Australian Fencing Hire v Chief Commissioner of State Revenue

[2005] NSWSC 1286

CITATION:	Australian Fencing Hire v Chief Commissioner of State Revenue [2005] NSWSC 1286 This decision has been amended. Please see the end of the judgment for a list of the amendments.
HEARING DATE(S):	6/12/05
JUDGMENT DATE :	16 December 2005
JUDGMENT OF:	Gzell J
DECISION:	Matter remitted to Chief Commissioner for determination in accordance with decision. Chief Commissioner ordered to pay manufacturer's costs.

CATCHWORDS:	TAXES AND DUTIES - Stamp Duties - Hire duty - Master Licence agreement under which manufacturer appoints another company to exploit its products by hiring them to the public and grants possession while retaining title - Other company registered as a commerical hire business paying duty monthly - "Hire of goods" defined as arrangement under which goods are or may be used at any time by a person other than the person hiring out the goods - Whether manufacturer hires its products to the other company - Whether the other company an agent - Whether the manufacturer but not the other company carries on the commercial hire business - Whether interest and penalties should be remitted
LEGISLATION CITED:	Duties Act 1997 Taxation Administration Act 1996 Corporations Act 2001 (Cth) Corporations Law (Cth)
CASES CITED:	Scott v Davis (2000) 204 CLR 333 Arbuckle Smith & Co Ltd v Greenock Corporation [1960] AC 813 Government Insurance Office of NSW v R J Green & Lloyd Pty Ltd (1965-1966) 114 CLR 437 Ryde Municipal Council v Macquarie University (1978) 139 CLR 633 Federal Commissioner of Taxation v Tourapark Pty Ltd (1982) 149 CLR 176 Deputy Commissioner of Taxation v Stewart (1983-1984) 154 CLR 385 Australian Guarantee Corporation Ltd v Ross [1983] 2 VR 319 at 329 Cyclone Scaffolding Pty Ltd v Commissioner of Stamp Duties (Qld) 84 ATC 4812 David Securities Pty Ltd v Commonwealth Bank of Australia (1991-1992)175 CLR 353 Markesinis and Munday, An Outline of the Law of Agency, 2nd ed, Butterworths, London, 1986 Palmer, Bailment, 2nd ed, The Law Book Co Ltd, Sydney, 1991 The Province of the Law of Tort, Cambridge University Press, London, 1931 Paton, Bailment in the Common Law, Stevens & Sons, London, 1952 Holmes, The Common Law, McMillan & Co, London, 1882 Bowstead and Reynolds on Agency, 17th ed, Sweet & Maxwell, London, 2001
PARTIES:	Australian Fencing Hire Pty Ltd - Plaintiff Chief Commissioner of State Revenue - Defendant
FILE NUMBER(S):	SC 6704/04
COUNSEL:	Mr C J Bevan - Plaintiff Dr H R Sorensen - Defendant
SOLICITORS:	Alan Friedlanders Solicitors IV Knight Crown Solicitor

LOWER COURT JURISDICTION:

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

GZELL J

FRIDAY 16 DECEMBER 2005

6704/04 AUSTRALIAN FENCING HIRE PTY LTD v CHIEF COMMISSIONER OF STATE REVENUE

Introduction

1 Australian Fencing Hire Pty Ltd is the manufacturer of a variety of products including mesh panels, chain-wire fence panels, hoarding panels, crowd control barriers, road barriers and portable gantries. From the time of their manufacture, Australian Temporary Fencing Pty Ltd, or sub-licensees of it, have possession of all manufactured products.

2 AFH has no contact with the public. ATF hires the products of AFH to the public. It also enters into sub-licence agreements with persons who hire out AFH products in regional areas. ATF is registered as a commercial hire business under the Duties Act 1997, s 196(1) and pays duty on monthly returns in accordance with s 199.

3 The Chief Commissioner of State Revenue raised assessments against AFH on the basis that it conducts a commercial hire business. He also raised interest and penalties. From an adverse decision on its notice of objection, AFH applied to the court for a review of that decision under the Taxation Administration Act 1996, s 97(1)(a).

4 The issues are whether AFH was liable to duty on hiring charges received in each calendar month from 1 July 1999 to 30 June 2003 from a commercial hire business in terms of the Duties Act 1997, s 198(1) and, if so, whether the assessed interest and penalty should be remitted in whole or in part.

Hire of goods duty

5 Chapter 6 of the Duties Act 1997 deals with the hire of goods. Section 180 provides that the chapter charges duty on the hire of goods. Section 183(1) defines the concept in terms of user of the goods:

“A hire of goods is an arrangement under which goods are or may be used at any time by a person other than the person hiring out the goods, unless the arrangement is excluded under section 186.”

6 Section 186(1)(g) of the Duties Act 1997 contains an exclusion for related companies. It provides that a hire of goods does not include an arrangement made between related bodies corporate. But AFH and ATF were not related bodies corporate. They had the same shareholders and directors but the term “related body corporate” is defined in the Dictionary to have the same meaning as in the Corporations Act 2001 (Cth) and, before it, in the Corporations Law (Cth), and s 50 in both pieces of legislation defined a related body corporate in terms of a holding company of another body corporate, a subsidiary of another body corporate, or a subsidiary of a holding company of anther body corporate.

7 It does not matter in what form a hire of goods is constituted. The Duties Act 1997, s 185 provides that it may take any form and it is immaterial whether or not the hire of goods is effected or evidenced by an instrument in writing.

8 The legislation provides for two kinds of hire of goods, an equipment financing arrangement and an ordinary hire of goods, that is any other hire of goods. It was not suggested that AFH was a party to an equipment financing arrangement.

9 The rate of duty chargeable on an ordinary hire of goods is 1.5% of the total amount of the hiring charges under the Duties Act 1997, s 188(2). If an ordinary hire of goods is also a special hiring agreement in terms of s 187, the maximum amount of duty chargeable is $10,000.00 under s 188(3). It was not suggested that AFH was party to a special hiring agreement.

10 Hiring charges are defined in general terms in s 189(1) of the Duties Act 1997 as payments made to the person who hires out the goods by or on behalf of the hirer for, or that arise as an incident of, the hire of the goods. There are specific extensions to this definition, irrelevant for present purposes.

11 Section 194(1) of the Duties Act 1997 provides that persons who hire out goods as a business are called a commercial hire business. In raising the assessments, the Chief Commissioner assumed that AFH was a commercial hire business.

12 A commercial hire business must be registered if in any month the hiring charges received exceed a specified threshold under the Duties Act 1997, s 195(1). Section 198(1) provides that duty is to be assessed on the total amount of the hiring charges received in a month by the commercial hire business. Section 199(1) provides that a commercial hire business must on or before the 21st day of each month lodge with the Chief Commissioner a return and pay the appropriate amount of duty subject to the duty free thresholds in s 199(2) that stood at $6,000.00 for a month ending before 1 July 2001 and thereafter at $14,000.00.

Master licence agreement

13 On 30 April 1995, AFH and ATF executed a master licence agreement for an initial term of one year with an option in ATF to extend the agreement for further periods of one year. The option was never exercised but it was common ground that during the relevant period AFH and ATF conducted themselves on the basis that the agreement continued in force.

14 Under the agreement AFH granted to ATF a licence within Australia and New Zealand to Exploit the Products manufactured by AFH pursuant to the Invention, Patent, Trade Secrets and Licensor’s Improvements.

15 The terms “Exploit” and “Exploitation” were defined in terms of hirings out by ATF and sub-licensees or purchase and sale by ATF as follows:

“(a) the entering into and the performance of hire agreements in respect of the hiring or use of the Products on the terms and conditions set from time to time by the Licensor;
(b) the purchase of the Products from the Licensor and the subsequent sale of those Products;
(c) marketing the Products as Products for hire or use;
(d) the entering into and the performance of sublicence agreements pursuant to clause 7 of this agreement whereby the sublicences (sic) are permitted to enter and perform hiring agreements and market the Products in accordance with subclauses (a) and (c) above.”

16 Clause 7 prevented AFT entering into sub-licence agreements without the written consent of AFH and upon specified terms. “Product” was defined to mean gantries and portable fencing panels comprised in or comprehended by the “Invention” which was defined to mean the gantries and portable fencing panels described in the “Patent”. That term was defined to mean the patent defined in the schedule to the agreement and future patents and applications relating to the Invention, the Product, the equipment to manufacture the Products and the process pursuant to which the Products were made. “Trade Secrets” were defined to mean the secret processes, formulae and technical information relating to the manufacture or use of the Product. “Licensor’s Improvements” meant all improvements to the whole or any part of the Invention.

17 During the relevant period, ATF did not purchase and sell any gantries or portable fencing panels. It hired Products to members of the public and entered into sub-licence agreements enabling sub-licensees to hire Products to members of the public.

18 ATF acknowledged in the agreement that title, both legal and equitable, in the Products belonged to AFH and that AFH would give ATF possession of so many of the Products as the parties agreed from time to time for the purpose of the agreement.

19 If, which did not happen, ATF wished to Exploit Products by means of a sale, the agreement provided that it would first purchase the Products from AFH at a price determined by AFH which would consent to the on-sale. Clause 3.9 was in the following terms:

“In the event the Licensee wishes to Exploit the Products by means of sale it shall first purchase the Products from the Licensor at a price determined from time to time by the Licensor PROVIDED THAT such sale by the Licensor will not be capable of being effected unless the Licensor both sells the Products to the Licensee and consents to the sale of those Products to the purchaser of same.”

20 The agreement provided for the payment of a licence fee described as a royalty, as follows:

“5 LICENCE FEE
5.1 Within fourteen (14) days after the end of each month during the Term of the Licence the Licensee shall pay to the Licensor a monthly royalty equalling eighty percent (80%) of the Revenue earned during that month by the Licensee through the Exploitation of the Products.”

21 “Revenue” was defined as the amount payable to ATF for the sale, hire or use of Product without deduction or set-off whether or not actually received, deemed to be earned upon the hirer of Product being invoiced plus the amount payable to ATF for the granting of sub-licences together with all other receipts, whether by way of royalty or otherwise, from such sub-licensees.

22 On 1 January 2003, AFH and ATF executed a deed of amendment to take effect from 1 July 2002. It reduced the licence fee to 65% of Revenue.

23 ATF was required to provide AFH with a written report specifying the Revenue earned from Exploiting the Product during each month. It was also required to keep detailed records of the Products made available by AFH for the purpose of the agreement. AFH was entitled to have an accountant or auditor inspect and verify those records.

24 AFH appointed ATF its agent and attorney to assert, in the name of AFH and for its benefit, whatever claims and rights AFH might have arising from any actual or apparent infringement or unauthorised use of the Patent or the Trade Secrets within Australia and New Zealand and, at AFT’s discretion, to institute and prosecute an action against such infringement or unauthorised use.

25 The agreement contained a specific provision that the parties were neither partners nor agents:

“Nothing in this Agreement shall constitute a partnership between the parties nor constitute one party the agent or representative of the other party.”

Agency?

26 ATF entered into written hire agreements with members of the public. There was no mention of AFH in those agreements. AFH monitored and controlled the terms of written sub-licence agreements between ATF and the sub-licensees. The sub-licensees entered into written hire agreements with members of the public. ATF was mentioned in those agreements. Sub-licensees retained 50% of Revenue. Of the 50% that was due to ATF, it paid AFH 80% and, subsequently, 65%.

27 ATF operated from the same premises as AFH. There was no division of the premises. They were common to both AFH and ATF.

28 It was argued on behalf of AFH that, notwithstanding the provision as to agency in the master licence agreement, AFH had constituted ATF its agent to Exploit its Products. The Chief Commissioner argued that there was no agency. Even if ATF was an agent, the Chief Commissioner argued that there was still a hire of goods by AFH to ATF for the purposes of the legislation.

29 In Scott v Davis (2000) 204 CLR 333, the owner of an aeroplane invited a pilot, who was a guest at the owner’s party, to take another young guest on a joy ride. The plane crashed through the negligence of the pilot causing serious injury to the child and nervous shock to his parents. It was held that the owner of the aircraft was not vicariously liable for the pilot’s negligence. Counsel for the Chief Commissioner referred to a passage in the judgment of Gummow J at 412-413 where his Honour cited with approval from Markesinis and Munday, An Outline of the Law of Agency, 2nd ed, Butterworths, London, 1986, at 10 to the effect that the law of agency does not come into play every time one person represents another. For those rules to come into play, the representation of one person by another must be meant to affect the principal’s legal position and, secondly, the purpose of the relationship must be for the agent to enter into a contract on behalf of his principal or to dispose of his principal’s property.

30 It was submitted on behalf of the Chief Commissioner that these elements were lacking in the relationship between AFH and ATF.

31 In my view the elements are present in the relationship. The master licence agreement empowers ATF to affect AFH’s legal position. Title to the Products remains with AFH. ATF is entitled to hire those Products to members of the public. By so doing, ATF creates in members of the public possessory rights in the Products enforceable against AFH. That affects AFH’s legal position. True it is that ATF does not dispose of AFH’s Products. But, in my view, there is no reason why the law of agency should not come into play if a representative creates lesser rights than ownership in the principal’s goods. That is the case here. Furthermore, it seems to me that by retaining title to the Products and authorising ATF to hire those Products to members of the public, AFH empowers ATF to enter into contracts with the public on its behalf.

32 The Chief Commissioner submitted that the master licence agreement did not create an agency because it provides for the payment of a royalty by ATF to AFH and not payment of a commission by AFH to ATF. It was submitted that the payment goes the wrong way. But that is merely a matter of form. The substance of the transaction was that ATF earned a commission of 20%, subsequently increased to 35%. Since ATF takes possession of Products of AFH and deals with the public, it is the recipient of hire charges and it was logical to require ATF to account for its gross earnings less its commission.

33 It was submitted for the Chief Commissioner that the master licence agreement was inconsistent with agency because it permitted ATF, in its own behalf, to hire out and sell Products in consideration of a monthly licence fee, whereas an agent deals on behalf of its principal.

34 But ATF was not empowered to act in its own behalf. Ownership of the Product remains with AFH. It is only if ATF wishes to sell Product that title first passes from AFH to ATF. And that did not happen in the relevant period.

35 It was submitted on behalf of the Chief Commissioner that agency was inconsistent with the presumed intention of AFH to protect its Patent. That protection would not arise if ATF is the agent of AFH. But that presumed intention is mere speculation and the proposition was not put to the representatives of AFH and ATF who were cross-examined.

36 There are features of the master licence agreement that demonstrate that the parties were not dealing at arm’s length: the dictation by AFH of the terms of any agreement for hire of its Products by ATF, the dictation of the terms of any sub-licence between ATF and its sub-licensees and the specification of the purchase price for any of its Products. The same conclusion arises from the identity of directors and shareholders between the companies. These features are consistent with an agency arrangement and inconsistent with an agreement with an independent contractor.

37 In my view, notwithstanding the provision disavowing agency, the master licence agreement constituted ATF as the agent of AFH for the Exploitation of the Products of AFH.

The meaning of “use”

38 The words “use” or “used” are not words of precise meaning. They gain meaning from their context. In Arbuckle Smith & Co Ltd v Greenock Corporation [1960] AC 813 the question was whether a company was in actual occupation of land during the period that alterations were carried out to the premises. At 828, Lord Radcliffe indicated that there would be no occupation in the context of rating, unless some use was made of the hereditament in the course of the relevant year. He continued:

“’Use’ is not a word of precise meaning, but in general it conveys the idea of enjoyment derived by the user from the corpus of the object enjoyed.”

39 In Government Insurance Office of NSW v R J Green & Lloyd Pty Ltd (1965-1966) 114 CLR 437 a hoist being manoeuvred onto the tray of a stationary and idle truck fell injuring a workman. It was held that the accident arose out of the use of the motor vehicle.

40 In Ryde Municipal Council v Macquarie University (1978) 139 CLR 633 there was an exemption from rates for land vested in Macquarie University and used or occupied by the University solely for the purposes thereof. Part of the grounds of the University were devoted to commercial and shopping facilities on land leased from the University. A majority of the High Court concluded that the land devoted to commercial and shopping facilities was used by the University solely for the purposes thereof. At 638, Gibbs ACJ said that a person who owned land might be said to use it for its own purposes notwithstanding that it permitted someone else to occupy it, even under a lease.

41 That passage was cited with approval in Federal Commissioner of Taxation v Tourapark Pty Ltd (1982) 149 CLR 176. There a taxpayer conducted a tourist caravan and camping park business on land that it occupied. It provided accommodation in caravans that were specially made for use as stationary caravans in such parks. A customer who required accommodation was granted a licence for a charge to occupy a caravan and make use of communal facilities. It was held that the taxpayer was not entitled to an investment allowance because of an exclusion, if the taxpayer leased the property, let the property on hire under a hire-purchase agreement, or otherwise granted a right to another person to use the property. It was held that an investment allowance was not available unless a taxpayer kept both the property and the exclusive right to use it, and used it only for the purpose of producing accessible income.

42 In Deputy Commissioner of Taxation v Stewart (1983-1984) 154 CLR 385 there was an exemption from sales tax for goods for use, and not for sale, by a public benevolent institution. A supplier of lottery tickets manufactured machines that could be used by its customers to sell tickets mechanically. It provided such machines free of charge to certain public benevolent institutions that used them to raise funds by conducting lotteries. The machines remained the property of the supplier who serviced them and, if necessary, replaced them. It was held that the machines were exempt although they were not used exclusively by the institutions, and they were not inherently goods designed for use by a public benevolent institution. It was sufficient that the institution made a real and significant use of them.

43 Depending upon the context, then, a thing may be used even if it stands idle; it may be used even though someone else has physical possession of it; it may be used by the person who has physical possession of it; or it may be used by a person who has a non-exclusive possessory interest in it of a significant kind. And there may be other situations that satisfy the concept of use in a specific context.

Hire at common law

44 The Duties Act 1997, s 183(1) contains the word “use” in a definition of a hire of goods. A hire is a particular type of bailment and the essence of bailment is possession (Palmer, Bailment, 2nd ed, The Law Book Co Ltd, Sydney, 1991 at 2).

45 In Australian Guarantee Corporation Ltd v Ross [1983] 2 VR 319 at 329, Marks J cited with approval a passage from the first edition of Palmer as well as Winfield, The Province of the Law of Tort, Cambridge University Press, London, 1931, at 101-102:

“The salient feature of bailment is, … the element of possession. Bailment is not only one of the modes of transferring possession, but while the bailment lasts it connotes possession. As between bailor and bailee that was recognised very early in our law.”

46 Paton, Bailment in the Common Law, Stevens & Sons, London, 1952 at 5 adopted Professor Winfield’s statement and added a statement from Holmes, The Common Law, McMillan & Co, London, 1882 at 175:

“All bailees from time immemorial have been regarded by the English law as possessors, and entitled to the possessory remedies.”

47 Marks J concluded that a condition as to bailment in an agreement required the respondent to have physical control of the motor vehicle in question whilst the bailment lasted.

48 Palmer at 1208, defined a contract of hire in terms of four elements:

“At common law four principle qualities distinguish contracts of hire: the transfer of possession in a chattel, an authority in the bailee to use it for his benefit, an advantage or reward accruing to the bailor in return for this permission, and a promise by the hirer to redeliver the chattel at a stated or determinable time.”

The arguments

49 It was submitted for the Chief Commissioner that Chapter 6 of the Duties Act 1997 was structured such that duty was levied on a wide front but the transactions to which the wide definition applied were cut down by exclusions. It was submitted that the singular included the plural and the reference to a person in s 183(1) applied to more than one person and hence there could be a use of the same goods by more than one person. The definition did not require that the use be for the person’s own purposes. It was submitted that whether an agent or not, ATF used the Products by hiring them out.

50 The contrary submission on behalf of AFH was that the use that attracted duty was that which created an advantage in the goods in a person other than the owner, and the persons who answered that requirement were the members of the public who entered into agreements for hire of AFH’s Products with ATF or sub-licensees. It was further submitted that principal and agent or sub-licensee should be treated as a single unit such that there could not be two hirings of the Products, one to ATF or a sub-licensee and another to a member of the public.

Resolution

51 It is a trite proposition that a disposition within an agent’s actual authority, express or implied, transfers property, whether the principal is disclosed or not (Bowstead and Reynolds on Agency, 17th ed, Sweet & Maxwell, London, 2001 at [8-127]). There is no reason why that principle should not apply to a hire of goods. Thus, when ATF hires the Products of AFH to members of the public, a hire of AFH’s goods is effected whether AFH is disclosed or not. And, likewise, when a sub-licensee enters into an agreement for hire with a member of the public, it is the Product of AFH that is hired whether AFH is disclosed or not.

52 Under that analysis the person hiring out the goods is AFH and the person who uses the goods is the member of the public. There is no separate hire of goods by ATF. The only capacity in which it takes part in a hiring, is on behalf of AFH, the person hiring out the goods.

53 In my view there is nothing in the master licence agreement or otherwise that would give rise to a hire of goods between AFH and ATF or a sub-licensee. The Products of AFH are not used by ATF or the sub-licensee in the sense of gaining a benefit from the physical possession of them. They are granted possession of the Products in order that they may confer possession on the member of the public who enters into an agreement for hire and gains the advantage of that possession. Unlike the sale position under the master licence agreement, ownership of the Products remains at all times with AFH and there is no intermediate transfer of title from AFH to ATF. Indeed, cl 7.3 is an acknowledgment by AFH that the entry into and the performance of hire agreements in respect of the hiring or use of the Products by ATF on terms and conditions set from time to time by AFH does not constitute a sub-licence.

54 The wealth of jurisprudence on bailment and hire should not be ignored when construing the definition of a hire of goods in the Duties Act 1997, s 183(1). It plays its part if the word “use” is construed in terms of possessory interests in the goods. If the legislature intended a radical extension of the common law of hire, one would have expected specific reference to that extension or, at the least, a use of language that did not rely upon the variable meaning of the ubiquitous term “use”.

55 In my view, in the performance of its duties of Exploitation under the master licence agreement, ATF does not use the products of AFH under the Duties Act 1997, s 183(1). In my view the user contemplated by that section is a physical one for the benefit of a person other than the person hiring out the goods. There is no physical use for the benefit of ATF or its sub-licensees when they hire the Products of AFH to members of the public. It is the members of the public with whom ATF or its sub-licensees contract who use the Products. The grant of possession to ATF or its sub-licensees is solely as agent for AFH in order to confer possessory rights in the Products of AFH upon members of the public.

56 I am fortified in this conclusion by Cyclone Scaffolding Pty Ltd v Commissioner of Stamp Duties (Qld) 84 ATC 4812. A rental business that attracted duty was defined by the Queensland legislation to mean the business of granting to any person rights to use any goods other than books. The appellant hired out its scaffolding for a fee and thereby conducted a rental business. It charged its clients separately for delivery, labour, stamp duty, insurance, cleaning and repairs. The question was whether these separate charges were received for or in relation to the use of goods. A majority of the Full Court held they were not. At 4819, McPherson J with whom Sheahan J agreed cited the passage set out above of Lord Radcliffe in Arbuckle Smith and said that the use of the scaffolding meant the enjoyment derived by the hirer from the corpus of the scaffolding hired.

Conclusion

57 The analysis set forth above has the consequence that the person who conducted the commercial hire business may well have been AFH and not ATF and the assessments of hire duty raised against AFH were correct although not for the reasons advanced on behalf of the Chief Commissioner.

58 That is a matter that the Chief Commissioner may wish to consider. In the circumstances I do not propose to revoke the assessments under the Taxation Administration Act 1996, s 101(1)(a). Instead I will remit the matter to the Chief Commissioner for determination in accordance with my decision under s 101(1)(d).

59 If the Chief Commissioner maintains the assessments upon the basis that AFH and not ATF or its sub-licensees conducted the commercial hire business, it would be appropriate for him to remit in full the interest raised against AFH under the Taxation Administration Act 1996, s 25 and to remit in full the penalties raised against AFH under the Taxation Administration Act 1996, s 33. Since the Chief Commissioner was in receipt of hire duty from ATF, it would be inappropriate to maintain additional charges against AFH.

60 Furthermore, the Chief Commissioner would, no doubt, reimburse ATF for duty paid by it under a mistake of law (David Securities Pty Ltd v Commonwealth Bank of Australia (1991-1992)175 CLR 353) or by virtue of the Taxation Administration Act 1996, s 18(1).

Orders

61 In terms of the Taxation Administration Act 1996, s 101(1)(d) I remit the matter to the Chief Commissioner of State Revenue for determination in accordance with this decision. I order the Chief Commissioner to pay Australian Fencing Hire Pty Ltd’s costs of the review.

**********

30/01/2006 - - Paragraph(s)