W. Smith v. Federal Commissioner of Taxation.

Judges:
Shepherdson J

Court:
Supreme Court of Queensland

Judgment date: Judgment handed down 26 February 1982.

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Shepherdson J.

This is an appeal by William Douglas Wilson Smith (whom I shall herein call ``the taxpayer'') against an assessment of income tax payable in respect of the year ended 30th June 1977. By the assessment the Deputy Commissioner disallowed the taxpayer's claim for a deduction of $153,719 described as an ``investment allowance''. The claim for the investment allowance was based on the acquisition by the taxpayer of a vessel known as ``Sea Strike'' on 6th April 1977 at a total cost (as disclosed in the return) of $384,298.

The appeal requires consideration of Subdiv. B of Div. 3 of Pt. III of the Income Tax Assessment Act 1936-1977. This Subdivision was inserted by Act No. 50 of 1976. It has since been amended but these amendments are not presently relevant.

The opening section of the Subdivision (sec. 82AA) provides (inter alia) that, subject to the following provisions of the Subdivision, the 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 or exclusively -
  • (i) in Australia; and
  • (ii) for the purpose of producing assessable income otherwise than by -
    • (A) the leasing of the eligible property;
    • (B) the letting of the eligible property on hire under a hire-purchase agreement; or
    • (C) the granting to other persons of rights to use the eligible property....''

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Subsections 82AB(1) and (2) provide:

``(1) Subject to this Subdivision, where -

• (a) on or after 1 January 1976, a taxpayer has incurred expenditure of a capital nature (in this section referred to as `eligible expenditure') in respect of the acquisition or construction by him of a new unit of eligible property in relation to which this Subdivision applies;
• (b) the eligible expenditure exceeded $500;
• (c) the eligible expenditure was incurred -
  • (i) in respect of a unit of property acquired by the taxpayer under a contract entered into on or after 1 January 1976 and before 1 July 1985; or
  • (ii) in respect of a unit of property that was constructed by the taxpayer and the construction of which commenced on or after 1 January 1976 and before 1 July 1985; and
• (d) the unit of property was first used or installed ready for use before 1 July 1986,

there shall be allowed as a deduction from the taxpayer's assessable income of the first year of income during which that unit was either used for the purpose of producing assessable income, or installed ready for use for that purpose, an amount (in this section referred to as the `relevant amount') ascertained in accordance with the following provisions of this section.

(2) Where the eligible expenditure was incurred -

• (a) in respect of a unit of property acquired by the taxpayer under a contract entered into before 1 July 1978; or
• (b) in respect of a unit of property that was constructed by the taxpayer and the construction of which commenced before 1 July 1978,

and was so incurred in respect of a unit of property that was first used or installed ready for use before 1 July 1979, the relevant amount is such percentage of the amount of the eligible expenditure as is prescribed by sub-section (3).''

Subsection 82AB(3) contains the prescribed percentage and, where the eligible expenditure is not less than $976 it is 40 per cent. This is the percentage relevant in the instant case.

Section 82AF is an exclusory provision in that it specifies property to which the Subdivision does not apply. In this case subsec. 82AF(2) is especially relevant and I now set it out in full although in the case attention was focused on para. (f) thereof.

``(2) This Subdivision does not apply in relation to -

• (a) motor vehicles (including vehicles known as four wheel drive vehicles) that are -
  • (i) motor cars, station wagons, panel vans, utility trucks or similar vehicles;
  • (ii) motor cycles or similar vehicles; or
  • (iii) other road vehicles designed to carry loads of less than 1 tonne or fewer than 9 passengers;
• (b) articles being, or being reproductions of, paintings, sculptures, drawings, engravings or photographs, or articles of a description, or having a use, similar to that of any of those articles;
• (c) books;
• (d) films, tapes, discs or other similar devices in which images or sounds are, or information is, stored or that are designed to be used for the storage of images, sounds or information;
• (e) musical instruments and equipment for use in conjunction with musical instruments;
• (f) plant or articles (other than plant or articles referred to in sub-section (1)) for use in, or primarily and principally in connexion with -
  • (i) amusement or recreation;
  • (ii) sport (including the racing of animals or vehicles) or physical exercise or any similar activities;

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    ATC 4076

  • (iii) gaming or gambling;
  • (iv) circus performances or the performance in public of music, plays, dancing or similar entertainment; or
  • (v) the exhibition to the public of cinematograph films otherwise than by television broadcasting;
• (g) plant or articles referred to in paragraph (h) or (i) of subsection (3) of section 62AA or in paragraph (h) of subsection (3) of section 62AB;
• (h) wharves or jetties; or
• (j) wearing apparel (other than wearing apparel designed principally for protective purposes) and accessories to such apparel.''

I refer also to sec. 82AQ an interpretation section but in particular subsec. (1) and (3) thereof.

The respondent Commissioner as I have said, disallowed the investment allowance claim. He did this on the basis that the buying of the vessel was ``related to entertainment which is not allowable under sec. 82AF(2)''.

Section 82AA contains several elements each of which has to be established before there can be any entitlement to the investment allowance.

``Eligible property'' is defined in subsec. 82AQ(1) as meaning ``plant or articles within the meaning of section 54 and includes earth tanks constructed for the purpose of conserving water for use in carrying on a business of primary production''.

``Unit'' is not defined and for the taxpayer it was submitted that the boat was a unit of eligible property. This was not challenged by the Commissioner. In addition, the Commissioner did not challenge the taxpayer's claim that he had acquired the boat within ``acquisition of property'' as referred to in subsec. 82AQ(3).

The taxpayer's claim that the boat had been acquired for use by him wholly and exclusively in Australia and wholly and exclusively for the purpose of producing assessable income was challenged by the Commissioner.

It is now necessary to say something of the facts as claimed by the taxpayer and to express my views on them.

The taxpayer gave evidence that he acquired a 56 foot boat called the ``Sea Strike'' pursuant to a lease purchase agreement with a company called Lease Purchase Limited and that this agreement was made on 20th April 1977.

Documents dealing with this acquisition are contained in Exhibit 1. On 16th February 1976, the taxpayer had entered into a written contract with David Jan Pleysier, a boat builder of Perth, to build the vessel. On 30th April 1976 taxpayer and Pleysier signed a document described as ``Acknowledgement of Release from Contract'' the effect of which was to cancel the earlier contract. Annexed to this release document was another written agreement also dated 16th February 1976 made between Lease Industrial Finance Limited and David Jan Pleysier and Sheryl Maree Pleysier for the construction of the same vessel at the same price.

On 6th April 1977 taxpayer signed a lease purchase agreement with Lease Purchase Limited (formerly Lease Industrial Finance Limited). Lease Purchase Limited accepted the offer on 20th April 1977. A copy of this document (which is covered by ``The Hire-Purchase Act of 1959'' (Qld.)) shows that the vessel described was:

``One (1) only new 55' 9" Twin Screw Diesel Powered Fly Bridge Deep V Game Fishing Launch. `Sea Strike'''

fitted with certain extras therein set out.

In evidence the taxpayer said that he first became interested in designing and constructing the new boat during 1975 and that at that time he was the owner of another boat 39 foot 6 inches long also called ``Sea Strike''. He said that boat had been used by him for the purpose of the production of assessable income by chartering it to game fishermen. In the witness box, taxpayer claimed that the earlier ``Sea Strike'' had very limited other uses having regard to its size. He said that in 1975 he had to have a much larger vessel capable of a lot more flexibility for chartering. He defined ``flexibility'' as meaning ``flexibility for other types of charter'' i.e. other than for game fishing.

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ATC 4077

Taxpayer further said that in 1975 he had in mind contract work for the Government on long-term surveys for the Fisheries Department, acting as a tender vessel for personnel and mother shipping. This latter term he said meant having a vessel capable of providing ``accommodation catering for food etc. whilst out in remote areas at sea''. The chartering of the earlier ``Sea Strike'' to game fishermen had apparently been done mainly in the Cairns area of North Queensland. Taxpayer said (this was not disputed) that the game fishing season lasted about three months of the year - about 70 days. This was from about September to November.

The taxpayer further stated that when considering the larger vessel he ``was primarily concerned that it would be engaged for the other nine months of the year because the three months in the game fishing season was not a financial proposition on its own''.

He further said:

``My thoughts were to have a vessel designed as this one was to enable it to tender and operate for long-term charters from 6 to 12 months. We would have forgone any game fishing for a number of other reasons.''

At the time the new vessel was considered, taxpayer had as master of the first ``Sea Strike'' Dennis Wallace who he described as an experienced seaman and a person who assisted him in high degree both in planning the vessel and in planning its prospective uses. Taxpayer asked Wallace, on his behalf, to speak to the Fisheries Division of the Department of Harbours and Marine. According to taxpayer, Wallace, after speaking to a Mr. Linneweber told taxpayer that reports were encouraging that there was work available for what taxpayer had in mind which ``was long-term Government or long-term charters in general''.

In answer to a question as to whether that information affected his thinking as to going ahead with plans for the construction of the new boat, taxpayer answered ``decidedly''.

The new ``Sea Strike'' was built to the requirements of the American Bureau of Shipping. The evidence - particularly from Mr. Doherty, a marine surveyor - showed that compliance with these requirements increased construction cost of the vessel by some 20 percent. When asked why he decided to have the vessel constructed in accordance with A.B.S. requirements, taxpayer replied:

``For a number of reasons, one of them giving the vessel the utmost flexibility for any future charter work, whether it be within Queensland or in another State or even outside of the country.''

He also said that he would not have bothered to have the boat comply with A.B.S. requirements had he intended to build it just for game fishing - the local Harbours and Marine requirements were not as stringent as those of the A.B.S. survey.

Taxpayer took delivery of the new vessel in early May 1977. Trials of the new vessel were performed in Western Australia where it had been built. It was then sailed around the norther coastline of Australia ultimately to Brisbane. Taxpayer himself undertook the voyage as far as Gove.

According to taxpayer the new ``Sea Strike'' did not perform satisfactorily. He said he had trouble with ``engines, gearboxes, refrigeration, certain electricals - just about all the engineering''. He claimed there were regular and frequent breakdowns with the engines and gearboxes until the second half of 1980, that these problems with his boat were widely known ``in just about all the Queensland coastline to right around to Western Australia'' and that over the period from delivery to the latter half of 1980 the vessel had a reputation of ``no reliability whatsoever''. Taxpayer said he felt he just could not commit himself to a long-term charter contract.

In short, the burden of taxpayer's evidence was that because of the above problems with his vessel and its unreliability, his hopes for longer-term charter work (other than game fishing charter) had not been fulfilled.

Wallace was not called as a witness. However, Laurence Sidney Linneweber was. From 1975 until 1980 Linneweber was employed by the Fisheries Division of the Department of Primary Industries (Commonwealth) as a senior investigation officer. Until September 1977 he was stationed at Cairns. He said that in 1975 his Department was using private boats for the purposes of patrolling to supervise prawn

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ATC 4078

closures and of prawn sampling. These uses of private boats had been on ``an ad hoc basis''. He said that in 1975 the Department was looking at private charter boats for these types of work. In 1975, Linneweber said, Navy boats were used to police foreign fishing boats.

Linneweber further gave evidence that Wallace spoke to him on more than one occasion about availability of work for the forthcoming year. Linneweber was aware that a new boat was being built but says that he told Wallace ``that work would be available on an ad hoc basis''. The type of work discussed with Wallace was prawn closures and policing foreign fishing vessels.

It transpired from Linneweber's evidence that each private boat given work on policing prawn closures could expect about 4 weeks work a year. Work in respect of foreign fishing vessels became available only when those vessels were sighted. He was unable to speak of the situation in Cairns after September 1977. It is fair to say that he said nothing about long-term Government contracts such as were mentioned by taxpayer - nor did he give me the impression that he in any way led Wallace to believe that there would be sufficient work for the new ``Sea Strike'' to keep it busy for the nine months of the year following completion of the marlin fishing season in the Cairns area.

The taxpayer, in cross-examination, acknowledged that a number of letters which were put into evidence (see Exhibits 3, 4, 5, 6 and 9) were composed by him. He also agreed that the general specification for the new vessel (Exhibit 7) was his.

These documents which (save for Exhibit 9) were contemporaneous with the period of which the taxpayer spoke in evidence, cast a different light on the taxpayer's oral evidence as to his intended use of the new ``Sea Strike''. I do not accept the taxpayer's evidence in respect of the flexibility and the intended use of the vessel for chartering other than for game fishing.

I find that, at the time the vessel was being constructed, at the time the taxpayer took delivery of it, and at all times material to this appeal the prime purpose for its use was charter sport fishing and that the vessel was to be basically non-passenger carrying (see Exhibit 5). I am satisfied that right from the outset this vessel was to be principally for game fishing. Both the contracts for the building of the vessel showed that the owner was to provide a game fishing chair (see Exhibit 1). The specification (Exhibit 7) showed that in the cockpit there was to be a ``fighting chair'' which I interpret as a game fishing chair, albeit readily removable. Indeed, as late as 11th May 1979 (Exhibit 9) taxpayer stated that the operation of the vessel was ``primarily for charter fishing on the Queensland coast''.

The taxpayer produced (as part of Exhibit 1) details of charters for the period May 1977 to June 1978. The first charter was on 30th July 1977. In the period from 19th September 1977 to 7th December 1977 (both dates inclusive) the total amount of charter fees earned was $40,543 - during the period of the marlin fishing season in Cairns. It is fair to say also that in 1975 the taxpayer had gone to the United States of America and had taken bookings for the 1977 marlin season. This conduct has helped reinforce my earlier expressed view that the plaintiff built the boat and acquired it with the dominant intention of using it for game fishing work and not for the greater flexibility of which he spoke in the witness box.

I turn now to the fact that the vessel was built to meet the requirements of the American Bureau of Shipping Standards. I have already referred to the evidence as to the estimated cost increase in meeting the standards. Mr. Doherty thought it ``a bit extravagant'' to meet the standards ``just for game fishing''. However, it is the reasons which actuated the taxpayer that concern me. They were:

• (a) The utmost flexibility for any future charter work whether it be within Queensland or in another State or even outside Australia.
• (b) That an international survey, from the future sale point of view gave better prospects of sale.
• (c) That every Australian State would recognise the international survey.

On the evidence I find it was the latter two reasons that probably influenced the taxpayer to have the survey incorporated in the building of the vessel and that the first

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ATC 4079

stated reason played no part. Compliance with the A.B.S. survey requirements is therefore of no relevance in this appeal.

I should refer also to one other proposed use for the vessel claimed in grounds 2 and 3 of the taxpayer's notice of objection. That was that the vessel was acquired for use in (inter alia) marine survey work. No evidence was led to support this claim and its omission also helps strengthen my earlier conclusion as to the dominant purpose for which the taxpayer acquired the vessel. It is perhaps of some interest to note that at the time the objection was lodged (23rd June 1978) no mention was made of use of the vessel for policing prawn closures, pursuing foreign fishing vessels or similar work under Government contracts - none of this in my view could possibly be classed as ``marine survey work''.

There were two matters raised by Mr. Morley Q.C. who appeared for the Commissioner with which I should now deal. Firstly, he said, in relation to sec. 82AA that the taxpayer had not proved and could not prove that the vessel was for use in Australia because, as I understood him to say, the Income Tax Assessment Act operated only to the marine low water mark. He referred to
Bonser v. La Macchia ((1969) 43 A.L.J.R. 275). I do not accept the proposition that for the purpose of sec. 82AA the words ``in Australia'' exclude that part of Australia on the seaward side of the low water mark. Since
New South Wales v. The Commonwealth ((1975) 135 C.L.R. 337) it cannot be doubted that sovereignty in respect of the territorial sea and the bed and subsoil is vested in and exercisable by the Crown in right of the Commonwealth. Mr. Morley further referred me to the definition of ``Australia'' in sec. 17 of the Acts Interpretation Act 1901. I do not accept Mr. Morley's submission that for the purpose of construing sec. 82AA ``Australia'' should be limited to the land mass above the low water mark. A moment's thought will readily bring to mind taxpayers who produce the whole of their assessable income from work at sea and whose income the Commissioner is pleased to tax under his Act. I refer particularly to trawler fishermen operating from the numerous ports around Australia. I reject this submission.

Secondly, Mr. Morley submitted that for the purpose of sec. 82AB the vessel was not ``used'' for the purpose of producing assessable income or installed ready for use for that purpose in the 1977 tax year. He based this submission on the first charter which was in July 1977. The vessel was ready for use in May 1977. Depreciation under sec. 54 was claimed on the vessel as from that date and this claim has been accepted by the Commissioner in making the subject assessment. In the light of this fact I find this submission rather strange. In my view, once the vessel was delivered to the taxpayer and ready for use by him then from that date the provisions of sec. 82AB commenced to operate. I do not accept, so far as subsec. 82AB(1) is concerned, that actual use is required before allowing the prescribed deduction. In my view the intention of the legislation is that once the unit is functionally ready for use then the taxpayer is to be allowed the deduction in accordance with the subsection. Accordingly I reject this second submission.

I find therefore that the taxpayer has established each of the elements in sec. 82AA. There remains the exclusory provisions in sec. 82AF and to that section and in particular subsec. (2)(f) thereof I now turn.

Mr. Morley has submitted that the investment allowance does not apply because the ``Sea Strike'' was used for sport, amusement and recreation and is therefore excluded by the operation of subsec. 82AF(2)(f)(i) and (ii).

Mr. Davies Q.C. who appeared for the taxpayer submitted that subsec. 82AF(2)(f) poses two alternative tests which are:

• (1) Was the vessel acquired by the taxpayer for (the dominant purpose of) use by him in the activity engaged in by him of amusement or recreation or sport?
• (2) Was the vessel acquired by him primarily and principally for use by him in connection with the activity engaged in of amusement or recreation or sport?

He further submitted that the phrase ``for use'' in this subsection means ``acquired or constructed by the taxpayer for use by him for the purpose of producing assessable income''. He bases this submission on a

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ATC 4080

reading of sec. 82AF with sec. 82AA and in particular subsec. 82AA(a) which provides:

``... this Subdivision applies in relation to a unit of eligible property acquired or constructed by the taxpayer that is... for use by the taxpayer... for the purpose of producing assessable income...''

He relies also on certain provisions in subsec. 82AF(1) in which there are references to ``use in a business carried on by the taxpayer'' and ``use in premises used or held for use by the taxpayer principally for the purpose of deriving income in the nature of...''.

The difficulty I have in accepting these submissions is that when one comes to subsec. 82AF(2)(f) there has been a change in the language of the statute.

One notes also sec. 82AE which provides that the Subdivision is not to apply in relation to certain structural improvements, and states:

``... fixtures or fittings for use in or in connexion with the provision for employees of facilities for entertainment, amusement or gambling or for engaging in cultural, sporting or recreational pursuits or in any similar activities...''

are not to have the benefit of the investment allowance. Subsection 82AF(1) has (as Mr. Davies correctly points out) on a number of occasions referred to use in a business of the taxpayer.

However, the change when one comes to subsec. 82AF(2)(f) is quite marked and to accede to Mr. Davies' submissions requires me to read the words ``by the taxpayer'' into the legislation after the words ``for use'' in subpara. (f).

I do not accept the submissions because, giving the language its natural meaning, in my view it is the use to which the vessel was put which determines whether or not the Subdivision is to apply.

As was correctly pointed out to me there are two alternative tests in subpara. (f) and they are:

```In' or `primarily and principally in connection with' any of the activities there set out.''

In view of my earlier finding as to the taxpayer's dominant purpose in acquiring the vessel I find that the vessel at the material time was used primarily and principally in connection with game fishing. It was not suggested by either counsel that game fishing was not a sport. In my opinion subsec. 82AF(2)(f) therefore operates to prevent the taxpayer receiving the investment allowance.

In the result therefore I find that the taxpayer has failed to discharge the burden of proof which lies on him of satisfying me that the assessment was excessive. I therefore confirm the assessment and dismiss the appeal.