Transfield Kumagai Contracting Pty. Ltd. v. Federal Commissioner of Taxation

Judges:
Grove J

Court:
Supreme Court of New South Wales

Judgment date: Judgment handed down 17 October 1990.

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Grove J.

This summons seeks declaratory orders in respect of the exemption from liability to sales tax of certain items which are to be used in connection with the construction and operation of the Sydney Harbour tunnel (the tunnel). The subject matter includes coaxial cable, observation cameras and radio communication sets of which more detail will be given later.

The relevant exemption is prescribed by item 74 of the First Schedule of the Sales Tax (Exemptions and Classifications) Act 1935, namely:

``74 Goods for official use (whether as goods or in some other form), and not for sale, by a department of the Government of the Commonwealth or of a State or of the Northern Territory, or an authority which is completely controlled by, and the expenditure of which is exclusively borne by, the Government of the Commonwealth or of a State or of the Northern Territory, as the case may be...''

The ultimate issue can be expressed in the question whether the subject goods are for the use of the Roads and Traffic Authority (RTA) of the State of New South Wales. Agreed facts include that the RTA (as successor to the Commissioner for Main Roads, any reference to whom may be taken as a relevant reference to the RTA) is an authority which is completely controlled by and the expenditure of which is completely borne by the Government of the Commonwealth or a State and that, for the purposes of item 74, the goods are not for sale by the RTA.

The site of the tunnel is upon land vested in the RTA pursuant to sec. 12 of the Sydney Harbour Tunnel (Private Joint Venture) Act 1987. By an agreement titled and described as a lease the RTA has ceded certain rights to a company called Sydney Harbour Tunnel Co. Ltd. (SHTCL). In its specific terms the lease is a quite unconventional agreement, however from a facility granted by it SHTCL has subcontracted the design and construction obligations to a joint venture between Transfield (SHTJV) Pty. Ltd. and Kumagai Gumi Co. Ltd. and this joint venture entity has in turn subcontracted its obligation to construct the tunnel to the plaintiff.

The evidence discloses that the plaintiff is a special purpose company formed to carry out this construction. It is not a trading company. It is observed that the building work is actually being done by the plaintiff or, pursuant to agreements, by tenderers and further subcontractors and for this purpose the project has been divided into some 25 ``packages''. The potential liability to sales tax on the items to be used in one of the packages and pertinent to the items presently under consideration has been estimated at approaching $7.5m. Other packages will also involve acquisition and use of goods potentially liable to sales tax. In these circumstances, no contention was advanced by the defendant that declaratory proceedings were inappropriate and I agree with the implicit concession.

The items which are the subject of this summons have different qualities relative to the span of time during which the plaintiff and its proprietor and parent corporations will have an interest in the tunnel. Pursuant to specifications, the minimum design life of the tunnel structure is 100 years; major mechanical and electrical items, pavement (except road surface) and tunnel finishes is 20 years and the road surface is 10 years. Renewable items are

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required to have a reasonable life (expectancy) at the date of expiry of the lease. This is now scheduled for 31 August 2022. The commencement date will be ascertainable from provisions in the agreement but it is anticipated that the term will be 30 years preceding the last-mentioned date and this period will be known as the ``tunnel site term''. The language of the responsible Minister at the launching of the project was that after the (then prospectively a different period of years from 30) the tunnel would ``revert to government ownership''. The statute vested the freehold in the RTA and nothing has altered that situation. There has been no transfer of ownership which has the potential to revert nor is the lease a demise of the owner's rights for a term of years simpliciter with a reversion upon expiry.

Against this 30-year period it is agreed that the SUCORAD radiating coaxial cable (the cable) has an anticipated physical and technological life of longer than that; the personal mobile radios (the radios) less in both respects and the fixed and zoom cameras (the cameras) a physical life longer and a technological life shorter.

It is apt to acknowledge what the purposes of the items are. The cable will be fixed in position and contributes to the establishment of a radio rebroadcast system within the tunnel. It also enables maintenance of effective communication between receivers and transceivers. Thus it becomes part of necessary surveillance and emergency service communication equipment. Its intrinsic design is to enable members of the public passing through the tunnel with radios in their vehicles tuned to AM or FM broadcasts to have continued reception strength but there is a corollary ability for controllers, which category includes staff of both the RTA and SHTCL, to interrupt by overriding the signal and give desired warnings, traffic directions or the like which can be heard by those transitting motorists.

The mobile radios will be supplied for use to maintenance and operational personnel and will enable contact between each other and the central control facility. The personnel working externally to the control would be employees of SHTCL. The evidence of Mr Di Bernardino is that the radios were specially designed for use in the tunnel and I infer that they would be unsuitable for adaptation for other use without radically altering their nature and components.

Obviously the cameras are part of the surveillance system. The specifications are structured to require a capacity for observation within the entire tunnel at the screens located in the central control facility. As already noted, employees of both RTA and SHTCL will monitor the screens. A submission was advanced by the defendant that those RTA employees viewing the screens were not ``using'' the cameras in any relevant sense. An analogy was offered of a citizen ``using'' his television receiver to view a telecast of an overseas sporting event who could not, it was put, be considered to be using the camera being operated by the television broadcasting company perhaps half a world away nor any intermediate equipment such as a satellite. I reject this submission. It is clear that relevant use need not be exclusive (
D.F.C. of T. v. Stewart 84 ATC 4146; (1983-1984) 154 C.L.R. 385) nor do I contemplate that immediate physical association between the user and the object is essential. To use in an ordinary sense is to utilise, to take advantage of or to exploit. These meanings are not exhaustive but I regard the viewer of a screen in the defendant's analogy as indeed utilising each of the components which led to his reception of a comprehensible image. I therefore conclude that in the current context the RTA controllers will use the cameras.

The primary submission of the plaintiff is that these categories of items ought not be viewed discretely but should be classified as incorporated constituents of the tunnel. No distinction should be drawn by reason of the mobility of the radios because, on the evidence, they do not have a capacity to be employed for any other purpose. Once the individual components are characterised as part of the tunnel itself then the applicability of item 74 will be determinable by answering the question whether the RTA is then an entity for whose use the tunnel is designed and will be constructed and operated.

It is appropriate to undertake some brief analysis of the nature of the project and the structure pursuant to which it will be operated. The freehold of the tunnel site is and will remain vested in the RTA by force of statute. It is to be constructed by the joint venture through

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the corporate vehicles whose arrangement I have mentioned. The lease grants to the lessee a restricted interest in the tunnel limited to the use of it for its design, construction, operation, repair and maintenance and some incidentals thereto (cl. 5.1). Concerning the construction, it is the lessor which undertakes the responsibility to obtain consents, approvals and authorisations needed to carry out the project (cl. 2.5).

The defendant submitted that the lease should be considered as indistinguishable in principle from common commercial arrangements whereby the owner of land lets it for a term of years upon condition that the lessee will erect a building or structure with acknowledged consequence that, upon expiry, the owner will accede to the benefit of the land with the improvements. I regard the comparison as inappropriate. The creation of the tunnel could not be achieved by a commercial arrangement of the type postulated. The Parliament needed to pass several cognate statutes in order to achieve its aim of establishing a submerged harbour crossing. The statutes are co-ordinate with the expression of intention by the responsible Ministers that the tunnel be incorporated in the complex of arteries comprising the State road system at a minimum, or (hopefully) nil or negative, charge upon Treasury funds. Citizens will pay tolls to transit the crossing but the perceptible intent of the web of statutes and agreements is to create an attractive commercial environment for the tunnel builder whereby it will be a viable proposition to build the facility. Its financial returns will be guaranteed by the Ensured Revenue Stream detailed in the Schedule to the Sydney Harbour Tunnel (Private Joint Venture) Act and the benefits of the Net Bridge Loan Agreement.

I find the situation resultant from these arrangements, statutory and contractual, to be quite distinguishable from a lease of land or site where the lessee enjoys the rights to use and profits. In essence the Government, in my view, sought to provide a commercially attractive scheme to induce a contractor to build the tunnel which would, subject to a period, specified at 30 years, during which the contractor would enjoy incentives, be part of the State road system.

At the hearing reference was made to the detail whereby the statutes and agreements operated in complement to each other. I refer to some examples which lead to the overall conclusion that the arrangements represent something other than a lease of property with reservation of specified rights to the owner. Part 3 of the Sydney Harbour Tunnel (Private Joint Venture) Act unequivocally excludes the application of nominated statutes of general effect which would otherwise be likely to have had real inhibition upon the project, given the location of the tunnel and the shore installations which it underpasses.

Although the tunnel builder must obviously utilise its own engineering skills and is not required to proceed in a fashion of item by item approval, there is an apparent effect in the framework of retaining to the RTA a maximised control over the total aspects of the building and operation of the tunnel. This intent is expressed in the originating statute to which I have just referred in particular:

``Tunnelling works etc. only to be carried out with the approval of the Commissioner

4(1) Tunnelling works shall not be carried out on the tunnelling site otherwise than with the approval of the Commissioner.

4(2) Ancillary works shall not be carried out on an ancillary site otherwise than with the approval of the Commissioner.''

It is an emphatic measure of this retained control that the statute gives the RTA rights considerably beyond those of the ordinary freeholder of a site. By sec. 15 powers to condition adjacent development are vested in it and the succeeding section, it may be worth noticing, clothes the Minister with some quite unusual power to inhibit a local council if prejudice to the tunnel or its ancillary works is observed.

It is also a valuable clue to the reality of the situation that, after the building phase is finished and the operational phase is entered, SHTCL is obliged contractually by RTA to keep the tunnel open at all times of the day and night whereas the latter can itself close the tunnel as it can any other part of the roads system pursuant to the State Roads Act 1986.

Again I refer to cl. 5.1 of the lease agreement which imposes an obligation upon the lessee to obtain the approval of the RTA for, as I conclude the draftsman must have intended, anything of consequence that the

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lessee might conceivably wish to do in and about the building and operation of the tunnel.

The RTA will collect the tolls payable by motorists but, for the first 30 years, SHTCL will be the effective beneficiary. In this sense and in having its operatives perform their functions upon the site, it is undeniable that SHTCL can be said to be using the tunnel. The connotations of the word ``use'' in the sales tax legislation have authoritative interpretation in D.F.C. of T. v. Stewart (supra). That case dealt with an exemption deriving from the use of goods by a public benevolent institution rather than a State but the applicable principles must be indistinguishable. Gibbs C.J. said at ATC p. 4149; C.L.R. p. 390:

``The word `use' does not connote exclusive use. Where it is intended that the use should be exclusive express provision is made in the Schedule to that effect: see, for example, Items 74D and 77 and see also Items 13(1), 14A, 41(ii) and 42B. If Item 81 were construed as requiring that the goods should be exclusively used by a public hospital or public benevolent institution, inconvenient or absurd results would follow. For example, many goods necessarily obtained by a public hospital are used not only by the hospital but by patients and visitors. Hospital beds, and chairs in a hospital ward, provide obvious examples. No doubt an article would not fall within Item 81 if the use to which it was to be put by the hospital or institution was transient or insubstantial; the suggestion in
F.C. of T. v. Hamersley Iron Pty. Ltd. 81 ATC 4582 at p. 4590; (1981) 37 A.L.R. 595 at p. 605, that the goods must be for use `to a significant degree', would appear to be correct. However if the goods are intended to be put to substantial use by a public benevolent institution, they will fall within Item 81 notwithstanding that they may be applied to the use of others as well.''

Brennan J. said at ATC p. 4153; C.L.R. p. 397:

``The use by a public benevolent institution referred to in item 81 is not necessarily exclusive of the use of the goods by others. Indeed, the use of particular goods by others is often the use intended for them by public benevolent institutions - hospital beds, for example. But the proposed use by a public benevolent institution must be sufficiently substantial in extent and time that it is right to regard that proposed use of the goods as giving a character to the goods. That is a question of fact and degree. Among the material circumstances which reveal a characteristic use, regard may be had to the nature of the goods, the activity of the institution which is to be advanced by using the goods, the terms upon which the goods are to be acquired by the institution or upon which the institution is to be entitled to use them, the power of others to determine or qualify that use, and the likelihood of the use being changed by the decision of the institution, by the decision of another person having power to determine or qualify the use or by the decision of both the institution and that person. As the question whether goods were goods for use by a public benevolent institution is likely to arise for determination after the institution has begun to use them, evidence of the actual use to which the goods have been put will be relevant and admissible.''

And Deane J. said at ATC p. 4155; C.L.R. p. 401:

``Item 81 does not require that the goods be used `exclusively' or `primarily and principally' by a public benevolent institution. It suffices that the goods come within the classification of goods for use by such an institution. That does not mean that any intended or planned or possible subsequent use of the goods by a public benevolent institution, however transient or insignificant or uncertain, would justify the goods being characterized as `goods for use' by that institution. The projected use by the institution must be such as would warrant characterization of the goods by reference to it. Ordinarily, that would involve definite commitment to a use by the institution as the main projected use of them. In other words, the question whether particular goods satisfy the description of being goods for use by a public benevolent institution will ordinarily fall to be answered by identifying the relevant projected use of the goods and by ascertaining whether that use answers the description of a use of the goods by a public benevolent institution.''

Stewart has been followed in two recent cases, the decisions finally turning on

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distinguishable circumstances of fact and degree, namely
Brambles Holdings Ltd. v. F.C. of T. 90 ATC 4584 and
Otto Australia Pty. Ltd. v. F.C. of T. 90 ATC 4604. I regard neither case as directly co-ordinate with the circumstances presently under consideration.

It was submitted that the distinctions drawn on the facts between those cases would provide guidance. Each dealt with mobile domestic refuse bins which were used in connection with routine garbage collection. This is the responsibility of local councils, bodies whose purchase of goods can attract exemption from sales tax. In Brambles the council itself hired the bins from the cleaning contractor and the terms included embossing an appropriate sign and the exclusive use of the implements for the council collections. The actual collection was done by the contractor. It was held that the council user was sufficient in the circumstances to attract exemption. In Otto, the arrangement was similar to the extent of marking the bins but there was no bailment to the council which itself acquired no rights over them. It was held that the exemption did not apply. The contention was that the goods now in question, cable, cameras and radios, should be characterised as no more than satisfactions of the obligations of SHTCL to the RTA similar to the Otto/council relationship. Mr Slater summarised his argument thus:

``... they [the goods] are not given to the Authority in any relevant sense, they are not bailed to the Authority, they are not given over to the control of the Authority, they are simply there.''

Thus, the present circumstances being said to be closer by analogy to Otto than Brambles I was invited to conclude in favour of the absence of qualification for exemption.

In my opinion, the submission views the whole of the arrangements from far too narrow a perspective. Once incorporated in the tunnel, it is the RTA which is the recipient of the goods (emphatically in the case of the fixtures) and it is the RTA which has real control. There can be scarcely a need for bailment to the owner and, as reversioner, that owner has not, except in the very circumscribed fashion manifested in the lease agreement, parted with possession.

The parting with possession which is the essence of any lease of land does not in any event extinguish the capacity of the lessor to continue to use it. In
Ryde Municipal Council v. Macquarie University (1978) 139 C.L.R. 633, Gibbs A.C.J. (as he then was) said at p. 638:

``A person who owns land may be said to use it for his own purposes notwithstanding that he permits someone else to occupy it, even under a lease. That is almost beyond argument when the owner's purpose is to acquire income. In the ordinarily accepted meaning of the word a building is `used' for the purpose of acquiring income if rents are derived from it, and an owner of premises who leases them is making use of those premises by employing or applying them for the purpose of letting:
Commissioner of Income Tax v. Hanover Agencies Ltd. (1967) 1 A.C. 681 at p. 689. But that is not the only way in which an owner of land may use it by letting it to someone else.''

His Honour reaffirmed his view in
Tourapak Pty. Ltd. v. F.C. of T. 82 ATC 4105; (1982) 149 C.L.R. 176.

The word ``use'' is to be understood in its ordinary meaning of purpose served or object or end and is not restricted to any notion of actual physical use. See
Max Factor & Co. Inc. v. F.C. of T. 71 ATC 4136; (1971) 124 C.L.R. 353.

Concluding, as I do, that both the RTA and the lessee are in varying degrees using the tunnel, I observe a circle of utilisation attaching to the RTA. It was a condition of the grant of the lease that SHTCL enter the Operation, Repair and Maintenance Agreement (ex. CDB 5) with the RTA. This agreement imposed a contractual obligation on SHTCL to keep the tunnel open at all times of night and day but a greater power is retained by the RTA which has an exercisable right to stop traffic and thus effectively close the tunnel pursuant to the State Roads Act 1986. Contemporaneously with the operation of the tunnel by employees of SHTCL, RTA employees will in fact use the tunnel in significant areas such as the maintenance of traffic surveillance, adjustments for emergencies and toll collection. The arcs of the circle include the RTA performing such functions by doing such acts as a subcontractor to the lessee which is in turn obliged to have them done in terms of the lease which agreement submits the lessee to the right of the RTA to direct performance by SHTCL of all

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the obligations under the Operation, Repair and Maintenance Agreement.

I find that the goods themselves will in fact be incorporated within the tunnel in any relevant sense. I am satisfied that in the circumstances the goods should therefore be characterised as part of it. The cable, once installed, will have no separate existence and although a similar transmutation is not as immediately obvious in the case of the cameras and radios (although the former will be fixed), I accept the evidence of Mr Di Bernardino, unchallenged as it was, that the mobile radios are a specific design for unique utilisation in the tunnel.

I do not consider that the characterisation of the goods as part of the tunnel is displaced by the terms of cl. 4.7 of the lease:

``The lessor acknowledges that, as between the parties hereto, the lessee shall be deemed to be the owner of all the lessee's plant during the tunnel site term.''

SHTCL has a continuing obligation to provide the goods and it has no discretion to extract them and dispose of them unless it does so under the umbrella of the powers of the RTA. The goods located within the tunnel have to be in a condition of prospective continuing useful life at the expiry of the tunnel site term when it all ``reverts'' to the RTA and whatever rights SHTCL might have had will expire.

It is significant that in the event of default by SHTCL the time of reversion will be brought forward and there will be a right in the RTA to regain possession forthwith. I do not regard it as necessary to detail the contents of the deed of charge but the special definition of the obligations secured therein should be noted and they include those arising as well under the lease and under the Operation, Repair and Maintenance Agreement. Clause 3.4, succinctly entitled ``Automatic Crystallisation'' is in a very practical sense an embargo on any freedom of SHTCL to deal with any interest it might have in the tunnel without the co-operation and therefore the permission of the RTA.

I have rejected the contention of the defendant that the goods are simply utilised by SHTCL in discharge of its obligations to the RTA. I confirm my rejection of the proposition that the arrangements are analogous to the use of a building erected by the holder of a ground lease. At the hearing very many provisions of the complex of agreements were referred to for the purpose of demonstrating that the RTA is much more involved in the construction and operation of the tunnel than a conventional lessor in the activities of his ground lessee. I do not pause merely to recite what is manifest in the exhibits and I repeat my conclusion of the substantial and ongoing involvement of the RTA.

For similar considerations, the defendant's arguments constructed about establishment of a liability at a taxing point must fail. I do not find that there is an interval between sale to the plaintiff and its user on the one hand and some later user by the RTA on the other. In reaching this conclusion it is appropriate to look at the actual use. See
F.C. of T. v. Kentucky Fried Chicken Pty. Ltd. 88 ATC 4363; (1988) 12 N.S.W.L.R. 643. I conclude that the purpose of acquisition of these goods is installation and use within the tunnel and the limited period during which the goods may be in store or warehouse are not separate events but a part of the continuum of acquisition from supplier to absorption as a constituent of the operational tunnel. I conclude that the goods are characterised as part of the tunnel and as such are used by the RTA.

I advert to the other obvious users of the tunnel who will be the citizens whose vehicles transit through it. I make this reference in the context of rejecting the submission that, because the technical facility for which the cable is foundational will enable motorists to hear uninterrupted radio broadcasts and override by the RTA is likely only to be activated in an emergency, the use by the RTA should be categorised as insubstantial. The submission overlooks the fact that the existence of the facility at all is a result of specification by the RTA and it was its election therefore that its ability to make emergency broadcasts would be facilitated through a system which produced a fringe benefit to motorists of not losing their signal strength if they happen to be listening to public broadcasters during their submarine passage.

Although I have earlier touched on his topic indirectly, I record that it was acknowledged by the plaintiff that in the course of construction of the tunnel there must obviously be many goods

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sold in taxable circumstances which will, in the event, be fabricated into the tunnel. It was contended however that as the plaintiff is in the position of being a special purpose company brought into existence for the singular purpose of the construction of the tunnel, goods which it acquires must be dedicated to that purpose and cannot be dealt with as it chooses. I accept the contention that it would be entirely unrealistic to treat every item which is acquired by it for the dedicated purpose as separate from the tunnel itself. The common use of the tunnel by the plaintiff and the RTA commences from the outset of the construction stage before the tunnel is a usable entity. It will be maintained thereafter. The use by the RTA itself is substantial and thus characterises the goods within the item of exemption.

It becomes unnecessary to recapitulate and explore the alternative argument advanced by the plaintiff nor to make differential findings in respect of the several described classes of goods.

I make declarations specifying exemptions in accordance with para. 1, 2 and 3 of the amended summons filed on 10 April 1990. I order the defendant to pay the plaintiff's costs.