Kirby, K.J. v The Commissioner of Taxation of the Commonwealth of Australia
[1987] FCA 262
•29 MAY 1987
Re: KEVIN JAMES KIRBY
And: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
No. VG305 of 1986
Income Tax
COURT
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
Sweeney J.
Jenkinson J.
Ryan J.
CATCHWORDS
Income Tax - Investment allowance in respect of aircraft leased by partnership operated by agent - chartered by agent principally to one freight carrier under agreement between agent and carrier - whether investment allowance excluded - whether contract or arrangement for use by another person - whether contract or arrangement between partnership and carrier.
Income Tax Assessment Act 1936.
Re British Basic Slag Ltd's Agreements (1963) 2 All ER 807
Re Austin Motor Co. Ltd's Agreements (1957) 3 All ER 62
HEARING
MELBOURNE
#DATE 29:5:1987
Counsel for the Appellant: Mr. B.J. Shaw Q.C. Mr. P.M. Bornstein
Solicitors for the Appellant: Ellison Hewison & Whitehead
Counsel for the Respondent: Dr. P. Buchanan Q.C. Mr. G.J. Davies
Solicitors for the Respondent: Australian Government Solicitor
ORDER
The appeal be dismissed.
The respondent's costs of the appeal be paid by the appellant.
NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
JUDGE1
This is an appeal from a judgment of Tadgell J. delivered on 16 July 1986 in the Supreme Court of Victoria against the disallowance of a claim by the appellant for investment allowance under Subdivision B of Division 3 of Part III of the Income Tax Assessment Act 1936 ("the Act") in respect of the operation of a Westwind 1124 aircraft ("the aircraft").
The appellant is a member of a partnership, named Victorian Jet Charter, in which he and his brother hold a 10% interest. The partnership at all relevant times was the lessee of the aircraft which was to be used for charter flights throughout Australia and elsewhere.
The partnership entered into an agreement ("the agency agreement") dated 15 February 1980 with Jet Charterers Nominees Pty. Ltd. ("Jet Charterers") with a view to having that company operate the aircraft commercially as agent on behalf of the partnership.
The aircraft, having been delivered in Australia on 14 April 1980, was certified by the Department of Transport and registered as VH AJQ. The first revenue flight, carrying passengers, was made on 2 June 1980. Shortly afterwards the aircraft was converted to freight configuration and it was subsequently used to carry freight.
Before the end of June 1980 the aircraft was put into regular service and operated by Jet Charterers on behalf of the partnership pursuant to the agency agreement. The principal use to which the aircraft was put, for the next succeeding twelve months at least, was to carry TNT Management Pty. Ltd. ("TNT") freight, Jet Charterers making the aircraft available to TNT generally in accordance with an existing agreement between Jet Charterers and TNT ("the TNT agreement"). The TNT agreement had been entered into by Jet Charterers and TNT prior to the formation of the partnership and the acquisition of the aircraft, and was dated 28 March 1979. The initial agreement was for a period of twelve months with an option to TNT to renew it for a further two years. The option was not exercised but the agreement was varied, either orally or by an exchange of letters, to a five year agreement, subject to certain other modifications relative to the type of aircraft to be provided, the timetable of flights and the basis for charging. The TNT agreement as varied was treated by the parties to it as creating the same general rights and obligations as set out in the original agreement even though that written agreement had been superseded.
The appropriate provisions of the agency agreement and of the TNT agreement respectively are set out in detail in the judgment of Ryan J. and need not be repeated.
The partnership in its taxation return for the 1980/81 financial year claimed the sum of $660,000 (being in effect 20% of the capital cost of the aircraft) by way of investment allowance.
It is common ground that, if the partnership were entitled to an investment allowance, pursuant to s.92 of the Act the appellant was entitled to a deduction from his gross income of a sum of $33,000 calculated by reference to his rateable share as a partner.
It is also common ground that the partnership was entitled to claim the expenditure incurred in respect of the acquisition of the aircraft as an allowable deduction under Subdivision B of Division 3 of Part III of the Act unless excluded under the provisions of s.82AG(3)(d), s.84AG(4) and/or s.82AH(4)(b)(iii) of the Act.
The respondent, relying on the provisions of one or some of those sections, disallowed the claim by the appellant.
These provisions were paraphrased by the trial judge in the following terms, which were accepted by all counsel as being accurate -
"Subdivision B of Division 3 of Part III of the Act does not allow an investment allowance in relation to property leased to a lessee -
(a) if before the expiration of twelve months after the property was first used by the lessee, and while the lease was in force, 'the lessee entered into a contract or arrangement with another person for the use of the property by that other person':
(s.82AG(3));
(b) if before the property was leased to the lessee 'the lessee entered into a contract or arrangement with another person for the use of the property by that other person': (s.82AG(4)); or
(c) if after the expiration of twelve months after the property was first used, and 'while the lease was in force, the taxpayer entered into a contract or arrangement with another person for the use of the property by that other person', and the Commissioner is satisfied that at the time when the taxpayer took the property on lease he intended to enter into such a contract or arrangement:
(s.82AH(4)(b) (iii) and (c))".
It was further accepted by the parties that the trial judge correctly stated the issue to be resolved, as follows -
"the essential question raised was whether, upon the facts disclosed, the partnership had at a relevant time entered into a contract or arrangement with another person for the use of the aircraft by that other person".
Before the trial judge the respondent contended, on three bases, that the partnership had entered into such a contract or arrangement. As stated by his Honour this contention was as follows -
"The first basis was that during the period from 2nd June 1980 (which was the date on which VH AJQ was first used) to 2nd June 1981 the partnership entered into a contract or arrangement either with Jet Charterers for the use of the aircraft by Jet Charterers or with TNT for the use of the aircraft by TNT. This basis relied on s.82AG(3)(d). The second basis was that prior to 27th March 1980 (which was the date on which the lease commenced) the partnership entered into a contract or arrangement either with Jet Charterers for the use of the aircraft by Jet Charterers or with TNT for the use of the aircraft by TNT. This basis relied on s.82AG(4). The third basis was that after 2nd June 1980 the partnership entered into a contract or arrangement either with Jet Charterers for the use of the aircraft by Jet Charterers or with TNT for the use of the aircraft by TNT in circumstances where the Commissioner could properly be satisfied that on 27th March 1980 the partnership intended to enter into that contract or arrangement. This basis relied on s.82AH(4)(b)(iii) and
(c)".
The appellant denied that the partnership had entered into any such contract or arrangement.
His Honour rejected the argument that there was a contract or arrangement entered into by the partnership directly with TNT for the use of the aircraft by TNT, or a contract or arrangement entered into by the partnership with Jet Charterers for use of the aircraft by Jet Charterers, but upheld the contention that there was a contract entered into between the partnership and TNT arising from each of the charter agreements which he held were entered into by Jet Charterers acting as agent for the partnership, for the use of the aircraft, or its carrying space, by TNT. He found that -
"the charter arrangements entered into by Jet Charterers as agent for the partnership appear to have been in effect agreements for flight charters --. If that is so, it seems right to regard them as agreements entered into with TNT for the use of the aircraft, or perhaps for the use of the carrying space of the aircraft, by TNT for the purpose of conveying goods upon designated flights or during a specified period".
On the hearing of the appeal, counsel for the respondent expressly disavowed any submission that there was a contract or arrangement between the partnership and Jet Charterers for the use of the aircraft by Jet Charterers.
I have had the advantage of reading the reasons for judgment of Jenkinson J. and those of Ryan J. I agree with the opinion of each of them that, upon the facts disclosed, the partnership had not at a relevant time entered into a contract with TNT for the use of the aircraft by TNT, and with their reasons for this opinion.
My brethren are also of opinion that the evidence justified the conclusion that the partnership had entered into an arrangement with TNT for the use of the aircraft by TNT, within the meaning of the relevant sections.
The finding of an arrangement was based upon the view that the evidence justified the drawing of the following inferences:-
(a) that the painting of the aircraft in TNT colours, to which the partnership agreed after the painting had commenced, had been undertaken with the approval of TNT;
(b) that Jet Charterers had authority from those in whom was vested a proprietary interest in the aircraft sufficient to authorise Jet Charterers to commit the aircraft, with other similar aircraft, to performance of the agreement between Jet Charters and TNT and to paint the aircraft in TNT colours;
(c) that the appropriate officers of TNT dealing with Jet Charterers believed what they were told by Jet Charterers, and believed that Jet Charterers was communicating to them, as the agent of the partnership, the consent of the partnership to the painting and commitment of the aircraft;
(d) upon the basis of that belief TNT consented to the painting of the aircraft and expected that it would from time to time meet the requirements for carriage of freight provided for by the contract between TNT and Jet Charterers; and
(e) the partnership believed that these communications were made to TNT by Jet Charterers on behalf of the partnership and that TNT had indicated to Jet Charterers the approval of the painting of the aircraft and its commitment from time to time, to the freight carriage.
If it be accepted that all of these inferences may properly be made, they do not, in my respectful opinion, justify the conclusion that the partnership entered into an arrangement with TNT within the meaning of the sections. They seem to me to be equally consistent with the conclusion that the rights and obligations of the partnership and Jet Charterers were regulated by the contractual relationship between them, and that those of Jet Charterers and TNT were regulated by the contractual relationship between them, without there being any arrangement between the partnership and TNT.
Re British Basic Slag Ltd's Agreements ((1963) 2 All ER 807) does not seem to me to assist the respondent's case. In that case the Court of Appeal was satisfied that the parties had entered into agreements which were subject to registration under the Restrictive Trade Practices Act, 1956. It then went on to consider the question raised by a second summons, whether the companies concerned entered into those agreements in pursuance of an "arrangement", whether or not it was or was intended to be enforceable by legal proceedings.
Willner L.J. (at p 813) quoted the dictum of Upjohn J. in Re Austin Motor Co Ltd's Agreements (1957) 3 All ER at p 69; (1958) Ch at p 74:
"Whether enforceable at law or not, it seems to me that an arrangement must at least connote an arrangement whereby the parties to it accept mutual rights and obligations".
and went on to say (at p.814):
"To deal first with the meaning of the subsection, I think it is highly significant that Parliament did not see fit to include any definition of 'arrangement'. I infer from this that it was intended that the word should be construed in its ordinary or popular sense. Though it may not be easy to put it into words, everybody knows what is meant by an arrangement between two or more parties. If the arrangement is intended to be enforceable by legal proceedings, as in the case where it is made for good consideration, it may no doubt properly be described as an agreement. But the statute clearly contemplates that there may be arrangements which are not enforceable by legal proceedings, but which create only moral obligations or obligations binding in honour. This seems to me to be entirely consistent with the dictum of Upjohn, J. (7), to which I have already referred. Nor do I consider that there is any inconsistency between that and the view expressed by the judge in the present case. For, when each of two or more parties intentionally arouses in the others an expectation that he will act in a certain way, it seems to me that he incurs at least a moral obligation to do so. An arrangement as so defined is therefore something 'whereby the parties to it accept mutual rights and obligations'".
Willmer L.J. said (at p.816) that criticisms of the observations of Upjohn, J. seemed to be saying:
"It is implicit in the judge's statement that 'mutual rights and obligations' include rights and obligations which are not enforceable by any legal process".
He posed the question:
"What is the limit of looseness of association which may be tolerated in the application of the Act?"
and offered the answer -
"It may be that it is impossible to lay down any principle for application and that each case must be decided on the particular circumstances of the case".
Diplock L.J. (at p.819) said -
"'Arrangement' is not a term of art; and in s.6(3) of the Act I agree with my lords that it bears the meaning that an ordinary educated man would ascribe to it. It involves a meeting of minds because under s.6(1) it has to be an arrangement 'between two or more persons' and, since it must be an arrangement 'under which restrictions are accepted by two or more parties', it involves mutuality in that each party, assuming he is a reasonable and conscientious man, would regard himself as being in some degree under a duty whether moral or legal to conduct himself in a particular way or not to conduct himself in a particular way as the case may be, at any rate so long as the other party or parties conducted themselves in the way contemplated by the arrangement. No necessary or useful purpose would be served by attempting an expanded and comprehensive definition of the word 'arrangement' in s.6(3) of the Act. Cross, J., said ((1962) 3 All E.R. at p.255):
'... all that is required to constitute an arrangement not enforceable in law is that the parties to it shall have communicated with one another in some way and that as a result of the communication each has intentionally aroused in the other an expectation that he will act in a certain way.'
I think that I am only expressing the same concept in slightly different terms if I say without attempting an exhaustive definition, for there are many ways in which arrangements may be made, that it is sufficient to constitute an 'arrangement' between A and B, if
(i) A makes a representation as to his future conduct with the expectation and intention that such conduct on his part will operate as an inducement to B to act in a particular way;
(ii) such representation is communicated to B, who has knowledge that A so expected and intended, and
(iii) such representation or A's conduct in fulfilment of it operates as an inducement, whether among other inducements or not, to B to act in that particular way".
In the present case I cannot see good reason for concluding that the partnership had made any representation to TNT as to their future conduct, with the expectation and intention that such conduct on their part would operate as an inducement to TNT to act in a particular way, or vice-versa. It seems to me that there were no representations passing between the partnership and TNT. It appears to have been a matter of indifference to TNT whether the partnership's aircraft was provided by Jet Charterers for the transport of TNT freight. All that concerned TNT was that Jet Charterers would provide an aircraft of the specified type, and it was clear that Jet Charterers owned or controlled a fleet of such aircraft. It was not established whether some of those aircraft other than that of the partnership had been painted in TNT colours.
TNT had sound commercial reasons for dealing with a fleet operator and experienced provider of aircraft like Jet Charterers, rather than the owner of a single aircraft, like the partnership. The former was much more likely to provide satisfactorily for TNT's freight requirements than the operator of a single aircraft or a number of such operators.
In respect of any individual proposed flight involving the carriage of TNT freight, there would have been no basis in contract for a claim by the partnership that TNT was obliged to use its aircraft. Nor can I discern that the partnership and TNT had each intentionally aroused in the other an expectation that the aircraft would be engaged in that carriage of freight. Similar considerations arise in relation to any suggested expectation that some particular proportion of TNT freight would be made available for carriage by the partnership's aircraft. The partnership's consent to the painting of its aircraft in TNT colours was given "for advertising purposes and to promote the use of" the aircraft (see affidavit of J. Johnson, para 14). If, on any particular occasion, Jet Charterers had provided an aircraft of the designated type other than that of the partnership for the carriage of TNT freight, I can see nothing in the way of an arrangement between the partnership and TNT which would have given the former any basis for complaint. Indeed the contracts between the parties would appear to negate any such basis. In its contract with Jet Charterers, TNT had all that it needed to ensure that it be provided with the services of an aircraft of the designated type for the carriage of its freight, and in the event of any failure by Jet Charterers to carry out its obligations it had its remedies in contract. It had no need for any arrangement between itself and the partnership creating "only moral obligations or obligations binding in honour" (Re British Basic Stag Ltd's Agreements, cited above, at p.814).
The partnership and Jet Charterers entered into a contractual relationship as did Jet Charterers and TNT. Even if it had been established that all three parties knew the details of the two relationships, it would not follow that the partnership entered into an arrangement with TNT. In my opinion, it did not do so.
I would allow the appeal, with costs of the trial and of the appeal, and order that Notice of Amended Assessment No. 388110 dated 19th October, 1984 be remitted to the respondent to be amended to exclude the sum of $33,000.00 from the appellant's assessable income and to enable the tax payable by the appellant to be recalculated accordingly.
JUDGE2
Appeal by a taxpayer against the dismissal by the Supreme Court of Victoria (Tadgell J.) of his appeal to that Court against the respondent's disallowance of his objection against the assessment of income tax payable by him in respect of the year ended 30 June 1980.
It is not in dispute between the parties that the appellant was entitled to a deduction in respect of his individual interest in a partnership loss alleged to have been incurred by a partnership of which he was a member during that year of income; nor that in the determination of the "net income" or the "partnership loss", for the purposes of Division 5 of Part III of the Income Tax Assessment Act 1936, of that partnership in the year of income, expenditure incurred in respect of the acquisition by a "leasing company" of a "Westwind" 1124 jet aeroplane leased by that company to the partnership was, by reason of the operation of Subdivision B of Division 3 of that Part, an allowable deduction from the assessable income of the partnership, unless -
(a) before the expiration of 12 months after the plane was first used by the partnership and while the lease was in force the partnership had entered into a contract or arrangement with another person for the use of the plane by that other person; or
(b) before the plane was leased to the partnership by that company the partnership had entered into a contract or arrangement with another person for the use of the plane by that other person; or
(c) after the expiration of 12 months after the plane was first used by the partnership and while the lease was in force the partnership had entered into a contract or arrangement with another person for the use of the plane by that other person and the respondent were satisfied that at the time when the partnership took the plane on lease the members had intended to enter into such a contract or arrangement.
Those three sets of disentitling circumstances are prescribed by s.82AG(3)(d), by s.82AG(4) and by s.82AH(4)(b)(iii) and s.82AH(4)(c) respectively. The appellant's objection against the assessment was that it was made on the basis that at least one of those sets of circumstances had occurred.
The acts and events by reference to which a conclusion is to be reached whether any of those three sets of circumstances had occurred are narrated in the reasons for judgment of Ryan J. and need not be repeated by me.
The learned trial judge rejected a submission that the aeroplane's engagement, for any particular period, in the carriage of freight for TNT Management Pty. Ltd. (TNT) had been in performance of a contract between the partnership and TNT, the terms whereof were, in substance and mutatis mutandis, those of the agreement in writing dated 23 March 1979, between Jet Charterers Nominees Pty. Ltd. (Jet Charterers) and TNT. But he did hold that the partnership by its agent Jet Charterers entered into one or more contracts of charter of the plane with TNT, in performance of which the plane was engaged for those particular periods in the carriage of freight for TNT.
It may be assumed for present purposes that the relevant officers of TNT at material times believed that the partnership had a proprietary interest in the plane and that any authority which Jet Charterers had in relation to the plane had been conferred by the partnership. It may also be assumed that when the partnership's plane was committed, for a period, to the performance of the work of carrying TNT freight, a contract for the charter of that particular plane during the particular period of its engagement in the freight carriage was constituted. But the conclusion which his Honour drew, that the contract was between the partnership and TNT, is one that I would hesitate to draw. It is true, as his Honour pointed out, that Jet Charterers had contracted with the partnership, by the agreement dated 15 February 1980, to make charter contracts of that description as the agent of the partnership. But the agreement between TNT and Jet Charterers in purported performance of which each commitment of a "Westwind" aeroplane to the carriage of TNT freight was made did not contemplate the creation of contractual relations between TNT and other persons. In its original form, the agreement dated 25 March 1979 between Jet Charterers and TNT contemplated the provision and operation of aircraft by Jet Charterers and contemplated that the pilot of such a plane would be the servant of Jet Charterers. None of the variations which the conduct of the parties to the agreement dated 25 March 1979 effected during the course of its performance altered those underlying provisions. Nor was there anything in the conduct of those parties to suggest that the making of a contract for charter between TNT and any person other than Jet Charterers was intended. The circumstances that a person other than Jet Charterers had, and was known by TNT to have, a proprietary interest in the plane and was believed by TNT to have given Jet Charterers authority to act on that person's behalf in relation to the plane does not in my opinion give rise to an inference that Jet Charterers was proposing a contract for charter between that person and TNT. No transfer of any proprietary interest in the plane was involved. There was in my opinion no reason to doubt that in the merely contractual provisions of the charter Jet Charterers' role was that of a principal, not an agent for the partnership. It is true that the obligation imposed on Jet Charterers by the agreement dated 15 February 1980 with the partnership was to effect, in respect of the plane, contracts of charter between the partnership and charterers, and not to enter into such contracts as principal. But so, too, was it a term of that agreement that only "employees and servants" of the partnership "should be entitled to fly or control" the plane, yet the pilots who flew the plane were in fact employed by Jet Charterers. There is in my opinion no persuasive evidence that the parties steadily maintained an intention to regulate their relations exlusively by observance of the agreement dated 15 February 1980.
Although the evidence does not in my opinion justify a conclusion of a contractual relation between the partnership and TNT, there is in my opinion good ground for finding that before the expiration of 12 months after the plane was first used by the partnership and while the lease of the plane to the partnership was in force the partnership entered into an arrangement with TNT for the use of the plane by TNT, within the meaning of the phrase, "arrangement with another person for the use of the property of that other person", in s.82AG(3)(d). The painting of the plane in TNT colours, to which the partnership gave approval in June 1980 after the painting had commenced, may be inferred to have been undertaken with the approval also of TNT. TNT may I think be safely found to have been informed by Jet Charterers that Jet Charterers had authority, from those in whom was vested a proprietary interest sufficient to authorise what was being done in relation to the plane, to commit the plane, with other similar planes, to performance of the agreement between Jet Charterers and TNT for freight carriage by "Westwind" aircraft, and to paint the plane in TNT colours. I think it may further be found that the officers of TNT whose function it was to deal with Jet Charterers on that subject believed what they were told by Jet Charterers, and believed that Jet Charterers were communicating to them as agents of the partnership the consent of the partnership to the painting and the commitment of the plane. Upon the basis of that belief TNT consented, it may be inferred, to the painting of the plane and expected that the plane would from time to time carry out the freight carriage for which the contract between TNT and Jet Charterers made provision. And, finally, the partnership (by those whose function it was to act on behalf of the partnership) may be inferred to have believed that the communications I have outlined were made by Jet Charterers on the partnership's behalf to TNT and that TNT had indicated to Jet Charterers its approval of both the painting of the plane and its commitment, from time to time, to the freight carriage. These circumstances in my opinion constitute the making of an arrangement between the partnership and TNT. By their conduct each has intentionally aroused in the other an expectation that the plane will be engaged in the carriage of freight for TNT. The communications, from the partnership to TNT and from TNT to the partnership, which constituted that conduct were made respectively by and to Jet Charterers as the agent of the partnership. The creation of such an expectation in each of the partnership and TNT by that means suffices in my opinion to constitute the entry of the partnership into an arrangement with TNT within the meaning of s.82AG(3)(d). (Cf Re British Basic Slag Ltd's Agreements (1963) 2 All ER 807.) TNT had the benefit of the obligation imposed on Jet Charterers by the contract between them to provide TNT with Westwind aircraft for the carriage of TNT's freight and might therefore be thought, as Sweeney J. has pointed out, to have been indifferent to an indication by the partnership of willingness to commit the partnership's aircraft to the carriage of TNT's freight. But that would not be decisive of the question whether the making of an arrangement is to be inferred from the circumstances. Further, it is not to be expected that TNT would be wholly indifferent to the presence of one more aircraft carrying its colours about the airports of eastern and northern Australia.
And I am further of the opinion that the arrangement was one "for the use of" the plane by TNT. The agreement between TNT and Jet Charterers in the performance of which the partnership's plane was first engaged in June 1980 was at that time for the provision of a daily scheduled carriage of TNT freight by a "Westwind" aeroplane between Adelaide and Darwin and the provision of other regular scheduled flights of a "Westwind" plane between several places in Australia in the carriage of TNT freight. The agreed remuneration payable under the agreement was unrelated to the weight or the volume of what was carried : whether expressed as a sum of money for each flight or for each hour of flight, Jet Charterers' remuneration by TNT was based upon hours flown or expected to be flown. If freight other than TNT freight was occasionally carried on a scheduled TNT flight (as to which the evidence is not clear), that was done pursuant to arrangements which were subordinate to the provisions of the agreement between TNT and Jet Charterers for the carriage of TNT freight. The carriage of that freight was a business activity of TNT in the course of which TNT used the plane which the partnership made available to it. The plane was not provided for the carriage of particular items of freight the subject of a contract of carriage for TNT, or for the carriage of freight by a particular flight the subject of a separate contract : the plane, like the other Westwind aircraft from time to time committed to the carriage of TNT freight, was provided in fulfilment of a contract (by Jet Charterers) and of an arrangement (by the partnership) that such freight as TNT should choose to present for loading would be carried on scheduled flights by a Westwind plane between specified places until such time as there should be agreement for alteration of the schedule. Those circumstances in my opinion show an arrangement for the use of the plane by TNT during the periods when the plane was committed to the performance of that contract.
For those reasons I think that the appeal should be dismissed with costs.
JUDGE3
This is an appeal from a judgment given in the Supreme Court of Victoria on 16 July 1986 on an appeal by the appellant taxpayer against the disallowance of a claim for an investment allowance under subdivision B of Division 3 of Part III of the Income Tax Assessment Act 1936 ("the Act"). The claim had been made by the appellant as a member of a partnership of some twenty partners which had become the lessee of a "Westwind" 1124 jet aircraft.
Before the aircraft was brought to Australia, negotiations were undertaken on behalf of the partnership with Jet Charterers Nominees Pty. Ltd. ("Jet Charterers") with a view to entrusting the commercial operation of the aircraft to Jet Charterers. Those negotiations resulted in the execution of a deed of agreement dated 15 February 1980 between the partners (in the agreement referred to as "the Owners") and Jet Charterers.
The agreement was prefaced by the following three recitals:-
"A. The Owners are lessees of a Westwind Jet Model 1124 ('the Aircraft') and carry on business of using the Aircraft for charter flight throughout Australia and elsewhere under the business name 'Victorian Jet Charter'.
B. Jet Charterers is experienced in the business of aircraft charter operations and has at its disposal various facilities in relation to the use and maintenance of aircraft which the Owners wish to employ.
C. The Owners are desirous of employing Jet Charterers to operate the Aircraft on their behalf for reward."
By clause 2 of the agreement it was provided that:-
"THE OWNERS agree to exclusively employ Jet Charterers for reward in the conduct of the charter operation for a period of four years from the date hereof or until prior determination as hereinafter provided upon the terms and pursuant to the conditions in this agreement."
"The charter operation" was defined in clause 1(d) as meaning the business of using the aircraft for charter flights as envisaged by the agreement "and all aspects thereof including but without limiting the generality of the foregoing all operational and promotion aspects of such business, the goodwill and reputation thereof, all licences permits and authorities used or necessary in connection therewith, all contract (sic) for carriage of goods and persons and all matters of every nature whatsoever connected therewith or in any way related thereto or arising therefrom."
Clause 3 of the agreement contained an extensive list of duties to be undertaken by Jet Charterers, including maintaining and fuelling of the aircraft, providing airport facilities for its operation, keeping it insured in the owners' names, acting for the owners to obtain persons to charter the aircraft for charter flights, and, as agents for the owners, employing suitable crew members for the aircraft. Another duty imposed on Jet Charterers expressly "as Agents for the owners", as described in clause 3(f), was "to enter into agreements for charter flights and to issue tickets for travel on the aircraft and to receive the consideration payable in respect thereof."
Paragraphs (h) and (i) of clause 3 respectively imposed a duty promptly to inform the owners of all overheads and flight costs incurred on their behalf, and "(i) at all times to give the Owners all such explanations information and assistance as they may reasonably require in connection with the conduct of the charter operation."
By cl.4 of the agreement, Jet Charterers guaranteed to the owners that the overheads incurred in operating the aircraft would not exceed a stated annual amount, and cl.5 recited, amongst other things, that:-
"ALL OVERHEADS will be borne by the Owners but Jet Charterers guarantees that it will introduce to the owners sufficient utilization on the Aircraft to produce net charter flight income of at least $360,000 plus the cost of overheads borne by the Owners per annum."
There was also a guarantee in clause 6, subject to a rise and fall provision, that flight costs to be borne by the Owners would not exceed $400 per log book hour flown.
Clauses 9, 10 and 11 imposed on Jet Charterers further duties to account and make disclosure to the owners, by providing:-
"9. JET CHARTERERS will keep appropriate records of all charters and of all income received as Agents for the Owners and all expenditure made by it in relation to the operation of the Aircraft and a Log Book of all charter flights and any other records that are required by the Department of Transport.
10. JET CHARTERERS will make available for inspection by the Owners all books and records kept by it relating to the Charter operation.
11. JET CHARTERERS will report to the Owners monthly giving details of all hours flown income generated expenses paid and/or accrued and any other related items required by the Owners and will give to the Owners all such explanations information and assistance as they shall reasonably require in connection with the conduct of the charter operation."
Consistently with Jet Charterers' duty, as agent for the owners, to employ suitable crew members, clause 12 of the agreement stipulated that:
"ALL CREWS required to conduct charter flights shall be engaged or hired by the Owners in accordance with the advice of Jet Charterers and no person other than the employees and servants of the Owners shall be entitled to fly or control the Aircraft. Jet Charterers shall ensure so far as practicable in all its dealings with such crews that all members thereof understand that they are subject to the control and direction of the Owners and bound to conform to the lawful directions of the Owners and their representatives."
Clauses 16 and 17 recited a series of events in which the Owners and Jet Charterers respectively might terminate the agreement, and clause 19 provided that:-
"JET CHARTERERS shall not enter into any contract on behalf of the Owners without first referring the contract to the Owners and obtaining the consent of the Owners to the contract, and the Owners shall not unreasonably withhold their consent if the contract is consistent with this Agreement."
Clause 25 of the agreement emphasized that any use or operation of the aircraft was to be exclusively that of the Owners by stipulating:-
"THIS AGREEMENT shall be construed for all purposes upon the basis that use or operation of the Aircraft consists exclusively of use or operation by the Owners and their servants or agents pursuant to this Agreement and any inconsistency obscurity or ambiguity shall be resolved upon that construction."
Before the agreement between itself and the partners had been concluded, and, indeed, before the partnership had been formed, Jet Charterers had entered into an agreement dated 28 March 1979 ("the TNT Agreement") with TNT Management Pty. Ltd. ("TNT") in which Jet Charterers was referred to as "the Contractor". That agreement provided by Article IA that the Contractor should ensure that TNT should (subject to the agreement) be provided with one "Lear" 35A jet aeroplane to make flights within Australia to such locations as might be designated by TNT and transporting cargo or passengers as TNT might from time to time require.
Article IB of the TNT agreement obliged Jet Charterers to provide, at its expense, a competent, sufficient and appropriately licensed air and ground crew to operate the aircraft and service and maintain it. Article 1 further obliged Jet Charterers to base the aircraft at Adelaide Airport, keep complete and accurate operation, service, maintenance and inspection records in respect of the aircraft and its movements, and make the same available to TNT at all times, and to organize, manage and administer all the operations of the aircraft as required, in accordance with the TNT Agreement in a manner satisfactory to TNT. Article I obliged Jet Charterers, subject to permissible variations by TNT, to provide on each day, other than Saturdays, Sundays and public holidays, a scheduled flight from Adelaide to Darwin and return, with intermediate stops at specified times at Alice Springs, Tennant Creek, and Katherine. The concluding provisions of Article IH stipulated that:-
"When not required by TNT for operation of the Adelaide - Darwin - Adelaide Flight or for Additional Utilization the Contractor agrees the Aircraft will be kept grounded and not otherwise utilized (except as necessary for essential testing or checking purposes) unless TNT gives its prior written approval (which approval it may in its absolute discretion withhold)."
Article I(1) of the TNT Agreement required Jet Charterers to supply a substitute aircraft and crew or take other steps to remedy any inability to commence or complete any flight. The TNT Agreement also incorporated a schedule of payments to be made against monthly invoices by TNT to Jet Charterers for each Adelaide - Darwin - Adelaide flight and at a specified hourly rate for "additional utilization". By Article IV it was provided that the TNT Agreement should be for an initial term of one year, subject to a right of earlier termination by TNT upon the happening of one or other of certain specified defaults or other events. Article IV required Jet Charterers to carry, and maintain in force, insurance against workers' compensation and employer's liability, aircraft loss or damage, and third party, passenger, crew and cargo liability.
Article VII of the TNT Agreement headed "INDEPENDENT CONTRACTOR" was in these terms:-
"A. Personnel selected by the Contractor shall at all times be the employee (s) of the Contractor and not the employee (s) of TNT and the Contractor is for all purposes of this Agreement, an independent Contractor and not an agent of TNT.
B. TNT shall have the general direction of the work to be done and of the points from which and to which and times at which the work is to be done; provided, however, all details of the work shall be under the supervision and control of the Contractor and of its employees and in particular the pilot of the Contractor in charge of the Aircraft shall be the sole judge of safe flying and safe landing site conditions, and the nature and weight of the load being such as to render it safe to fly and his decision in this respect shall be final provided that it is a decision which is responsible and reasonable and rational. (The onus of justifying such a decision where challenged by TNT shall fall upon the Contractor). The Contractor will use its best endeavours to ensure always that the maximum possible cargo and/or passenger capacity (as TNT may desire) is available to TNT on all flights.
C. Unless with the express agreement of TNT no flight shall be operated unless the minimum payload mentioned in Exhibit A is carried."
By Article XIII, Jet Charterers agreed to keep confidential the contents of, and any information contained in, the TNT Agreement which it acknowledged were trade secrets of value to TNT.
Evidence was given by Mr. Johnson the former managing director of Jet Charterers that "in late 1979" the TNT Agreement "was varied to delete the reference to Lear jets and substitute Westwind aircraft". Other variations deposed to by Mr. Johnson included a change from Adelaide to Sydney as the base for the aircraft, a change in the term of the agreement from one year to five years, and changes in the rate per flight and the hourly rate at which Jet Charterers was to be paid for provision of the aircraft and crew. At least some of those variations were effected in writing, by letters between TNT and Jet Charterers. There was no evidence that any of those changes were brought to the notice of the partners. When it was put to Mr. Johnson that the term of the TNT Agreement had expired, he replied:
"The agreement as such has expired but we operate under the same terms of agreement."
The same witness testified that by some date before June 1981, Jet Charterers needed to have more than the aircraft available to fulfil its obligations to TNT. It was also indicated by Mr. Johnson that Mr. Condon, a director of Jet Charterers, was assigned to be the chief pilot for the partnership, although Jet Charterers continued to pay his salary for which it was reimbursed by the partnership. Two other pilots employed by Jet Charterers also flew the partnership's aircraft as required from time to time.
After the aircraft arrived in Australia, it made its first commercial flight on 2 June 1980 for the transport of passengers under charter to CRA Limited. It was then converted to a freight configuration and was used to carry freight for other freight forwarders including Ansett Air Freight, Trans Australia Airlines and Wards Express, as well as TNT. However, by late 1979 the partners expected that, whilst it was being managed by Jet Charterers, the aircraft would be working mainly for TNT and in about May or June 1980 "by agreement with (Jet Charterers and the partnership) TNT was allowed to paint the (aircraft) with TNT colours for advertising purposes and to promote the use of (the aircraft)". (See para.14 of Mr. Johnson's affidavit of 30 January 1986) By August 1980 the partnership's management committee was able to report to the partners with approval that TNT's use of the aircraft would increase. Apparently, it was not considered necessary to obtain the approval of TNT to use the aircraft for the purposes of other freight forwarders, and it occasionally happened that on one flight the aircraft carried freight consigned by more than one forwarder.
Mr. Johnson also gave evidence that before Jet Charterers took delivery of the aircraft it was requested to allow representatives of the partners to inspect the agreement between Jet Charterers and TNT. That request was refused because "the TNT document was confidential and belonged to Jet Charterers Nominees, and we said it was of no concern to the partners." Similar requests were made during Jet Charterers' operation of the aircraft but were always refused.
Shortly before it commenced to operate the partnership's aircraft, Jet Charterers was managing on behalf of other owners six or seven other aircraft of which two or three were used to carry freight for TNT. In addition, Jet Charterers owned or leased in its own right about a further twelve aircraft, making a total fleet under its control of some seventeen or eighteen aircraft, of which about five were also painted in TNT colours.
There was evidence that from an early date the partners had notice that Jet Charterers had itself incurred obligations to make aircraft available to TNT. For example, in the minutes of a meeting of the partners on 30 January 1980, Mr. J. Wilson of Jet Charterers is recorded as saying that it was clearly in Jet Charterers' best interests "in order that they would fulfil their obligations not only to the partnership, but to TNT in this instance, for the use of the aircraft to obtain all certificates as soon as possible."
It was accepted by both counsel for the appellant and counsel for the respondent Commissioner that the learned judge on the hearing of the first appeal had correctly identified the essential question between the parties as being "whether, upon the facts disclosed, the partnership had at a relevant time entered into a contract or arrangement with another person." That question arose from the provisions of Subdivision B of Division 3 of Part III of the Income Tax Assessment Act 1936, which is framed to allow to a taxpayer, subject to certain exceptions, a deduction from his assessable income of a percentage of expenditure of a capital nature in respect of the acquisition or construction by him of a new unit of eligible property to which the Subdivision applies. Section 82AA(1), so far as relevant, makes the Subdivision applicable :
"in relation to a unit of elgible property acquired or constructed by the taxpayer that is -
(a) in the case of any taxpayer, for use by the taxpayer wholly and exclusively -
(i) in Australia; and
(ii) for the purpose of producing assessable income otherwise than by
-
(A) the leasing of the eligible property;
(B) the letting of the eligible property on hire under a hire-purchase agreement; or
(C) the granting to other persons of rights to use the eligible property;"
There are then prescribed three alternative sets of circumstances in which a taxpayer who has incurred expenditure of the kind described in s.82AA(1) loses the prima facie entitlement to a deduction conferred by s.82AB(1).
By s.82AG(3) it is provided, so far as relevant, that:-
"This Subdivision does not apply, and shall be deemed never to have applied, in relation to sub-section 82AA(1) property leased by a leasing company to another person (in this sub-section referred to as the 'lessee') if before the expiration of 12 months after the property was first used, or installed ready for use, by the lessee -
...
(d) while the lease was in force the lessee entered into a contract or arrangement with another person for the use of the property by that other person"
The second relevant disqualification from entitlement to a deduction is imposed as follows by s.82AG(4):-
"This Subdivision does not apply, and shall be deemed never to have applied, in relation to sub-section 82AA(1) property leased by a leasing company to another person (in this sub-section referred to as the 'lessee') if, before the property was leased to the lessee by the leasing company, the lessee entered into a contract or arrangement with another person for the use of the property by that other person."
Thirdly, s.82AH(4) stipulates that:
"Where -
...
(b) after the expiration of 12 months after the property was first used, or installed ready for use by the taxpayer -
...
(iii) while the lease was in force the taxpayer entered into a contract or arrangement with another person for the use of the property by that other person; ...
and
(c) the Commissioner is satisfied that, at the time when the taxpayer took the property on lease, the taxpayer intended ... to enter into a contract or arrangement as mentioned in sub-paragraph (b)(iii) ... the deduction shall, if the Commissioner so determines, be deemed not to have been, or not to be, allowable, as the case may be."
His Honour ultimately determined that the partnership had at a relevant time, entered into a contract or arrangement with another person for the use of the aircraft by that other person. He held that charter agreements with TNT for the use of the aircraft were entered into by Jet Charterers as agent for the partnership. His Honour rejected the contention that the partnership had entered into an agreement with TNT on the terms (or some of them) of the agreement between Jet Charterers and TNT. He also, shortly, rejected the contention that the partnership had entered into an agreement or arrangement with Jet Charterers for the use of the aircraft by Jet Charterers.
The "use" of an item of plant or equipment on which the statutory scheme outlined above is erected, is an elusive concept. As Gibbs C.J. pointed out in Tourapark Pty. Ltd. v. The Commissioner of Taxation of the Commonwealth of Australia (1982) 149 CLR 176 at 181, a person may be said to use property for his own purposes by making it available for use by others. In my view, whether another person has the use of, or has a right to use, certain property turns on the aptness of the ordinary meaning of "use" to describe the relation which exists as a matter of fact between that person and the property. The application of this test may throw up fine distinctions. For example, a passenger who engages a taxi cab to take him from one place to another would probably not be said to have "the use of", or to have been granted a "right to use" the cab in the sense in which those words are respectively used, in ss.82AG(4) and 82AA(1)(a). On the other hand, a customer who hires a vehicle from a car rental establishment could readily be said to have "the use of" that car, or to have been granted a "right to use" it, during the period of hire. The fact that a vehicle or piece of mechanical equipment is provided to a hirer with the services of a driver or operator does not necessarily make it inapt to say that the hirer has "the use" of the vehicle or equipment whilst it is on hire to him.
I consider that an objective examination of the manner in which the aircraft in this case was operated after 2 June 1980, tends strongly to the conclusion that TNT, had "the use of" it, and had a "right to use" it. A similar conclusion was reached by a Full Court of this Court in Hamilton Island Enterprises Pty. Ltd. v. Federal Commissioner of Taxation (1982) 43 ALR 519 where some aspects of the operation of a helicopter were not materially different from the use made here of the partnership's aircraft. The fact that the partnership could also be said to be using the aircraft through its agent, Jet Charterers, for the partnership's purposes does not detract from the conclusion TNT had "the use of" the aircraft, or had a "right to use" it.
It therefore becomes necessary to consider whether TNT's use of, or right to use, the aircraft was pursuant to, or conferred by, a contract or arrangement entered into by the partnership with TNT. I share the doubts expressed by Jenkinson J. as to whether an enforceable agreement was concluded between the partnership and TNT, but I am satisfied, for the reasons which he has expressed, that the partnership had entered into an "arrangement" within the meaning of s.82AG(3)(d), with TNT for the use of the aircraft by TNT. The fact that s.82AG(3)(d) is predicated on the lessee of property having "entered into" an arrangement with another person for the use of the property by that other person, does not require direct communication between the lessee and that other person. It is sufficient if the lessee so conducts himself in relation to the property as to raise an expectation in the other person that the property will be, or continue to be, available for the use of the other. In my view, an objective observer would impute such conduct to the partnership having regard to its consent to the painting of the aircraft in TNT's colours, and to its acquiescence in Jet Charterers' deployment of the aircraft for TNT's purposes.
In the light of that conclusion, it is unnecessary to determine whether, as Dr. Buchanan contended, the partnership did not also, or alternatively, enter into a contract or arrangement with Jet Charterers for the use of the aircraft by Jet Charterers in its own right, which enabled Jet Charterers, in turn, to deploy the aircraft for the use of TNT. I am content to indicate, in case this matter should go further, that in my view that further or alternative contention is strongly arguable.
Accordingly, I agree with Jenkinson J. that the appeal should be dismissed with costs.
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