DAVIS v FC of T; SIRISE PTY LTD v FC of T

Judges:
Hill J

Court:
Federal Court

MEDIA NEUTRAL CITATION: [2000] FCA 44

Judgment date: 4 April 2000

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Hill J

Before the Court are two applications heard together by consent. In each the applicant seeks a declaration that it or he, as the case may be, is entitled to an exemption from sales tax by virtue of Item 59(3) of the Sales Tax (Exemptions and Classifications) Act 1992 (Cth) (``the Act'') in respect of a particular vessel. In the case of the application brought by Sirise Pty Ltd (``Sirise''), the vessel is known as ``Yes''. In the case of the application brought by Anthony William Davis (``Dr Davis'') the vessel is know as ``Surreal''. Although there was a common witness in each case, a Mr Goddard from Eastsail Pty Ltd (``Eastsail''), to which company each of the vessels was said to have been leased, the facts in each case differ substantially and accordingly it will be necessary to make finding of fact separately for each of the two applications.

2. In order to appreciate the significance of the evidence, it is necessary at the outset to set out the terms of Item 59(3). It provides for the exemption from sales tax of:

``A ship that can be licensed to carry at least 12 passengers and is for use by a person ( `the exemption user' ):

• (a)...
• (b) mainly for long-term leasing to another person who is to use the ship mainly in providing regular and scheduled sight-seeing tours to the public in the course of a business carried on by the other person.''

3. By force of Item 59(6) of the Act the expression ``long-term lease'' is defined as a lease for a term of at least four years. The Table in Section 5(1) requires that the intended use by a person quoting a certificate is to be during the whole of the statutory period.

The facts relevant to the application by Sirise

4. The vessel ``Yes'' is a Beneteau 42S7 yacht. It is not in dispute that ``Yes'' was, at relevant times, a ship which could be licensed to carry at least 12 passengers. It is also common ground between the parties that Sirise became the owner of the yacht (it had earlier been imported into Australia, but in circumstances which would not then have attracted sales tax) by purchasing it from a company Vicsail Pty Ltd, the importer. At the time of purchase Sirise had purported to quote an exemption declaration, claiming exemption from sales tax. Thereafter the yacht was put into the possession of Eastsail in circumstances which constituted an application by Sirise to own use of the yacht and subject to the application of Exemption Item 59(3)(b) gave rise to sales tax (see AD13 in Table 1 to Schedule 1 of the Sales Tax Assessment Act 1992). This occurred no later than 2 April 1997. The precise date was not established by the evidence, but I am content to treat 2 April 1997 as the relevant date on which the tests of Exemption Item 59(3)(b) must be satisfied.

5. Sirise was, at all relevant times, a company of which Mr McLeod was the Managing Director. Before it acquired ``Yes'' it had owned a Beneteau Oceanis 390 yacht which it had leased to Eastsail. According to an affidavit sworn by Mr McLeod this lease had been for a period of four years. The lease later emerged in the course of cross-examination. It was not a lease for four years, but a lease for three years. Indeed, it seems that it was the practice of Eastsail at the time to enter into leases having a term of three years. While nothing turns directly on whether the previous lease was for a period of three years or a period of four years the discrepancy does not assist the credibility of Mr McLeod. While I do not think that Mr McLeod was attempting to falsify his evidence, it is clear that he was attempting to give his evidence in the best possible light to assist his case and was not assisted in this by what may have been carelessness in swearing the affidavits without verifying the correctness of them. It was in the interest of Mr McLeod, as will later be seen, to emphasise the number four as the number of years during which his leases were to continue. At some stage the original yacht had been sold and the proceeds of sale were used to acquire ``Yes''.

6. A further affidavit was sworn by Mr McLeod but it was ultimately not read. In its place the parties agreed both that Eastsail had previously leased a boat from Sirise which at the time it was bought was second-hand and also that Mr McLeod was aware at some time prior to the point of time at which a liability for sales tax might arise in respect of the vessel ``Yes'' that there was an exemption from sales tax. The form of the admission which counsel for the Commissioner made was ``that Mr

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McLeod was aware of an exemption'', meaning thereby the exemption in Item 59(3)(b). Although the transcript shows that I then restated the conversation by reference to the exemption being one that related to boats leased for four years or more, I do not think that the admission can be read as an admission that Mr McLeod was aware at the relevant time that the exemption required a lease for a term of four years. It may be one thing to be aware in general terms that an exemption is available, it is another to be aware in detail of the strict requirements of that exemption. It is the latter kind of awareness which, it would seem, Mr McLeod had and which was admitted by the Commissioner.

7. In another affidavit filed and read in the Sirise case in chief, Mr Goddard of Eastsail deposed that Eastsail conducted sight-seeing cruises on Sydney Harbour aboard two vessels, ``Yes'' and ``Surreal'', and that cruises were available daily seven days per week between 9.30 am and 12.30 pm each day. The cruises were, he said, advertised and he exhibited a copy of a brochure showing this. Finally he deposed that on 2 April 1997 Eastsail had resolved to execute and had in fact executed an instrument which he annexed. He said that on 3 December 1998 Eastsail had resolved to execute and had in fact executed a document which he also annexed. As will be seen, that evidence cannot be accepted. Again, while I would not find that Mr Goddard was deliberately giving evidence which was false, I did form the impression that he was attempting to give his evidence in the way that would best assist the applicants, but without checking the correctness of the affidavits which he had sworn and which, it will be seen, somewhat misstated the position.

8. The first document annexed shows a typed date 2 April 1997 and is referred to as ``Yacht Lease Agreement''. The execution page shows the common seal of Sirise, but not that of Eastsail. The document is a demise of a vessel said to be listed in the schedule (``Yes'' is so listed) and is for a term of three years, which term may be extended for a further term of two years if both parties agree. The vessel is to be used for various purposes which include sight- seeing, sailing school and yacht charter. It emerged later that the term of the lease (three years) and the stipulated uses for sailing school purposes and yacht charter were similar to those which had been in the lease dated 1 June 1993 which had been executed between Sirise and Eastsail in relation to the earlier boat leased to Eastsail, but subsequently sold to finance the purchase of ``Yes''. However, that earlier lease made no reference to sight-seeing.

9. The second document annexed appears to have been executed under the common seals of both Sirise and Eastsail. The schedule to the document contains a number of headings, followed by information. Two of these items read as follows:

``DATE OF THESE PRESENTS : 3rd December, 1998

...

DATE OF LEASE : 2nd April, 1997''

The document recites that by virtue of a lease between the parties dated 2 April 1997 Sirise had leased ``Yes'' to Eastsail, but that:

``certain of the terms of the lease do not correctly reflect the bargain between the parties and do not contain all of the covenants and promises all of which bargain and promises had been agreed between the parties prior to execution of the writing and were to be set forth in writing by way of written memorandum of their prior oral agreement...''

The operative terms of the document then provide that the lease is to be for five years and that clause one of the lease document is to be read accordingly ``as from the date thereof'', presumably meaning as from 2 April 1997. There are other provisions which are not relevant for the present proceedings.

10. But for the matter referred to in the preceding paragraph one would be hard pressed to look for, or indeed find, what the controversy might be as between the parties if the evidence had stayed as it was in chief. The real matters in controversy were left to emerge in cross- examination.

11. In supplementary oral evidence given by leave in chief, Mr McLeod said that he had caused the first of the two documents referred to above to be executed under the common seal of Sirise on 2 April 1997. Before doing so he had had, he said, a conversation with Mr Goddard around August, presumably 1996. In that conversation Mr McLeod said that he had told Mr Goddard that he had done some research and had discovered that if he leased a

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new yacht to Mr Goddard that would hold more than 12 people and that the lease was for ``a long period of time'' - 4 years - the boat would be exempt from sales tax. Mr McLeod said that he had ``just roughly signed'' the document, meaning, presumably, that he had not read it carefully.

12. The second document arose as a result of advice from his accountants, Pannell, Kerr and Forster.

13. Mr McLeod was then cross-examined. It emerged that the accountants had been contacted by the Australian Taxation Office in around December 1997. By 23 December of that year the accountants had written to the Australian Taxation Office claiming exemption from sales tax for ``Yes'' on the basis that it satisfied the tests laid down in Item 59(3)(b), including that Sirise had entered into ``a three year lease with Eastsail''. The letter enclosed a copy of what was said to be the lease. That document is not in evidence. It may or may not have been the document bearing the date 2 April 1997.

14. The inference is open that the letter was written by the accountants on Mr McLeod's instructions. The failure to call the accountants makes that inference easier to draw.

15. On 24 June 1998 the Australian Taxation Office wrote to the accountants ruling that the exemption item was not complied with, both because the yacht had not been the subject of a long term lease, ie one of four years duration or more and because the inquiries which the Australian Taxation Office had made indicated that the yacht had not been used on regular and scheduled sight-seeing tours. The letter demanded payment of sales tax in the amount of $73,042.54.

16. It seems that Mr McLeod became aware that there was a sales tax problem in December 1997. He said that at some stage the accountants prepared a document, presumably hoping to rectify the problem, but that this was not satisfactory and the accountants had agreed to ``fine tune'' it. He had changed to another office of the accountants and they had prepared the deed which had finally been executed in December 1998. That deed had been signed on the advice of the accountants who had, it seems, obtained an opinion from counsel. It may be inferred that the idea of producing a second deed to ``rectify'' the initial agreement emanated from counsel. A letter to Mr McLeod from the accountants dated 5 November 1998 suggested that the original intention had been that there would be a lease for 5 years with use of the vessel being mainly for ``regular and scheduled sight-seeing tours''. That letter probably accompanied the first draft agreement which the accountants prepared and which had to be fine tuned. Given the circumstances under which the letter came to be written it can be seen to be somewhat self-serving. No attempt was made to call the accountants involved and it may be inferred that their evidence would not have been of assistance to Sirise.

17. Mr Goddard was then called to give supplementary evidence in chief. He contradicted his affidavit evidence that there had been a directors' meeting which authorised the execution of the first of the two documents. Some questions directed at him suggested that an attempt had been made to correct this problem in September 1999. A proposed tender of what were said to be minutes to this effect was withdrawn. Mr Goddard could not recall whether there was a board meeting approving the execution of the second document. However he said there had been a discussion with other directors prior to signature in which he had said that he thought a mistake had been made and that the company had to extend the term of the lease contract. The second document had come to him from the accountants with a letter explaining that there had been a mistake. The idea of signing it had emanated from the accountants and Mr Goddard had just gone along with it. The remainder of Mr Goddard's evidence in chief, so far as relevant to the ``Yes'' case was concerned with the use of the boats by Eastsail. I will deal with the use of the boats together.

Dr Davis - ``Surreal''

18. The vessel ``Surreal'' is a Beneteau 461 yacht. It is common ground that ``Surreal'' is a yacht which could be licensed to carry at least 12 passengers. It is also common ground that ``Surreal'' was imported into Australia by Vicsail Pty Ltd, and sold by that company to Dr Davis who at the time of sale purported to quote an exemption declaration which thereby freed that transaction from sales tax. The sale took place around November 1996. It will be necessary later to say something about the form this declaration took. Dr Davis at some time shortly after the purchase gave possession of the yacht to Eastsail. Initially Eastsail was to fit

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out the yacht for the purposes which Eastsail intended, but at Dr Davis' cost. At some time after November 1996 and at the latest on or about 1 June 1997 it is clear that Dr Davis applied to his own use the yacht by giving possession of it to Eastsail (other than for the purposes of the fitout) for use by Eastsail in the course of its business. The precise date was not established in evidence, although Dr Davis said in evidence that the date 1 June 1997 was the first date on which Eastsail in fact used ``Surreal''. This application to own use gave rise to an assessable dealing (AD 13 in Table 1 to Schedule 1 to the Sales Tax Assessment Act 1992) and thus to a liability to sales tax in Dr Davis unless the provisions of Exemption Item 59(3)(b) applied. It is thus between November 1996 and early June 1997 on which the requirements of Exemption Item 59 must be satisfied to free the application to own use from sales tax. In the event that the exemption declaration given in respect of the sale from Vicsail Pty Ltd to Dr Davis did not operate to free that transaction from sales tax, sales tax would be exigible as at November 1996. As it is not contemplated that sales tax would be paid more than once in respect of the same item of goods, liability to sales tax as at November 1996 would presumably result in the consequence that the boat had been used by Dr Davis between November 1996 and June 1997 and the subsequent bailment of the boat to Eastsail would not attract a further amount of sales tax. In these circumstances I propose to consider in due course whether Exemption Item 59(3)(b) was satisfied both as at November 1996 and early June 1997, although it may also be relevant to determine what the consequence was of the incorrect sales tax exemption declaration given by Dr Davis in November 1996.

19. There was no admissible affidavit evidence in chief from Dr Davis, a formal filed affidavit having been rejected. The only remaining affidavit was an affidavit from Mr Goddard who deposed, in terms similar to the evidence he had given in the Sirise matter, to the fact that Eastsail conducted sight-seeing tours on Sydney Harbour using, inter alia, ``Surreal'', that these cruises were available seven days a week between 9.30 am and 12.30 pm each day and were advertised in a brochure which he produced. Mr Goddard deposed that Eastsail had resolved to execute and had executed a yacht lease agreement which he annexed. Dr Davis was shown as a party to that agreement, the date 1 June 1997 being handwritten on the first page of the agreement as the date the agreement had been reached, notwithstanding that the signature page bore the date: ``... day of December 1998''. The agreement was for a term of five years, with an extension for a further two years by agreement. As will shortly be noted Mr Goddard's evidence, if it suggested that a lease was executed on 1 June 1997, can not be accepted. Indeed it was ultimately contradicted by him in the course of cross-examination. It is clear that a lease in the form which Mr Goddard annexed was not executed until December 1998, although there is a faint possibility that another lease in different form had been executed earlier.

20. In supplementary oral evidence in chief Dr Davis said that the question of sales tax had been raised with him in conversations before he purchased ``Surreal'', including in conversation with Mr Goddard. From correspondence which was tendered it would seem that the purchase of ``Surreal'' took place some time in November 1996. On 1 November 1996 Dr Davis wrote to Mr Goddard advising of the proposed purchase. He wrote, inter alia, that he intended to place the boat with Eastsail: ``for the purpose of regular sightseeing harbour trips from Rushcutter's Bay.''

21. The letter said, inter alia:

``It should be able to be used for some corporate charter work initially until the scheduled departure cruise work builds up.

I would be grateful if you would confirm with the tax office that the boat used in this way would not attract sales tax.''

22. It would seem that Mr Goddard did not see fit to write to the Tax Office as requested. On 20 November 1996 Mr Goddard wrote offering to enlist the yacht in Eastsail's ``scheduled cruise service''. The letter suggested that the yacht would be scheduled for sailing every day, although early on little business was expected. Mr Goddard wrote that ``as long as we offer the service the boat will be considered a legitimate scheduled cruise vessel''. It is interesting to note that the letter suggests that the yacht could be made available to Dr Davis ``for extended use'' and that

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Eastsail would be able to ``provide crew for your own sailing cruising or racing''.

23. There was tendered through Dr Davis the exemption declaration dated 28 November 1996 which he had signed when he had purchased ``Surreal'' from Vicsail. That declaration indicated that Dr Davis intended to use the yacht so as to satisfy Exemption Item 59(3)(a), rather than Item 59(3)(b). The former section relates to:

``use by a person

mainly in providing public commuter transport in the course of a business carried on by the exemption user.''

It makes no reference to ``regular and scheduled sight-seeing tours''.

The exemption declaration had been prepared by the boat salesman and on being assured that it was correct Dr Davis had signed it. It was clearly a mistake. There is no suggestion that the intended use was for a purpose to which item 59(3)(a) related.

24. Subsequently on 10 January 1997 Dr Davis wrote to Mr Goddard advising that he had purchased the yacht and that it would soon be available to Mr Goddard. He requested Mr Goddard, when drawing up the agreement between them to note that the lease would have to be at least 4 years for tax purposes.

25. Dr Davis also said that the lease document which was annexed to Mr Goddard's affidavit and which he had signed had been prepared by Pannell Kerr Forster on his instructions.

26. Dr Davis was then cross-examined. It appears that the first inclination Dr Davis had that there was a problem with the tax office came in December 1997 when he saw a letter, sent to the accountants, drawing his attention to the fact that Exemption Item 59(3)(a) had not been satisfied. He had learned that the Taxation Office had been conducting some inquiries. On 15 June 1998, the Australian Taxation Office sent a letter addressed directly to him. Dr Davis did not recall receiving the letter. Although I have no reason to reject Dr Davis' evidence, and indeed he struck me as a truthful witness, I also have no reason to believe that he did not receive a letter on or around that date. It is quite possible that he has forgotten. He certainly recalled that he was aware there was a problem with sales tax when the Australian Taxation Office demanded payment. It galvanised him into action because it made him aware that the claim for exemption had not been accepted.

27. It seems that Dr Davis rang a Mr Miles from the Australian Taxation Office who was conducting the investigation upon receipt of a letter, presumably that of 15 June 1998. Dr Davis was aware by at least some time around that date that there was a problem about whether a lease had or had not been signed. He conceded that he may have said to Mr Miles that there had never been a contract signed between Eastsail and himself, although he did not recall what he had said. But, whatever was said in this conversation it is clear that at the time the boat was passed into the possession of Eastsail no lease had been signed and further that Dr Davis was upset that a demand had been made upon him for payment of sales tax at a time he believed that Mr Goddard had been asked to supply information, but this demand had not yet been complied with.

28. Before Dr Davis had given evidence Mr Goddard had been cross-examined on various matters, including the question of when an agreement was, in fact, reached with Dr Davis. Before he was cross-examined on matters relating to Dr Davis, Mr Goddard, corrected what he had said in his affidavit about the signing of the lease agreement by noting that he did not recall the date upon which it was signed but said that it was in December 1998. It ``solidified'', whatever that should mean, the relationship his company had with Dr Davis.

29. In the cross-examination of Mr Goddard, it emerged that he had been in contact with Mr Miles of the Australian Taxation Office over a period of time. On 9 June 1998 he had forwarded to Mr Miles what he said was ``a copy of Surreal contract''. The letter suggested that the ``signed version'' may have been with the owner. Mr Goddard said that he had written this letter hoping that somewhere there may have been a contract, although he knew that he could not find one. On this point I would find that Mr Goddard was perfectly well aware that there was no contract and sent the document in the hope that it would content Mr Miles and conclude Mr Miles' inquiries. It did not.

30. What is more significant is that the document which Mr Goddard forwarded to the Australian Taxation Office did not emphasis that the yacht was to be used by Eastsail for scheduled sight-seeing and was a lease for three, not four or more years. The document,

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although unsigned, bore the date 1 July 1997. It is, in effect, in the same terms as the document initially signed between Sirise and Eastsail. Mr Goddard probably downloaded what was the standard form of lease he used from his computer and completed the names of the parties.

31. On or around 18 June 1998 Mr Goddard spoke to Mr Miles by telephone. The subject of the conversation was the ``signed'' agreement concerning ``Surreal''. In that conversation Mr Goddard told Mr Miles that it appeared that a contract had never been signed. In another conversation shortly thereafter Mr Miles asked Mr Goddard what was to happen with the yacht contract, to which Mr Goddard replied to the effect that there was to be a meeting between Dr Davis and his solicitor after which a contract would be signed.

32. Two things flow from this evidence. The first is that despite Dr Davis' letter of 10 January 1997 to Mr Goddard, which referred to the necessity of a lease of four years for tax purposes, at least until June 1997, Mr Goddard's understanding of the appropriate agreement with Dr Davis seems to have been that the agreement was to be for three years. The second is that it is likely that the lease agreement which was ultimately signed, and the only lease agreement which was signed was signed no earlier than the end of June 1998 but perhaps not until December 1998, being the date which appears on the last page. Precisely why almost six months went by between June and December 1998 has not been explained. It may also be noted that when the lease was finally prepared and signed between Dr Davis and Eastsail it provided that:

``The yacht shall be mainly employed in scheduled departure and sight seeing cruises, sailing school and yacht charter between good and safe ports or places which it can lie always afloat within the geographical limits agreed upon from time to time by the parties.''

33. The provisions of the lease dealing with rent treated separately, and in this order, with sailing school income on the one hand and monthly charter or scheduled departure income on the other.

The use of the yachts by Eastsail

34. It is clear from the evidence of Mr Goddard that both boats were used, on occasions, if required, for sight-seeing tours on Sydney Harbour. There was a limit of 12 passengers, for customer comfort. The cruises, which Mr Goddard advertised in his brochures during the relevant times took approximately two hours of sailing time and were available to commence at either 9.30 am according to Mr Goddard, or 10 am according to the brochure to which reference is hereafter made. Approximately half an hour was occupied with getting the boats ready for departure and having tea or coffee.

35. The brochure to which Mr Goddard referred as advertising these sight-seeing tours described them as ``sailing adventures'' or as the ``Sydney Harbour Sailing Adventure''. The brochure advertises the ``adventure'' as taking place between 10 am and 12.30 am, seven days a week. Advance bookings are said to be essential. Tours commenced at Rushcutters Bay, sailed to Garden Island, around Fort Denison, across to the Royal Sydney Yacht Squadron at Kirribilli, around to the Zoo and then across to Rose Bay and Point Piper and Watsons Bay, returning on the western side of the harbour to Rushcutters Bay.

36. As Mr Goddard had warned Dr Davis in the letter to which I have referred the tour business was likely to be slow, at least when it started. Boats were thus available for charter for different periods during the day. Indeed ``Surreal'' was advertised as being available for private charter in marketing material by name. And there were also advertisements for charter of particular size boats which would include both ``Surreal'' and ``Yes'' as well as sister ships of the same class. If a customer wished to charter ``Surreal'', for example, in response to the advertisement, that would happen. So if one boat was chartered then another would be available for the so-called sight-seeing tours if required. So in this sense, a boat was only available to be used for the sight-seeing tours if that boat was not previously chartered. It seems that on some occasions boats were chartered to ``special clients'' such as the Navy.

37. A boat might be used for a tour in the morning but chartered in the afternoon, or be chartered for a charter commencing in the morning. The so-called sight-seeing tours were normally booked through travel agents. It was only on a small number of occasions when tourists would turn up at the wharf for a sight- seeing tour. Generally as long as there was one

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tourist wishing to go on the sight-seeing tour a tour would take place, that is to say so long as the day was not too windy, so that for safety reasons the boat would not depart. The evidence does not suggest that the boat sailing with only one passenger on board was a regular occurrence. Indeed it seems highly unlikely that it ever happened. Passengers were, to some extent, required to participate in the sailing as each yacht was only crewed by one person, employed by Eastsail, a master class 5 coxswain skipper who might need assistance to get the boat in or out of the dock and to sail it effectively around the harbour. It is because of the possibility of passengers participating in the sailing that Mr Goddard described the tours as ``sight-seeing with a difference''. Three boats were available for the sight-seeing cruises, two of which were ``Yes'' and ``Surreal''.

38. As the letter from Mr Goddard to Dr Davis of 20 November 1996 makes clear a yacht would be available to the owner for ``extended use'' should the owner so require. Use by an owner (not for the scheduled sight- seeing tours) was thus also contemplated among the various uses to which the boats were to be put by Eastsail. The records to which reference will shortly be made include, in respect of ``Yes'', entries showing, for example ``owner 5 hours standby'' and a date. In one document these standby entries were but a week apart. Mr McLeod said that he only went out on the boat about once a month. Mr Goddard in cross- examination in respect of a particular record relating to ``Yes'' on 21 June 1998 noted that the boat had been prepared for sight-seeing on that day, but that on the morning the owner had rung asking to use the boat that day. The record thus showed the boat to be on standby on that day and also records ``preparation''. An entry just of ``preparation'' meant that a boat had been prepared to go out on a sight-seeing tour, but as there was no business it had not gone out. Where there was no narrative against a particular day this meant that it was not intended that the vessel go out, either for sight- seeing or charter work.

39. Mr Goddard produced some invoices and computer generated records purporting to show the use of the two boats in the relevant period. The most detailed records were those for the financial year commencing 1 July 1999 in respect of ``Yes''. It is interesting to note that on its statements in that period Eastsail describes itself as ``Sailing School - Corporate events - Yacht Charter and Regattas''. No mention is made of its running sight-seeing tours. In the accounting period commencing on 1 July 1999 Eastsail adopted a new accounting program. While the records are far from complete I am satisfied that in general terms they give a picture of the use of the two yachts in the relevant period.

40. The reports for the period 1 July to 30 July and 1 September to 30 September 1999 disclose that the yacht ``Yes'' made seven trips which the report describes as: ``scheduled''. This heading apparently relates to the sight- seeing tours. In the same period at least 10 trips were on charter. In the period from 4 August 1999 to 30 August 1999 the statement, while showing no ``scheduled'' trips, shows eight trips that were headed ``cruise'' and said to have been ``skippered''. There was no attempt to show that these were in fact sight-seeing trips, notwithstanding that no charterer's name is shown. On two days in that period there is an entry ``Yacht N/A'' on one occasion with the letters ``AM'' appearing. This obviously indicates that the yacht was not available. It may suggest that it was being used by the owner.

41. For the period prior to the implementation of the new accounting system there are summaries, computer generated, which record the use of the yachts. By way of example, the yacht ``Yes'' was apparently used for sightseeing between 6 April 1997 and 6 April 1998 118 times, that is to say slightly more than twice a week. In the same period, albeit occasionally on the same day as the yacht was used for ``scheduled'' purposes it was chartered 42 times (on the assumption that the entries ``sailing'' and ``Team Build'' refer either to a charter, or at least to a non sight- seeing tour).

42. Whether it is deliberate, or merely a result of the way the computer report was structured, the records for the period 1997-8 give no indication of use by the owner. A summary prepared by or for Mr Goddard discloses that in the period 6 April 1997 to 30 May 1998 ``scheduled'' sight-seeing use amounted to 420 hours (each trip being treated as 3 hours, although, as the evidence disclosed, it was only 2½ hours including coffee/tea break and preparation). By contrast other use (described as ``charter/Regatta'') amounted to

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326 hours. The calculation discloses that it is the latter use which is the more financially rewarding, generating $20,676 out of a total of $36,934 total gross income to Mr McLeod.

43. A computer generated report for the period from 6 June 1998 to 30 June 1999 in slightly different format discloses details of the occasions when ``Yes'' was actually used by Mr McLeod. Approximately 18 occasions are shown, somewhat more than the 12 a year to which Mr McLeod deposed. In this period ``Yes'' actually sailed on 80 occasions on the so-called scheduled sight-seeing tours - a little more than once a week. On many occasions the records show that the yacht was prepared to sail for sight-seeing tours but did not sail, presumably because there were no passengers who presented themselves.

44. The only records tendered in respect of ``Surreal'' were those covering the period from 7 June 1997 to 24 April 1998. They at least suggest that the yacht was first used by Eastsail in early June 1997. As already indicated the records for this period show no personal use by Dr Davis, but this, I would conclude, is not because there was none, but because that is the way the records were prepared. According to a summary prepared by or for Mr Goddard, ``Surreal'' operated the so-called ``scheduled'' tours for 174 hours out of a total of 340 hours it worked during the period. Since each tour is shown on the report as being of 3 hours duration, this means that it sailed such tours 58 times, or just over once a week. The remaining 166 hours were devoted to either ``regatta'' or ``charter'' ranging from 3 to 8 hours. As was the case with ``Yes'', so too with ``Surreal'', income from the non sight-seeing tours ($18,399) was considerably in excess of that derived from the sight-seeing tours ($7,588).

45. Having regard to this evidence, therefore, the question is whether at the relevant dates either boat qualified for the exemption in Item 59(3)(b) in Schedule 1 of the Act.

The Exemption Item analysed

46. It will be noted that the exemption item requires the ship to be ``for use'' by a person, that person being the person who claims to be entitled to the exemption from sales tax (``the exemption user'') ``mainly'' for ``long term leasing'' to another (in the present case, the other is Eastsail) where that other person ``is to use the ship'' in a particular way, namely ``mainly in providing regular and scheduled sight-seeing tours''. Each of the italicised expressions requires consideration.

47. The words ``for use'' require an investigation into the use to which the yacht is to be put by the exemption user. While, no doubt, that requires an investigation of purpose, and direct evidence of purpose may be given, the best evidence of purpose will, ordinarily, be found in the use to which the yacht is in fact put. As Fullagar J said in
Pascoe v FC of T (1956) 11 ATD 108; (1956) 30 ALJR 402, in considering evidence of ``purpose'' in the context of s 26(a) of the Income Tax Assessment Act 1936 evidence of the object to be pursued, that is to say the state of mind of the person claiming the exemption, will necessarily be the subject of careful scrutiny.

48. It would be a rare case where a claim is made that goods are for a particular use, where that use is not the use to which the goods are in fact put. The present is, if the submissions for the applicants are accepted, such a case. Putting to one side the effect of the document which is said to have been executed on 3 December 1998 and relevant only to the case of Mr McLeod, the case for each of the applicants in essence amounts to the proposition that whatever the documentation entered into, or in the case of Dr Davis, the lack of documentation, each intended a lease to Eastsail of the respective yacht for a term of at least four years for use by Eastsail for the requisite purpose.

49. The only evidence upon which either Mr McLeod or Dr Davis can really rely in support of their case (apart from, in the case of Mr McLeod, the assertion he made in the witness box as to his intention and in the case of Dr Davis his letter of 10 January 1997) is evidence that each was aware of the potential exemption from sales tax available and wanted to claim that exemption. From this evidence they seek to argue that it should be found that they intended to do whatever was necessary to obtain the exemption. I have difficulty with this proposition. The facts are different in each case.

50. I have no doubt that Mr McLeod was aware of the fact that a sales tax exemption was available and wanted to avail himself of it. I am not satisfied on his evidence and notwithstanding the agreement between the parties as to his knowledge, that he was aware of the precise terms of the exemption, so far as the exemption stipulated a minimum term for the lease. It is clear that Mr McLeod relied on

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ATC 4211

advice, either from Mr Goddard, or his accountants, on the question of the sales tax exemption. That reliance was, obviously misplaced.

51. Although Mr Goddard also was aware that a sales tax exemption was available, it seems that the standard lease which he entered into with boat owners was a lease of three years. It may be the case that Mr Goddard believed that three years was the relevant term, and either ignored, or misunderstood the letter mentioning four years which he had received from Dr Davis in January 1997. It is clear to me that Mr Goddard was aware only in general terms that a sales tax exemption was available for leases of yachts in providing regular and scheduled sight-seeing tours to the public and that while no doubt some conversation did occur between Mr Goddard and Mr McLeod in or around August 1996 about available sales tax exemptions that conversation did not specify four years as the requisite period of the lease.

52. As has been noted three years was the term of the lease that Sirise in fact initially entered into with Eastsail in connection with ``Yes''. It was also the term which his accountants referred to in their request for a ruling that the exemption item was satisfied. Whether Mr McLeod instructed the accountants that the lease was for three years and requested them to seek a ruling, or the accountants merely looked at the term of the lease in the document which Mr McLeod had obviously given them one does not know. It is possible that the accountants were, from the outset, responsible for the mistake and wrongly advised Mr McLeod that the requisite term of a lease to satisfy the sales tax exemption item was three years. However, the fact that the application for ruling was made in connection with a lease for a term of three years is a significant fact in the case and counts against the conclusion that Mr McLeod and Mr Goddard intended from the outset that the arrangement between them was to be for a term of four years.

53. In the case of Dr Davis I am satisfied that he was aware of the need for a four year term, as his letter of 10 January 1997 shows. It is less clear if he knew with any clarity the precise user which qualified for exemption, other than, of course, that there was a need for a schedule and that cruises were involved. Given that he ultimately signed the lease which bears the date 1 July 1997 and the terms of it, it is hard to think that Dr Davis was aware of the need that the long term lease to be entered into had to be mainly for the purpose referred to in the item.

54. There remains the question of the significance of the execution of the second document between Eastsail and Mr McLeod.

55. Counsel for Mr McLeod submitted that the sales tax law had to be seen against the background of the general law, cf
MacFarlane v FC of T 86 ATC 4477 at 4486 and
Zobory v FC of T 95 ATC 4251 at 4252-4253; (1995) 129 ALR 484 at 486-487. So much may be accepted. But that does not mean that the Commissioner is bound by the legal position ``as accepted by the parties'' as was then submitted. The parties to an agreement can not effect a change to an agreement retrospectively so that the agreement between them is altered as against the rest of the world. The parties can, no doubt, enter into an agreement, binding as between them, that a prior agreement they have entered into will be construed in a particular way from the moment the prior agreement was entered into. But the original agreement will, so far as the Commissioner is concerned, govern their relationship until the time of its amendment. For example A and B may enter into an agreement which provides, inter alia, that certain income will, for the term of the agreement, be held by A in trust for B. Later the parties may as between them agree to alter the arrangement ab initio to provide that that income will not be held in trust for B, but will always be treated as belonging to A beneficially. The agreement will be binding inter partes, but for income tax purposes the income will, until the date of the agreement, still be treated as beneficially the income of B.

56. The example above noted should be distinguished from the case where parties have entered into an agreement under the mutual mistake that the document they have executed records the terms of their bargain when it does not. In such a case an application could be made to a court for rectification of the written document. But even where an order of a court is obtained to rectify the written agreement, the court order does not operate to alter the past. The order of the court merely recognises what has always been the case, namely that the true agreement between the parties was not that which they have mistakenly executed, but what they in truth agreed upon.

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57. As an alternative to an order of rectification the parties could execute a deed rectifying their prior writing. That deed, if truly operating to record that the parties were under a mutual mistake, and also setting out what the parties acknowledge to be the true agreement between them would not, any more than a court order, actually alter the position as between the parties. It would merely record that agreement as it always was. Whether by court order or by deed, rectification requires that there be a mutual mistake, that is to say what is required is that there be a common intention between the parties as to the effect that the instrument they signed would have had which was inconsistent with the effect which the instrument which they executed in fact had: cf
Commissioner of Stamp Duties (NSW) v Carlenka Pty Ltd 95 ATC 4620. Mistake as to the revenue consequences of the agreement would not bring about the same result:
Baird v BCE Holdings Pty Ltd (1996) 40 NSWLR 374 at 384.

58. In the present case I am not satisfied that there was a mutual mistake as to the effect of the original agreement. Despite Mr McLeod's evidence as to the terms of the conversation he said took place between Mr Goddard and himself in August 1996 and the admission made by counsel for the Commissioner, I am of the view that it is more probable than not that Mr McLeod knew only in a general way that it was necessary that there be a lengthy lease entered into but that he relied upon Mr Goddard to know what the necessary term was. For whatever reason I think it to be the case that Mr Goddard believed that a term of three years would suffice - this was the term he had ordinarily incorporated in such leases. In other words, both he and Mr McLeod originally intended that there be a lease of three years. There was a mutual mistake, but that was as to the term required to come within the exemption item, not as to the term of lease which they agreed to.

59. It follows that for this reason alone the exemption item was unavailable to Mr McLeod.

60. The next element in the exemption item is the word ``mainly''. The word appears twice in the item; first in relation to the words ``for long term leasing'' and second in relation to the provision of regular and scheduled sight-seeing tours. Usually the word ``mainly'' means ``more than half'', see eg
Fawcett Properties Ltd v Buckingham County Council [1961] AC 636 at 669. Necessarily, the context will be relevant in determining what the word means. Where first used, the word directs attention to the main or substantial use to which the exemption user intends to put the yacht. This will be the main use. Where next used the word ``mainly'' appears in the context of the contractual arrangement that is required to exist between the exemption user and the lessee of the ship.

61. Section 3(1) of the Sales Tax (Exemptions and Classifications Act) 1992 defines the word ``mainly'', unless there is a contrary intention, to mean ``to the extent of more than 50%''. There is a question whether a contrary intention appears.

62. It was submitted for the Commissioner that a contrary intention does appear and that the word should be given its ordinary English meaning of ``chief; principal; leading'', the first meaning appearing in the Macquarie Dictionary, 2d edition. Reference to the legislative history supports the view that Parliament did not intend that the word ``mainly'' as first used was to be used in the defined sense. When the 1992 rewrite of the sales tax legislation was adopted the exemption item with which this case is concerned was rewritten to make it easier to follow, but otherwise, so the Explanatory Memorandum stated, there was to be no substantive change. The prior exemption was item 119(1A). It spoke of the vessel being used ``exclusively or principally''. These words were replaced by the word ``mainly''. 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%. So, while in my view a yacht would not fall outside the exemption merely because a use other than for sight-seeing tours was permitted, any other use must be subsidiary to the preponderant use. The substantial required use must, however, be that described in the exemption item.

63. I doubt, in any event, whether the difference in meaning of the word ``mainly'' has any real significance in the present case. This is so because what the item requires is that the relevant main use be that which the long term lease mandates. Actual use, the subject of the evidence which I have recounted, has little relevance to the issue, save so far as it casts light on the use which is required by the

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ATC 4213

intended lease with which the exemption item is concerned.

64. In the case of Sirise the lease executed on or around 2 April 1997 referred to use as being for charter and sailing school purposes. Such a use on no view was a use ``mainly'' for the relevant purposes. The later (and purported rectification) lease might qualify as a lease which was mainly for the relevant purposes. As we have seen in the case of the boat ``Surreal'', no lease at all was entered into until a considerable time had elapsed and the Commissioner had commenced investigation. One is thus left in that case then to the letter from Dr Davis to Mr Goddard of 1 November 1996. That letter makes it clear that the vessel was to be placed with Mr Goddard for ``regular sight-seeing harbour trips from Rushcutter's Bay''. If that were to qualify as the relevant use for the purposes of the item, then I think it should be taken as the main use which it was intended Dr Davis should be required to undertake. There is reference in that letter to use for some corporate charter work initially, but the context of the letter makes it clear that such was not contemplated as the main use, but rather an incidental use. The stated use is, however, wider than the main use which the exemption item requires.

65. The expression ``regular and scheduled sight-seeing tours'' was the subject of consideration in the only case which has considered the exemption, namely,
Mr Boat Pty Ltd v FC of T 86 ATC 4689. In that case Lee J of the Supreme Court of New South Wales said [ at 4691]:

``... the expression `regular and scheduled tours' in my view, contemplates that there will be a timetable in the sense that daily operation of the service and the times of departure of the craft are fixed in advance and can be ascertained either from enquiry or from a notice which would be called a timetable.''

66. It is submitted for the applicants that the tours conducted by Eastsail were in accordance with what was said in that case ``regular and scheduled sight-seeing tours''. The Commissioner submits otherwise.

67. In my view the tours advertised and run by Eastsail can be see to be scheduled in the relevant sense, they were scheduled to take place on a daily basis and they certainly included sight-seeing. The Eastsail boats were available to go out on a so-called sight-seeing tour at any time between 9.30am (or 10am) and 12pm - depending upon the time booked in advance. In other words they ran at a set and defined time in the day, which is all that scheduled means. Thus, for the purposes of the case, I am prepared to accept that Eastsail ran tours that were both regular and scheduled, in the sense that if there was a demand (and prebooking) each tour would commence at 9.30am (or perhaps 10am) and conclude at 12pm. I am less convinced that the tours were properly to be characterised as sight-seeing for they had two quite distinct attractions: sight- seeing and sailing. The adventure nature of the experience of sailing, which Mr Goddard's evidence pointed out, meant that each excursion was as much a sailing tour as a sight-seeing tour. However, it is not necessary to form a decided view on this point.

Were the yachts ``for use'' by each applicant mainly for long-term leasing?

68. As is now clear from the evidence Sirise did enter into a lease with Eastsail shortly after purchasing ``Yes''. But that lease was not a long term lease within the exemption item, it was a lease for three years. Counsel for Sirise submits that I should ignore this and instead, concentrate upon three matters. First, that Mr McLeod was aware of the exemption item, and thus aware of the need for a minimum four year term. Second, Mr McLeod signed the lease without proper consideration of its terms. Third, as the amending deed made clear the parties indeed intended a five year lease, the three year lease was a mistake and I should give effect to the intention of the parties in finding that the yacht was ``for use'' in long term leasing as defined.

69. As I have already pointed out I am not satisfied on the evidence that both Mr McLeod and Mr Goddard intended at the outset to enter into the lease ultimately prepared by the accountants and executed by the parties in December 1998. It is clear from Mr Goddard's evidence that all his leases, at least until enquiries of the Commissioner commenced, were three year leases. The lease entered into by Eastsail was not entered into it by mistake. That was, I find, the lease which Eastsail intended to enter into. The fact that when the problem of non-compliance with the exemption item had emerged Eastsail was prepared to enter into whatever lease the accountants

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ATC 4214

prepared is not to the point. No doubt Mr Goddard was happy to do whatever was necessary to help Mr McLeod, including signing a document which as between the parties may have estopped them from denying that there had been no mistake. I am also not prepared to find that Mr McLeod was particularly conscious of the need for a four year lease. His evidence that he was, was rather self serving and does not sit well with his lack of interest in the lease he signed. Rather, as already indicated, I find that Mr McLeod was generally aware that there was a sales tax exemption, although not in detail as to its requirements and that he relied upon Mr Goddard (and his accountants) to ensure the exemption was available to them. The fact that his reliance was misplaced is likewise not to the point. I am reinforced in this by the fact that the accountants put up the claim for exemption to the Australian Taxation Office as arising from the entry into of a three year lease . This suggests neither that the three year lease was a mistake, nor that its significance was appreciated. It was, I would infer, only when advice of counsel was taken that the need to assert mistake through the execution of the second deed arose.

70. I am, therefore, not satisfied that in the relevant sense the yacht ``Yes'' was for use by leasing it for four years to Eastsail.

71. Although it seems clear that Dr Davis did not enter into a written lease until some eighteen months after Eastsail first commenced using the yacht ``Surreal'', that is not necessarily fatal to his case, for the item looks at intention at the relevant time, not what happened. However, the problem for Dr Davis is that while there was an oral agreement between Mr Goddard on behalf of Eastsail and himself, I must conclude that that agreement, while being for a lease of the yacht for four years, must be taken to be on the terms of the agreement which bears the date 1 July 1997. But I think that it is difficult to say that the main mandated user in that document was for scheduled sight seeing tours. That was but one of the main uses to which the yacht was required to be put, other uses being sailing schools and yacht charter, both uses outside the ambit of the exemption item. Even if the word ``mainly'' has the same meaning as it has in the exemption item, as a matter of construction, the word used in the lease does not govern only the scheduled sightseeing tours.

72. Of both cases it must be said that a mere generalised intention that a yacht is to be dealt with in such a way as to ensure the exemption item is satisfied and sales tax freed from the application to own use will not qualify the yacht for exemption from sales tax under the item. For the exemption item to be available the exemption user must have the intention to lease the yacht for four years at least and that lease must require that the main use be that described in the exemption item.

73. It follows that neither Sirise, nor Dr Davis succeed in demonstrating that ``Yes'' or ``Surreal'' were for use in long term leasing for the use described in the item.

The required use of each ship - mainly

74. The requirement of the exemption item that the relevant ship ``is for use mainly'' for the defined purpose requires there to be consideration of two factors. The first, and probably the most important, is to be found in the terms of the long term lease of which the exemption item speaks. Where there is none, or where the lease permits alternative uses, none of which is main or predominant, I am of the view that the exemption item is not satisfied. That is the case here.

75. If the test is to be fulfilled solely by reference to the terms of the lease the question might arise (it is not the present case) that the lease requires the yacht to be mainly used for regular and scheduled sight-seeing tours, but in fact the actual use is different. It is not necessary to consider this conundrum in detail. In the present case if one looks at actual use the exemption item would, most likely, not be satisfied. On the view I take as to the use of the word ``mainly'' in the exemption, the exemption would not be satisfied by merely adding up the number of hours of use for regular and scheduled sight-seeing tours and then if that number of hours of use exceeds the number of hours devoted to other uses, treating the exemption item as having been satisfied, even if evidence of actual use is relevant at all.

76. As I have already noted the evidence of use is far from satisfactory. The truth is that on a substantial number (indeed a majority) of days in a year neither yacht was used at all. No doubt it is true that if a yacht was not chartered it was available to go out on a tour assuming

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ATC 4215

that there were bookings for it. Given that there was a number of yachts available for tours and it would seem not large numbers of bookings it is hard to say that each yacht was realistically used for tours when it sat in the dock on a particular day. It is not irrelevant that a large part of the income of both Eastsail and the owners came from chartering. I am unable on the evidence before me to find in respect of either yacht that it was in fact used mainly for sight-seeing tours, even if those tours might satisfy the description of being regular and scheduled and being sight-seeing tours.

77. Given the conclusions I have reached it is not necessary that I consider what consequence, if any, might arise by the signing of the incorrect exemption claim form by Dr Davis.

78. Each application for a declaration should be dismissed with costs.

THE COURT ORDERS THAT:

1. The application for a declaration be dismissed.

2. The applicants pay the respondent's costs.