Kennards Hire Pty Ltd v Chief Commissioner of State Revenue - [2006] NSWADT 136

No judgment structure available for this case.

CITATION: Kennards Hire Pty Ltd v Chief Commissioner of State Revenue [2006] NSWADT 136

DIVISION: Revenue Division

PARTIES: APPLICANT
Kennards Hire Pty Limited
RESPONDENT
Chief Commissioner of State Revenue

FILE NUMBER: 046030; 056046

HEARING DATES: 09/11/05

SUBMISSIONS CLOSED: 11/09/2005

DATE OF DECISION:
05/10/2006

BEFORE: Hole M - Judicial Member

CATCHWORDS: Duties Act - duty on the hire of goods

MATTER FOR DECISION: Principal matter

LEGISLATION CITED: A New Tax System (Goods and Services Tax) Regulations 1999 (Cth)
Duties Act 1997
Intergovernmental Agreement Implementation (GST) Act 2000
Stamp Duties Act 1920
Stamp Duties Act 1923 (SA)
Victorian Stamp Act 1958

CASES CITED: ANI Corporation Limited v Commissioner of State Taxation (WA) 90 ATC 4714
Chief Executive Officer of Customs v AMI Toyota Ltd (2000) 102 FCR 578
City Link Melbourne Ltd v Federal Commissioner of Taxation (2004) 141 FCR 69
Commissioner of State Revenue (Vic) v Royal & Sun Alliance Insurance (2003) ATG 4998
Cyclone Scaffolding Pty Ltd v Commissioner of Stamp Duties [1985] 2Qd R435
Federal Commissioner of Taxation v Broken Hill Pty Co Ltd (2000) 179 ALR 593
Federal Commissioner of Taxation v Texas Co (Australasia) Limited (1939) 63 CLR 382
Haydon v Kent County Council [1978] 2 WLR 485
Masterwood P/L v Far North Queensland Electricity Board [1999] 1 Qd R345
McDowell v Baker (1979) 144 CLR 413
McLaurin v Federal Commissioner of Taxation (1961) 104 CLR 381
Ridis v Proprietors of Strata Plan 10308 [2005] NSWCA 246
Roadshow Distributions Pty Ltd v Commissioner of State Revenue (Vic) 97 ATC 4271
SA Crate Pty Limited v The State of South Australia 83 ATC 4587
Trustees Executors & Agencies Co. Ltd v Reilly (1941) VLR 110

REPRESENTATION:
APPLICANT
M Richmond, barrister
RESPONDENT
I Young, barrister

ORDERS: 1. That the Chief Commissioner of State Revenue refund to the applicant any overpayment of hire of goods duty ascertainable after applying the findings referred to in paragraph 71; 2. That the applicant pay any additional hire of goods duty to the Chief Commissioner of State Revenue after applying the findings referred to in paragraph 71; 3. That the Chief Commissioner of State Revenue reassess the hire of goods duty for the period from 1 July 2000 to 28 February 2003 after applying the findings referred to in paragraph 71

1 This is an application to review decisions made by the Chief Commissioner of State Revenue to: -

require payment of additional hire of goods duty amounting to $25,123.00; and

assess hire of goods duty for the period from 1 July 2000 to 28 February 2003 in the amount of $1,228,743.00.

Taxation Administration Act

2 The applicant is a company which engages in the hire of goods to the public for a fee. The applicant has hire centres in New South Wales, Queensland, Australian Capital Territory, South Australia, Victoria and Western Australia. At the time of hiring of goods the applicant provides the goods under conditions as set out in the hire agreement with the particular customer. The hire agreement is disclosed on the form of invoice together with the hire agreement conditions. It will be of assistance to set out the relevant parts of the format invoice and all the hire agreement conditions as shown on the invoice relevant at the time of the decisions made by the Chief Commissioner of State Revenue:

“HIRED FROM:

Kennards Hire Pty Ltd

CUSTOMER

DATE:

PRODUCT# DESCRIPTION QTY CHG RATE

DAYS EXTENSION

DAMAGE WAIVER FEE

Damage Waiver is subject to an Excess –

Damage Waiver does not relieve you of all responsibility –

See Conditions on back hereof

DAMAGE WAIVER DOES NOT COVER LOST OR STOLEN EQUIPMENT.

NOTE: TYRE DAMAGE IS YOUR RESPONSIBILITY

WE CHARGE FOR TIME OUT – NOT TIME USED.

DAILY AND WEEKLY RATES BASED ON 8 HOURS AND 40 HOURS WORKING

EXTRA SHIFTS WORKED CHARGED AT 50% PER SHIFT

MINIMUM HIRE ONE DAY ON DELIVERIES

Hire Charge includes Stamp Duty where applicable under corresponding State Act

Hire Charge includes a maintenance factor of 20%

EQUIPMENT NOT RETURNED BY DUE DATE MAY BE REGARDED AS STOLEN

I HEREBY CERTIFY THAT THE ABOVE IDENTIFICATION INFORMATION IS CORRECT AND THAT THE ABOVE EQUIPMENT IS RECEIVED IN GOOD ORDER AND CONDITION AND IS HIRED SUBJECT TO THE CONDITIONS ON THE BACK HEREOF WHICH I ACKNOWLEDGE HAVING READ BEFORE SIGNING.

GST INCLUDED IN INVOICE TOTAL E. & O.E.”

Page 2 – Back page to Page 1 – Column 1

“HIRE AGREEMENT CONDITIONS

NOTE TO CUSTOMERS

This Agreement is a claim for payment under the Building and Construction Industry Security of Payment Act 1999.

1. Interpretation of Words in this Agreement:

Commencement – The latter of the date on the front page or the time of delivery of the Equipment to the Customer.

Equipment – The equipment, tools, Motor Vehicles (including accessories) hired to the Customer.

Hire Period – The period from Commencement until the Equipment is returned to Kennards.

NOTE TO CUSTOMER: You are responsible for the Equipment until it is back in the possession of Kennards, even after obtaining a Customer Pick Up Number.

Kennards – The Companies listed on the front page of this Agreement

Kilometre Charge – The amount payable for the kilometres that a Motor Vehicle has in the reasonable opinion of Kennards travelled during the Hire Period.

Motor Vehicle – A truck, utility or trailer but not any other equipment such as a scissor lift or bobcat.

Kennards will:

2.2 provide the Equipment to the Customer clean and in good working order;

2.3 where the Equipment is a Motor Vehicle arrange motor vehicle accident damage insurance. That insurance will NOT cover the customer for the following:

(a) if the driver is over 25 the first $2,000.00 of the cost of any damage,

(b) if the driver is under 25 the first $2,500.00 of the cost of any damage,

(c) The loss or theft of the Motor Vehicle,

(d) Costs of repairing damage:

to a truck above the top of the cabin; or

to or caused by a truck mounted loading device;

caused other than by the normal use of the Motor Vehicle;

caused while the Motor Vehicle is being driven on any road that is unsealed or is not a public road;

caused while the Customer is in breach of any clause of this Agreement.

2.4 subject to clause 3.2 be responsible for repairing any damage to the Equipment (that is not a Motor Vehicle) cause by the ordinary use of the Equipment by the Customer;

2.5 re-supply or repair the Equipment if it fails to operate properly;

2.6 collect the Equipment within 5 days of being requested to do so by the Customer and issuing to the Customer a Customer Pick Up Number.

NOTE TO CUSTOMER: You must return the Equipment when due back unless you obtain a Customer Pick Up Number from Kennards.

3.2 Immediately on request by Kennards, the Customer will pay:

(a) the new list price of any Equipment which is for whatever reason not returned to Kennards (NOTE TO CUSTOMER: You are responsible for loss or theft of the Equipment);

(c) all costs of repairing any damage caused by the ordinary use of the Equipment (that is not a Motor Vehicle) up to an amount equal to 10% of the new list price of the Equipment;

(d) the cost of repairing any damage to the Equipment caused by the negligence of the Customer or the Customer’s agent;

(e) the cost of repairing any damage to the Equipment caused by vandalism, or (in Kennard’s reasonable opinion) in any way whatsoever other than by the ordinary use of the Equipment by the Customer;

(f) the amount not covered by the insurance referred to in clause 2.3;

(g)stamp duties, Goods and Services Tax, any other taxes or duties and all tolls fines, penalties, levies or charges payable in respect of this Agreement and the hiring;

(h) all costs incurred by Kennards in delivering and recovering possession of the Equipment;

(i) a late payment fee calculated daily at 10% per month on all unpaid Charges;”

(k) the cost of fuels and consumables provided by Kennards and used by the Customer;

(l) any expenses or legal costs (including commission payable to a commercial agent) incurred as a result of the failure of the Customer to pay any Charges when due;

(m) all costs of repairing or replacing tyres, including road service.

The Customer will:

4.2 return the Equipment to Kennards clean and in good repair.

The Customer will:

5.2 operate the Equipment safely strictly in accordance with the law, only for its intended use and in accordance with any manufacturer’s instructions whether supplied by Kennards or posted on the Equipment;

5.3 indemnify Kennards for all damage caused to persons and property in relation to the Equipment and its operation and have insurance to cover any legal liabilities incurred as a result of the use of the Equipment;

5.4 ensure that all persons operating or erecting the Equipment are suitably instructed in its safe and proper use and where necessary hold a current Certificate of Competency and/or are fully licensed;

5.5 comply with all occupational health and safety laws relating to the Equipment and its operation;

5.6 safely secure all items loaded in or on the Equipment or in or on the Customer’s vehicle;

5.7 operate the Equipment with an adequate motor vehicle and/or power source;

5.8 tamper with, damage or repair the Equipment;

5.10 rely upon any representation relating to the Equipment or its operation other than those contained in this Agreement;

5.11 allow any person to drive a Motor Vehicle if the person:

(a) does not hold an unrestricted licence to drive that class of Motor Vehicle;

or

(b) is affected by drugs and/or alcohol.

5.12 exceed the recommended or legal load and capacity limits of the Equipment;

5.13 use or carry any illegal, prohibited or dangerous substance in or on the Equipment;

5.14 travel outside the State where the Equipment is hired unless Kennards approves the destination.

The Customer cannot recover from Kennards compensation for any damages (including for consequential loss) arising in respect of this Hire Agreement or the hiring or the use of the Equipment.

If the Customer breaches any clause whatsoever of this Agreement or becomes bankrupt, insolvent or ceases business, then:

(a) terminate this Agreement, and/or

(b) sue for recovery of the Charges, and/or

(c) repossess the Equipment (and is authorised to enter the Customer’s premises to do so);

7.2 The insurance referred to in Clause 2 is immediately invalidated.

7.3 The Customer must pay for any repairs to the Equipment despite Clause 2.4.

All warranties and conditions are excluded to the full extent permitted by law and Kennard’s only obligation resulting from a breach by it of any condition or warranty is limited to the supplying of the Equipment again or to the repair of the Equipment.

If a dispute arises relating to this Agreement the hiring or the use of the Equipment (except in regard to the payment of Charges), the parties agree to negotiate to settle the dispute with the assistance of the Hire and Rental Association of Australia before litigation.”

4 An audit was conducted by officers of the Office of State Revenue on 14 July 2003 following the claim made on behalf of the applicant for a refund of duty set out in the letter dated 19 May 2003.

5 On 21 August 2003 the Senior Compliance Officer and Principal Compliance Officer, the investigating officers, finalised their report following the audit on 14 July 2003. On 21 August 2003 the respondent forwarded a letter to the applicant which advised the applicant that the request for a refund was rejected, and that further information was required to determine the total amount of underpayment of duty which had been detected.

6 Allens Arthur Robinson on behalf of the applicant objected to the respondent’s letter dated 21 August 2003. This was considered by the respondent’s officers and a letter was forwarded in reply on 22 April 2004 disallowing the objections.

7 On 18 June 2004 the applicant lodged Application No. 046030 with the Tribunal seeking a review of the two decisions included in the respondent’s letter being: -

(b) to request additional hire of goods duty amounting to $24,123.00.

(a) to assess hire of goods duty for the period from 1 July 2000 to 28 February 2003 in the amount of $1,228,743.00.

Evidence

10 The applicant filed affidavits by Peter John Brown (the Finance Director of the applicant) dated 28 June 2005 and 4 November 2005 setting out his understanding of the operations of the applicant, the agreements entered into by the applicant and the hire charges. Mr Brown also gave oral evidence. He particularly gave evidence as to the manner in which the applicant determined the portion of maintenance expenses included in the total hire charges. By reference to the hire agreement (as set out above) he drew attention to various parts of that agreement which permitted calculation of the amount to be exempted from liability for hire of goods duty.

11 The first affidavit, which was partly omitted following objections, disclosed that a figure of 20% as a maintenance factor was first shown on the hire agreement as “Hire Charge includes a maintenance factor” in early to mid 2000. This was explained as having occurred pursuant to advice from a consultant to the applicant being Mr Martin McGee.

12 Brown averred to causing further calculation to be made by an employee Mr Edward Wales which disclosed that the percentage of costs on maintenance compared to revenue for the calendar year 1999 was in excess of 25%. Having considered the advice of Mr McGee and the comparison figures obtained, Brown decided to calculate the maintenance factor at 20%. This followed through to the form of Hire Agreement (Invoice).

13 Brown set out the items included in the maintenance factor and a chart covering the relevant years being 2001, 2002 and 2003 which, in his opinion disclosed that the estimated service costs (that is maintenance and cleaning costs) expressed as a percentage of revenue was 32.72%, 37.49% and 38.45% respectively.

14 Brown amended the figures referred to by way of his second affidavit wherein he disclosed that the Estimated Service Costs as percentage of revenue for the years 1999, 2000, 2001, 2002 and 2003 were 24%, 24.89%, 28.81%, 32.83% and 33.71% respectively. The reasons for the amended figures given as being that the first figures did not include all the relevant data, the wages on a costs proportion was changed from 661/3% to 60% and the Premises Costs was revised to 33% rather than 50%. The methodology used in the charts of figures was by way of reconstruction of the general ledger of the company. Mr Brown was a reliable witness and was particular as to each detail.

15 In cross examination Brown responded that the reformatting of the applicant’s invoices coincided with provisions relating to the implementation of GST. Brown further responded that the assumptions in respect of the percentages of cleaning, repairing and maintenance were his, based on his knowledge and work representations. His opinion was that the cost of cleaning, repairing and maintenance was not income it was the recovery of the cost.

16 Further Brown averred to the facility which enable the applicant to require a hirer to pay further costs in respect of damage which are set out at item 3.2(c), 3.2(d) and 3.2(m). The costs being those related to damage or negligent use and they would be in excess of the amount included in the items under the heading “Damage waiver fee” shown on the face of the hire agreement which is signed off at time of hire. He further averred that on occasions, where equipment is returned and is extraordinarily dirty then the hirer would be required to pay for all costs of cleaning, this facility was not relied on for general repairs and cleaning, and that these costs would be determined after return of the hired goods. Brown stated that it would not be commercially viable to separately spell out all the damage waiver fees.

17 The applicant filed an affidavit by Mr Barry Chapman dated 14 July 2005. He is the Quality of Operations Manager of the applicant and has been employed by the applicant for 15 years. He impressed the Tribunal as honest, diligent and straightforward. He expressed the view that approximately 60% to 70% of the staff time is expended on maintenance tasks of equipment for hire. The figure being an average of short and long term fire of equipment, his experience being that the maintenance required on short term is usually greater than that required where the hire is long term. He averred to his estimation of the site area usage for maintenance and cleaning based on his 24 years experience in the industry as being approximately one third of building site areas.

Legislation

18 The application turns on the construction of Section 190(1)(a) Duties Act 1997. It is relevant to consider the following sections of the Act: -

“183 What is a “hire of goods”?

(1) 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.”

(c) Section 188(2)

“188 What is the rate of duty?

…

(2) The duty chargeable on a hire of goods that is an ordinary hire of goods is 1.5% of the total amount of the hiring charges.

…”

“189 What are “hiring charges”?

(1) “Hiring charges” are 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.”

“190 Payments exempted from “hiring charges”

(1) The following charges are not included as hiring charges:

(a) payments for delivery, repositioning, erection, installation, maintenance or cleaning of the goods,

(b) refundable cash deposits or bonds (unless appropriated as hiring charges),

(c) insurance premiums payable by the hirer,

(d) duty paid or payable under this Act or a corresponding Act,

(e) payments for the sale of goods (such as fuel, replacement parts or theft replacement),

(e1) any GST payable on the supply to which the hire of goods relates,

(f) any payment of a type prescribed by the regulations.”

Submissions by the applicant

19 The applicant’s representative submitted that the relevant facts which do not appear to be in dispute are: -

The total number of different categories of goods that may be hired by customers from Kennards is in the vicinity of 500 to 750;

For the relevant period Kennards entered into approximately 20,000 to 25,000 hire agreements each month. The hire charge was calculated to recoup all Kennards direct and indirect costs of hiring the item to the customers including stamp duty on the hire;

The hire agreements between Kennards and the customer and the tax invoices issued to the customer contain the following statement in capital letters:

“HIRE CHARGE INCLUDES STAMP DUTY APPLICABLE UNDER CORRESPONDING STATE ACT

HIRE CHARGE INCLUDES A MAINTENANCE FACTOR OF 20%”

The reference to the 20% maintenance factor first appeared on Kennards’ invoices and hire agreements in early to mid 2000 as a result of calculations performed by Kennards prior to its inclusion in the invoices. It was adopted by Kennards as a conservative figure which represented the portion of Kennards’ revenue from hiring out goods which was devoted to the maintenance of the items that it hires to customers;

Kennards incurred a range of expenses in the Relevant Period in connection with the maintenance of goods which were hired by its customers, including charges rendered by third parties, wages paid and other costs associated with the payment of those wages, additional costs associated with the employment of staff, expenses associated with the use of the premises and quality control costs;

Each of the items that Kennards hires to customers requires some form of maintenance and it is Kennards’ policy that such maintenance be conducted;

Kennards operates a maintenance intensive business. Approximately 60% to 70% of time spent by Kennards’ staff in New South Wales branches is spent performing maintenance tasks and at least one third of Kennards’ premises are devoted to the cleaning, repairing and maintenance of goods for hire.

21 That the interpretation of Section 189(1) falls into two limbs being: -

This interpretation allows the words within the brackets, being ‘or that arise as an incident of’ to serve a purpose in that they relate back to the use as referred to in Section 183(1).

“The primary purpose of the bill is to replace the current Stamp Duties Act with simple, clear and equitable legislation drafted in contemporary language and modern style. … The bill also simplifies the duty imposed on the hire of goods in order to reduce the potential for double duty. … The clarity it provides will bring certainty and reduced compliance costs for business and the community generally.”

These sentiments are suggested as conveying a view that the introduced Chapter 6 should not be read in an overly restrictive or technical manner, rather that the intention of Parliament was to simplify and clarify the duty payable on the hire of goods and to reduce compliance costs for business.

23 At the same time as Section 190 was introduced, Sections 181 and 191 were introduced to assist in hiring which had potential to be subject to a duty in more than one jurisdiction on the same agreement. Section 190(1)(d) was also included for this reason.

24 By virtue of the Intergovernmental Agreement Implementation (GST) Act 2000, Section 190(1)(e1) was added to obviate duty on GST i.e. double taxation.

25 The second reading speech given by Mr Face (on behalf of Mr Aquilina) referred to this amendment to the Duties Act being intended to eliminate the cascading of hire of goods duty and GST for hirers as the hire of goods duty is imposed on the hirer rather than the customer. This is an exception to the imposition of stamp duty on a purchaser rather than the supplier.

26 The significance of the amendment being that, in the submission of the applicant, it is clear that there is no obligation to separately itemise the GST payable, it being sufficient that the tax invoice discloses that the total amount payable includes the GST and therefore the GST is equal to 1/11th of the total amount. Thus the application of Section 190(1)(e1) was intended to apply irrespective as to whether the GST was included in the price by separate itemisation or included in the price without separate itemisation.

27 Prior to the introduction of Section 190 there had not been an equivalent provision. The corresponding provisions of the Stamp Duties Act to Chapter 6 of the Duties Act were included in Division 15 Part 3 and in the Second Schedule.

28 The applicant submitted that: -

Where the person hiring out the goods did not pay duty by monthly return, duty was payable at the rate of 1.5% (or the lower rate of 0.75% in the case of an “equipment financing arrangement”) of the “total amount payable under the hiring arrangement”: see Second Schedule, “hiring arrangement”;

Where the person hiring out the goods was approved by the Commissioner to pay the duty by monthly return, the duty was payable at the rate of 1.5% of “the total amount received in respect of each … hiring arrangement” during the preceding month: see s.74F(7)(b);

In either case there was no exemption for amounts paid by the hirer, to reimburse the person hiring out the goods, for stamp duty on the hire. Nor was there any express exemption for payments in respect of maintenance costs.”

30 In considering Section 190(1)(a) two issues arise being: -

(b) whether the amount paid for maintenance of the goods must be separately itemised on any relevant invoice to allow the exemption to apply.

SA Crate Pty Limited v The State of South Australia

Stamp Duties Act

“… I am quite unable to indicate,…, whether any, and what part of the “fill charge” can rightly be said to be attributable to the “cost of servicing” the crates supplied by the company to a grower. Because the “fill charge” was calculated primarily on the estimated “costs of running of the [company’s] business as a whole”, I cannot therefore think that the entire “fill charge” can be described as an “amount equivalent to the cost of servicing” the crates, so as to entitle the company to claim the deduction allowed by sec. 31i(l)(f) of the [Stamp Duties Act 1923 (S.A) as amended]”.

Commissioner of State Revenue (Vic) v Royal & Sun Alliance Insurance

(ii) Each of the payments referred to in Section 190(1)(a) would be included in the hiring charge and subject to tax by virtue of Section 189 if the exemption in Section 190 was not available. Thus a payment may be for both the hire of the goods and for the maintenance (etc) of the goods and, therefore that Section 190(1)(a) is concerned with only the payment for the hire of the goods which relates to the maintenance (etc) of the goods.

(iii) In construing the meaning of the word “maintenance”, as used in Section 190, it should be given its ordinary meaning:

“The Oxford English Dictionary, Vol IX, defines “maintenance” relevantly as “the action of keeping in effective condition, in working order, in repair etc: … the state or fact of being kept up; means or provision for keeping up”.

The ordinary meaning of the word “maintenance” was considered in Haydon v Kent County Council [1978] 2 WLR 485, where Shaw LJ found that:

“… the ordinary meaning of “to maintain” is to keep something in existence in a state which enables it to serve the purpose for which it exists.”

Ridis v Proprietors of Strata Plan 10308

(iv) The parties to the hire agreements, being the applicant and particular hirer, agreed between them that the hire charge included “… a maintenance factor of 20%” which is referable to the maintenance of the goods hired.

Regard should be had to the entire factual matrix in determining what the payment, as described by the parties, is for. The label used to describe the payment is irrelevant and regard had to be had to what the money was really paid for: See Federal Commissioner of Taxation v Broken Hill Pty Co Ltd (2000) 179 ALR 593 and City Link Melbourne Ltd v Federal Commissioner of Taxation (2004) 141 FCR 69.

That in the present case the factual matrix is consistent with the terms of the hire agreement.

In particular: -

the cost of the maintenance activities are significant and,

the calculations on behalf of the applicant that the maintenance factor of 20% is a bona fide calculation expended on maintenance including preventative maintenance and is reasonable.

(iv) The legislation does not impose a requirement that the items referred to in Section 190(a) be expressly identified or to be disclosed to hirers as a specified dollar amount. That if there is a disclosure required then the applicant has done so by the disclosure made in the hire agreement. That in view of the legislative history, if it had been the intention that a separate itemisation be made then that requirement would have been expressed clearly in Section 190(1). That to read into Section 190(1)(e1) that the dollar amount be shown for the GST would be contrary to the legislative intent espoused at the time of the legislation. That to require there to be a separate item on the invoice described as “maintenance” and specifying the relevant amount and a separate line for each exempted charge specifying the relevant amount would not provide the result espoused on introduction of Section 109 to bring certainty and reduce compliance costs for business and the community generally.

Chief Executive Officer of Customs v AMI Toyota Ltd

Customs Act

The Full Court of the Federal Court said:

“The real issue in the present case is whether the average warranty costs are payments ‘in relation to’ activities undertaken by the purchaser on the purchaser’s own account in relation to warranties in relation to the goods. The average warranty costs are based on Toyota Japan’s pre-estimate of the likely cost of the liability undertaken by Toyota Australia in giving and honouring its warranty obligations to customers in respect of warranty repairs under the Toyota warranty policy. In return for payment of those costs, which for the purposes of this case the parties agreed formed a component of the calculation of the purchase price, as part of the price the actual costs are to be reimbursed. Thus, the average warranty costs can be seen to relate to activities undertaken by Toyota Australia in relation to warranties it gives on its own account in relation to the cars it imports.”

(vii) That the statutory context of Roadshow Distributions Pty Ltd v Commissioner of State Revenue (Vic) 97 ATC 4271 was closer to that of this matter. That there was imposition of a duty at the relevant time pursuant to Section 131AC(1)(a)(i) of the Victorian Stamp Act 1958 on;

“… the total amount received … in respect of rental business for or in relation to the use of goods (other than books) …”

Tadgell JA said:

“An estimate would no doubt be permissible for want of a better means of apportionment; and apportionment on the basis of cost of the subject goods would presumably be an important consideration, if not the only one, in the making of a realistic estimate on sensible, commercial grounds.”

McLaurin v Federal Commissioner of Taxation

“It is true that in a proper case a single payment or receipt of a mixed nature may be apportioned amongst the several heads to which it relates and an income or non-income nature attributed to portions of it accordingly. … But while it may be appropriate to follow such a course where the payment or receipt is in settlement of distinct claims of which some at least are liquidated, … or are otherwise ascertainable by calculation … it cannot be appropriate where the payment or receipt is in respect of a claim or claims for unliquidated damages only and is made or accepted under a compromise which treats it as a single, undissected amount of damages. In such a case the amount must be considered as a whole …”

34 The applicant referred to Federal Commissioner of Taxation v Texas Co (Australasia) Limited (1939) 63 CLR 382 which concerned amongst other things the method of ascertaining the division or apportionment between capital and income of an outgoing which was partly of a capital nature and partly a revenue nature. Dixon J commented that: -

“There is I think nothing which prevents the division or apportionment between capital and income of an outgoing which is in part of a capital nature and in part of a revenue nature. But the outgoing must be of such a kind that it is capable of distribution. The point arises in reference to the nature of the liabilities which the remittances discharged. As I have stated, they were made without specific appropriation, and debited to a running account which included items for the supply of plant, some comparatively small items for advances, and some other items of a capital nature. Is it possible to trace the liabilities which the remittances during a year have operated to discharge, and, by apportionment or otherwise, to attribute a proper part to liabilities incurred on account of revenue, that is, of an income nature? The question is I think almost entirely one of fact.”

36 The applicant submitted that the consideration for the hire of goods was the total paid at the time of hire which included the amounts designated as “Hire charge includes Stamp Duty where applicable under corresponding State Act” and “Hire Charge includes a maintenance factor of 20%”. The sum paid at the time of hire was in consideration of the right to use the goods which is analogous to the right to insurance for total sum paid as discussed at paragraph 28 of Commissioner of State Revenue (Vic) v Royal & Sun Alliance Insurance.

Submissions by the respondent

37 The respondent submitted that the fundamental issue in this matter was the ability of the applicant to unilaterally designate a part of the consideration received from customers as “a maintenance factor of 20%” and “stamp duty applicable”. That if the applicant was able to do this then this would reduce the tax base upon which the duty on the hire of goods is levied and other hirers in the industry would have the option of unilaterally designating a maintenance factor in the same way.

38 The respondent agreed with the chronological sequence of relevant events and documents provided by the applicant whilst not accepting that a maintenance factor of 20% of the applicant’s fee income is a payment exempt as provided by Section 190(1)(a).

39 The respondent drew attention to the requirement set out in the hire agreement on page 2 thereof at 3.2, 3.2(b), (c), (d), (e), (g) and (h). When cross examining Brown in respect of these items the respondent’s representative put to him that it was open to the applicant to require the hirer to pay all cleaning charges and he responded that the applicant only relied on this provision in rare and extraordinary circumstances. Further attention was drawn to the ability of a hirer to agree to the agreement or go down the road to hire elsewhere, therefore the terms were non-negotiable.

40 The relevant legislation, as submitted by the respondent being Chapter 6 Sections 180 to 193 of the Duties Act; particularly Sections 180, 183(1) and 189(1).

41 The provisions of the former Section 74D of the Stamp Duties Act 1920 provided that duty was levied on the “total amount payable under the hiring arrangement”. This meant that the tax base under that Act included all amounts payable under the hiring arrangement. The respondent submitted that the only facility to recognise the expenses incurred by the hirer was by way of administrative fiat pursuant to Ruling SD53, that Section 190(1) provided the existing legislative provisions to recognise certain expenses incurred by the hirer and which were thus exempt.

42 The respondent submitted that the structure of Division 6 of the Duties Act is fundamentally different to the previous requirements. Attention was drawn to the two limbs to Section 189(1). These two limbs bring two amounts into the tax base being “payments made … for …the hire of the goods” pursuant to the first limb and “payments made … that arise as an incident of the hire of the goods” pursuant to the second limb. That the payments referred to in paragraph 3.1 of page 2 of the hire agreement fall into the first limb and any payments made which are in respect of items in paragraph 3.2 fall into the second limb. The Tribunal was referred to Cyclone Scaffolding Pty Ltd v Commissioner of Stamp Duties [1985] 2Qd R435 which supports the distinction between a payment made directly for the hire of the goods and a payment that arises as a consequence or incidence of that hire.

43 By analysis of Section 190(1)(a) the respondent submitted that there are three elements to be considered being firstly that there must be a payment; secondly that the payment must be ‘for’ certain specified items to allow the exemption; and thirdly the payment must be ‘for’ one of a series of specific items including, amongst others “maintenance or cleaning”. That the first requirement is that there be an actual payment, that is an item of expenditure that is paid for by the customer, that it is insufficient to satisfy the Section’s requirements that a charge be levied but not yet received.

44 That the Section requires the payment must be for one of the specified items, it is insufficient that the payment be, in relation directly or indirectly to, maintenance. Attention was drawn to Roadshow and Chief Executive Office of Customs in that they were to be distinguished as the legislative provisions under consideration in those cases were considerably different to Section 190(1)(a). That the legislative provisions in AMI Toyota included the reference to ‘in relation to” rather than “for”; similarly as in Roadshow the legislative provision included reference to “in relation to” and that the inclusion of these words permitted the widest possible connection between two otherwise disparate subject matters: see McDowell v Baker (1979) 144 CLR 413 at 419 per Gibbs J. That Walters J in SA Crate adopted the words of Mann CJ in Trustees Executors & Agencies Co. Ltd v Reilly (1941) VLR 110 at p111:

“they [the words ‘in respect of’] have the widest possible meaning of any expression intended to convey some connection or relation between the two subject matters to which the words refer”

Masterwood P/L v Far North Queensland Electricity Board

In my judgment the section requires that the conduct in question (“anything done”) be an essential or inherent part of carrying out the identified purpose of the Act or be necessarily incidental to that identified purpose. In my view, such a test is workable. It is a test which enables a line to be drawn at a point which will allow reasonable but limited scope for the section to operate. For the reasons advanced earlier, that is a consequence which ought to follow from the proper construction of the section.

47 The respondent submitted that it is not open to the applicants to secure unilaterally, a reduction in their tax base by the artifice of designating that 20% of their overhead expenses relate to maintenance or cleaning of the goods. The legislative intention is not to confer an across the board percentage reduction in the tax base on account of general overheads: see ANI Corporation Limited v Commissioner of State Taxation (WA) 90 ATC 4714. Rather, the exemption is granted in respect of payments “for” specific items.

SA Crate

48 The respondent submitted that the words “maintenance or cleaning” are, in fact, part of a series of specific items. Excluded from the tax base, in seriatim, is a payment for delivery; a payment for repositioning; a payment for erection; a payment for installation; and, of course, a payment for maintenance or cleaning, of the goods. That each of those items, namely, delivery, repositioning, erection, installation, and so on, connote and require specificity. The payment for example, must be for delivery, repositioning and so on. In that manner the presence of such specific items reinforces the requirement that the payment must be for that item and not merely relating generically thereto.

49 The respondent submitted that to reduce the tax base by the artifice of unilaterally designating some part of the consideration received by the applicant as a maintenance factor or stamp duty applicable was of considerable importance to the respondent and ultimately of public interest.

50 In response to the applicant’s submissions concerning Section 190(1)(e1) and GST the respondent submitted that those submissions misconstrued the Section. Rather that by Regulation 29 – 70.01(4) of the A New Tax System (Goods and Services Tax) Regulations 1999 the GST ‘is exactly 1/11th of the total price for the supply “alternatively by Regulation 29 – 70.01(5) if it “is less than 1/11th of the total price” then the tax invoice must specify the amount. Further it is a Commonwealth imposed rate not an artifice unilaterally designated by the supplier.

51 In respect of stamp duty, the respondent submitted that a payment made pursuant to paragraph 3.2(g) on page 2 of the hire agreement would satisfy the exemption, and that it is not open to the applicant to unilaterally apportion part of the consideration received as referable to duty paid or payable.

Reasons for decision

52 Section 109 provides that certain activities are capable of exemption from the hiring charges. The effect of this exemption is that no duty is chargeable on the charge for those activities. The activities described in subsection 1(a) are:

“payments for delivery, repositioning, erection, installation, maintenance or cleaning of the goods.”

“payments made to (the applicant, in this matter) by or on behalf of the hirer, for the hire of the goods or that (i.e. the payments) arise as an incident of the hire of the goods.”

It is noted that the hirer is the customer.

54 It is necessary for the applicant to attend to maintenance and /or cleaning of the goods that are to be hired out. The applicant has brought reliable and credible evidence to the Tribunal that discloses that there is a necessary cost incurred incidental to the hiring of the goods to a hirer. That as a matter of business requirements, where some 750 separate items are available for hire, the itemisation of the cost of maintenance and/or cleaning those items individually would create an accounting monolith, although it could be achieved, the cost in doing so would be inefficient albeit every cost would be identified. A sensible approach to recouping these costs and maintaining the exemptions would be an averaging of costs related to supportable estimations of the incurred cost.

55 Legislation must be given meaning, otherwise it is ineffective and unsupportable. In this situation, where it must be recognised that a maintenance cost is inevitably a cost of providing the goods for hire, the exemption referred to in Section 109(1)(a) for “payment for … maintenance or cleaning of the goods” must be considered to be the cost of the applicant doing so. The section does not require that the payment be shown in any particular manner, rather the reference is to “The following charges …” and “payments for”.

56 The applicant supplied evidence disclosing the manner in which the cost of maintenance and cleaning had been calculated. As a business operation it was possible to establish the cost overall of attending to the maintenance and cleaning of the total items for hire. It would also be possible to establish the specific cost of maintenance and cleaning of each individual piece of equipment hired out and also the specific cost of maintenance and cleaning for each piece of equipment hired out on each hiring. This would have the effect that the sum to be paid by the hirer would not be determined until the equipment was returned, both parties to the agreement would be uncertain as to the total cost in most situations and it would be economically more costly and inefficient. The applicant has provided an averaged amount and both parties to the agreement have accepted that amount, also, they have accepted that there may be further costs for this item (maintenance and cleaning) in rare and extraordinary circumstances.

57 The real test as to whether the averaged amount is reasonable may be by way of consideration of the items included in the calculation to determine the percentage amount. The applicant has disclosed calculations that were tested by the respondent in cross examination. The calculations were based on two scenarios described in the affidavits of Brown, being a calculation in 1999 and then one in 2000. These calculations set out the costs overall to the business of the applicant and were capable of dissection to disclose a total amount expended on maintenance and cleaning of the equipment for hire. A decision was made following consideration of these calculations, in preparation for the introduction of GST and in redesign of the hire agreements to allow the applicant to comply with its duties and tax obligations. The decision to disclose an overall percentage amount for maintenance (and cleaning) at a rate of 20% was based on the averaged amount disclosed in the calculations as being a reasonable charge.

58 It is clear that there would be a need for the applicant to maintain and clean the equipment so that it was capable of being used for the purpose for which it was intended. This is supported by the references to the decisions in Haydon and Ridis.

59 Evidence was provided that the applicant attends to the maintenance and cleaning of the goods in order that the goods may be hired out, the costs of maintenance and cleaning is significant and that an across the board averaged percentage factor of 20% for maintenance and cleaning was a bona fide calculation which was reasonable. The money paid for the hiring was really paid in part, defined as 20% of the fee, for maintenance and/or cleaning. The consideration of the factual matrix in this manner is supported by the decision in Federal Commissioner of Taxation v Broken Hill and City Link Melbourne Ltd.

60 The charge for maintenance and cleaning would be made by the applicant and paid for by the hirer regardless whether the charge was part of an undissected sum or separately itemised. Unlike the dilemma identified by Walters J in SA Crate P/L where there was an inability to indicate the part of the fill charge (if any) that was attributable to the “cost of servicing”, here the evidence given discloses the specific calculations that have been used to estimate the cost to be separately identified in the hire agreement i.e. 20%.

61 The provisions in force prior to the introduction of Division 6 relied on the Revenue Ruling SD53. This Ruling set out, in chart form, the items which were designated as a “Factor”, the relevant “Guideline” and a decision whether the Factor was Dutiable. Significantly the first Factor was: -

“Charges against the hirer to cover delivery costs, transport arrangements and any maintenance, labour or servicing costs in respect of delivery or transport” and the second Factor was: “Charges against the hirer representing any part of the cost of providing labour to operate or maintain the hired goods.”

“Factors of a hiring arrangement attracting a fee payable by a hirer, and in respect of which a separate entry or record is made on the hirer’s invoice, will not be dutiable where indicated in the guidelines. This applies unless such factors are indistinct from dutiable factors in which case the rate of 1.5% will apply.”

“Separate arrangement for services or provision of labour.”

(b) Indirect servicing expenses, such as e.g. depreciation of tools used to maintain hired goods, factory lighting, etc.”

“Direct cost of owner – unrelated to hire of goods.” and each factor was shown as “No” in the Dutiable column.

66 In the particular circumstances the disagreement between the applicant and the respondent concerning the maintenance and cleaning costs may be distilled to whether the showing of those costs as a distinct severable amount of 20% (calculated with some specificity from the overall costs to the applicant) or whether the costs for maintenance and cleaning as referred to in Section 190(1)(a) should be shown for the distinct specified item in each case. A further requirement suggested by the respondent is that any such distinct specific item must be for one of a series of specific items. The solution to this disagreement could have been that the hire agreement disclose that: “20% of the Hire Charge is a charge for maintenance or cleaning of the goods.” whereas the hire agreement discloses that “Hire Charge includes a maintenance factor of 20%”. The drafting of Section 190(1)(a) has led to an exercise in semantics, being one that could affect the tax base of the State and, unless it is remedied, will at least cause confusion and may lead to extraordinary uncertainty and convoluted mathematic calculations to permit an economically viable business to continue operating.

67 The respondent drew attention to the apparent conflict between the notes on the hire agreement on page 1 and at paragraph 3.1 shown on page 2 and then those shown, particularly as paragraph 3.2(b), (c), (d), (g) and (l). The evidence provided by the applicant that the provisions of paragraph 3.2 were to require a future payment (after return of the goods) and that this would be rare was an arising situation which was distinguishable from the notes on page 1 of the hire agreement and paragraph 3.1 which were the requirements in respect of payment in each hire prior to or at the commencement of the hire.

68 In Roadshow, Tadgell JA considered the two separate benefits that the exhibitor obtained, being the right to exploit a particular copyright and a right to use certain goods. An apportionment of the payment was necessary to determine the taxpayer’s income from the rental business “for (or in relation to) the use of goods”. This distinction allowed the separation off from total monies received and the amount received for (or in relation to) the use of goods. In the extant situation the applicant seeks to separate off from the total monies received an amount (calculated as a percentage) for the maintenance and for the cleaning of the goods. That amount is then paid to the applicant by the hirer; this amount is for the costs of maintenance and cleaning. This maintenance and cleaning has a direct and intimate connection with the goods hired for use.

69 The applicant has submitted that the stamp duty as referred to on page 1 of the hire agreement has the effect of allowing reimbursement of the stamp duty it is liable to pay on the hiring charges. The stamp duty required to be paid by the applicant is a finite amount which is capable of calculation on each invoice, the statement identifies to the hirer the fact that the stamp duty is included in the invoice. The reference to stamp duty in paragraph 3.2(g) on page 2 of the hire agreement is subject to the introduction to paragraph 3.2 that immediately on request the customer will pay stamp duty as described, the provision on page 1 advises the customer that the Hire Charge includes the stamp duty (where applicable) and therefore the customer is obliged to pay this amount, whatever it may be, at the time of hire. To require a further amount to be shown to be paid by the hirer would affect the commercial competitiveness of the applicant alternatively to show the specific amount payable would allow the hirer to discern the amount paid to the respondent by that hirer. As the amount payable is a finite figure, it is not an apportionment; the statement draws attention to the hirer that an amount is paid or payable. The apparent conflict between the statement on page 1 in respect of the maintenance factor and the requirement shown on page 2 at paragraph 3.2(b) is explained by the requirement that the 20% is included in the initial charge and then if, on return, further costs are payable for cleaning the equipment then that amount will be payable immediately on request by the applicant thus amounting to, as a combined amount, all costs incurred in cleaning the equipment.

70 The reference to GST being included in the invoice total leads to the conclusion that 1/11th of the invoice total will be collected for GST. If the amount of GST is capable of being less than 1/11th then it would be necessary to disclose the amount payable. Therefore where the invoice shows, as in this case, that the GST is included in the invoice total the amount of GST payable is 1/11th of the total.

71 For the above reasons I find:

(b) that the specificity and calculations undertaken by the applicant in this case are sufficiently precise to allow a percentage of 20% to be the apportionment to maintenance and cleaning, and that this percentage is reasonable;

(c) that the statement on the hire agreement that “HIRE CHARGE INCLUDES STAMP DUTY APPLICABLE UNDER CORRESPONDING STATE ACT” is sufficient to allow the amount of stamp duty to be included in the total Hire Charge. The stamp duty then calculated will be payable by the applicant;

(d) that the showing on the statement “GST included in invoice total” has the effect of making 1/11th of the total being remittable for GST.

ORDER

2. That the applicant pay any additional hire of goods duty to the Chief Commissioner of State Revenue after applying the findings referred to in paragraph 71.

3. That the Chief Commissioner of State Revenue reassess the hire of goods duty for the period from 1 July 2000 to 28 February 2003 after applying the findings referred to in paragraph 71.

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Citations

Kennards Hire Pty Ltd v Chief Commissioner of State Revenue [2006] NSWADT 136

Cases Citing This Decision

0

Cases Cited

8

Statutory Material Cited

6

NM Superannuation Pty Ltd v Young [1993] FCA 91

Western Gold Mines NL v Commissioner of Taxation (WA) [1938] HCA 5

Federal Commissioner of Taxation v Broken Hill Pty Co Ltd [2000] FCA 1431

CITATION:	Kennards Hire Pty Ltd v Chief Commissioner of State Revenue [2006] NSWADT 136
DIVISION:	Revenue Division
PARTIES:	APPLICANT Kennards Hire Pty Limited RESPONDENT Chief Commissioner of State Revenue
FILE NUMBER:	046030; 056046
HEARING DATES:	09/11/05
SUBMISSIONS CLOSED:	11/09/2005
DATE OF DECISION:	05/10/2006
BEFORE:	Hole M - Judicial Member
CATCHWORDS:	Duties Act - duty on the hire of goods
MATTER FOR DECISION:	Principal matter
LEGISLATION CITED:	A New Tax System (Goods and Services Tax) Regulations 1999 (Cth) Duties Act 1997 Intergovernmental Agreement Implementation (GST) Act 2000 Stamp Duties Act 1920 Stamp Duties Act 1923 (SA) Victorian Stamp Act 1958
CASES CITED:	ANI Corporation Limited v Commissioner of State Taxation (WA) 90 ATC 4714 Chief Executive Officer of Customs v AMI Toyota Ltd (2000) 102 FCR 578 City Link Melbourne Ltd v Federal Commissioner of Taxation (2004) 141 FCR 69 Commissioner of State Revenue (Vic) v Royal & Sun Alliance Insurance (2003) ATG 4998 Cyclone Scaffolding Pty Ltd v Commissioner of Stamp Duties [1985] 2Qd R435 Federal Commissioner of Taxation v Broken Hill Pty Co Ltd (2000) 179 ALR 593 Federal Commissioner of Taxation v Texas Co (Australasia) Limited (1939) 63 CLR 382 Haydon v Kent County Council [1978] 2 WLR 485 Masterwood P/L v Far North Queensland Electricity Board [1999] 1 Qd R345 McDowell v Baker (1979) 144 CLR 413 McLaurin v Federal Commissioner of Taxation (1961) 104 CLR 381 Ridis v Proprietors of Strata Plan 10308 [2005] NSWCA 246 Roadshow Distributions Pty Ltd v Commissioner of State Revenue (Vic) 97 ATC 4271 SA Crate Pty Limited v The State of South Australia 83 ATC 4587 Trustees Executors & Agencies Co. Ltd v Reilly (1941) VLR 110
REPRESENTATION:	APPLICANT M Richmond, barrister RESPONDENT I Young, barrister
ORDERS:	1. That the Chief Commissioner of State Revenue refund to the applicant any overpayment of hire of goods duty ascertainable after applying the findings referred to in paragraph 71; 2. That the applicant pay any additional hire of goods duty to the Chief Commissioner of State Revenue after applying the findings referred to in paragraph 71; 3. That the Chief Commissioner of State Revenue reassess the hire of goods duty for the period from 1 July 2000 to 28 February 2003 after applying the findings referred to in paragraph 71