National Bus Co Pty Ltd v The Commissioner of Taxation of the Commonwealth of Australia [1998] FCA 143 (3 March 1998)

Last Updated: 4 March 1998

FEDERAL COURT OF AUSTRALIA

SALES TAX - Exemptions - Goods for use by person for supply to another under contract if property is to pass to the other under the contract and goods would have been exempt if purchased by the other - Buses operated by taxpayer under agreement with public authority - Buses owned by authority - Lease of buses requires taxpayer to keep in good repair and condition - Spare parts purchased by taxpayer used to effect repairs - Whether for supply to authority under lease - Whether property in parts passes to authority under lease - Whether parts would have been exempt if purchased by authority.

PERSONAL PROPERTY - Chattels - Accession - Lease of buses - Lessee obliged to keep in good repair and condition - Lessee affixes replacement parts to buses - Whether property in parts passes to lessor under lease.

Sales Tax Assessment Act 1992 , s 51, Table 3 Item CR5A

Sales Tax (Exemptions and Classifications Act) 1992, Sch 1 Items 64, 126, 194

The Commonwealth v Sterling Nicholas Duty Free Pty Ltd [1972] HCA 19; (1972) 126 CLR 297 considered

Andeloro v Wyong Co-operative Dairy Society Ltd (1965) 66 SR (NSW) 466 applied

Dawson v Deputy Commissioner of Taxation (1984) 84 ATC 4752 considered

Rendell v Associated Finance Pty Ltd [1957] VR 604 applied

Thomas v Robinson [1977] 1 NZLR 385 applied

Lewis v Andrews and Rawley Pty Ltd (1956) 73 WN (NSW) 670 applied

Bergougnan v British Motors Ltd (1929) 30 WN (NSW) 61 mentioned

Akron Tyre Co Pty Ltd v Kitson [1951] HCA 6; (1951) 82 CLR 477 mentioned

Chan v Cresdon Pty Ltd [1989] HCA 63; (1989) 168 CLR 242 considered

Elmslie v Federal Commissioner of Taxation [1993] FCA 549; (1993) 46 FCR 576 considered

Kiwi Brands Pty Ltd v Federal Commissioner of Taxation (1997) 148 ALR 605 mentioned

Deputy Commissioner of Taxation v Stewart [1984] HCA 11; (1984) 154 CLR 385 applied

Ryde Municipal Council v Macquarie University [1978] HCA 58; (1978) 139 CLR 633 distinguished

Commissioner of Taxation v Brambles Holdings Ltd [1991] FCA 122; (1991) 28 FCR 451 considered

THE NATIONAL BUS COMPANY PTY LIMITED (ACN 060 042 444) v THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

VG 755 OF 1996

SUNDBERG J

3 MARCH 1998

MELBOURNE

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY	VG 755 of 1996

BETWEEN:	THE NATIONAL BUS COMPANY PTY LIMITED (ACN 060 042 444) Applicant
AND:	THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent

JUDGE:	SUNDBERG J
DATE OF ORDER:	3 MARCH 1998
WHERE MADE:	MELBOURNE

THE COURT ORDERS THAT:

. The separate question, namely "Whether the applicant is entitled to exemption under Item 194 of the Sales Tax (Exemptions and Classifications) Act 1992 for goods bought by the applicant in the period from 1 January to 30 June 1994 and used in the repair of buses owned by the Public Transport Corporation and leased to the applicant", be answered: "The applicant is not so entitled".

. The applicant pay the respondent's taxed costs of the question.

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

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY	VG 755 of 1996

BETWEEN:	THE NATIONAL BUS COMPANY PTY LIMITED (ACN 060 042 444) Applicant
AND:	THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent

JUDGE:	SUNDBERG J
DATE:	3 MARCH 1998
PLACE:	MELBOURNE

REASONS FOR JUDGMENT

THE FACTS

By an agreement made on 26 November 1993 the Public Transport Corporation ("the PTC") granted the applicant the right to operate a bus service on specified routes in Melbourne. Clause 4.1 of the agreement requires the applicant to provide the service using only public commercial passenger vehicles licensed in accordance with the Transport Act 1983 (Vict). Clause 4.2 applies the provisions of s 144 of that Act to each vehicle in the same manner and to the same extent as if the provisions were set out in the agreement as an obligation of the applicant. Section 144(1)(a) makes it an implied condition of every commercial passenger vehicle licence that the vehicle is maintained in a fit and serviceable condition. On 22 December 1993 the applicant entered into an agreement with the PTC for the lease of buses to be used by the applicant in providing the service. By clause 6.1 of the lease the applicant is obliged to "keep and maintain the buses properly serviced, in proper working order and condition and in good and substantial repair". Clause 11.2 requires the applicant to surrender possession of the buses to the PTC at the conclusion of the term "in good and substantial repair and in proper working order".

During the period 1 January to 30 June 1994 the applicant operated the route using only buses leased from the PTC pursuant to the lease. In accordance with its obligations under the agreement and the lease the applicant repaired and maintained the buses. The repair and maintenance were carried out by the applicant itself or by an independent contractor engaged by it. When the applicant carried out the works, this was done at its depots in North Fitzroy and Doncaster. Parts required for the repair and maintenance were ordered by the workshop manager at each of the depots. The parts included batteries, windscreens, distributors, bearings, clutches and brakes. They were used to keep the buses in a fit and serviceable condition, and were incorporated into the buses so as to form an integral part of them. In its accounts, the cost of the parts was expensed by the applicant, and no part of the cost was treated as an asset of the applicant.

THE ISSUES

The overall issue between the parties is whether the applicant is entitled to a credit of $47,351.20 for sales tax paid on the parts under Part 4 of the Sales Tax Assessment Act 1992 . Section 51, which is in that Part, provides that the situations in which a claimant is entitled to a credit are as set out in Table 3. The relevant item in that Table is CR5A which, together with the sub-headings of the Table, is as follows:

SUMMARY OF GROUND	DETAILS OF GROUND	AMOUNT OF CREDIT	TIME CREDIT ARISES
AOU in certain cases where exemption Items satisfied	Claimant has borne tax on goods and has applied the goods to own use while still assessable goods. The AOU satisfies exemption Item 192, 193 or 194	the tax previously borne to the extent that the claimant has not passed it on	time of AOU

The letters "AOU" mean "application to own use", which in turn is defined so as to include consuming the goods, giving them away, leasing them and "using the goods as materials in manufacture, construction, repair, renovation or other treatment or processing ...". All but one of the issues raised by item CR5A were canvassed before me. The one that was not canvassed was whether the applicant had passed on the tax. The parties have agreed to defer that issue. Because a conclusion on the exemption item in favour of the applicant will thus not result in its entitlement to a credit, I ordered by consent, pursuant to O 29 r 2 of the Rules, that there be decided separately the following question: "Whether the applicant is entitled to exemption under Item 194 of the Sales Tax (Exemptions and Classifications) Act 1992 for goods bought by the applicant in the period from 1 January to 30 June 1994 and used in the repair of buses owned by the Public Transport Corporation and leased to the applicant".

Item 194 of the Sales Tax (Exemptions and Classifications) Act 1861 exempts

Goods for use by a person for supply to another person under a contract (other than a contract of sale) if:

(a) property in the goods is to pass to the other person under the contract; and

(b) the other person would have been entitled to quote for the purchase in reliance on an exemption Item, if the other person had purchased the goods.

The exemption Items relevant to par (b) are Items 126 and 64. Item 126 exempts, amongst other things,

Goods for use by:

...

(b) an authority that is completely controlled by an Australian government, and whose expenditure is exclusively borne by that government ....

...

The expression "Australian government" includes a State. Item 64 exempts

Goods for use by a public transport authority exclusively for or in connection with the establishment, conduct or maintenance of transport services.

Three questions arise:

. Were the goods for use by the applicant for supply to the PTC under a contract other than a contract of sale?

. Is property in the goods to pass to the PTC under the contract?

. Would the goods have been exempt under Item 126 or Item 64 if they had been purchased by the PTC in the hypothetical situation postulated by par (b) of Item 194?

For the purposes of question 2, it is common ground that property in the parts is to pass to the PTC. What is in dispute is whether it is to pass "under the contract". For the purposes of question 3, it is common ground that the PTC is a relevant authority for the purpose of Items 126 and 64.

WERE THE PARTS FOR USE BY THE APPLICANT FOR SUPPLY TO THE PTC?

(a) Meaning of "supply"

The contract relied on by the applicant is the lease. Under clause 6.1 the applicant undertakes to keep and maintain the buses "properly serviced, in proper working order and condition and in good and substantial repair". The parts are thus for use by the applicant. Are they for supply to the PTC? The ordinary meaning of "supply" is the act of providing something that is needed or wanted: New Shorter Oxford Dictionary; Macquarie Dictionary 3rd ed (1997). In The Commonwealth v Sterling Nicholas Duty Free Pty Ltd [1972] HCA 19; (1972) 126 CLR 297 the High Court was concerned with a statute which prohibited the supply of goods or services within an airport. Barwick CJ at 304 and Windeyer J at 314-315 adopted as a good general definition of "supply" what had been said by Sugerman J in Andeloro v Wyong Co-operative Dairy Society Ltd (1965) 66 SR (NSW) 466 at 479:

`Supply', as applied to a commodity, commonly denotes the furnishing or providing of that commodity by one person who has it to, or for, another person who requires it; and it is usually evidenced by delivery by the one and acceptance by the other.

Having set out this passage, Windeyer J continued at 314:

In common parlance a supplier of goods is ordinarily a person who owns them and who by delivery transfers the ownership to another either for reward or gratuitously. But I do not think that the concept must be narrowed, as the learned trial judge narrowed it, to a delivery of something the ownership of which has not already passed to a recipient. The word is, I think, of wider import. Property in a thing bought may have passed from seller to buyer, yet the supply of it is only completed by delivery. The concept of supply is not to be made dependent upon the distinction between goods bargained and sold and goods sold and delivered. Delivery is ordinarily an essential element in the supply of a thing. But that does not mean that anyone who delivers a thing to another is a supplier of it. A carrier who, as an independent contractor, carries goods from one person to another is not the supplier of them. And yet the sender of these has not supplied them until they are delivered.

At 309 Menzies J, with whom McTiernan J agreed, said:

It was argued for the company that it could not "supply" goods at the airport because the property in the goods had passed, at the latest, upon entry for export. To accept this, however, would be to accept an altogether too narrow meaning of the word "supply". The supply of goods does not necessitate a change in ownership of the goods supplied. In many cases the word "supply" is equivalent to the word "provide" and it often happens that a person is provided by others with what belongs to him. Thus a shop, which has a home delivery service, supplies goods upon delivery notwithstanding that they may have been bought in the shop, or by telephone, or by mail order. A supplier is not merely one who sells. He may be one who delivers. It would, I think, be wrong to call the company the supplier of goods at the point when an entry for export has been passed. To become a supplier something more would still be necessary, namely the delivery of the goods to the purchaser.

In Dawson v Deputy Commissioner of Taxation (1984) 84 ATC 4752 the Full Court of the Supreme Court of South Australia considered the meaning of "supplied" in the phrase "goods ... manufactured for a person ... out of materials supplied by him". The Court rejected the argument that the word "supplied" was restricted to physical delivery. King CJ said at 4758:

The meaning of the word "supply" varies with the context .... The sense of physical delivery is the narrowest sense in which the word can be used. It is by no means its typical sense. The notion of physical delivery has no relevance to the purpose of sec 17A. That section contemplates the arrangements between manufacturer and customer as to the provision of materials needed for manufacture. The distinction made is that between a business arrangement in which the manufacturer manufactures the product out of his own materials and that in which he manufactures the product out of the customer's materials. Physical possession and delivery are irrelevant to that distinction. I have no doubt that under the arrangements deposed to by the appellant, the materials were supplied by the customer.

Conformably with the foregoing authorities, "supply" does not necessarily involve the passing of property in goods. Nor is "delivery" necessarily involved in "supply". The ordinary meaning of "supply" in relation to goods is the provision or furnishing of the goods to another person.

(b) Explanatory Memorandum

The applicant relied on passages from the Supplementary Explanatory Memorandum to the Sales Tax (Exemptions and Classifications) Bill 1992 to support the contention that the parts had been supplied to the PTC:

6.9 A new exemption Item will be introduced to provide exemption for goods that are incorporated by a repairer into other goods that are for use by another person in exempt circumstances.

6.10 To qualify for exemption, property in the goods has to pass under a contract (other than a contract of sale) from the repairer to the other person where the other person would have been entitled to exemption had the goods been purchased by that other person. For example, a manufacturer is entitled to purchase parts for use in the repair of exempt business inputs free of sales tax. If, instead of purchasing the goods direct, the manufacturer arranges for an external repairer to supply the parts and repair the goods, the exemption will also apply to the parts in the hands of the repairer. The same position will apply if an external repairer repairs goods owned by exempt bodies.

...

6.14 The new Item will provide exemption for parts held tax-free by repairers and it will allow repairers to purchase repair parts tax-free where the repairer is aware that the parts will be for use in the repair of goods owned by exempt bodies or exempt users.

Although the words in par 6.10 - "if an external repairer repairs goods owned by exempt bodies" - and those in par 6.14 - "for use in the repair of goods owned by exempt bodies" - at first blush appear to apply to the present case, because the parts are being used to repair goods owned by the PTC, the first example given in par 6.10 shows that the explanation is directed to the case where, instead of the exempt body purchasing the parts and effecting the repairs itself, it entrusts those tasks to a repairer. In that situation the repairer provides the parts to the exempt body. That is not the present case, because the parts were not provided to the PTC but to the applicant.

(c) Conclusion

In my view "Goods for use by a person for supply to another person" are goods to be used by a person for the purpose of providing or furnishing them to another person. The parts were used by the applicant for the purpose of keeping the buses in working order so that the applicant could continue to carry on its business in compliance with the lease. The applicant was obliged by the terms of the lease to purchase the parts and install them, but the lease does not require the applicant to provide or furnish them to the PTC. Nor were they in fact so provided or furnished. The buses in which the parts were installed were in the applicant's, and not the PTC's, possession. The most that can be said is that the parts will come into the PTC's possession when the buses are returned to it at the end of the lease. The PTC may well be the owner of the parts upon their installation, but as the Sterling Nicholas case shows, that does not mean that it has been supplied with the parts. Paragraph (b) of Item 194 provides its own indication that "supply" is directed to something other than the transfer of ownership. I need not decide whether "delivery" is involved in providing or furnishing the goods. The verbiage of Item 194 is quite unlike that of the section considered in Dawson, and par (b) provides some support for the view that "supply" does involve the passing of possession. However, if "supply" does contemplate delivery, the position is the more clear. The PTC did not take delivery of the parts. Possession of the parts did not pass to it. For these reasons, I am of the opinion that the parts are not goods for use by the applicant for supply to the PTC under the lease.

DID PROPERTY PASS TO PTC UNDER THE LEASE?

In view of the conclusion I have reached on the first question, it is not necessary for me to deal with the second. But since the matter was fully argued, I will express my opinion on whether property in the parts is to pass to the PTC under the lease. Property in a chattel does not pass by reason merely of its annexation to the chattel of another. Prima facie the property in an accessory in the nature of a spare part does not pass to the owner of the vehicle to which it is affixed unless the owner of the accessory intends it to pass. It is for the owner of the vehicle to show that the necessity of the case requires the application of principles whereby the property is deemed to pass by operation of law. The accessory continues to belong to its original owner unless it is shown that as a matter of practicability it cannot be identified, or, if identified, it has been incorporated to such an extent that it cannot be detached from the vehicle without damage to the accessory or to the vehicle. See Rendell v Associated Finance Pty Ltd [1957] VR 604 at 608, 610 and Thomas v Robinson [1977] 1 NZLR 385. The principles whereby the necessity of the case results in the passing of property by operation of law are the principles of accession. See Sawer, "Accession in English Law", Australian Law Journal vol 9 (1935), 50; Guest, "Hire-Purchase : Accession and Confusion", Modern Law Review vol 27 (1964), 503; Nicholson, "Accessory Clauses in Motor Vehicle Hire Purchase Agreements", Australian Law Journal vol 39 (1966), 408 at 412-413. In Lewis v Andrews and Rowley Pty Ltd (1956) 73 WN (NSW) 670 Ferguson J, with whom Roper CJ in Eq agreed, said that the doctrine of accession operates only when it must be applied as a matter of practical necessity: at 672. The same opinion was expressed by the Full Court of the Supreme Court of Victoria in Rendell at 608-610.

In accordance with those principles, in Lewis tyres and other parts belonging to one person were attached to the vehicle of another, and it was held that they had not become the property of the latter even though they were essential to the operation of the vehicle. In Rendell it was held that property in a truck engine did not pass to the owner of the truck notwithstanding its incorporation in the truck. See also Bergougnan v British Motors Ltd (1929) 30 SR (NSW) 61.

As I have said, the Commissioner accepts that property in the parts is to pass to the PTC. Given that the parts are all identifiable and detachable from the vehicles, so that the doctrine of accession does not apply, property will only pass if the applicant intends it to pass. Clause 3.4 of the lease provides that the PTC retains full title to the buses. Clause 11.2 requires the applicant, on the termination date, to surrender possession of the buses to the PTC in good and substantial repair and in proper working order and condition. In my view those provisions evince an intention on the part of the applicant that parts affixed to the buses pursuant to the obligations in the lease will become the property of the PTC. Does this mean that the property in the parts is to pass under the lease? In my view it does. I do not accept the Commissioner's contention that the property is to pass by operation of law. That would be the case if the doctrine of accession operated. But since the mere affixing of the parts does not cause property to pass to the PTC, and since property will pass only if the applicant intends that it pass, the document which evinces that intention is the document which explains why the property will pass. If the lease had provided that any additions and improvements made to the goods were to be deemed to belong thereto and to become the property of the owner, there would be no doubt that property in the parts would pass under the lease. Cf Akron Tyre Co Pty Ltd v Kitson [1951] HCA 6; (1951) 82 CLR 477. That would be an express statement of an intention that property should pass. Although in the present case the applicant's intention is not express, it is implied in the clauses I have mentioned. I see no difference in this context between an express intention that property is to pass and an implied intention to that effect.

In Chan v Cresdon Pty Ltd [1989] HCA 63; (1989) 168 CLR 242 a party to a lease guaranteed the performance by the lessee of its obligations "under this lease". The lease was not registered under the Real Property Act (Q) and accordingly was not "effectual to pass any estate or interest in land". However, the lessee went into possession and paid rent. On default by the lessee, the lessor sought to recover rent from the guarantor. The claim failed. The High Court held that although a common law tenancy had come into existence as a result of the lessee going into possession and paying rent, the obligation to pay rent under that tenancy was not an obligation "under this lease". The Court said that the word "under" in that expression "refers to an obligation created by, in accordance with, pursuant to or under the authority of, the lease". In the present case, the lease contains the expression of the applicant's intention that property is to pass. That intention is what will cause the passing to occur. In my view the property will pass "in accordance with, pursuant to or under the authority of, the lease".

In Elmslie v Federal Commissioner of Taxation [1993] FCA 549; (1993) 46 FCR 576 Wilcox J considered the phrase "where the asset was acquired or disposed of under a contract" in s 160U(3) of the Income Tax Assessment Act 1936 . His Honour said at 591-592:

It seems to me that, for the legislation to work satisfactorily, it is necessary for the courts to confine the words "under a contract" in s 160U(3), to the contract that directly effected the acquisition. It is necessary to disregard any earlier contract obliging one or both parties to the acquisition to enter into the immediately operative contract. This approach is consistent with the interpretation given in the decided cases to analogous provisions, such as "under an enactment" and "under this lease". I have already referred to some of those cases. They demonstrate that the word "under" usually imports a direct connection between the relevant act and the instrument .... In the same way, the contract under which an asset is acquired, within the meaning of s 160U(3), is the contract through whose operation the asset changes ownership.

See also Kiwi Brands Pty Ltd v Federal Commissioner of Taxation (1997) 148 ALR 605 at 618-619. In my view there is a "direct connection" between the lease and the passing of property in the parts. As I have said, the lease contains the expression of the applicant's intention that property is to pass, and that intention is what will cause the passing to occur. Accordingly it is the lease through the operation of which property in the parts will pass to the PTC.

WOULD THE GOODS HAVE BEEN EXEMPT IF PURCHASED BY THE PTC?

My conclusion on the first question makes it unnecessary for me to deal with the third, and since the nature of the hypothesis required by par (b) of Item 194 was not fully explored in argument, I will not express an opinion on whether the parts would have been exempt under Item 126 or Item 64 if they had been purchased by the PTC.

CONCLUSION

The application must be dismissed with costs.

I certify that this and the preceding seven (7) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Sundberg

Associate:

Dated: 3 March 1998

Counsel for the Applicant:	J W de Wijn QC
Solicitors for the Applicant:	Mallesons Stephen Jacques
Counsel for the Respondent:	J Davies
Solicitor for the Respondent:	Australian Government Solicitor
Date of Hearing:	19 February 1998