FEDERAL COURT OF AUSTRALIA

Melbourne Car Shop Pty Ltd v Commissioner of Taxation [2010] FCA 373

THE COURT ORDERS THAT:

1.         The proceeding be listed at 9:30 am on 30 April 2010 for the purpose of receiving the parties’ submissions as to the orders necessary to be made in accordance with the court’s reasons for judgment published this day.

Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using Federal Law Search on the Court’s website.

REASONS FOR JUDGMENT

1                          There are two proceedings presently before the Court.  The first is an appeal under s 14ZZ(a)(ii) of the Taxation Administration Act 1953 (Cth) (“the Administration Act”) against a decision made on 6 April 2009 by the respondent, the Commissioner of Taxation, to disallow the applicant’s objection, dated 4 October 2007, against a notice of assessment issued on 6 August 2007.  The notice related to –

(a)        the understatement of input tax credits for the purposes of goods and services tax          (“GST”) with respect to the months ended 28 February 2002, 31 January 2003, 31             August 2003, 31 October 2003 and 30 November 2003;

(b)        the understatement of GST payable with respect to the month ended 30 June 2004;

(c)        the understatement of luxury car tax (“LCT”) payable with respect to the months            ended 28 February 2002, 31 January 2003 and 31 August 2003;

(d)        administrative penalty; and

(e)        general interest charge.

2                          The second proceeding is under s 5 of the Administrative Decisions (Judicial Review) Act 1977 (Cth) (“the ADJR Act”) and s 39B of the Judiciary Act 1903 (Cth).  The ADJR Act aspect of that proceeding relates to the Commissioner’s decision to refuse to remit the general interest charge pursuant to s 8AAG of the Administration Act with respect to the assessments forming the subject of the proceeding under s 14ZZ of that Act.  The s 39B aspect of the second proceeding is based on the contention that in relation to the months ended 28 February 2002 and 31 January 2003, the notice of assessment was issued outside the time limit prescribed by s 105‑50 of Sch 1 to the Administration Act.  

3                          At the start of the hearing of the appeal, I was informed that the Commissioner no longer resisted the applicant’s appeal to the extent that it related to so much of the assessment of 6 August 2007 as dealt with the months ended 28 February 2002 and 31 January 2003.  At the same time, I was informed that the applicant no longer pressed its appeal in relation to so much of the assessment as dealt with the months ended 31 October 2003, 30 November 2003 and 30 June 2004.  That left only the month ended 31 August 2003.  It was in that month, that the applicant acquired a Bentley Arnage motor vehicle from Lance Dixon Motors, and has overstated the input tax credits to which it is entitled and understated the LCT to which it is liable, in respect of that acquisition.

The facts in outline

4                          At times relevant to this proceeding, the applicant was a licensed motor car trader under the Motor Car Traders Act 1986 (Vic).  By s 7 of that Act, it was an offence to carry on the business of trading in motor cars unless the trader was the holder of such a licence.  The applicant traded as “Melbourne’s Car Supermarket” at 399 Warrigal Road, Cheltenham.  The vehicles in which it traded were priced between $5,000 and $30,000.  While being offered for sale, these vehicles were kept in an open yard, exposed to the elements.  On average, the applicant sold 10-15 cars per month, yielding a turnover in the range $80,000-$100,000.  Mr Gavin Terry was the secretary of the applicant and its sole director. 

5                          Gavin Terry’s father, Bruce Terry, had been a licensed motor car trader himself until 1991.  He was, it seems, a motor car enthusiast, with a particular interest in Rolls Royces and Bentleys.  According to Gavin Terry, his father was an experienced trader in such vehicles, and recognised as such within the motor trading community.  Although Bruce Terry was not involved in the everyday operations of the applicant, he regularly discussed its business prospects with his son.  In the course of these discussions, it was apparently proposed, and it was Gavin Terry’s intention, that the applicant should be “re-positioned” into the higher end of the car market, trading in better quality cars at higher prices.  It was Gavin Terry’s intention to make use of premises that would be more suitable for this purpose at Well Street Brighton, which had been purchased in 1998.  No such intention had been carried into effect, however, as at the dates which are relevant to the present proceeding. 

6                          In the second half of 2001, it came to the attention of Bruce Terry that a new Rolls Royce Silver Seraph was available for wholesale purchase from Chequered Flag Motors Pty Ltd, which traded as “Lance Dixon”.  To make the purchase, Mr Terry used the services of a well-established trader in Rolls Royces and Bentleys, Mr David Ekberg.  He was associated with a licensed motor car trader, David Ekberg Pty Ltd (“DEPL”).  Mr Ekberg negotiated a price of $403,027.40 with the relevant sales executive at Lance Dixon, Mr Bill Upfield.  A contract of sale of the car from Lance Dixon to DEPL was executed on 9 August 2001.  On 13 August 2001, David Ekberg Pty Ltd quoted its ABN in connection with this transaction.  The deposit of $50,000 was paid on that day, not by DEPL but by the applicant.  The applicant, in turn, was put in funds to pay that deposit by Bruce Terry (or one of his companies).  On 2 January 2002, the car was registered in the name of DEPL, and David Ekberg and Bruce Terry attended at the Lance Dixon premises to take delivery.  On 20 February 2002, DEPL invoiced the applicant in the sum of $403,027.40 for this car, but no part of that sum was ever paid to DEPL.  As with the deposit, the balance of the purchase price was paid directly by the applicant to Lance Dixon, presumably before delivery of the car on 2 January 2002.  Again, the funds were provided by Bruce Terry (or one of his companies).  On 4 March, the applicant provided DEPL with a quotation of its ABN in connection with this transaction. 

7                          For the next purchase from Lance Dixon, Bruce Terry did not use the services of Mr Ekberg.  He dealt directly with Mr Upfield.  On 27 May 2002, a contract of sale was executed by Lance Dixon and the applicant.  It related to a new Bentley Continental, which the applicant bought for the price of $570,047.00.  Again, the funds for the deposit and the balance were provided by Bruce Terry (or one of his companies).  There was little direct evidence about this purchase, but the contract of sale gave December 2002 as the estimated delivery date, and the applicant quoted its ABN in connection with the transaction on 27 December 2002.

8                          A third vehicle was purchased from Lance Dixon by contract made on 11 August 2003 between Lance Dixon and the applicant.  This was a 2002 Bentley Arnage.  It was a demonstrator with 1856 km on the odometer.  Once again, Bruce Terry dealt directly with Mr Upfield for this transaction.  The applicant quoted its ABN on 11 August 2003.  According to an affidavit made in the Victorian Civil and Administrative Tribunal (“VCAT”) (in a proceeding to which I shall return) by Bruce Terry on 15 November 2006, he required some persuasion to take this car.  He said that Mr Upfield came to him with an offer which, according to Mr Upfield, was “too good to refuse”.  Against a nominal list price of $500,000, Mr Upfield was prepared to sell the demonstrator for $320,000.  Mr Terry told Mr Upfield that he did not want the car “because we still had the last two cars we had purchased from [Lance Dixon]…and could not sell them”.  By “we” in this context, I take it that Mr Terry was referring to himself and the applicant.  Mr Upfield then made the car more attractive for Mr Terry by offering to take the car back, after the passage of two years, as a trade-in on another 6 month-old demonstrator Bentley that Lance Dixon had at the time.  Mr Upfield offered a cascading series of trade-in valuations, dependant on the number of kilometres which the car had done when so returned.  On 8 August 2003, Mr Upfield signed a memorandum, addressed to Bruce Terry, in the following terms:

The following values will apply on the bases that a new Bentley Arnage is purchased when the 2 years of ownership has expired.

            1.         $320,000 if the vehicle does not exceed 20,000 klm

            2.         $300,000 if the vehicle does not exceed 30,000 klm

            3.         $290,000 if the vehicle does not exceed 40,000 klm

If the vehicle exceed [sic] 40,000 klm’s a realistic figure will be negotiated.

All figures are based on the vehicle being maintained in excellent condition throughout i.e. In a roadworthy state, no body damage, no interior damage, with all keys and books.  If any of the above is in question Mr Terry will rectify prior to trading at his cost.

As events transpired, the applicant was obliged to call up this promise by Lance Dixon. 

9                          In his affidavit sworn on 20 August 2009, Gavin Terry explained that luxury cars were to be a new line of business for the applicant, the pursuit of which arose out of his father’s interest in the three cars to which I have referred above.  He said that his father assured him as follows:

(a)        each car was available for purchase at a substantial discount and he told me Bill Upfield, Lance Dixon’s sales manager from whom each car was bought, said prices paid for each of the cars were ‘wholesale prices’;

(b)        there was a ready market for each of the cars and the Rolls Royce Silver Seraph and Bentley Continental had features which made them likely to attract a re-sale premium from prospective purchasers:

(i)         the Bentley Continental is a rare car and fully optioned; known as this prestige brand’s premium marquee and produced in extremely low volumes in this instance;

(ii)        the Seraph, known as the ‘Last of Line’, was the last Rolls Royce produced by Crewe Motors, English coach builders, before all subsequent Rolls Royces were manufactured by Volkswagen;

(c)        B. M. Terry (Investments) Pty Ltd A.C.N. 004 500 145 would fund the purchase of these 3 cars;

(d)        he would actively market them among Rolls Royce and Bentley Club members, at rallies and through his colleagues, whom I further understood from our conversations to be Robert McDermott, David Ekberg and Bob Parsons;

(e)        the discounted prices, and special features, made the Rolls Royce Silver Seraph and Bentley Continental a ‘good business opportunity’ for the applicant; and

(f)        the Bentley Arnage came with a buy-back option which provided a hedge against any loss in the event it couldn’t be sold.

Gavin Terry was here collapsing events which occurred over two years (August 2001 − August 2003).  The evidence generally is inconsistent with the notion that the purchase of all three cars was contemplated at the same time. 

10                        The purchase of any one of these cars would have introduced a certain asymmetry into the applicant’s inventory.  The price of the first, about $400,000, would have represented about 4−5 months’ trading by reference to the applicant’s normal business of selling cars valued between $5,000 and $30,000.  When I put it to Gavin Terry that he might have responded to his father’s suggestion that the applicant make this investment with the inquiry “What has it got to do with me? Why can’t you buy it yourself?”, he said:

Well, I am the licensed car trader. … [T]hat’s how you purchased the car from Lance Dixon at wholesale.  …  I can’t as a private person go knock on the door and say I want to buy that Rolls at cost.  As a dealer, that gives you the opportunity, and these are cars that he never wanted to collect or put away in his collection.  The collection he has got is old Morrises and funny cars, you know, these are very expensive trading stock and there was never an intention to let them just sit around and not drive them.  There is no point, you know.  They were there because they were cheap and he had a good rapport with Bill Upfield, which I met once or twice for coffee, but he was offered a deal.  He said it was unbelievable and I’ve got the money and you’ve got the licence and let’s make some money.  So we took it as an opportunity to hopefully make a good profit.

11                        In his evidence, Gavin Terry left no doubt but that he had no interest in luxury cars until the purchases which have become controversial in this proceeding.  He had no background or experience in trading in such vehicles  He relied wholly on his father’s expertise, which he regarded as considerable.  He accepted his father’s advice that a profit could be made on the resale of these cars, and he accepted his say-so that the most propitious means of obtaining a sale would be by showing the cars at rallies and concourses conducted by the relevant car clubs.  The cars were not left at the applicant’s premises in Warrigal Road, because, being prestige cars, they had to be kept under cover.  It seems that, as a practical matter, the cars were under the control of Bruce Terry, who also seems to have been the only one involved in such attempts as were made to sell them.  Neither the Rolls Royce nor the Bentley Continental was sold until both passed with the applicant’s business when that was sold to another company with which Gavin Terry was associated in March 2009.  That company sold the Rolls Royce to a third party on 5 June 2009 for the sum of $211,000.

12                        The Bentley Arnage became a source of dispute as between Bruce Terry (and the applicant as owner) and Lance Dixon.  Despite showing the car at rallies in Victoria and elsewhere (Sydney and Adelaide), Mr Terry was unable to sell it.  In about October 2004, he started to contact Mr Upfield, intending to open discussions on the subject of the agreed trade-in.  According to Mr Terry’s affidavit in the VCAT proceeding, he found it hard to make contact with Mr Upfield who, he inferred, was fobbing him off.  Towards the end of 2004, Mr Upfield left the employ of Lance Dixon.  He was re-employed in 2005, and Mr Terry succeeded in contacting him in March of that year.  Mr Upfield said that the principal of his company was not prepared to honour the trade-in agreement.  After concerted attempts by Mr Terry to contact the principal directly, ultimately he arranged for a solicitor to write to Mr Upfield on behalf of the applicant.  This led to a more meaningful negotiation between Mr Terry and Mr Upfield, the result of which was (according to the former) an agreement for the exchange of the 2002 Arnage for a 2005 demonstrator Arnage, with the applicant being obliged to make a cash payment of $10,000. 

13                        However, the applicant was not to be the dealer which bought the 2005 demonstrator: that was to be Mr Ekberg’s company, David Ekberg Pty Ltd (“D Ekberg P/L”), a different company from DEPL.  D Ekberg P/L entered into a contract for the purchase of the 2005 demonstrator on 22 July 2005.  Bruce Terry took delivery of the car, but presumably then did not procure the applicant to pay the balance owing, as the terms of the contract were quite different from those which he had negotiated with Mr Upfield.  The contract provided for a purchase price of $393,422.50 and for a trade-in allowance of $291,028.50.  When he realised this, Mr Terry returned the 2005 demonstrator to Lance Dixon, collected the original Arnage and recovered such payments as had been made.  There appears to have been no resistance from Lance Dixon to this course of action, and D Ekberg P/L presumably offered such co-operation in unscrambling the egg as was then required. 

14                        However, Bruce Terry was not happy.  On 22 November 2005, he wrote a letter, on a letterhead which read “Bruce M Terry Group of Companies” to the Regional Director, South Asia and Australasia, of Bentley Motors Ltd in Singapore.  After the greeting, the letter opened as follows:

Please let me explain the background to the situation with Lance Dixon and my Desert Dune Bentley Arnage:

8 August 2003

            Bill Upfield at Lance Dixon’s induced me into buying a demonstrator Bentley Arnage enticing me with a deal, saying it was too good to refuse.  He offered me the demonstrator Bentley for A$319,025 including GST but exempt from Luxury Car Tax (LCT).  A sale of a luxury car from one car trader to another is not required to have LCT paid.  This car was supplied to a related licensed motor car trading company.  Of course, LCT would have to be paid if the car was resold before it was 2 years old. 

            It was agreed that in 2 years time, Lance Dixon would take the car back as a strait [sic] exchange on another 6 month old demonstrator Bentley ordered to my colour specifications 9 months prior.  With the car being 2 years old, LCT is no longer applicable.  I presume this was attractive to Lance Dixon and Bill Upfield pressured me into the transaction.  I never, at any time, asked for this deal.

15                        It seems that the difference between the $10,000 change-over payment which Mr Terry thought he had agreed with Mr Upfield and Lance Dixon’s contract of 22 July 2005 was very much related to the GST and LCT treatments of the transaction.  In his letter, Mr Terry explained the matter as follows:

The agreement required my giving Lance Dixon bank cheque for $10,000 plus LCT, Lance Dixon arguing correctly that the LCT can be refunded back from the Tax Office.  I should have been out of pocket for only $10,000, however the LCT refunds would have taken up to 3 months to receive.  GST did not need to be taken into account as the GST value of the cars was the same.

However when the paperwork for the deal was written up, the value given to the traded-in Arnage was its price excluding GST, $291,028 rather than $320,000.  This unequal treatment in GST would cost me, and pay Lance Dixon, an extra $26,455.

The result was the deal went from:

·     zero cash change-over, with the choice of colour inside and out; to

·     $10,000 change-over and no choice of colour, to

·     $36,455 change-over net of GST AFTER having to wait up to 3 months for a refund from the government of approximately $90,000 in LCT and GST.

Being insulted and astonished that having agreed a net price of $10,000 Lance Dixon adjusted the price for GST we can claim but not the GST he would claim.  I told Lance Dixon the deal was not what we agreed and I returned the grey demonstrator.

16                        Mr Terry also explained the nature of his ongoing predicament in the following terms:

I also have the additional dilemma of owning 3 cars purchased new from Lance Dixon.  These are a Bentley Continental Mulliner (approximately 2 years old), a Bentley Arnage (bought in August 2003) and a Rolls Royce Seraph (3 years old).  These motor cars no longer have any dealer support, as Lance Dixon has stated through his service manager, that he refuses to service these cars.  This is in spite of my having paid all accounts issued by Lance Dixon (and there have been many) promptly and in full.  I am currently not using these cars in case they give trouble.

I also have 12 other Bentley and Rolls Royce motor cars which require service.  As these cars are older, there are other service providers for them.  However with the 3 new cars, the only accredited service provider and the only service provider with the correct knowledge and equipment is Lance Dixon.

As I understand it, on purchasing a new car, there is an implied warranty that there will be service available from a factory accredited dealer.  However in my case my Bentleys are orphaned.  This leaves me in a situation where, as I cannot get the cars serviced, I cannot drive them.  If it was not so frustrating, it would be amusing that even though I am the owner of 15 Bentley and Rolls Royce motor cars, I am now the driver of a Mitsubishi!  This whole situation has put me off Bentleys which I have driven for 35 years.

17                        I note the following about Bruce Terry’s letter of 22 November 2005.  First, the letter is written by Mr Terry personally, not on behalf of the applicant. Indeed, the applicant is not mentioned.  Secondly, Mr Terry makes no complaint about not being able to sell the 2002 Arnage or the other cars: his complaint is that he cannot drive them.  And thirdly, the letter shines a light on Mr Terry’s then real concerns, both with cars and with money.  Unlike much of the other contemporaneous documentation in the case, the letter owes nothing to the need to fit a certain transaction within the regulatory or fiscal requirements of Australian legislation. 

18                        Bruce Terry’s attempts to sell the Arnage included placing it on consignment twice, first with D Ekberg P/L at its showroom in Prahran (probably in the first half of 2005) and secondly with Brighton Motors at its showroom in Bay Street, Brighton.  The car sat in the Brighton Motors showroom for about a year, during which time it attracted the serious interest of a potential buyer only once.  An offer was made, but was immediately rejected by Bruce Terry when it was conveyed to him by the principal of Brighton Motors, Mr Arthur Parsons.  Although the parties concerned could not recall the actual dates. It seems that the car was at Brighton Motors between late 2005 and late 2006. 

19                        Eventually, the applicant took the proceedings in VCAT against Lance Dixon to enforce Mr Upfield’s trade-in promise referred to in para 8 above.  It was in those proceedings that Bruce Terry swore the affidavit to which I have referred.  The proceedings were settled in November 2006, pursuant to which the car was re-purchased by Lance Dixon for the sum of $250,000. 

Goods and services tax

20                        The GST issue in the present case concerns the operation of s 69-10(1) of the A New Tax System (Goods and Services Tax) Act 1999 (Cth) (“the GST Act”), which reads as follows:

(1)        If:

            (a)    you are entitled to an input tax credit for a creditable acquisition or           creditable importation of a car; and

                (b)    you are not, for the purposes of the A New Tax System (Luxury Car       Tax) Act 1999, entitled to quote an ABN in relation to the supply to     which the creditable acquisition relates, or in relation to the            importation, as the case requires; and

                (c)    the GST inclusive market value of the car exceeds the car limit for           the financial year in which you first used the car for any purpose;

            the amount of the input tax credit on the acquisition or importation is the amount of GST payable on the supply or importation of the car up to 1/11 of that limit.

It was common ground, in relation to the acquisition of the Bentley Arnage by the applicant, that paras (a) and (c) of this subsection were satisfied.  The Commissioner contends, and assessed the applicant to GST on the basis, that para (b) was also satisfied.  If so, the input tax credit to which the applicant was entitled in relation to that acquisition was limited to 1/11 of the “car limit”.  The applicant resists this contention, and says that its GST liability was wrongly so assessed. 

21                        The question which arises under s 69-10(1)(b) is whether the applicant was “entitled to quote” its ABN in relation to the supply to it of the Arnage.  Relevantly, that question is to be determined under s 9-5(1)(a) of A New Tax System (Luxury Car Tax) Act 1999 (Cth) (“the LCT Act”), which provides as follows:

You are entitled to quote your ABN in relation to a supply of a luxury car or an importation of a luxury car if, at the time of quoting, you have the intention of using the car for one of the following purposes, and for no other purpose:

(a)        holding the car as trading stock, other than holding it for hire or lease;

The applicant contends that, at the time when its ABN was quoted for the supply of the Arnage, it had the intention of holding the car as trading stock. 

22                        The applicant did not resist the suggestion that it was Bruce Terry who was the driving force behind the acquisition of the Arnage.  Its case then involved the proposition that his purpose in buying it was to re-sell it on advantageous terms.  Since the applicant was to be the vehicle through which this purpose was effected, and since the applicant was a car trader, it followed, according to its case, that its purpose, objectively determined, was to hold the car as trading stock.  These propositions, however, blur the distinction between the making of an investment with a view to resale at profit, on the one hand, and the acquisition of a commodity as part of the trading stock of a business, on the other hand. 

23                        The expression “trading stock” is not defined in the LCT Act, but the parties both relied upon the meaning given to the term in Federal Commissioner of Taxation v Suttons Motors (Chullora) Wholesale Pty Ltd (1985) 157 CLR 277, 282:

“…goods held by a trader in such goods for sale or exchange in the ordinary course of his trade”. 

Thus the question in the present case is whether, when Bruce Terry acquired the Arnage from Lance Dixon, its (the applicant’s) purpose was not merely to hold the car for sale or exchange, but to do so “in the ordinary course of [its] trade”. 

24                        The fact that the applicant’s ordinary trade was confined to much lower-priced vehicles than the Arnage, and to vehicles which, self-evidently, stood in an entirely different segment of the market, must be the starting point for any consideration of this present question.  I accept that there is no reason why the applicant might not have moved into the prestige segment of the market, and if it did so (or was intending to do so) that the cars which it purchased in the first instance for that purpose might well have been regarded as trading stock, notwithstanding that the applicant had no established history of dealing in such cars.  However, I am not persuaded that this was a stage which was reached by the applicant at the time which is presently relevant, August 2003. 

25                        It was not until August 2004 that the applicant first sought council approval for the use of the Well Street premises as a used car showroom.  In his evidence, Gavin Terry was not specific as to when he and his father first contemplated using those premises for such a purpose, but I think it quite improbable that, if the premises were intended to be the main outlet for the applicant’s trade in prestige cars, three very substantial investments would have been made without any step having been taken to obtain the required council approval.  Some idea of the applicant’s purpose in August 2003 may be inferred from the fact that delivery had been taken of the Rolls Royce in January 2002, and of the Bentley Continental in December of that year.  The applicant’s inaction with respect to the Well Street premises over this period, and down to August 2004, counts rather strongly against the suggestion that it was its purpose, in August 2003, to use these three cars as trading stock in a showroom at those premises. 

26                        To an extent, the applicant’s purpose in August 2003 may be inferred from what was in fact done with the car after acquisition.  That is to say, it is a reasonable starting assumption that the applicant probably carried through with the intentions which it had at the point of acquisition.  The Commissioner expressed no objection to the tender of the affidavit which Bruce Terry had made in the VCAT proceedings to which I have referred.  From that affidavit, and from such other evidence as exists, it appears that Mr Terry took the Arnage to club rallies, concourses and the like because he was of the view that the exposure from which the car benefited on such occasions was the most likely way to achieve an advantageous sale.  If it mattered, I would find as a fact that, in proceeding in this way, Bruce Terry was using the car for the purpose of achieving such a sale.  It was, however, not until the first half of 2005 that the car was placed into a showroom for sale, and then only after Bruce Terry had encountered some difficulties with Lance Dixon taking it back under its agreement of 8 August 2003.  None of these facts assists the applicant’s case that its purpose of acquisition in that month was to hold the car as trading stock. 

27                        Neither do the other objective indications of which there was evidence assist the applicant.  It was Gavin Terry who was the director of the applicant.  Unlike his father, he had no interest in prestige cars, and professed no understanding of the market in which they were bought and sold.  It was submitted on behalf of the applicant that there was no reason why the applicant might not rely on the expertise of Bruce Terry in relevant respects, albeit that he was neither its director nor its employee.  This is theoretically true, but if cars of this kind were truly to be part of the ordinary trade of the applicant, it would be more conventional for the sole director to have a personal understanding of the workings of the relevant market. 

28                        The applicant did not carry the financial risk that these cars would not be sold: the funds in each case were provided by Bruce Terry’s company, and it seems that interest was not payable, and that there was no particular obligation on the applicant to repay the debt (until, of course, the cars were sold).  As security for the loans, Bruce Terry’s company had a registered charge over each of the vehicles.  All this indicates that, as a matter of commercial reality, these cars represented an investment for Bruce Terry, rather than an accretion to the applicant’s trading stock. 

29                        That impression is strengthened by the following evidence given by the applicant’s accountant, Mr Ian Gould:

The business case was an informal matter Bruce discussed with me in the following way:

(a)        B.M. Terry Investments Pty Ltd was expecting to receive proceeds from completing real estate developments and was in a position to loan the applicant money to purchase cars;

(b)        there appeared to be declining opportunities for further real estate speculation in the immediate future during which the applicant could expect to sell cars purchased;

(c)        holding costs for any cars purchased were likely to be negligible where the interest rate on bank deposits was low as against the borrowing costs car dealers paid;

(d)        purchasing cars with unique qualities often led to profits on re-sale as Robert McDermott had proven prior to 2000;

(e)        the Rolls Royce Silver Seraph and Bentley Continental Coupe purchased by the applicant had unique qualities;

(f)        specifically with respect to the Arnage, Bruce thought the next model Bentley to be released was not markedly different from the Arnage purchased and the applicant could offer an ‘apparently identical’ car for sale at a significant discount to the purchase price of the next model; all the while enjoying the ‘hedge’ position it had of the guaranteed ‘buy back’ should it not sell.

From the terms of this conversation, I take the view that the acquisition of the Arnage was by way of an investment for Bruce Terry, rather than by way of accretion to the applicant’s trading stock. 

30                        Finally on this question, I refer to what Bruce Terry said to Mr Upfield when the latter first suggested that the former should buy the Arnage.  It was that he did not want the car because the other two cars remained unsold.  Had Mr Terry genuinely been in the business of building up a portfolio (however small) of prestige cars for the applicant to use as trading stock, and had there been a real intention to use the Well Street premises in that regard, I think it rather unlikely that he would have reacted in this way.  His reaction, rather, was that of a man engaged in the business of making ad hoc investments apart from the ordinary trading activities of the applicant. 

31                        An entitlement to quote arose under s 9-5(1)(a) of the LCT Act only if the applicant’s intention was – and was only – to hold the car as trading stock.  On the facts of the present case, and for the reasons expressed above, I am not satisfied that this was the applicant’s only intention in relation to the Arnage in August 2003.  Indeed, I think it more likely that the applicant’s intention was to facilitate the making of an investment by Bruce Terry.  That project was quite separate from the trading activities of the applicant.

Luxury car tax

32                        Under s 5-5 of the LCT Act, the obligation to pay luxury car tax falls upon the supplier (ie the seller) of the car in question.  However, by s 5-10(2)(a) of the LCT Act, the supplier does not make a “taxable supply” if “the recipient quotes for the supply of the car”.  This is a reference to the quotation of the recipient’s ABN.  In the present case, the applicant did quote its ABN when it bought the Arnage in August 2003.  This meant that Lance Dixon did not thereby make a taxable supply, and did not have to pay LCT. 

33                        However, the Commissioner relies on the provisions of Div 15 of Pt 3 of the LCT Act.  That Division is concerned with the matter of “adjustments”.  Subdivision 15-B deals with the subject of “change of use adjustments”.  Under s 15-30(3) −

(3)        You have an increasing luxury car tax adjustmentif:

            (a)        you were supplied with a luxury car; and

            (b)        either

(i)         no luxury car tax was payable on the supply because you quoted for the supply; or

(ii)        you had a decreasing luxury car tax adjustment under subsection (1); and

            (c)        you use the car for a purpose other than a quotable purpose.

34                        Under s 27-1 of the LCT Act, a “quotable purpose” is “a use of a car for which you may quote under s 9-5”.  The existence of the conditions set out in paras (a) and (b) of this provision is uncontroversial.  The question which arises under para (c) is not whether the applicant was entitled to quote its ABN in August 2003: it is whether the car was ever used for a purpose other than one which would have given rise to such an entitlement.  In the present appeal, the applicant challenges the Commissioner’s conclusion, reached under para (c), that the Bentley Arnage was in fact used other than for the purpose of being held as trading stock. 

35                        Much of the debate before me on this issue was concerned with the question whether Mr Bruce Terry maintained, throughout the period that the Arnage was owned by the applicant, the aspiration of selling it or whether, by contrast, he used the car, to an extent at least, for his own recreation and amusement.  As I have indicated in the previous section of these reasons, however, use of the car for the purpose of achieving a sale on advantageous terms would not resolve favourably to the applicant the question arising under s 15-30(3) of the LCT Act.  That question is whether the car was ever used save for the purpose of being held as trading stock. 

36                        In my reasons above dealing with the applicant’s intention as at August 2003, I have dealt to an extent with the use to which the car was put.  It was submitted on behalf of the applicant that the fact that it did not place the Arnage (or the Rolls Royce or the Continental, for that matter) on display at its Warrigal Road yard was not inconsistent with the use of the car as trading stock, since the car was clearly in need of a quite different approach to sale from that taken in relation to the lower-value cars in which the applicant dealt.  That is correct as far as it goes, of course, but there are few objective indications of use which would favour the applicant’s case.  If the car were not to be placed on display at Warrigal Road, were ought it to have been placed on display?  Here the applicant could not rely on its embryonic intentions with respect to Well Street, since it was not until August 2004 that approval was sought to use those premises as a used car showroom.  Even then, the next documentary indication of any activity in relation to the application is a letter from the council to the applicant dated 4 July 2006, in which it said that no correspondence had been received since 7 September 2004 and that, if the applicant wished to avoid having the application “considered to be withdrawn”, it would need to “provide the appropriate information” within 14 days.  I consider that, in a characterisation of use in relation to the Arnage in August 2003 and thereafter, the applicant’s intentions, such as they were, for the Well Street premises make little or no contribution to the analysis. 

37                        There was evidence that, in its own books of account, the applicant entered the Arnage as trading stock, in which respect it relied upon the observation of Mason J in Federal Commissioner of Taxation v St. Huberts Island Pty Ltd (in liq) (1978) 138 CLR 210, 226 that “trading stock” was “a commercial term, ordinarily employed by accountants and auditors…[and that it was] to usage by commercial men that we must look in determining what it signifies.…”  However, this evidence, while relevant, is self-serving to a degree, and I am disposed to place little weight on it.  Notwithstanding how the car was treated in the applicant’s books, the question is how it was in fact used. 

38                        For the applicant to succeed on this question in accordance with Suttons Motors,  it needs to establish that the Arnage was held for sale or exchange in the ordinary course of its trade.  Quite clearly, the ordinary course of the applicant’s trade did not involve dealing in vehicles such as this.  It had not, in August 2003 and thereafter, an established trade in such vehicles.  Whatever intention Gavin Terry and his father may have had to establish a prestige car showroom, no concrete step had been taken in that regard.  The attempts which Bruce Terry made to sell the car, such as they were, were ad hoc and, in my estimation, quite separate from the course of the applicant’s trade.  Further, as indicated above, the financial risk in the Arnage, and in the other two cars with which this proceeding is concerned, lay with Bruce Terry rather than with the applicant.  The reality is that the car was an investment for him, and that the applicant’s name was lent for the transaction because it was a licensed trader. 

39                        For the above reasons, I am not satisfied that the Commissioner was in error to conclude, for the purposes of s 15-30(3) of the LCT Act, that the Arnage was used for a purpose other than a quotable purpose.  I shall dismiss this aspect of the appeal. 

Penalty

40                        The applicant’s liability to administrative penalty under Div 284 of Sch 1 to the Administration Act in relation to the months ended 28 February 2002 and 31 January 2003 will, of course, fall away with the upholding of the appeal which relates to its substantive LCT and GST liabilities for those months.  Likewise, as noted in para 3 above, the applicant no longer presses its appeal in relation to the months ended 31 October 2003, 30 November 2003 and 30 June 2004.  The only month with respect to which the applicant’s appeal on penalty must be considered, therefore, is that ended 31 August 2003, where I propose to dismiss the appeal so far as it relates to the applicant’s substantive LCT and GST liabilities. 

41                        Assuming lack of success on its substantive appeals, the only bases upon which the applicant challenged its assessment to administrative penalties were by way of contention that it and its agent, “took reasonable care within section 284-15 in making the relevant statement” (ie the statement that was false or misleading within the meaning of s 284-75(1)(b) of the Schedule), and that it treated the application of the LCT and GST provisions in a way that was “reasonably arguable within Division 284”.  However, there is no concept of “reasonable care” in s 284-15, and, as the Commissioner pointed out, the circumstance that a taxpayer’s treatment of its tax obligations was “reasonably arguable” is relevant, under s 284-75(2)(b), only where the obligations arise under an “income tax law”, which neither the LCT Act nor the GST Act is.  I must, therefore, dismiss the applicant’s appeal on penalty. 

General interest charge

42                        The applicant was liable to pay the general interest charge under s 105-80 of Sch 1 to the Administration Act in relation to the unpaid amounts of indirect tax the subject of this proceeding.  In conjunction with his notice of assessment of 6 August 2007, the Commissioner forwarded to the applicant a memorandum which dealt with his consideration of the question whether the general interest charge should be wholly or partially remitted under s 8AAG of the Administration Act.  By subs (2) of that section, the charge may be remitted only in the circumstances set out in subs (3), (4) or (5).  Those subsections provide as follows:

(3)        The Commissioner may remit all or a part of the charge referred to in subsection (2) if the Commissioner is satisfied that:

            (a)        the circumstances that contributed to the delay in payment were not         due to, or caused directly or indirectly by, an act or omission of the             person; and

            (b)        the person has taken reasonable action to mitigate, or mitigate the            effects of, those circumstances.

(4)        The Commissioner may remit all or a part of the charge referred to in subsection (2) if the Commissioner is satisfied that:

            (a)        the circumstances that contributed to the delay in payment were due        to, or caused directly or indirectly by, an act or omission of the             person; and

            (b)        the person has taken reasonable action to mitigate, or mitigate the            effects of, those circumstances; and

            (c)        having regard to the nature of those circumstances, it would be fair          and reasonable to remit all or a part of the charge.

(5)        The Commissioner may remit all or a part of the charge referred to in subsection (2) if the Commissioner is satisfied that:

            (a)        there are special circumstances because of which it would be fair and      reasonable to remit all or a part of the charge; or

            (b)        it is otherwise appropriate to do so.

43                        In his memorandum on the subject, the Commissioner referred to something described as the “Law Administration Practice Statement LA PS 2006/8” as authority for the proposition that –

…where a case involves intentional disregard of the consequences of non-compliance with the tax laws, remission will not be warranted as you were aware of the potential tax shortfall and could have taken steps to reduce your exposure to interest.

Because he took the view that the case involved “intentional disregard of the consequences of non-compliance with the tax laws”, he declined to remit the charge.

44                        The applicant challenged the Commissioner’s decision not to remit the charge under s 5(1)(e) and (h), and s (2)(a) and (b), of the ADJR Act.  He contended that, in making the decision, the Commissioner had taken an irrelevant consideration into account, namely “that the shortfalls… resulted from an intentional disregard to compliance”; and had failed to take a relevant consideration into account, namely, the fact that, if there were a shortfall, the applicant “held a reasonably arguable position and took reasonable care”.  The applicant also contended that there was no evidence or other material to justify the making of the decision, in the sense that any tax shortfall did not result from “an intentional disregard to compliance”.

45                        I was not provided with a copy of the practice statement referred to above.  The applicant did not submit that it was inconsistent with the criteria set out in subs (3), (4) and (5) of s 8AAG of the Administration Act.  That being the case, I am bound to commence with the proposition that the existence, on the part of a taxpayer, of an “intentional disregard of the consequences of non-compliance with the tax laws” is a legitimate basis upon which to exclude the circumstances referred to in subs (3), to regard it as not fair or reasonable to remit the charge under para (c) of subs (4) or para (a) of subs (5), and to conclude that it is not otherwise appropriate to remit the charge under para (b) of subs (5). 

46                        Counsel for the applicant described this part of his client’s case as “more of a fall-back position, on the basis that the conclusion would be reached that there [was] no intentional disregard”.  The difficulty with this is that it is not the court’s function to determine whether there was intentional disregard.  Once it be accepted that the matter of “intentional disregard” might be taken into account in the way I have described, it cannot be said to have been an irrelevant consideration.  Neither is it the court’s function under the ADJR Act to contradict findings made by the Commissioner under the guise of holding that, by declining to make other findings, he failed to take relevant considerations into account.  And the applicant effectively presented no case in court in support of its allegation that there was no evidence or other material to justify the Commissioner’s decision.  As pointed out by counsel for the Commissioner, the applicant’s accountant was called in the case, but gave no evidence about his, or the applicant’s, consciousness of the potential for a tax liability to arise under the provisions of the GST Act and the LCT Act referred to earlier in these reasons. 

47                        For the above reasons, I propose to dismiss the applicant’s challenge to the Commissioner’s decision under s 8AAG(1) of the Administration Act. 

Section 39B

48                        The s 39B aspect of the applicant’s case related to the months ended 28 February 2002 and 31 January 2003.  It was said that, to the extent that it dealt with these months, the notice of assessment was out of time pursuant to s 105-50 of Sch 1 to the Administration Act.  As I have indicated above, the Commissioner indicated that he no longer resisted the applicant’s appeal to the extent that it related to these months.  It was not made clear whether that concession applied also to the s 39B aspect, or whether the concession was effectively based on the applicant’s grounds under that section.

49                        Given the Commissioner’s approach to these two months, the applicant accepted that its application under s 39B should be dismissed.  I am not, however, convinced that that would be the appropriate order, especially if the Commissioner’s concession involves an acceptance of the validity of the grounds upon which the applicant relied.  These aspects were not explored at the trial of the proceeding, and I consider that the better course is for me to hear further from the parties when I list the matter for the making of orders generally to reflect these reasons. 

Disposition of the proceeding

50                        Both for the reasons just expressed in relation to s 39B and because, both in point of tax liability and in point of penalty, the way I have disposed of the case will necessitate amendments at the level of detail, I propose to list the proceeding again to receive short submissions from the parties as to the orders required to give effect to these reasons for judgment, and on the matter of costs. 

Associate:

Dated:         23 April 2010