Rendyl Properties Pty Limited and Commissioner of Taxation

[2009] AATA 177

Administrative Appeals Tribunal

DECISION AND REASONS FOR DECISION [2009] AATA 177

ADMINISTRATIVE APPEALS TRIBUNAL      )

)          No 2007/6008

TAXATION APPEALS DIVISION		)
Re		RENDYL PROPERTIES PTY LIMITED

Applicant

And COMMISSIONER OF TAXATION

Respondent

DECISION

Tribunal Ms G Ettinger, Senior Member
Mr S E Frost, Member

Date18 March 2009

PlaceSydney

Decision The objection decisions are affirmed.

.................[sgd].............................

Ms G Ettinger
  Senior Member

CATCHWORDS

TAXATION – goods and services tax (GST) – importation and use of a boat – “enterprise” – “creditable importation” – “creditable acquisitions” – whether taxpayer carrying on activities in the form of a business – objection decisions affirmed

A New Tax System (Goods and Services Tax) Act 1999 – s 9-20, 11-15, 15-10, 195-1

Ferguson v Federal Commissioner of Taxation [1979] FCA 29; (1979) 37 FLR 310

REASONS FOR DECISION

18 March 2009

Ms G Ettinger, Senior Member

  Mr S E Frost, Member   

Introduction

1.      The taxpayer, Rendyl Properties Pty Limited (“Rendyl”), imported a boat from the United States of America in October 2004.  GST was paid on the importation.  Rendyl claimed that it was entitled to an input tax credit for the GST paid, but the Commissioner did not agree.

2.      Rendyl used the boat to carry on activities which, it claimed, amounted to an “enterprise” for the purposes of the A New Tax System (Goods and Services Tax) Act 1999 (“GST Act”). On that basis it claimed, for the period October 2004 to March 2006, further input tax credits in relation to those activities. Once again, the Commissioner did not agree with Rendyl’s claim.

3.      Eventually, the Commissioner made assessments of GST net amounts, effectively seeking to reverse the input tax credit claims.  Rendyl objected against the assessments but the objections were disallowed.  Rendyl has now applied to the Tribunal for review of the objection decisions.

The Issues

4.      There are two issues for us to resolve.  The first is whether Rendyl made a “creditable importation” of the boat in October 2004; if it did, it is entitled to the input tax credit it has claimed for the GST that was paid on the “taxable importation” of the boat.  The second is whether Rendyl made “creditable acquisitions” in the period October 2004 to March 2006; if it did, it is entitled to input tax credits in respect of those acquisitions.

5. The input tax credits on the importation of the boat are available if, and to the extent to which, Rendyl imported the boat “in carrying on [its] enterprise”, but not to the extent that the importation was “of a private or domestic nature”: s 15-10(1) and (2)(b) of the GST Act.

6. Similarly, the input tax credits on any creditable acquisitions are available if, and to the extent to which, Rendyl made the acquisitions “in carrying on [its] enterprise”, but not to the extent that the acquisitions were “of a private or domestic nature”: s 11-15(1) and (2)(b) of the GST Act.

7.      So it is that both questions depend on whether the activities that Rendyl conducted in relation to its use of the boat amounted to the carrying on of an enterprise at the relevant times. 

The evidence

8. Mr Caughlan made a written statement, as did Rendyl’s current accountant, Mr Glenn Hughes. Both men supplemented their written statements with oral testimony. We also had two volumes of documents filed with the Tribunal under s 37 of the Administrative Appeals Tribunal Act 1975, and various exhibits tendered during the proceedings.

What activities did Rendyl undertake with the boat?

9.      Rendyl was incorporated in February 2004.  The share capital is held by JC and KC Holdings Pty Limited.  Mr Caughlan is the sole director and secretary, and he is evidently the driving force behind the activities that Rendyl undertakes.

10.     Rendyl has been involved, at different times, in child care activities and property development, and Mr Caughlan has also been involved in a farm and raising cattle.  These proceedings, however, concern the purchase and importation of the boat, and the use to which the boat was put in the period October 2004 to March 2006.

11.     Mr Caughlan has been involved in the game fishing industry for over 20 years and is an International Game Fishing Association representative.  He describes himself as a “third generation” participant in the industry, his grandfather and father having preceded him.  He has an active interest in game fishing and attends a lot of fishing tournaments in New South Wales.

12.     Some time towards the end of 2003 Mr Caughlan started making arrangements for the activities with which the boat would be involved.  He had some conversations with a man named Craig Denham about buying a boat.  Mr Denham would eventually, according to Mr Caughlan, become a full-time employee of Rendyl as the skipper of the boat.

13.     Mr Caughlan said that he prepared a budget, or at least a forecast, of income and expenditure for a venture that would involve the chartering of a boat to customers for fishing purposes.  Apparently the forecast suggested that a “very small profit” could be derived from such a venture: somewhere around $20,000 to $30,000 in the first year, and gradually increasing over the years.  It was envisaged that the boat would be chartered for $2,000 to $3,000 a day. 

14.     We were mindful from the “T” documents that, at different stages from 2006 onwards, in the course of an audit of Rendyl’s affairs, the Commissioner asked Mr Caughlan for further information to support his claim that Rendyl’s boating activities amounted to the carrying on of an enterprise.  In April 2007, in response to written questions from the Commissioner, he stated among other things:

The reason for me running charter business is to make a profit.  When I started my charter business in 2003 I was passionate about the opportunities created by both my Grandfather and Father and with the wealth of talent and expertise in this field I thought I had the edge over other competitors.  I decided to import a customer sport fishing boat from Florida USA.  The boat that I bought is not available in Australia and with so many American clients and the reputation of the brand of boat I purchased “Guthrie and Stewart” I would be first choice of the Australian boats.

I constructed a budget for the 2004 and 2005 fishing seasons and came to the conclusion that it was worth having a go at.

15.     He could not produce to the Tribunal a copy of the first forecast that he made, and he could not recall specifically which categories of expenditure he had included in the forecast, but in response to questions from Ms Collins, counsel for the Commissioner, he said that he had included such things as advertising fees, marina fees, and salaries for a skipper and one or more casual employees. 

16.     Mr Denham went to the United States to look around for an appropriate boat.  In due course a “Brokerage Purchase Agreement” was entered into on 13 February 2004 between John Bleakley as “Owner” and Mr Caughlan as “Purchaser” for the sale of a boat called “Bounty Hunter” for the sum of $US 515,000.  Mr Caughlan attaches no particular significance to the fact that it was he, rather than Rendyl, who was named in that agreement as “Purchaser”; from Mr Caughlan’s perspective the purchaser of the boat was Rendyl, and not Mr Caughlan personally.  He described as an “oversight” the use of his name in the Brokerage Purchase Agreement, and explained that when the boat was purchased, it was the company, Rendyl, that purchased it.  In support of that contention, he directed us to a “Closing Statement” dated 10 May 2004 which identified Rendyl Pty Ltd (Rendyl’s former name) as the purchaser, and Bounty Hunter Inc as the seller.  We were not shown any documents evidencing a transfer of ownership, and we are satisfied there are none.

17.     Mr Caughlan explained that the purchase price was paid by Shelf Retail Equipment Pty Ltd (“Shelf Retail”), another company of which Mr Caughlan was a director.  He said that the purchase price was lent by Shelf Retail to Rendyl, but he could not tell us whether interest was payable on the loan.

18.     On 12 July 2004 an application was made to insure the boat.  In that application Rendyl was named as the insured. 

19.     Arrangements were made to bring the boat to Australia.  It arrived in Tasmania on or about 3 October 2004.  It was entered for home consumption, and on the entry “Rendyl Properties Pty Limited” was shown as the “owner”.  GST totalling $85,554.12 was paid to the Australian Customs Service on 7 October 2004, apparently by the customs broker that organised the import clearance. 

20.     The customs broker issued a tax invoice dated 1 October 2004, to Shelf Retail, for the GST, customs duty and ancillary charges payable in respect of the import clearance. Mr Caughlan said that the invoice was paid, but there is no documentary evidence of that.

21.     The boat was moved, under its own power, from Hobart to Queensland, where the charters were to take place.  It is not clear how long it took to reach Queensland, but the evidence establishes that it was being fuelled in Bermagui, on the New South Wales south coast on 9 October 2004, and then in Mooloolaba on the Queensland Sunshine Coast on 12 October 2004.

22.     What appears to have been intended as the first charter of the boat, had been invoiced to the customer “Alan Stuart USA” on 11 August 2004 for 9 days of marlin fishing (on unspecified dates) at $US 2,300 per day.  The calendar for the boat suggests that the charter took place from 24 September to 3 October 2004 (that is, for a total of 10 days), and that Mr Stuart “paid in full”.  (The “paid in full” notation is consistent with Mr Caughlan’s stated policy not to allow anyone on board the boat unless the charter had been paid for.)  However, the boat was only arriving in Tasmania as that first charter was coming to an end.  Mr Caughlan explained that it had been necessary, because of the late arrival of the boat, for Rendyl to hire another boat so that this particular charter could go ahead. 

23.     Mr Caughlan told us that the late arrival of the boat was not the only setback that Rendyl suffered.  The boat broke down towards the end of October 2004, and it was out of the water from then until February 2005, undergoing repairs.  So, in the first marlin season (we were told that the marlin season runs from September to December), on the basis of the information in the calendar, the boat was used at most only once – by the customer “Warren”, from 18 to 29 October.  The suggestion that it was also used for the charter to “Don Tyson” from 9 to 16 October must be wrong, since it was still in transit at least as late as the 12^th (see [21] above).  We infer that Rendyl had had to hire a replacement boat for the Tyson charter, just as it had had to do for the charter to Stuart.  Both the Tyson and the Warren charters are, like the one to Stuart, also annotated “paid in full” in the calendar.  As to the Tyson charter, there is in evidence a document described as a “tax invoice” issued by Rendyl; as to the Warren charter, there is no such document.

24.     During the time that the boat was out of the water, the business name “Wahine and Desperado Charters” was registered in both Queensland and New South Wales.  Mr Caughlan explained that “Wahine” is a name that was going to be used for the boat, but instead it was decided to name it “Desperado”.  At no stage did Rendyl advertise its activities, or issue invoices, under the registered business name.

25.     When the boat returned to the water in February 2005, it was taken to Gold Coast City Marina (located, curiously, in Brisbane) for a “refit”.  This apparently took several months.  It was rewired to the Australian electrical standard 240 volts from the American 110 volts.  It also had its hull repainted.

26.     According to the boat’s calendar, it was at Gold Coast City Marina at the beginning of the next marlin season in September 2005.  On 27 September 2005 it left for Cairns, and was then chartered to “Allen Stewart” from 6 to 16 October, to Mr Tyson from 18 to 27 October, and to “Fred Cameron, USA” from 28 to 31 October.  During November, according to the calendar, it was chartered to “Patrick Gee, Shimano, USA” from the 1^st to the 5^th, and then the notation “Cncelled Chartered” (sic), with nothing more, appears for the dates 6 November to 14 November.  The name “R. Newton”, again with no further detail, is noted for the dates 22 to 25 November. 

27.     Documents labelled “tax invoices” issued by Rendyl in respect of the Tyson and Gee charters are included in the “T” documents.  There are no invoices in evidence for any of the other charters for the 2005 season.  There is, however, a document in the following terms:

To Whom it may concern,

I hereby confirm that I have fished on the vessel “Desperado” a 52’ G&S Sport fishing boat out of Cooktown.

The trip that I went on was a fully paid commercial charter for Black Marlin fishing in the 2005 season.

The inclusions of the charter were, the supply of all food and drinks, all tackle and bait and accommodation.  The trip was fantastic and the Captain and crew were professional at all times.

Yours Faithfully,

(signed)

Ross Newton

28.     There is a document to similar effect, signed by “John Ashley”, and referring to fishing out of Cairns “during the 2004 and 2005 black marlin seasons”.  The document does not disclose who was responsible for arranging the trip, and therefore it is impossible to correlate the document with any of the trips recorded in the calendar. 

29.     Mr Caughlan says that the boat was not used for charter fishing trips after November 2005.  It was around the same time that Mr Denham left.

Do these activities amount to the carrying on of an enterprise?

30. The word “enterprise” is defined in s 9-20 of the GST Act. That part of the definition that Rendyl relies on is paragraph (a) – it says, in summary, that its activities were done “in the form of a business”. The word “business” is itself defined in the Dictionary of the GST Act, in s 195-1, in identical terms to the definition in s 995-1 of the Income Tax Assessment Act 1997 (“ITAA 1997”), namely:

business includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee.

31.     The Commissioner says that we should find that Rendyl’s boating activities did not amount to the carrying on of an enterprise, and that we should affirm the decisions under review.  We agree with the Commissioner.  We are not satisfied that Rendyl’s use of the boat amounted to the carrying on an enterprise.  Our reasons follow.

32. Taking into account the statutory definition of the word “enterprise” in s 9-20 of the GST Act, the question for us is whether, in using the boat as it did, Rendyl was “carrying on an activity or series of activities [that are] done in the form of a business”. It is appropriate to approach the resolution of the question, as the parties did, by reference to the authorities dealing with the carrying on of a business.

33.     There is a multitude of cases dealing with the notion of what is a “business”.  In Ferguson v Federal Commissioner of Taxation [1979] FCA 29; (1979) 37 FLR 310 Bowen CJ and Franki J said at [15] (page 314):

There are many elements to be considered.  The nature of the activities, particularly whether they have the purpose of profit-making, may be important.  However, an immediate purpose of profit-making in a particular income year does not appear to be essential.  Certainly it may be held a person is carrying on business notwithstanding his profit is small or even where he is making a loss.  Repetition and regularity of the activities is also important.  However, every business has to begin and even isolated activities may in the circumstances be held to be the commencement of carrying on business.  Again, organization of activities in a business-like manner, the keeping of books, records and the use of system may all serve to indicate that a business is being carried on.  The fact that, concurrently with the activities in question, the taxpayer carries on the practice of a profession or another business, does not preclude a finding that his additional activities constitute the carrying on of a business.  The volume of his operations and the amount of capital employed by him may be significant.  However, if what he is doing is more properly described as the pursuit of a hobby or recreation or an addiction to a sport, he will not be held to be carrying on a business even though his operations are fairly substantial.

34.     Mr Caughlan said that Rendyl went into the venture “to make a profit”.  It is hardly surprising that he should say so; in fact, it would be surprising if he did not.  However, we need to examine that statement to see whether there is any objective support for it.

35.     “To make a profit” is not the same as “to make money”.  It is not enough to expect to be able to generate revenue.  Making a profit entails generating enough revenue to be able to cover expenses, and have something left over.  Mr Caughlan’s expectation to “make a profit” would be well founded, objectively, if his forecasting took into account reasonable estimates of revenue, reasonable estimates of expenditure, and an expectation that, within a reasonable period, the former would exceed the latter.

36.     Unfortunately, he could not locate his initial forecast.  Therefore, although he said it showed him that a profit of $20,000 to $30,000 might be achieved, we do not know what he had predicted in the way of revenue, or what were the predicted amounts and categories of expenditure.  What we do know, is that, in the early days at least, the boat was not able to generate income to its full potential.  It arrived late, and missed the first charter that had been booked; when it did arrive, it broke down.  A large part of the revenue that was generated by the early charters was paid away in the hire fees incurred for the replacement vessels. 

37.     But even ignoring those unexpected additional expenses, was Mr Caughlan’s intention to make a profit reasonably held?  It seems likely that Mr Caughlan had not factored into his forecast any allowance for depreciation, nor any reasonable regular repayment (either with or without interest) of the money that had been borrowed from Shelf Retail, not only for the purchase price but also for the importation costs including some $44,000 in freight charges and $36,000 in customs duty. 

38.     The revenue-generating opportunities were also limited. There were suggestions that the boat might be available for use, outside the marlin season, off Port Stephens or elsewhere off the New South Wales and Queensland coasts, but these trips, if they were ever actually planned, never eventuated.  The use of the boat, therefore, was restricted to two marlin seasons – 2004 and 2005. 

39.     Our general impression is that the boat’s revenue-generating opportunities were thought of more as a means of defraying some of the costs of ownership and operation of the boat than as essential elements of establishing a viable, profit-making business.  The activity was entered into, and then carried on, in a haphazard and unbusinesslike way, as is demonstrated by the following factors:

(a)  Mr Caughlan’s signing of the Brokerage Purchase Agreement which identified him, rather than Rendyl, as the purchaser of the boat;

(b)  The “skipper” of the boat, if he was employed at all, was not employed by Rendyl – Rendyl was not registered for Pay As You Go purposes;

(c)  No loan documentation was produced to support the claim that significant amounts of money were lent to Rendyl by Shelf Retail, and Mr Caughlan was unable to tell us whether interest was payable on the loan;

(d)  Rendyl did not have a Queensland charter fishing licence, even though it is mandatory to have one if you “intend to run fishing trips on a commercial basis in offshore waters”.  (Mr Caughlan had mistakenly believed that there was “no such thing” as a charter fishing licence in Queensland.);

(e)  The boat was not in survey, although this was also mandatory in Queensland;

(f)   There is no apparent connection between the income derived from the fishing trips and the “sales” figures declared on Rendyl’s Business Activity Statements (“BASs”).  Rendyl’s BASs covering the period 1 April 2004 to 31 March 2006 reported “Total Sales” of $123,080, although, according to Mr Hughes’ fourth attempted reconstruction, the actual sales figure for that period is $296,094. 

40.     Further to this last point, the financial report for Rendyl for the year ended 30 June 2005 reported “charter income” of $179,906.  Rendyl’s then accountants noted the following under the heading “Significant Matters”:

Certain assumptions were made due to lack of appropriate records and supporting information in the preparation of the financial statements.  This matter has arisen due to poor record keeping and the former accountant holding a lien over the records of the company when the accounting records were being prepared.  The following assumptions were taken into consideration when preparing the financial report:

-   that income and expenses relate to the company.

-   that the assets and liabilities relate to the company.

-   that all expenses have been incurred in the normal course of the company’s business trading.

41.      Mr Caughlan himself described Rendyl’s record keeping as “atrocious”.  When asked where the charter income had gone, the best he could suggest was that it may have been deposited into the bank account of Shelf Retail.  That may or may not be true; we have no way of knowing, since none of the bank statements of Shelf Retail, and only two pages from Rendyl’s bank statement (one for the month of April 2005 and one for the month of August 2005), were provided to us.  It was not explained how the income might be banked into a Shelf Retail account when the invoices (all of those that we have seen were issued to customers in the USA) invited a direct deposit to Rendyl’s account, which was identified by account number and BSB number on the face of the invoice.  There was also a suggestion that GST on the charter income was accounted for by Shelf Retail, but the BASs for Shelf Retail, which might have confirmed that claim, were not produced.

42.     As to whether the calendar reliably records the use of the boat, we have some doubts.  Mr Caughlan said that it was a document that his personal assistant had put together.  It remains a mystery as to why it records the very first charter, running from 24 September to 3 October 2004 – and this at a time when “Desperado” had not yet arrived in Cairns – when the replacement vessel, “Atlantic Princess”, was hired by Rendyl only from 24 to 30 September.  Most likely, then, the calendar is a combination of bookings made and trips undertaken, but we are not satisfied that the booking was always converted into a trip.  Other records that might have confirmed the accuracy of the calendar (or exposed its inaccuracy) – such as Mr Denham’s log, which as a Master Class V he was bound to keep; or a diary of his movements; or Mr Caughlan’s own personal diary – were not available to us.  Mr Denham, the person who as skipper was closer to the action than anyone else, did not give evidence.  It is also surprising that, while the calendar recorded eight separate charter engagements, invoices in relation to four of those engagements were not produced.

43.      We found some of Mr Caughlan’s evidence unsatisfactory. 

44.     He said that Rendyl had only one boat.  It was originally named “Bounty Hunter”, but it was renamed “Desperado”.  He said that he had previously owned a boat named “Desperado”, from 1996 to 1998 or 1999, but he had owned no boats from that time until 2004.  Nevertheless, he could not explain the tax invoice issued to him on 18 December 2003 and on which he had written “Repairs Desperado Nov. 03 from Bad fuel Atlantic Princess”.  This is not the only tax invoice dealing with supplies made before the boat arrived in Hobart on 3 October 2004.  There is a tax invoice dated 6 September 2004 describing a cash sale for “signwriting name on game boat Desperado” and on which there is a handwritten notation, apparently by the supplier, “This job was completed on 27^th Aug.” 

45.     There is no explanation of the whereabouts of the boat since November 2005, nor any details of its use since that time.  There is correspondence suggesting that some further charters might have been planned for the 2007 marlin season, but no confirmation that they took place.  Of course, it does not follow that the character of activities undertaken after March 2006 will determine whether Rendyl’s boating activities up to that date were done “in the form of a business”.  Nevertheless, evidence of the use of the boat in later periods may support a contention that Rendyl engaged in activities of sufficient “repetition and regularity” (see Ferguson) as to warrant a finding in its favour for the period in question.

46.     What little information we have about the boat after March 2006 includes:

·     the Queensland registration certificate for the boat, for the 12 months to 20 October 2007, which shows “Purpose of use: Private”; and

·     the insurance policy for the boat for the period June 2005 to June 2006, which notes that the boat is “moored @ Burraneer Bay NSW 2230”.  Mr Caughlan denied that the boat is moored near his home, but could not provide a satisfactory answer as to how that notation came to be made by the insurer.

47.     We infer from the fact that Rendyl provided no evidence of its use of the boat since March 2006, that it had no evidence tending to support its contention that it had carried on an enterprise during the relevant period.

Conclusion

48.     In all the circumstances, we are not satisfied that Rendyl’s boating activities from October 2004 to March 2006 amounted to the carrying on of an enterprise.

49.     The objection decisions are therefore affirmed.

I certify that the 49 preceding paragraphs are a true copy of the reasons for the decision herein of Ms G Ettinger, Senior Member and Mr S E Frost, Member

Signed:         .............[sgd]...................................................................
  Associate

Dates of Hearing  3 & 4 February 2009
Date of Decision  18 March 2009

Solicitor for the Applicant  Mr T Pambris, Anthony C Simpson &   Associates 

Counsel for the Respondent                      Ms E Collins
Representative for the Respondent          Ms C Egan, ATO Legal Services