Bass v. Federal Commissioner of Taxation.
Judges:Pidgeon J
Court:
Supreme Court of Western Australia
Pidgeon J.
This is an appeal from that part of the decision of the Taxation Board of Review No. 2 [reported as Case S87,
85 ATC 631] which upheld the Commissioner's decision on objections lodged by the appellant in respect of assessments for the years ended 30 June 1978 and 1979. The appellant is a crayfisherman who acquired two new crayboats. One was delivered in September 1977 and the other in January 1978. He, as skipper, operated the latter vessel but the other was subject to an arrangement to which I shall shortly refer. The taxpayer claimed by way of a deduction in respect of each of the vessels an investment allowance pursuant to the provisions of sec. 82AA of the Income Tax Assessment Act 1936; the relevant provisions of this section and a section modifying its operation were set out by the Board in its reasons (it varies slightly but immaterially from the latest reprint):
``82AA. Subject to the following provisions of this Subdivision [B], this Subdivision applies in relation to a unit of eligible property acquired or constructed by the taxpayer that is -
- (a) in the case of any taxpayer, for use by the taxpayer wholly and exclusively -
- (i) in Australia; and
- (ii) for the purpose of producing assessable income otherwise than by -
- ...
- (C) the granting to other persons of rights to use the eligible property...
- ...''
``82AG. (1) This Subdivision does not apply, and shall be deemed never to have applied, in relation to property acquired or constructed by a taxpayer, not being property that, in the case of a taxpayer being a leasing company, the taxpayer has leased to another person, if, before the expiration of 12 months after the property was first used, or installed ready for use, by the taxpayer -
- ...
- (b) the taxpayer leased the property... or otherwise granted a right to another person to use the property...''
The Commissioner allowed the deduction in respect of the vessel of which the taxpayer was skipper but disallowed it in respect of the other vessel. The basis on which it was disallowed was that there was a granting of the right to use the vessel to another person and this becomes the question for determination.
The agreement which the appellant entered into in respect of the vessel the subject of the disallowance was a verbal agreement with Mr H.G. Fletcher made in September or October 1977. It was described as a 60/40 arrangement and is a type of agreement well known and common in the crayfishing industry. Under this agreement Mr Fletcher acted as skipper of the vessel the ``Rose Margaret'' for a period of three years. He engaged a crew of two deck-hands and fished in the Dongara area with the vessel based at Port Denison. He would go out by day with the vessel berthed at night. The catch was sold to a fishery on shore. Mr Fletcher was entitled to 60 per cent of the sale of the catch and the appellant 40 per cent. The deductions from the gross proceeds were, in the main, fuel and bait which was purchased from the fishery and which were deducted from the sale price so that Mr Fletcher bore 60 per cent of these outgoings and the appellant 40 per cent. I was told it was customary for the skipper to share his percentage with deck-hands he engaged. The Board made findings to which I shall later refer as to the obligations of the parties in respect of maintaining the vessel and overhauling its machinery and running gear.
The vessel had a licence to fish 128 pots and this was in the appellant's name. The appellant arranged for the sale of the catch. He required it to be sold to the Kailis depot. Mr Fletcher delivered it to the depot. The purchaser made out two cheques, one to the appellant for his 40 per cent net share and one to Mr Fletcher for his 60 per cent net share. The document that issued was an account sales headed ``Bass Industries - Rose Margaret - skipper G. Fletcher''. In some instances there was a variation in some of the details but this was the substance. Bass Industries referred to the appellant's firm.
The Board reached its decision by applying the decision of the High Court in
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Tourapark
``However these submissions are put, they require a departure from the ordinary and natural meaning of the words of the sections. Although the taxpayer retains a right to use the caravans, and does in fact use them, it nevertheless grants to each customer a right to use them. Even if it were to be admitted that the provisions of sec. 82AA are rendered ambiguous by the use of the words `wholly and exclusively', the words of sec. 82AG(1) are perfectly plain; their effect is that if, within the time mentioned, the taxpayer has granted a right to another person to use the property, the subdivision does not apply in relation to the property. The argument of the taxpayer seeks to modify these words by adding to them words such as `and has not himself at the same time used the property as plant'. There is no context that requires this departure from the ordinary meaning of the sections; on the contrary, the context suggests that no such gloss as is suggested on behalf of the taxpayer should be put upon them.''
And at ATC p. 4108; C.L.R. p. 183:
``All these provisions support the view that (except in the case of leasing companies) the Parliament intended that the allowance should not be payable unless the taxpayer kept both the property and the exclusive right to use it, and did use it only for the purpose of producing assessable income.''
It would be necessary to distinguish this case for the appellant to succeed. The first submission made by the appellant to the Board was that the relationship between the appellant and Mr Fletcher was a relationship of employer and employee. That was the premise from which it was to be argued that the Tourapark case could be distinguished. The Board rejected the view that it was an employer/employee relationship and there is now no challenge to that finding. The appellant bases his appeal to this Court on the ground that there was not granted to Mr Fletcher ``a right to use'' the vessel. The basis of this submission is that Mr Fletcher was under the direct control of the appellant and operated the ``Rose Margaret'' on the orders of the appellant. For much of the time the two vessels fished together, but there were periods when they did not. The appellant claims that at all times he was in radio communication with Mr Fletcher and could transmit orders to him.
To determine the question it becomes necessary to examine the evidence to see what was the verbal contract in respect of the ``Rose Margaret''. The basis on which it was formed was as outlined by the appellant:
``We were both familiar with the industry. We did not have a great deal of discussion of the arrangements except that it would be a 60/40 arrangement and I would provide the vessel with the gear.''
Mr Fletcher's evidence was similar. It was:
``Was there any discussion at this time about the terms on which you would skipper the boat? - Not exact terms but we said it would be on a normal type basis of a 60/40 basis.''
This very limited discussion was sufficient for the parties, during the performance of the contract, to be of the one mind as to its further details and their relationship appeared to be a harmonious one for the three years that it existed. To enable the Board to ascertain the terms of the contract evidence was given as to what was common in the industry; as to what was in the parties' minds and as to the way in which the contract was performed. It had been discussed and accepted that the fishing was to be limited to the area of the Dongara waters. Mr Bass's evidence referred to one specific difference to the generally accepted arrangement. He was asked and said:
``What are the owner's responsibilities and the skipper's responsibilities under a 60/40 arrangement? - Under a 60/40 arrangement I take care of all maintenance except - Initially as the boats were new I said I would take care of all maintenance because quite often there is a running-in period where extra expense could be incurred, so I said I would take care of all maintenance.
ATC 4460
For how long? - It was for at least 12 months. I am not quite sure, it might have been extended to the two years, but it was for the first 12 months - I am sure of that.''
I have referred to this latter question because there is no evidence on the length of the term of the arrangement being specifically discussed but this question would indicate it was contemplated that it would last for a length of time and did in fact do so. Mr Bass's evidence as to other details were:
``When you say all maintenance, do you mean both major and minor? - Yes. After that initial running-in period he was to take care of just day to day maintenance, meaning oil changes, material, Comprox, to wash the vessel down. If a fan belt is broken or an impeller that goes in the motor - But anything major, alternator, starter motor, on the mechanical side or the boat repair side was my responsibility. It was to book the boats in for slippage, to find out where we were going to slip them, whether it was Fremantle, Geraldton or Two Rocks, wherever it was convenient, and organise the skippers and the crew to be there to take the vessels down and do the maintenance on the boats, and then we may leave them on dry dock for several months and go back prior to the forthcoming season, or we may take them straight back. It just depended on the time of the year we did the maintenance.
What about the purchase of equipment? - The purchase of equipment initially is supplied by me; that is, ropes, floats, pots, everything that is needed for the vessel for the fishing operation. After that, any loss of gear is the responsibility of the skipper to replace.
Who is responsible for end of season maintenance in this arrangement? - I am always responsible for end of season maintenance on the vessel; that is, including paint, anything that needs to be done.''
The Board made findings in accordance with this evidence. The essence of the appellant's case before me is the extent of the control he himself exercised over the ``Rose Margaret''. The appellant's evidence in respect of this was:
``Did you exercise any degree of control over the vessel during the season and, if so, what? - I was always in control of the vessels. We were in constant radio contact. I stipulated to Mr Fletcher that he had to operate out of the Dongara harbour.
Why did you so stipulate? - That way I could see the vessel come in each day, I could check it out whenever I wanted at my own leisure, I could go on it at any time and just make sure it was being maintained in the correct manner.
Mr Fletcher complied with that requirement? - Yes. We are in constant radio contact at all times. We would work in together. If I was on a good patch of crays I would let Graeme know and he would come into the area where I am fishing so he could get the benefit. Also, I would ask him how he was catching and if he was catching well I would move closer to his area. If necessary, I could stipulate where he was to fish.''
Mr Fletcher's evidence in this area was:
``Did he from time to time direct you to go to a particular spot and drop your pots at a particular spot? - We did that both ways; yes. There was three or four of us used to work in together and if the crayfish were in a certain area we would let each other know. Yes.''
Further evidence of what was accepted as being the degree of control in the industry in contracts of this nature was given by Mr Stewart, an executive officer of Kailis Fishing Corporation and a former executive officer of the Australian Fishing Industry Council. He referred to the fact that 128 pots in 1977 would have an approximate value of $100,000. His evidence then was:
``The owner does what else? - The owner then has control over the operations of the vessel, he lets the skipper use it on the remuneration system described but he has control over its operations because he is the person who at law is responsible for the vessel, especially with regard to the Fisheries Act, and he faces the possibility of losing that licence if there is a contravention of the law, so he maintains a fairly strong control of the vessel.
In what ways would he exercise that control? - To ensure that to the best of his ability the vessel is not contravening any
ATC 4461
fisheries regulations such as operating outside specified fishing zones or using too many pots. It has an allocation of a certain number of pots and if it uses too many pots and it is convicted of that offence, the owner would be the person who would suffer the consequences. He would also ensure that, to the best of his ability, no undersized lobsters were taken - those types of regulations which pertain to the vessel.In practice, in your experience, how would an owner physically exercise that degree of control? How would it be put into practice? - Usually he specifies the area that the vessel operates in, so you generally find that the vessel that he owns is operating from the same anchorage that he is, so he can keep an eye on the vessel, just day to day. He can eyeball it each day; he knows what is going on. He obviously has a vested interest to ensure that the catch, when it is delivered, the whole of the catch, is accounted for so they generally keep a fairly close eye, even when they are at sea, through radio contact. In fact, when vessels are moving around at sea, a little bit of backchat, everybody knows pretty roughly where people are and it is in everybody's best interests to keep an eye on each other. If somebody is catching well in an area it is standard practice to take a note of where the crayfish are running well. So the owner would keep an eye on the vessel by keeping it operating in the locality that he is operating in. He has the right to go on board the vessel any time he so desires.''
The first matter to which I will refer is the stipulation that the vessel was to be operated out of Dongara harbour. Mr Fletcher said it was made clear to him at the time that the vessel was to be operated in the Dongara area. The vessel was moored overnight at Port Denison which was sometimes referred to as the Dongara harbour. The appellant had provided a special and heavy mooring for it. The vessel would accordingly be limited to waters that were within a day's steaming distance. These factors would not foreclose the concept of ``the right to use'' if it was otherwise created. Such a right can be given within a limited area. Similar observations can be made in respect of the owner's right to enter and inspect and to insist that the operations comply with local regulations and that the licence is not put in jeopardy. One would expect these provisions in a lease as well as in a more limited agreement amounting to ``a right to use''. The appellant refers to inspecting the engine room and requesting it to be cleaned.
I would refer to the appellant's claim that he could stipulate where Mr Fletcher was to fish. This was in the sense that he could specify the precise position where pots were to be dropped. The evidence indicates that this was never discussed at the time the contract was made. The evidence does not suggest that this would be accepted in the industry as a normal right of the owner. The appellant stated that he did at times stipulate this and Mr Fletcher complied. This relates to a time after the contract was made and while it was being performed. In cross-examination he said:
``Apart from the requirement that he fish out of Dongara, do you say that you in fact directed Mr Fletcher exactly where to fish, where to drop his pots and that sort of thing? - There were occasions, yes, and I mean precisely within the area of this room and that means dropping in a certain depth on the continental shelf. To be efficient you must be exactly in the right position.
Those occasions were occasions when you either worked out or had, in fact, experienced that a particular spot was a good fishing spot, so you said to Fletcher, `Drop your pots there, because the chances of a good catch are good, presumably'. Is that right? - That is right.
Were there occasions when Mr Fletcher said to you, `I have had a good catch yesterday' or something `over there. How about you dropping your pots'? - Yes.
Equally, he would specify an area perhaps the size of this room within which to drop your pots? - It is not so much the area of this room, it is the width of the room but it may run for miles along.
What I am saying is that Fletcher told you where to drop your pots on occasions just as you told Fletcher where to drop his pots? - He was instructed to tell me. If he was on good crays he was instructed to let me know as well.
You were fishing as a team, in a sense, were you not? You were two boats operating and
ATC 4462
obviously if there was a good area you would both want to cash in as it were? - That is the way I instructed him that we had to work; that way, to be efficient.He always complied with your directions as to where to drop his pots, did he? - Yes.''
I do not consider the evidence shows that the terms of the contract were such that the appellant could give a stipulation that the skipper was bound to comply with if it was against his better judgment as a fisherman.
I consider the following remarks of the Board were justified on the evidence:
``While it is true that he was bound to comply with the taxpayer's directions concerning such matters as the general area in which fishing could take place and to keep the boat in a clean and workmanlike condition, his position was, it seems, little different (if at all) from that of any other skipper (including the taxpayer) in charge of a fishing vessel while at sea who, whilst complying with fisheries' regulations, was intent on pursuing his tasks diligently and in a professional-like manner.''
The next factor that was submitted was that the appellant had the right to forbid the employment of a crew member. The evidence does not support this and I would consider that the following finding of the Board is also justified on the evidence:
``Apart from one instance where, on the taxpayer's advice, F decided not to employ a particular person, there was no evidence that the taxpayer played any part in the hiring and firing of crew. F both hired and fired crew without reference to the taxpayer and, indeed, the evidence indicates that, if the taxpayer had advised F to fire any particular crewman, it would have had to have been for a good reason otherwise F would not have accepted the advice.''
This related to a crew member that the appellant had previously dismissed.
I have made reference to the fact that the length of time of the agreement was not discussed nor was the question as to how it could be terminated. There was no evidence of any accepted custom in the industry other than for misconduct or breach. There would be some right of termination and the question of what notice is required does not, I consider, need be determined for the present purposes. The Board made reference to this when considering the question of whether there was an employer/employee relationship when it said:
``However, the essential fact remains that the taxpayer had the ultimate control over the R.M. in the sense that he had the right at any time to terminate the arrangement for the use of the R.M. by F. Nevertheless, and notwithstanding the presence of a similar situation in the case of
Queensland Stations Pty. Ltd. v. F.C. of T. 70 C.L.R. 539, the High Court concluded in that case that there was not sufficient control to lead to the conclusion that there was a relationship of employer and employee.''
I do not consider there is any factor present in the area of termination that would negate a ``right to use''.
It was submitted that the Tourapark case could be distinguished on the basis that in that case the taxpayer gave to his customers the actual occupancy of the caravans for a rent that related to the occupancy. In the present case it was submitted that the 60 per cent share of the catch was not a rent for the use of the boat but was for remuneration for actually catching, acquiring and selling the fish. It was, however, conceded in argument that for this distinction to succeed it must be coupled with the fact that the vessel was under the control of the appellant. I do not consider it was. It appears to me that Mr Fletcher was in control of the vessel and would be using it to catch fish which he in turn would sell. I do not consider on the evidence that there were any special factors of control that would make it any different to the ordinary type agreement. Mr Fletcher had the right to use the vessel to acquire fish. I consider that the principles in the Tourapark case are applicable and the Board was correct in its decision. I would dismiss the appeal.
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