.

46                  Hostess Marine also claimed to have used the “Hostess” for demonstration purposes during the statutory period by having her photographed for use in press articles, brochures and other promotional material partly under its joint arrangements with MFA and partly on its own account.  As well, mooring the “Hostess” at her home base in Sandringham and authorising the Sandringham shipbroking agent, Jackson Marine, to act for Hostess Marine in relation to enquiries about the vessel were calculated to generate interest in “Monte Fino” yachts and promote sales of the range.  It was also submitted that, by mooring the “Hostess” at Sandringham and using her only in the sense of keeping her ready for the activities just mentioned (including sailing her to and from demonstration venues), Hostess Marine had acted consistently with its claimed intention that the main use of the vessel should be incidental to the business of being an agent for Kha Shin and a joint distributor with MFA of the “Monte Fino” range.

47                  In a related way, it was submitted on behalf of Hostess Marine that each species of its use of the “Hostess” as an adjunct to the conduct of its business was relevant to determining the “main” use which it intended for the vessel at the time of application for the purposes of Item 59(1).

48                  Counsel for Hostess Marine acknowledged that, during the two year statutory period, the “Hostess” had been used on three occasions for non-exempt purposes which were not incidental to its use as a business demonstration vessel.  In the first place there were four days of unscheduled recreational use by Ungar and his wife on the Pittwater and on the Hawkesbury River to fill in time when, unexpectedly, the vessel had to wait for a six week berth to become available in a marina at Newport, NSW, where she had been scheduled to undergo substantial fit-out and warranty works.  Secondly, Mr and Mrs Ungar slept aboard the “Hostess” for two nights, one after a New Year’s Eve function at the Sandringham Yacht Club at the end of 1999 and the other after returning late from a promotional trip.  The third instance was a month’s recreational cruising by Mr and Mrs Ungar during a seven week interval between the Sanctuary Cove and Sydney Boat Shows.

49                  That admitted use of the “Hostess” for private purposes, it was said, amounted to no more than five weeks out of the 104 weeks of the statutory period and could not be decisive of what had been intended to be the main use of the vessel.  In submissions in reply, the admitted private use of the “Hostess” was quantified as no more than 53 days out of the 731 days of the statutory period or a mere 7% of that period.  Accordingly, the admitted private use, even on the view of it most unfavourable to Hostess Marine, was incapable of displacing the claimed intention to use the “Hostess” for the main purpose of demonstrating the “Monte Fino” range and facilitating the sales of similar vessels. 

50                  It was further contended on behalf of Hostess Marine that it was carrying on a business of selling boats, notwithstanding the Commissioner’s criticism that the conduct of the business was not calculated to generate substantial profits. In this context, Counsel for Hostess Marine referred to Thomas v Federal Commissioner of Taxation (1972) 46 ALJR at 400-401 where the High Court held that a small, unsuccessful, horticultural venture was nonetheless a business.  In further support of the contention that the applicant was carrying on a business, it was submitted that every business must have a first transaction (Puzey v Federal Commissioner of Taxation 131 FCR 244 at 256 [46]) which in this case was achieved when commission income of $30,000 was derived as Hostess Marine’s share of the commission on the sale to Mr Puglisi. 

51                  In a related way it was said to have been reasonable for Ungar to have believed, before Hostess Marine commenced business, that it had real prospects of selling “Monte Fino” motor yachts to generate a profit.  He had been aware that the motor yacht market in south-eastern Australia was expanding and he had extensive experience and contacts in motor cruising in Victorian and Tasmanian waters.  Accordingly, he had developed a feasible marketing plan in conjunction with Currie Communications in the six months leading up to the application to own use of the “Hostess”.

52                  It was also submitted that, although the agreement between Hostess Marine and Kha Shing referred to the fact that MFA was also an authorised distributor of the “Monte Fino” range of motor yachts, it was a matter for Hostess Marine whether it would enter into any agreement with MFA regarding the payment of commission or any other matter related to the selling of “Monte Fino” motor yachts.  In those circumstances, it was not necessary for Kha Shing and Hostess Marine to agree as to the commission to be paid to Hostess Marine which did, in fact, secure $30,000 commission income from MFA.

Penalties

53                  The applicant submitted that, because no liability to sales tax was incurred, no penalties were attracted.

54                  Alternatively, it was submitted if there were a sales tax liability (which was denied), there was no false statement in respect of Hostess Marine’s intention to use the vessel in such a way as to attract the exemption in Item 59(1).  Accordingly, no penalty could be imposed under s 97 of the STAA.

55                  In the further alternative, Counsel for Hostess Marine submitted that, if there is a liability to sales tax and a false statement has been made for the purposes of the relevant provisions (both of which are denied), then the statement was not made recklessly or carelessly.  It was made on the basis of the Item 59 Ruling and after legal advice had been obtained to confirm that genuine demonstration use over the two year statutory period would qualify for exemption pursuant to the ruling in relation to Item 59.

56                  Pursuant to s 100 of the STAA 1992 (Cth) the Commissioner has a discretion to remit all or any of the penalty.  Ms Batrouney SC, who appeared with Ms Krigsman for Hostess Marine, submitted that the Commissioner, having made his decision when the statutory period had five months left to run had paid no regard to the events which happened in that residual period of five months and had therefore “exclude[d] from consideration some factor which should affect his discretion” (per Dixon J in Avon Downs Pty Ltd v Federal Commissioner of Taxation (1949) 78 CLR 353 at 360).  That omission, it was said, empowered the Court to review the Commissioner’s decision not further to remit the penalty.

57                  It was further submitted that Hostess Marine had made its statement in reliance upon the Commissioner’s publication, “Sales Tax News and Views” and, accordingly, the Court ought to remit the penalty decision to the Commissioner to exercise his discretion according to law and, in particular, in conformity with SST ruling No 19 “Sales tax; remission of penalty and general interest charge”.

Submissions on behalf of the Commissioner

58                  Mr Murphy SC, who appeared with Mr Sievers for the Commissioner, submitted that under Item 59(1) and s 14ZZO(b) of the Taxation Administration Act 1953 the applicant is required to prove that the intended use of the “Hostess” at the date of application to own use on or about 10 July 1999 was mainly (or principally (see Davis v Federal Commissioner of Taxation 2000 ATC 4201) for purposes other than the provision of pleasure, sport or recreation, private transport or accommodation.  Counsel referred, in this context to Davis at 4210 to support the proposition that the best, but not the only, evidence of intention is ordinarily the actual use of the vessel during the statutory period.

59                  In the Commissioner’s submission, the applicant had failed to establish that the main use of the “Hostess” was for purposes other than pleasure, sport or recreation, private transport or accommodation.  Having regard not only to the extent of the private use of the vessel by Ungar and his family during the statutory period, Counsel for the Commissioner contended that there were no real prospects that Hostess Marine would sell sufficient vessels to make a profit and pointed to the absence of any proper analysis of the likely profitability of the business before entering into the contract to purchase the “Hostess” and before the application to own use of the “Hostess”.  The Commissioner pointed also to the nature of the arrangements with Kha Shing and MFA and, in particular, the failure of Kha Shing and Hostess Marine to agree with MFA on the rate of commission which Hostess Marine was to receive.  Another matter relied on by the Commissioner was the entry by Hostess Marine and Kha Shing into a joint distribution agreement without the knowledge of MFA.  A related submission instanced the absence of a written agreement stipulating that Hostess Marine could act as the agent of Kha Shing when the applicant entered into the contract to purchase the vessel and the failure of the parties to make that agency agreement contingent on a joint distribution arrangement between Hostess Marine and MFA.

60                  The Commissioner also relied on the fact that the “Hostess” had initially been insured for private use only and that the notation on the relevant policy that she was used for demonstration and viewing was made only after representatives of the Commissioner had asked to see copies of the policy.

61                  Counsel for the Commissioner invoked the principles articulated in Jones v Dunkel (1959) 101 CLR 298 in support of an invitation to the Court more readily to reject the applicant’s claim that, at the time of application for own use, Hostess Marine intended to use the vessel mainly for purposes other than those outlined in pars (a)-(c) of Item 59(1) or to find that it has not discharged its burden of proof because it failed to call evidence from certain sources.  In particular, it was submitted, an adverse inference could be drawn from the failure to call evidence from Stephen Ungar, Hostess Marine’s sole director at the time, who, according to the Commissioner, was in the best position to give evidence as to its intended use of the vessel. 

62                  A similar adverse inference was open, in the Commissioner’s submission, from Hostess Marine’s failure to call evidence from its accountant who had obtained a copy of the Australian Tax Office publication “Sales Tax News and Views” from Metro Marine in September 1998, had prepared financial projections for the first five years of the business to help assess its profitability and prospects and had obtained written legal advice from Hall & Wilcox in March 1999 regarding the availability of a sales tax exemption for demonstrator use.  Likewise, the Court was invited to drawn an adverse inference from Hostess Marine’s failure to call evidence from Currie Communications, which had been engaged to assist with marketing which included working with Ungar on a marketing plan and devising and implementing a public relations campaign for the launch of the vessel.  Similar criticisms were made of the omission to adduce evidence from the employed captain, Mike Percy, who had been engaged to sail the vessel to the Whitsunday Islands via the Sanctuary Cove Boat Show and from any potential purchasers.

Penalties

63                  The Commissioner claimed to have imposed penalty tax because a reckless statement had been made in the exemption declaration as contended by s 97 of the STAA which prescribes a penalty for such an offence at the rate of 200% of the duty properly payable which penalty has been remitted, in this case, to 30%.  In the Commissioner’s submission, the Court has no power to order a further remission of the penalty.

64                  In support of the Commissioner’s contention as to Hostess Marine’s recklessness, reference was made to BRK (Bris) Pty Ltd v Federal Commissioner of Taxation 2001 ATC 4111 where Cooper J observed, at 4129;

‘Recklessness in this context means to include in a tax statement material upon which the Act or regulations are to operate, knowing that there is a real, as opposed to a fanciful risk that the material may be incorrect, or be grossly indifferent as to whether or not the material is true and correct, and that a reasonable person in the position of the statement-maker would see that there was a real risk that the Act and regulations may not operate correctly to lead to the assessment of the proper tax payable because of the content of the tax statement …So understood, the proscribed conduct is more than mere negligence and must amount to gross carelessness.’

That observation was endorsed by Hill and Hely JJ as members of a Full Court of this Court in Hart v Federal Commissioner of Taxation (2003) 131 FCR 203 at 214.

65                  According to the Commissioner, Hostess Marine had been reckless in making the exemption declaration as it was aware that there was a real, as opposed to a fanciful, risk that the material in the declaration may have been incorrect, or it was grossly indifferent as to whether or not it was true and correct.

Resolution of the issues

66                  Section 4 of the ST(E&C) Act prescribes the effect to be given to Sch 1 of that Act by providing, so far as is relevant;

‘(1)      Schedule 1 has effect for the purposes of those parts of the Assessment Act that refer to exemption Items. The Schedule does not by itself have the effect of exempting an assessable dealing from sales tax.

(2)       In broad terms, Schedule 1 has the following effects (through the Assessment Act):

(a)       if all the requirements of an exemption Item are satisfied at or before the time of an assessable dealing, the dealing is not taxable;’

67                  Item 59(1) of Sch 1 to the ST(E&C) Act in turn confers an exemption on;

‘A ship for use by a person mainly for purposes other than providing any of the following for any person (whether or not for reward):

(a)       pleasure, sport or recreation;

(b)       private transport;

(c)        accommodation.’

68                  The fact that Item 59(1) carves out an exemption for a vessel “for use” other than to provide any of the three excluded facilities means that regard must be had to the purpose “for” which it was intended, at the time of application to own use to use, the vessel.  Section 5 of the ST(E&C) Act explains what the use requirement means for different Schedule 1 functions by providing, so far as is relevant;

‘Some exemption Items require the exemption goods to be used in a particular way or by a particular person. The following Table explains what the use requirement means for each of the Schedule 1 functions set out in section 4.’

………

‘Use requirements for Schedule 1

69                  That explanation makes clear that it is necessary to have regard to the intended use during the whole of the statutory period which, in this case, it is common ground was two years from the date of application of the vessel to own use by Hostess Marine.  I accept the contention advanced by Counsel for Hostess Marine that a change of intention after the application to own use will not deprive the applier of an exemption for which a ship has qualified by reason of an intention subsisting at the time of application to own use to use it for a purpose other than one enumerated in pars (a), (b) and (c) of Item 59(1).  However, that is not to say that regard may not be had to the actual use of the vessel during the whole of the statutory period as illuminating the use intended by the applier at the time of application to own use.  In the absence of evidence of a change of intention, the presumption of continuance will support an inference that an intention shown to exist at a given point in time was in existence at an earlier or subsequent time;  see eg Phipson on Evidence 16th Edn p 168 [7-20].

70                  I also accept that the definition of “mainly” in s 3(2) of the ST(E&C) Act as meaning, in the absence of a contrary intention, “to the extent of more than 50%” has the effect that the exemption provided by Item 59(1) will not be lost unless the intention at the time of application to own use is to use the vessel for at least 50% of its total use or predominantly or preponderantly for providing one or more of the facilities enumerated in pars (a), (b) and (c) of Item 59(1);  see Davis v Federal Commissioner of Taxation (2000) ACT 4201 at 4212 [62] per Hill J.  In my view, the directing mind and will of Hostess Marine in the sense used in Tesco Ltd v Natrass [1972] AC 153 at 171 and approved by the High Court in Nissho Iwai Australia Ltd v Malaysian International Shipping Corp. Berhad (1989) 167 CLR 219 at 230 was that of Ungar, notwithstanding that his son, Peter, was the sole director of the company until 7 September 2000 when Ungar joined him as co-director.  I am reinforced in that view by the fact that Ungar and his wife were at all times the only shareholders in Hostess Marine.  A further fact tending to the same conclusion is that Ungar appears to have given all significant instructions and made all the critical decisions in relation to the acquisition of the “Hostess” and its disposition after the application to own use. 

71                 I am satisfied, on the evidence of Ungar, that the intention which he formed on behalf of Hostess Marine was that the “Hostess”, after being landed in Australia, should be used principally or predominantly for demonstration and display to potential purchasers of “Monte Fino” motor yachts.  I consider that Ungar’s direct testimony to that effect is reinforced by the extrinsic evidence of what was done by way of incorporating Hostess Marine, entering into contractual arrangements with Kha Shing and MFA and ensuring that the vessel was landed in Australia in time for the 1999 Sydney Boat Show.  I also regard the elaborate, expensive and time-consuming preparation and execution of a marketing strategy for the promotion, featuring the “Hostess”, of sales of the “Monte Fino” range as confirmatory of Hostess Marine’s principal intention to use the vessel otherwise than for providing pleasure, sport or recreation, private transport or accommodation or a combination of those facilities. 

72                  It is true that the onus of proving facts giving rise to an exemption like that furnished by Item 59(1) of Sch 1 to the ST(E&C) Act is on the applier;  see s 14ZZO(b) of the Taxation Administration Act 1953 which provides;

‘In proceedings on an appeal under section 14ZZ to the Federal Court against an appealable objection decision:

… …

(b)       the appellant has the burden of proving that:

(i)        if the taxation decision concerned is an assessment (other than a franking assessment) – the assessment is excessive;  or

(ii)       if the taxation decision concerned is a franking assessment – the assessment is incorrect;  or

(iii)      in any other case – the taxation decision should not have been made or should have been made differently.’

73                  That means, in the present context, that the onus is on Hostess Marine affirmatively to satisfy the Court that the principal or predominant use which it intended for the “Hostess” on 7 July 1999 was other than the provision of one or more of pleasure, sport or recreation, private transport or accommodation.  It cannot seriously be suggested that it was ever in contemplation that the vessel be used to provide private transport or accommodation, except as an incident of its use for pleasure, sport or recreation.  The most significant example of the latter use occurred early in 2002 when Ungar and his wife used the “Hostess” for three weeks of recreational cruising around Tasmania.  However, that use occurred after the decision had been made to sell the “Hostess” and assumes little significance in ascertaining the use to which, in mid-1999, it was intended to put the vessel.

74                  It is not destructive of an exempt main, principal or predominant intended use that those proposed as having formed the intention may have contemplated some minor incidental use for a non-exempt purpose.  I believe that, from the time when he first began negotiating for Hostess Marine to acquire the “Hostess”, Ungar expected that he and members of his family might obtain some use of the vessel for their own pleasure or recreation.  However, I do not regard that expectation as displacing the intention to use the “Hostess” principally or predominantly for demonstration and promotional purposes in connection with Hostess Marine’s intended (and actual) business of selling “Monte Fino” motor yachts on commission.

75                  The intended principal or predominant use which I have imputed to Hostess Marine is borne out, first, by the time and expense which that company incurred in its own incorporation, procuring distributorship appointments from Kha Shing and MFA and promoting sales of the “Monte Fino” range.  Although criticisms have been made that the distributorship arrangements lacked sophistication, it has not been suggested that they were a sham in the sense identified by Lockhart J in Sharrment Pty Ltd v Official Trustee (1988) 18 FCR 449 where his Honour, after reviewing the authorities, observed at 454;

‘A “sham” is therefore, for the purposes of Australian law, something that is intended to be mistaken for something else or that is not really what it purports to be. It is a spurious imitation, a counterfeit, a disguise or a false front. It is not genuine or true, but something made in imitation of something else or made to appear to be something which it is not. It is something which is false or deceptive.’

76                  It is true that the distributorship agreement between Kha Shing and Hostess Marine appointed the latter as distributor of the Kha Shing “Monte Fino” range for the States of Victoria and Tasmania “together with Monte Fino Australia Pty Ltd” without specifying a rate of commission or how the commission should be shared between Hostess Marine and MFA.  However, that omission was rectified by the stipulation in Hostess Marine’s facsimile message to MFA on 28 June 1999 which is reproduced at [10] above.  That stipulation recited that Hostess Marine should receive, presumably from MFA, a flat fee of $60,000 on any sale resulting from enquiries emanating from Ungar’s contacts in Victoria and Tasmania.  MFA’s co-operation in the Sydney Boat Show, its sharing of promotional expenses and the payment to Hostess Marine of $30,000 noted at [6] above, despite the fact that the purchaser resided outside Hostess Marine’s “territory”, raise the strong inference that MFA genuinely regarded itself as bound by a joint distributorship agreement in terms of the facsimile message of 28 June 1999.  All of those factors in combination militate strongly against the characterisation of that arrangement as a “sham”.

77                  I do not regard as weighing significantly against the intention which I have imputed to Hostess Marine the absence of a written distributorship agreement between Kha Shing and Hostess Marine antedating or contemporaneous with the latter’s agreement to purchase the vessel.  It is at least as significant in Hostess Marine’s favour that it was incorporated a few days before the agreement to purchase was executed, with the obvious intention that it, and not Ungar or any other members of his family personally, should become the owner of the vessel.  Moreover, the critical date at which Hostess Marine’s intention has to be assessed is 7 July 1999 when it applied the “Hostess” to its own use in Australia.

78                  Nor do I accept that the failure, until the ATO officers raised the matter, to have it noted on the insurance policy related to the “Hostess” that she was used for demonstration and viewing, gives the lie to the claim that she was intended, in July 1999, to be principally or predominantly for that use.  In light of the elaborate steps already recounted to equip the “Hostess” for demonstrating and viewing, that failure is more readily to be explained as an oversight.  Support for that view is provided by the fact that the insurance cover was transferred, as set out at [13] above, from the “Ranger”, which had concededly been devoted to “private use only”. 

79                  My acceptance of the general thrust or substance of Ungar’s evidence renders inapplicable the principle in Jones v Dunkel (1959) 101 CLR 298.  That was a case in which a majority of the High Court concluded that the failure of the defendant to adduce evidence from the driver of the defendant’s vehicle, entitled the jury, in a civil action for negligence arising out of a motor vehicle collision, to infer that the driver’s evidence “would not have assisted the defendants by throwing doubt on the inference [that the defendants had been guilty of negligence] which, as I have explained, I consider was open on the plaintiff’s evidence”;  per Kitto J, at 308.  To similar effect, Windeyer J observed, at 321;

‘As Wigmore points out (Evidence 3rd ed. (1940) vol. 2, ss. 289, 290, pp. 171-180), exactly the same principles apply when a party, who is capable of testifying, fails to give evidence as in a case where any other available witness is not called. Unless a party's failure to give evidence be explained, it may lead rationally to an inference that his evidence would not help his case.’

80                  In the present case, if I were to draw the inference that the evidence, for example, of Stephen Ungar who was not called, would not have helped Hostess Marine’s case, that inference would not detract from the affirmative force of Ungar’s evidence which I have accepted.  Moreover, as I have explained at [70] of these reasons, notwithstanding Stephen Ungar’s position as sole director in July 1999, the controlling mind and will of Hostess Marine for the purpose of its forming the relevant intention at that time was Ungar’s.

81                  Similar considerations apply to the failure to call evidence from Hostess Marine’s accountant, Currie Communications, the employed skipper, Mike Percy, or any of the potential purchasers who had gone on board to inspect the “Hostess”.  Even if it be inferred, conformably with Jones v Dunkel, that the evidence of none of those potential witnesses would have helped Hostess Marine, that inference does not afford a basis for the rejection of the affirmative evidence of Ungar himself and the other witnesses, including Victor Bates, a director of MFA, from whom evidence was adduced.  Nor does the inference made available by Jones v Dunkel from the failure to call the witnesses identified by Counsel for the Commissioner diminish the force of the inference which I have drawn from the matters canvassed at [71] above as to how Hostess Marine intended, in July 1999, to use the vessel.

82                  I agree, in general, with the contention implicit in the Commissioner’s criticism that Hostess Marine did not have a realistic prospect of generating substantial profits from sales of “Monte Fino” motor yachts within a reasonable time after the application to own use of the “Hostess”.  That militates, so the argument would go, against the existence of a claimed intention to use the ship for business purposes.  However, an applier can have an intention to use a ship for business purposes notwithstanding that the business is unlikely to generate much, if any, profit.  The confidence with which a court can impute the presence or absence of a “business” intention depends on the weight to be attached to all of the surrounding circumstances.  Thus, if the applier can be shown to have known that the business would almost certainly generate a large loss, the Commissioner’s argument that the principal or predominant intended use was for a non-business purpose becomes correspondingly more cogent.

83                  On the other hand, it is not destructive of an intention to use the ship for the purposes of a business, that the applier thought that the business would be only modestly profitable, or even that it would break even.  Nor does it necessarily negative an intended use for “business” purposes that the applier was likely to derive pleasure or enjoyment from the conduct of the business and activities associated with it.  Whether the conduct of the business or the derivation of pleasure is the principal or predominant use for which the presumptively exempt goods are obtained is a conclusion to be drawn from the relevant facts and circumstances.  One such fact or circumstance relevant to the present case is whether the goods are intended for uses mainly in the conduct of a business, but, the size or scope of the business may be immaterial to the inquiry;  see eg Thomas v Commissioner of Taxation (Cth) (1972) 46 ALJR 397 at 401 where Walsh J observed;

‘But a man may carry on a business although he does so in a small way. In my opinion the appellant's activities in growing the trees ought not to be found to have been carried on merely for recreation or as a hobby. I leave out of account the pine trees, the growing of which did not have, I think, a significant commercial purpose or character.’

84                  In Hope v Bathurst City Council (1980) 144 CLR 1 Mason J ventured, at 10, this explanation of Walsh J’s observation in Thomas;

‘The issue in Thomas was whether the taxpayer was carrying on the business of growing avocado, macadamia nut and pine trees. Walsh J. in the passage quoted did no more than say that he left the pine trees out of account because the growing of them did not have a commercial purpose or character which was significant for the purpose of characterizing the taxpayer's other activities as a business. His Honour's remarks did not go to the magnitude or size of the activities necessary to constitute a business, nor indeed to the genuineness or bona fide character of those activities. His Honour had expressly conceded that a man may carry on a business though in a small way.’

85                  After the hearing of the present application, I was referred by the solicitor for the Commissioner with notice to the solicitors for Hostess Marine to Ell v Commissioner of Taxation [2006] FCA 71 (10 February 2006).  That case concerned a claim by two taxpayers to deduct for income tax purposes leasing expenses, interest, depreciation and the cost of repairs in relation to two yachts from each of which they claimed respectively to have derived income.  Emmett J upheld the Commissioner’s disallowance of the claimed deductions on the ground that, in the relevant years, the yachts had not been used mainly for letting on hire in the ordinary course of a business carried on by the taxpayers.  His Honour found on the facts that neither taxpayer had the intention of using the yachts to gain or produce assessable income or in the course of carrying on a business.  In the present case, the critical intention was to use the “Hostess” mainly for purposes other than the provision of the facilities enumerated in pars (a), (b) and (c) of Item 59(1).  By contrast with Ell v Commissioner of Taxation, that intention was not negatived by the facts which I have found. 

86                  I draw no inference adverse to Hostess Marine from the fact that most of the time spent by the “Hostess” at her moorings was at the Sandringham Yacht Club.  It is true that Ungar had strong social and recreational connections with that Club but its selection as a mooring of choice is equally explicable by a belief that those connections would enhance the prospects of making sales of “Monte Fino” vessels.  As well, Sandringham had the convenience of proximity to the brokers, Jackson Marine, who had been selected to respond to day to day enquiries and requests to view the “Hostess”.  Quantitatively, the time which the “Hostess” spent at her moorings, mainly at Sandringham, constituted an overwhelming proportion of the two year statutory period.  However, that fact casts no light on the use which Hostess Marine intended for the vessel at the time of application to own use.  That is because, I infer, the “down time” for the “Hostess” would have been broadly the same whether the principal or main use to which she was intended to be put had been as a display and demonstration unit for the “Monte Fino” range or had been to provide pleasure, sport or recreation for Ungar, his family and friends.  Similar reasoning applies to the time spent by the “Hostess” in dry dock or at contractors’ berths.  The evidence related to that time is, at worst, neutral for Hostess Marine and, at best, tends to support the claimed intention to use the “Hostess” as a display and demonstration vessel.  I instance, in this regard, the modifications carried out in the Launceston Shipyard which are described at [27] of these reasons and were, it seems, principally intended to keep the appearance of the “Hostess” consistent with that of newer models in the “Monte Fino” range.  It is not without significance in this connection that the relatively large expense of those modifications was incurred at the end of the two year statutory period.

87                  Those “Monte Fino” related modifications and the continued use of the “Hostess” as a display and demonstration vessel after the expiration of the statutory period tends to confirm an intention subsisting throughout that period and beyond to use her mainly for that purpose.  It seems to be implicit in the Commissioner’s contentions that the use of the “Hostess” as a demonstration craft was elaborately colourable and devised to obscure an actual intention to use her primarily for pleasure, sport or recreation.  However, that contention involves the corollary, which was not borne out, that the colourable use, with its attendant expense, would have ceased immediately upon the expiration of the statutory period.  Similarly, although less unequivocally, the sale of the vessel a few moths after the end of the statutory period argues against a consistently maintained intention that her main use should be the provision of pleasure, sport or recreation.

88                  I have not attached any weight to the fact that Ungar’s decision to commission the construction of the vessel was heavily influenced by the provision to him of a copy of the ATO’s “News and Views” for October 1993.  That publication, amongst other things, posed the question “Do boats used for demonstration purposes qualify for exemption under Item 59?”  To that question it supplied the answer reproduced at [32] above.  The provision of that information prompted Ungar to request his accountant, Mr Axton, to seek advice from Hall & Wilcox, solicitors, about what was required to ensure that a boat used for demonstration purposes qualified for the exemption.  That advice was obtained and was to the effect that the boat had to be acquired genuinely for demonstration use for at least two years and not for pleasure, sport or recreation.  That history tends to corroborate that Hostess Marine’s genuine intention in July 1999, formed through Ungar, was to use the “Hostess” as a demonstration vessel.  The focus required by Item 59(1), as is borne out by the use of the word “intended” in the second item of the table of functions to Sch 1 of the ST(E&C) Act and numerous references in the Explanatory Memorandum accompanying the Bill which became the ST(E&C) Act, is on intention.  Intention is an act of the will directing a particular action, in this case, the use of the “Hostess”.  It is a distraction from the inquiry into what was Hostess Marine’s intention to have regard to the motive or the reason which prompted the intention.  I accept that the, or a, motive, of Hostess Marine in forming the requisite intention was to qualify for the sales tax exemption which made the acquisition of the vessel economically attractive.  However, that cannot be allowed, of itself, to detract from the genuineness of the formation of the intention.

89                  A comprehensive review of the evidence, including the salient features noted at [70]-[88] of these reasons, has led me to conclude, on a preponderant balance of probabilities, that Hostess Marine in July 1999 genuinely intended to use the “Hostess” for the principal or predominant purpose of displaying and demonstrating the “Monte Fino” range of motor yachts.  To the extent that it matters, I am also satisfied that the intended use which I have imputed to Hostess Marine was expected to generate income in the form of commissions under the agreement with MFA.

Conclusion

90                  It follows from what I have found was the purpose for which Hostess Marine intended mainly to use the vessel, that it was a use other than providing pleasure, sport or recreation, private transport or accommodation for any person.  Thus, s 4(2) in combination with Item 59(1) of Sch 1 of the ST(E&C) Act has the effect of exempting from sales tax Hostess Marine’s assessable dealing with the vessel.  This conclusion makes it unnecessary to canvass the propriety of the penalty imposed as part of the objection assessment.  The applicant’s appeal will accordingly be allowed and the Commissioner’s decision and assessment of 19 February 2001 will be set aside.  The Commissioner must pay Hostess Marine’s costs of its application to this court, including any reserved costs.

Associate:

Dated:              30 November 2006.