Madigan and Commissioner of Taxation [2003] AATA 519; (2003) 52 ATR 1193; 2003 ATC 2150 (3 June 2003)

Last Updated: 1 October 2009

Administrative

Appeals

Tribunal

DECISION AND REASONS FOR DECISION [2003] AATA 519

ADMINISTRATIVE APPEALS TRIBUNAL Nº VT2002/184
Nº VT2002/215

TAXATION APPEALS DIVISION

Re: PETER JAMES MADIGAN

Applicant

And: COMMISSIONER OF TAXATION

Respondent

DECISION

Tribunal: Mr B.H. Pascoe, Senior Member

Date: 3 June 2003

Place: Melbourne

Decision: The Tribunal sets aside the decisions under review and, in their stead, allows the objections in full by finding that the ships Investigator and Negotiator were exempt from sales tax under Item 59(1) of Schedule 1 to the Sales Tax (Exemptions and Classifications) Act 1992.

(sgd) B.H. Pascoe
Senior Member

SALES TAX – ships acquire to provide training courses – whether for use mainly for the purposes of providing pleasure, sport or recreation for any person

Sales Tax (Exemptions and Classifications) Act 1992

Commissioner of Taxation v The Leeuwin Sail Training Foundation Limited (1996) 68 FCR 197

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

REASONS FOR DECISION

3 June 2003 Mr B.H. Pascoe, Senior Member

1. These are applications to review two decisions of the respondent to disallow objections against assessments of sales tax in relation to two vessels acquired by the applicant in 1999. The applicant had claimed that the vessels were exempt under Item 59(1) of Schedule 1 to the Sales Tax (Exemptions and Classifications) Act 1992 (the Act).
2. At the hearing the applicant, Mr P. Madigan, was unrepresented and the respondent was represented by Mr C. Sievers, of counsel. The Tribunal had the documents provided by the respondent pursuant to s.37 of the Administrative Appeals Tribunal Act 1975. There was no dispute as to the facts of this matter and the parties provided an agreed statement of facts. These documents can be summarised as followed:
   • the applicant conducts a business known as Ocean Yachtmaster from the Western Port Marina at Hastings, Victoria. It provides training in water safety, power and sail boat handling, navigation, meteorology and survival techniques,
   • the applicant built, with assistance, a 7.4 metre aluminium power boat for use in training. The vessel named Investigator was commissioned on 1 July 1999. It was valued by the applicant at $110,000.00,
   • on 30 November 1999, the applicant purchased a Farr 38 yacht from Binks Yacht Construction Pty Ltd for $203,489.00. This vessel was named Negotiator,
   • based upon advice in July 1998 from a Mr Theo Van Beek that the vessels were exempt from sales tax, the applicant purchased materials for Investigator free of sales tax and provided a sales tax exemption declaration to the vendor of Negotiator,
   • after inquiries by the respondent in August 2000, notices of assessment of sales tax on both vessels were issued by the respondent. In respect of Investigator, taxable value was assessed at $48,803.00 and no penalty was levied. In respect of Negotiator, sales tax was levied on the purchase price and a penalty under s.99 of the Sales Tax Assessment Act 1992 (the Assessment Act) was remitted to 15 per cent of the sales tax, and
   • the respondent accepted that both vessels were used primarily by the applicant in the business of the training school and not substantially used by the applicant for his private purposes. Both vessels were used in accordance with a logbook or diary maintained by the applicant and produced to the respondent in respect of the two years from date of acquisition.
3. The sole issue in dispute was whether the vessels were exempt from sales tax under Item 59(1), which states:

...
59(1) A ship for use by a person mainly for purposes other than providing any of the following for any person (whether or not for reward):
(a) pleasure, sport or recreation;
(b) private transport;
(c) accommodation.

Section 5 of the Act provides that the use requirement is to be determined on the basis of intended use during the whole of the statutory period. Under s.5 of the Assessment Act, the statutory period is a period of two years from the time of first application to the person's own use.

4. It was submitted by Mr Madigan that the two vessels were used primarily for the purposes of training in boat handling, water safety, navigation, etc. It was argued that, while the trainees may ultimately utilise that training in a pursuit of sport, recreation or pleasure, the vessels were not so used by him or the trainees in such pursuits. Mr Madigan stressed that the relevant vessels had to comply with standards in excess of those required for pleasure or sport. The Negotiator was unsuitable for racing because of the extra weight of modifications required for greater stability and safety. Mr Madigan said that his training school was one of only four accredited training operations in Victoria and, after compulsory safety course requirements were brought in after the Sydney to Hobart yacht race disaster, Ocean Yachtmaster was the only licenced provider for the course in the first year. Mr Madigan maintained that he had discussed the question of sales tax with the boat builder, the Boat Owners Association and the Yachting Federation and had been advised that boats acquired by sailing schools were exempt from sales tax.
5. It was submitted for the respondent that the activities of Ocean Yachtmaster were for the purpose of training customers to participate in sailing or boating activities on either a recreational or sporting basis and the use of the relevant vessels in those activities should be regarded as being for the purpose of providing those customers with pleasure, sport or recreation. It was said that coaching and training in any sport is a part of that sport and that training of persons such as intended crew in a Sydney to Hobart yacht race was preparation to participate and, therefore, for the purpose of such sport. Similarly, it was argued that training of persons intended to participate in yachting or boating activities for recreational purposes was for purposes of pleasure or recreation.
6. It is noted that Item 59(1) refers to the use by the purchaser of a vessel for purposes other than providing pleasure, sport or recreation for any person. Its application is clear where the vessel is acquired for the purpose of the acquirer's own use in pleasure, sport or recreation, or mainly for hire to other persons for use in such activities. Here, it is clear that neither vessel was for Mr Madigan's own use in such activities. The question is, therefore, whether the use of the vessels by him in the training of others can be said to be for the purpose of providing pleasure, sport or recreation to those other persons. In Taxation Ruling Nº ST2171 of 2 May 1985, the respondent considered the application of sub-item 119(1) of the First Schedule of the former Act, which was in the same terms as Item 59(1), to training vessels. In that ruling it was stated:

...
FACTS
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2. The operation of the sub-item was considered recently in relation to the acquisition by sailing clubs of sailing boats for training children and others in the rudiments of sailing. The boats are used physically by a number of persons, e.g. instructors, trainees, club members and other passengers. The kind of vessels used in these training programs are vessels which ordinarily are used for pleasure, sport or recreation, e.g. sailing boats.
RULING
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3. Notwithstanding the instructional element in the use of the particular vessels it is considered that their primary or principal use is for the purposes of pleasure, sport or recreation. If an activity is of itself properly described as pleasure, sport or recreation, it is considered that coaching, training, instruction etc. in the activity is also to be characterized as pleasure, sport or recreation. Training in sailing is no different from coaching in other sports, e.g. cricket, tennis, football etc. The training is part of the pleasure, sport or recreation.
4. The overall use of sailing boats used by sailing clubs for instruction purposes is principally for purposes of pleasure, sport or recreation. Those boats are not covered by sub-item 119(1) and they are taxable at 20%.

7. In my view, the facts in this ruling can be distinguished from those in this case. A sailing club, by its very nature, is engaged in providing facilities for pleasure, sport or recreation for its members. While the Tribunal is not bound by such a ruling being an expression of view of the respondent, it is not difficult to accept that, on the facts set out in the ruling that such sailing boats can be said to be used for pleasure, sport or recreation. Here, however, the circumstances are different. The boats in question were acquired for use in a commercial business for use in providing structured training courses. Its purpose was to impart skills to those prepared to pay for such courses irrespective of the motives of the trainees as to the use to which they would utilise such skills in the future.
8. In Commissioner of Taxation v The Leeuwin Sail Training Foundation Limited (1996) 68 FCR 197, the Federal Court considered an appeal against a decision of this Tribunal. The issue was whether the respondent was entitled to sales tax exemption in respect of a quantity of rope purchased for use on the STS Leeuwin, a square rigged traditional sailing ship. The Tribunal had found that the rope was exempt on two grounds. The first was that the respondent was a school and the second was that it was exempt under Item 59(1). The Commissioner appealed in relation to the first ground only and the Court was concerned with that issue solely. The Tribunal decision was unreported but the Court set out, in some detail, the facts of the use of STS Leeuwin. At pages 199 and 200, it was stated that:

The respondent Foundation uses the Leeuwin — which is the largest sailing ship operating in Australia — in the following training programmes:
(a) Personal development;

(b) Corporate team building;
(c) Disabled youth;
(d) School Maritime Studies; and
(e) Eco Adventure.

These programmes accounted for 90 per cent of the operational use of the ship in the 14½ month period from January 1994 to March 1995 when its activities were surveyed.
The Tribunal in its reasons described in some detail each of the above programmes. Here, simply to convey a sense of them we set out the Tribunal's description of the personal development programme which in any event would seem to account for about 70 per cent by time of the training activities involving the ship:
"12. Participants in the Personal Development Programmes are provided with a training manual and pre-voyage preparatory material prior to the voyage. The duration of the voyage is 10 days which, depending on weather and other exigencies, the ship sails across 750 to 1,000 nautical miles. During the voyage participants receive instruction in basic seamanship, catering, marine engineering, maritime history, meteorology, navigation, pilotage, oceanography and oceanology. Participants live in cramped conditions on board.
13. The Leeuwin's complex rig facilitates instruction in teamwork and requires participants to climb the rigging.
14. Instruction is provided mainly by volunteer crew called watch officers, the purser and watch leaders. Volunteers are experienced and have been purposely trained at a two day ship familiarisation and personal development programme.
15. Before the Leeuwin goes to sea participants are instructed in the rudiments of rope handling, bridge work, bracing the yards and going aloft. At this stage participants are involved in a joint session and set personal goals to be achieved by the conclusion of the voyage. The emphasis, whilst at sea, is to engender teamwork and responsibility. On-board activities are structured and disciplined. They range from watch duty (ie actually sailing the vessel), emergency drills, cleaning, scrubbing and galley duty, all conducted according to merchant navy standards. Participants are assigned to teams of eight, each of which rotates the four-hour on-off 'watch duty'. Each watch team is involved in 'trust initiation activities' to help develop personal relationships. Participants take part in structured problem solving and learning activities. Activities are planned in such a way that participants have minimal spare time apart from scheduled sleeping periods. Midway through the voyage participants are debriefed in relation to their performance so far and personal goals previously set may be reassessed, based on their experience so far. Watch leaders then withdraw from each team which elects its own leader, the former watch leader acting as an observer to oversee safe handling procedures. Teams then combine to sail the vessel back to port. Before leaving the vessel, participants engage in a structured debriefing session where their overall performance is analysed by the permanent crew and watch leaders. Each participant is assessed on the following attributes: reliability, tact and cooperation, approach to tasks, adaptability, innovative skill, responsibility, new skill knowledge, leadership, organising ability, response to direction, reaction to physical stress and team spirit. Those participants adjudged successful are given a Certificate of Achievement. Participants who, in the crew's opinion, have not achieved the goals of the training voyage — usually, only a small minority — are not awarded such a Certificate."

The Court noted the Tribunal's finding that the STS Leeuwin was not used mainly for the purpose of providing pleasure, sport or recreation.

9. It is clear that the test of purpose in Item 59(1) must be an objective one, and the question is whether, objectively, it could be concluded that the main purpose or characterisation of a particular ship is, or is not pleasure, sport or recreation (see Deputy Commissioner of Taxation v Stewart and Another [1984] HCA 11; (1984) 154 CLR 385). It is important to note that the exemption depends on the use of the ship. It is not directly concerned with whether a participant in a course run by the applicant believes that the experience is recreational or pleasurable, but rather whether the use of the ship can be seen objectively for a purpose of providing recreation or pleasure. From the evidence, it is clear that the use of these vessels is for the purpose of providing training in skills required for the safe handling of boats. I accept the evidence of Mr Madigan that the training is done in a structured disciplined and rigorous manner. While some participants may have found the experience rewarding and enjoyable, the main purpose in the use of the vessels was not to provide recreation and pleasure as such but to equip participants to use other vessels for pleasure, sport or recreation. It is acknowledged that advertisements placed by the applicant are headed Boats are fun and implied that some courses may include an enjoyable interlude such as cricket on the beach and even a glass of wine if you're lucky.. However, an enjoyable interlude within a weekend course on navigation, sail handling, anchoring, dinghy handling, etc, does not, in my view, make the use of the vessel mainly for pleasure or recreation. On one's view, the tenor of the advertisements can be taken as advertising that boating is fun after a participant has learned the skills to allow such enjoyment in the future.
10. The evidence is clear that neither vessel was acquired for use or had been used in any competitive boating activities which may be described as sport. Clearly, the vessels were not used for the purpose of engaging in sport. The respondent sought to attribute a sports use on the basis that training or coaching of a sporting activity is itself sport. Mr Sievers argued that the specific training course for intending participants in the Sydney to Hobart yacht race involved the vessel in question being used for the purpose of preparation for sport and this use constituted the provision of sport as it was not possible to distinguish between the sport itself and the training to enable participation in that sport. In my view the two can be distinguished, particularly in the example used. The training course, according to the evidence of Mr Madigan, was a course required as a prerequisite to subsequent participation in a yacht race. It was a precedent to the sport and very different to regular coaching whilst being engaged in the sport. In any event, it is clear that the vessel concerned was not itself used to provide sport to those undertaking such a course. The vessel which would be used to provide the sport would be the vessel on which a participant would later sail in the relevant race.
11. It follows from the foregoing that it is appropriate to find that neither the Investigator nor the Negotiator was a ship for use by the applicant mainly for the purpose of providing pleasure, sport or recreation for any person. It was not in dispute that they were not for use for purposes of providing private transport or accommodation. Consequently, the decisions under review should be set aside and on the basis of a finding that the ships Investigator and Negotiator were exempt from sales tax under Item 59(1) of Schedule 1 to the Act.

I certify that the eleven [11] preceding paragraphs are a true copy of the reasons for the decision herein of

Mr B.H. Pascoe, Senior Member

(sgd) Catherine Thomas

Clerk

Date of Hearing: 9 May 2003

Date of Decision: 3 June 2003

Solicitor for the applicant: NIL — IN PERSON

Counsel for the respondent: Mr C. Sievers

Solicitor for the respondent: Australian Taxation Office