Re Hyteco Hiring Pty Limited v Commissioner of Taxation [1992] FCA 189; (1992) 92 Atc 4216 (1992) 23 Atr 270 (5 May 1992)

FEDERAL COURT OF AUSTRALIA

Re: HYTECO HIRING PTY. LIMITED
And: COMMISSIONER OF TAXATION
Nos. G825-G827 and G835 of 1989
FED No. 234
Income Tax - Commercial lease
[1992] FCA 189; (1992) 92 ATC 4216
(1992) 23 ATR 270

COURT

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
Beaumont J.(1)

CATCHWORDS

Income Tax - ascertainment of assessable income - ss.25(1), 26(a) and 26AAA of Income Tax Assessment Act 1936 - applicant carried on activity of hiring forklifts - whether applicant engaged in selling forklifts as its business - whether proceeds of sale of forklifts, when unsuitable for further hiring, assessable as income.

Commercial lease - lease of chattels - provision for lessee to pay residual value on expiration of lease - true nature of transaction - whether financial device.

HEARING

SYDNEY
5:5:1992

Counsel and Solicitors Mr D.H. Bloom QC with
for Applicant: Mr B.J. Sullivan instructed by

Marshall Marks Kennedy

Counsel and Solicitors Mr G. Downes QC with Mr S.

for Respondent: McMillan instructed by

Australian Government Solicitor

ORDER

That the decisions of the respondent upon the objections under review be set aside and that there be substituted decisions allowing the objections.

The respondent pay the applicant's costs.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

DECISION

In its income taxation returns for the years ended 30 June 1977, 1978, 1979 and 1983, the applicant described as "capital profits on sale of hiring assets" the following amounts: 1977 - $81,985; 1978 - $142,608; 1979 - $219,489; 1983 - $140,065. By amended assessments issued in 1984, the Commissioner included these amounts in the applicant's assessable income pursuant to s.25(1) of the Income Tax Assessment Act 1936 ("the Act") or, alternatively, s.26(a). or s.26AAA of the Act. The applicant objected to the assessments and the matter has now been referred to the Court for decision.
The general history of the applicant's business activities

2. The applicant commenced carrying on, in Victoria, the business of hiring out forklift trucks ("forklifts") to its customers in 1967. Shortly before this, in 1965, a related corporation, Hyteco Pty. Limited ("Hyteco"), having acquired from Hyster Australia Pty. Limited ("Hyster") the right to distribute Hyster forklifts in Victoria, had commenced to carry on the business, in Victoria, of selling forklifts. From March 1973 to November 1985, the applicant was a wholly-owned subsidiary of Ateco Holdings Limited ("Ateco"), a listed public company. The applicant carried on its business until September 1985, when the business was sold to Brambles Holdings Limited. From 1982 until September 1985, the applicant's business was carried on under the name of "Ateco Rentalift". Prior to this, the applicant had used the business name of "Hyteco Rentalift".

3. In March 1973, Hyteco (N.S.W.) Pty. Limited ("Hyteco (NSW)"), another related corporation, acquired from Lawrence Tootill Pty. Limited ("Tootill") the right to distribute Hyster forklifts in New South Wales and in the Australian Capital Territory and then commenced to carry on that business. At the same time the applicant acquired from Lawrence Tootill (Hire) Pty. Limited, ("Tootill (Hire)"), a related corporation of Tootill, its fleet of forklifts which were available for hire. Some of the forklifts were purchased outright; but, in the majority of cases, the forklifts had been leased from a financier, and the applicant acquired the lessee's interest under the lease. From March 1973, until September 1985, the applicant carried on in New South Wales and in the Australian Capital Territory the business of hiring out forklifts to its customers.

4. (Since there is a dispute between the parties as to many of the secondary facts, the above description is not intended to be a finding of any contentious matters. In particular, this description should not be treated as a finding that the applicant's only business was that of hiring the forklifts. An important part of the Commissioner's case is that the applicant also carried on the business of selling forklifts.)
The primary facts

5. The nature of the applicant's activities in the period now in question (1977 to 1983) was described in the affidavit of evidence of Donald Jacobs, a former employee of the applicant. From 1 September 1976 to 31 March 1984, he was the applicant's Rental Manager for New South Wales; from April 1984 until November 1985, he was General Manager of the applicant's New South Wales Division. Mr Jacobs also gave oral evidence when cross-examined on his affidavit. He was an honest and reliable witness. Mr Jacobs gave evidence of the primary facts, which, in its essentials, I accept.

6. I make the following findings with respect to the primary facts from the evidence of Mr Jacobs, supplemented, where appropriate, by documents in evidence and facts admitted by the Commissioner in the course of the proceedings:
(1) The applicant obtained its forklifts, usually those made by Hyster, from the following sources: (a) as a result of the Tootill transaction in 1973; (b) from Hyteco (for use in Victoria); (c) from Hyteco (NSW), for use in New South Wales and the Australian Capital Territory.
(2) (a) With respect to the Tootill forklifts, as has been said, although some were purchased outright by the applicant, in most cases, the applicant took over an existing lease from a financier.

(b) There was tendered in evidence, by way of

illustration, the file of the applicant in respect of several forklifts acquired from Tootill. The file, entitled "RT (Rental Truck) 86" showed, inter alia, the following:
(i) On 10 September 1970, Tootill raised an invoice showing a sale of a Hyster Model H.80C forklift ("the 80C forklift") to the Bank of New South Wales ("the Bank") for a price of $10,275, including sales tax, payable in cash on delivery. A statement appeared on the invoice that the vehicle was for leasing to Lawrence Tootill (Leasing) Pty. Limited ("Tootill (Leasing)"). It is common ground that this vehicle was used by Tootill and, later, by the applicant for hiring out.
(ii) On 17 September 1970, an acknowledgment in writing, addressed to the Bank, was executed by Tootill (Leasing) as follows: in consideration of the Bank agreeing to lease, inter alia, the 80C forklift the subject of the above invoice, Tootill Leasing acknowledged that, prior to execution of the lease of the vehicle, it had sold the goods to the Bank.
(iii) The written lease between the Bank and Tootill (Leasing), dated 18 September 1970 provided relevantly as follows:
(i) A term of 60 months (five years) at a monthly rental of $193.21;
(ii) Determination of the lease by the effluxion of time was relevantly dealt with by cl.22 in these terms:

"22. (a) Unless within thirty (30) days prior to the
expiration of this Lease the Bank has agreed in
writing to an extension of the term hereof, the
Lessee shall at his own expense return the goods
to the Bank at such expiration.
(b) Unless otherwise agreed in writing, any
extension hereof shall be at the rental and upon
the terms, including the residual value,
contained herein and such extension shall
continue until determined by either party giving
one month's written notice to the other expiring
at any time.
(c) Upon the expiration of this Lease or any
extension thereof, the following provisions
shall have effect:
(i) if the Lessee does not within a period of
fourteen (14) days thereafter return the
goods to the Bank, the Lessee shall pay to
the Bank the residual value of the goods
contained in the First Schedule or any
substituted residual value agreed upon.
(ii) if the goods are returned to the Bank
within such period and within three months
thereafter the Bank sells them, the Lessee
shall pay to the Bank such residual value
less the net proceeds of sale, which shall
for the purpose of this paragraph mean the
gross proceeds of sale actually received
by the Bank within such period of three
months after deducting all costs and
expenses of and incident to such sale
including the costs incurred by the Bank
in taking possession, storing, moving,
repairing, registering and insuring such
goods. If such costs and expenses exceed
the gross proceeds of sale actually
received as aforesaid, then the Lessee in
addition will reimburse the Bank to the
extent of such excess.
(iii) if the goods are returned to the Bank
within such period and have not been sold
within three months thereafter
notwithstanding that they have been
submitted for sale by public auction
without reserve, then their value shall be
deemed to be nil and the lessee shall pay
to the Bank the full amount of the
residual value and in addition will
reimburse the Bank for all moneys expended
by it which if the goods had been sold
would under the preceding paragraph (ii)
have been deductible from the gross
proceeds of sale.
..."

7. The residual value was stated to be $2,055.00.
(iv) The applicant's stocktaking records in the period between 1973 and 1982 indicate that in this period, the 80C forklift was hired out to several of the applicant's customers, including, in the latter part of this time, a hiring which extended over some years.
(v) Depreciation for taxation purposes was claimed by the applicant in respect of the 80C forklift. As has been said, it is common ground that it was used in hiring activities. The applicant's depreciation schedule for the year ended 30 June 1982 showed, in respect of the 80C forklift, an "original cost" of $2,055 (i.e. an indication that the applicant acquired the vehicle from the Bank at its residual value, presumably in about September 1975). Its opening written down value in the 1982 depreciation schedule was $258. It was shown as disposed of in February 1982 for $8,700.
(v) An invoice from Hyteco (NSW) to Bomaderry Auto Wreckers dated 10 February 1982 evidenced a sale of the used 80C forklift for a price of $8,700. In the invoice, it was stated that it was "sold in used condition with all faults if any".
(3) In addition to the Tootill vehicles, forklifts were obtained by the applicant from Hyteco and used in its hiring business in Victoria. The applicant also procured forklifts from Hyteco (NSW) that were used for hire in New South Wales and in the Australian Capital Territory. Some of these vehicles were purchased outright by the applicant, if liquid funds were then available. Others were acquired from Hyteco or Hyteco (NSW) by a financier and leased to the applicant, usually for a term of five years. At the expiration of the lease, the applicant would either purchase the forklift from the financier at its residual value or enter into a further leasing arrangement. Until 1981, hire purchase arrangements were, on some occasions, entered into by the applicant with a financier.
(4) (a) In hiring forklifts to its customers, the applicant entered into long-term arrangements (i.e. a period of two years or more) on some occasions and casual or short-term arrangements on others.

(b) The applicant's policy was to make new, or,

occasionally as new, forklifts available for long-term hiring. For this purpose, the applicant would usually quote its customer a rental based on the cost to the applicant of acquiring or leasing the forklift, preparation and delivery charges, estimated repair and maintenance charges and a profit component to show a return on funds invested of between 20% and 30%.

(c) For casual or short-term hire, the applicant employed

second-hand or used forklifts.

(d) The applicant did not generally hold forklifts in stock

to await a hiring arrangement. Usually, Hyteco (NSW) had forklifts in stock, available for sale.

(e) At the expiration of a long-term hiring, the applicant

would decide whether the forklift (a) should be available for re-hire long-term (if in good condition); (b) should be available for hire on a casual, short-term basis; or (c) was unsuitable for further hiring and should be disposed of.
(5) In the applicant's experience, the average useful hiring life of a forklift was in the range of five to eight years, although examples of a hiring life of up to 15 years could be given. If the applicant decided to dispose of a forklift, arrangements would be made for its sale through the used equipment division of Hyteco (NSW).
The inferences to be drawn from the primary facts

8. In my opinion, these primary facts, and the evidence taken as a whole, justify the inference or conclusion that the business of the applicant was that of hiring out forklifts. Although other members of the Ateco group were engaged in selling forklifts, the applicant was not engaged in that activity as its business. The applicant maintained and utilised what it described as its "hire fleet" of forklifts. This fleet constituted fixed assets of the applicant. They were not its trading stock. The applicant's forklifts were available for hire, not sale. When, as a general rule, the applicant decided finally to dispose of a vehicle, this was the disposition of a fixed asset. It was not a dealing with an item which merely circulated in the applicant's business.

9. On behalf of the Commissioner, reliance is placed on evidence that, on a few occasions, the applicant negotiated for the sale of its forklifts. In my opinion, these dealings were exceptional transactions. They happened in special circumstances and do not provide a reliable guide to the character of the business carried on by the applicant.

10. In my view, in analysing the character of the applicant's business, it is important to bear in mind that the lease agreements entered into by the applicant with its financiers were, in truth, a "financing device" (per Hutley J.A. in Austin v United Dominions Corporation Ltd. (1984) 2 NSWLR 612 at 614; see also C. Turner, "Chattel Leasing and the Credit Acts - The Ressurrection of form over substance?" (1992) 66 ALJ 116 at 116-117). For the applicant the leasing arrangement was only a means to an end. It was not an end in itself. It was a method of financing the acquisition of vehicles for use in the applicant's business of hiring them out to its customers. The residual value provision should, for this reason, be seen in its proper context. As Priestley J.A. said in Austin's case (at 623-4):

"Rogers J. also pointed out that the residual value in the
lease agreements must be taken to have been calculated on
the footing that the total rent had been received. By this
remark I take him to have been referring to the commercial
practice of lessors of chattels whereby their rental charges
and residual values are so calculated that if a leasing
agreement runs its full course and on its conclusion the
lessee buys the chattel from the lessor (there having been
no pre-existing obligation upon the lessor to sell if
requested) the lessor will have been reimbursed by the
receipt of the rental instalments and the residual value for
the capital laid out on the chattel and commercial rates of
interest on that sum for the period of the lease, in a way
analogous to that in which it is finally reimbursed at the
conclusion of a hire purchase agreement which has run its
normal course by the receipt throughout that agreement of
instalments only, without any residual payment. Thus, in a
leasing transaction of this kind the residual value will be
a balancing figure which, when added to the rental
instalments, will produce a figure equal to a return of the
lessor's capital plus the desired return of interest over
the period for the outlay of its capital. It will thus bear
no necessary relation to the market value of the chattel at
the end of the lease, although presumably the lessor would
tend to calculate it at a lower figure than market value
(difficult though this might be to predict in regard to some
types of chattel) to ensure that if the lessee did not
indicate any wish to buy it at the end of the term it could
then be sold without detriment to the lessor's original
calculations. In some cases this approach would require the
rental payments to be at a higher rate than what would be
the market rate for the rental of goods which were simply
expected to be returned to the owner at the end of the
lease."

The Commissioner's amended assessments

11. The amounts now assessed by the Commissioner as assessable income, being "net profit on sale of hiring assets", were calculated by the Commissioner in the manner appearing in the schedules annexed to these reasons.

12. As has been said, the Commissioner contends that these amounts, or parts of them, were assessable income by virtue of s.25(1) of the Act, or s.26(a), or s.26AAA.

13. (It should be noted that the amounts assessed, totalling $584,147, represented the proceeds of sales of forklifts received by the applicant less: (a) in the case of a used forklift purchased from Tootill, the cost of that vehicle; (b) in all other cases, the residual value stated in respect of the forklift, being the amount paid by the applicant in order that it might acquire the lessor's interest in the vehicle; instalments of rent paid by the applicant to the lessor have not been taken into account.

14. It should further be noted that on no occasion did the applicant receive, by way of the proceeds of sale of a used vehicle, an amount that was greater than the original cost of acquiring the vehicle as a new forklift.

15. It should also be noted that the applicant made the following pre-tax profits from the hiring of its forklift trucks:-

1974 $ 231,959.00
1975 $ 166,212.00
1976 $ 54,728.00
1977 $ 148,144.00
1978 $ 68,679.00
1979 $ 219,004.00
1980 $ 283,261.00
1981 $ 114,605.00
1982 $ 40,809.00
$1,327,401.00)

Did s.25(1) apply?

16. On behalf of the Commissioner, reliance is placed upon the well-known reasoning of the Full High Court in Federal Commissioner of Taxation v The Myer Emporium Limited [1987] HCA 18; (1987) 163 CLR 199 at 209-211 and of Gibbs J. and of Jacobs J. in London Australia Investment Co. Ltd. v Federal Commissioner of Taxation [1977] HCA 50; (1977) 138 CLR 106 at 116, 128. Further, it is submitted, on his behalf, that the decisions of the Full Federal Court in Memorex Pty. Ltd. v Federal Commissioner of Taxation (1987) 77 ALR 299 and in Federal Commissioner of Taxation v GKN Kwikform Services Pty. Ltd. 91 ATC 4336 are in point here.

17. In Memorex, the applicant was a distributor of computer equipment. As a general rule, it sold its equipment outright, either to its customer or to a financier who provided finance to the customer. However, from time to time, the applicant also leased equipment to customers. At the end of the term of the lease, the goods would be re- leased or sold at a profit over and above their original cost to the applicant. Leasing of goods did not form a major part of the applicant's business. Nevertheless, the sale of goods which had been leased was held to be of sufficient magnitude and of sufficient regularity to be regarded as an ordinary part of the applicant's business.

18. It was held that the profits made on the sales were assessable income. Davies and Einfeld JJ. said (at 308-9):

"...it is well settled that, if goods are traded in the
course of a business of trading in such goods, the trade in
particular goods may be on revenue account whether or not
the goods were or were not traded in with an expectation of
profit...
The principles we had enunciated above are in substance
those which were applied by the Administrative Appeals
Tribunal. The tribunal concluded that the profit derived on
the sale of the computer equipment was derived in the
ordinary course of its business activity. The tribunal held
that the profit was not a profit arising on the mere
realisation of capital but arose from dealing in the
computer equipment to the best advantage of the applicant's
business."
...
In our opinion, no ground has been shown for disturbing the
tribunal's findings on these matters or the conclusion that
the subject profits were assessable income of the
applicant."

Pincus J. said (at 315):

"...no doubt a possible view of the matter is to treat the
leasing activities as a distinct enterprise, but the more
reasonable view of the matter, being that accepted below, is
that sales of leased equipment were during the years in
question an integral part of the appellant's business as a
supplier of computer equipment. The leasing part of the
business was not separate in a physical or accounting sense
from the rest of the appellant's business. Counsel for the
appellant contended that there was one important matter
distinguishing the assets leased from those initially
acquired for sale, namely that each and every item was, at
the time of purchase from the parent, earmarked as one
intended for leasing or for sale. There was, however, no
specific finding in favour of the appellant on that point,
and an examination of the evidence relating to it makes one
doubt that any such finding would have been open. That was
so because it was not shown that none of the items leased to
customers was taken from stock, rather than being
specifically imported against an order. At all material
times, equipment of substantial value was held in stock."

19. In the present case, however, the relevant business of the applicant was that of hiring out forklifts to its customers. Likewise, the facts in GKN are very different from the circumstances of this case.

20. In my opinion, s.25(1) had no application here. The sales were of fixed assets generally held for the long term. Their realisation did not, in my view, produce income in accordance with the ordinary usages and concepts of mankind. I cannot accept, as was submitted on behalf of the Commissioner, that the applicant was trading in vehicles. That was the business of Hyteco and Hyteco (NSW) (see G.P. International Pipecoaters Pty. Ltd. v Federal Commissioner of Taxation [1990] HCA 25; (1990) 170 CLR 124 at 138-9).

21. Expert accounting evidence was given, in which opinions were expressed with respect to the appropriate accounting treatment of transactions of the kind entered into by the applicant. In my opinion, this evidence does not assist in the resolution of the present matter which does not raise any accounting issues (cf. Commissioner of Taxation v Cyclone Scaffolding Pty. Ltd. (1987) 18 FCR 183).
Did s.26(a) apply?

22. By s.26(a), the assessable income of a taxpayer included profit arising from the sale by the taxpayer of any property acquired by him for the purpose of profit-making by sale, or from the carrying on or carrying out of any profit-making undertaking or scheme. In the light of the decision of the High Court in A.L. Hamblin Equipment Pty. Limited v Federal Commissioner of Taxation [1974] HCA 44; (1974) 131 CLR 570, the first limb of s.26(a) was not pressed by the Commissioner before me. But can it be said that the proceeds of sale realised by the applicant in the above circumstances constitute profits arising from the carrying on or carrying out of a profit-making undertaking or scheme?

23. In my opinion, they were not. As has been said, the forklifts, which were usually sold many years after their original acquisition, at a time when they had gone beyond their useful lives as part of the applicant's hire fleet, were disposed of for prices which were less than their original acquisition cost. Viewed in that context, there was not present here any relevant profit-making undertaking or scheme.
Did s.26AAA apply?

24. By s.26AAA(2) of the Act, the assessable income of a taxpayer includes any profit arising from property purchased and sold within 12 months. By s.26AAA(5)(b) the provisions of s.26AAA(2) do not apply if s.54 applied in relation to the property and, as a result of the sale, s.59 applies in relation to the property.

25. On behalf of the Commissioner, it is submitted that the applicant has not discharged the usual statutory onus of establishing that the forklifts in question would ordinarily have been used for hiring.

26. It is true that the business records of the applicant in respect of the period in question are no longer complete. The applicant has, in my view, satisfactorily explained their absence in the evidence of Kenneth Stephen Scarra, the applicant's company secretary. In his affidavit, Mr Scarra said:

"5. I have access to such of the records of the Applicant
and Hyteco (NSW) for the period February 1973 to 30
June 1983 as still exist.
6. On 2 September 1985 the Applicant sold to Brambles
Holdings Limited the Applicant's forklift truck hire
business and its plant and equipment.
7. In late December 1985 the business records of the New
South Wales division of the Applicant were moved from
its then premises at Thornleigh to premises that it
then commenced to occupy at Marayong.
8. Between March and May 1986 the business records of the
Victorian division of the Applicant were moved from
Victoria to the premises that it then commenced to
occupy at Marayong.
9. I have been informed by employees of Ateco and verily
believe that during the moves referred to in the above
paragraphs, a substantial proportion of the records of
the Applicant were lost.
10. After the Applicant's business records had been moved
to Marayong such records were left out in the weather
with inadequate protection. I have been informed by
employees of Ateco and verily believe that a
substantial proportion of the documents that were not
lost in the move were damaged or destroyed by rain.
11. I have searched the records of the Applicant, but due
to the matters set out above, I have been unable to
find any complete files relating to the forklift
trucks referred to in the Schedules 4A, 5A and 6A to
the Affidavit of Mr Vella. I verily believe that
such documents no longer exist.
12. I have however unearthed files for forklift trucks
used by the Applicant in its hiring business during
the years in question although sold outside the tax
years involved in these proceedings. From enquiries
made by me I believe these files to be relevantly in
the same form as files relating to trucks sold in the
years in question. Now exhibited to me and marked
'KSS1', 'KSS2', 'KSS3' and 'KSS4' are four files
relating to forklift trucks used by the Applicant in
its hiring business during the period 1973 to 1982."

27. As has been noted, the subject assessments were amended in 1984 and extended back to 1977. It appears that the delay in bringing these proceedings to a final hearing arose out of a desire to await the outcome of the Full Court decisions in Cyclone, Memorex and GKN.

28. The schedules annexed to these reasons relied on by the Commissioner were prepared by Trevor John Vella, a chartered accountant in private practice, primarily from information contained in the applicant's income tax returns.

29. As I followed it, the argument put on behalf of the Commissioner relies very much on the absence of documentation of the transactions now in question. It is true, of course, that by s.190(b) of the Act, the burden of proving that the amended assessments were excessive lies upon the applicant. But I have already found that, in the period with which we are now concerned, the applicant's fleet of forklifts were part of its fixed assets and thus depreciable. As has been said, a few special instances of sales, apparently out of the ordinary course of the applicant's business, were given. But they were exceptional. Taking the material in evidence as a whole, it is legitimate, I think, to infer that the applicant's forklifts be treated as a unit, that is, as a fleet available for hire and thus depreciable. In this connection, it should be noted that references in the applicant's business records to "casual sales" should be treated as a reference to rental transactions of a casual or short-term kind. As Mr Jacobs explained in his evidence, he regarded himself as "selling" rental, that is, soliciting customers who would hire the applicant's vehicles. That is to say, "casual sales" did not refer to sales of the forklifts.
Orders proposed

30. I propose to order that the decisions of the Commissioner upon the objections under review be set aside and that there be substituted decisions allowing the objections. The Commissioner must pay the applicant's costs.