Telstra Corporation Limited v Chief Commissioner of State Revenue
[2004] NSWADT 189
•08/31/2004
Set aside by Appeal:
Set Aside by Appeal 17/6/2005 - Telstra Corporation Limited v Chief Commissioner of State Revenue (RD) [2005] NSWADTAP 28
CITATION: Telstra Corporation Limited v Chief Commissioner of State Revenue [2004] NSWADT 189 DIVISION: Revenue Division PARTIES: APPLICANT
Telstra Corporation Limited
RESPONDENT
Chief Commissioner of State RevenueFILE NUMBER: 046026 HEARING DATES: 28/05/2004 SUBMISSIONS CLOSED: 05/28/2004 DATE OF DECISION:
08/31/2004BEFORE: Verick A - Judicial Member APPLICATION: Duties Act - duty on the hire of goods MATTER FOR DECISION: Principal matter LEGISLATION CITED: Administrative Decisions Tribunal Act 1997
Duties Act 1997
Stamp Duties Act 1920
Telecommunications (Consumer Protection and Service Standards) Act 1999
Telecommunications Act 1997CASES CITED: Bell v Federal Commissioner of Taxation (1953) 87 CLR 548
CIC Insurance Ltd Bankstown Football Club Ltd (1997) 187 CLR 384
Commissioner of Taxation v The Distribution Group Ltd 2003 ATC 4696
Director of Public Prosecutions v United Telecasters Sydney Ltd (1990) 168 CLR 594
Faywin Investments Pty Ltd (1990) 22 FCR 461
FC of T v Murray (1998) 193 CLR 605
Fox v Commissioner for Superannuation (N02) (1999) 88 FCR 416
Jaques v The Federal Commissioner of Taxation (1924) 34 CLR 328
Jetmaster Fireplaces Pty Ltd v FC of T (1989) 89 ATC 4464
Newcastle City Council v GIO General Ltd (1997) 191 CLR 85
Newton v Federal Commissioner of Taxation [1958] AC 450REPRESENTATION: APPLICANT
M Richmond, barrister
RESPONDENT
H R Sorenson, barristerORDERS: The objection decision under review is affirmed.
Introduction and Background
1 The issue in these proceedings is whether the hire of telephone handsets by Telstra Corporation Limited (“Telstra”) to its customers in New South Wales in the period from 1 December to 31 December 2003 (the relevant period) falls within paragraph (f) of s 186(1) of the Duties Act, 1997 (the Duties Act) and, therefore, is excluded from hire of goods duty.
2 Telstra is a public company listed on the Australian Stock Exchange and is a provider of domestic and international telecommunication services. It provides local, STD, IDD and mobile carriage services for the purpose of voice telephony (‘VT Carriage Service’).
3 The Tribunal had before it the documents lodged by the Chief Commissioner of State Revenue (“the Commissioner”) as required under s 58 of the Administrative Decisions Tribunal Act 1997, a statement of agreed facts with a number of attachments including a copy of the “Telstra Public Switched Telephone Service (PSTS) Section of the Standard Form of Agreement”, a statement in writing made by Paul Anthony Vella, National Manager, Voice Platforms, Technology and Deployment Standards, Telstra (who was produced by Telstra as a witness) and various submissions in writing made by the parties.
4 The parties have in their statement of agreed facts provided the following background to these proceedings:
- ‘2.1 On government deregulation of telecommunications services on 1 July 1991, Telstra separated its previous bundled service charges imposed in the monopoly era and replaced these with individual charges including a service or line rental fee and a fee for rental of the handset. From that date Telstra commenced to pay hiring arrangement duty in New South Wales (under the Stamp Duties Act 1920) in respect of the hire of telephone handsets.
2.2 Prior to 1 July 1991, Telstra had a monopoly over the provision and installation of the exchange line and the first telephone handset in the customer’s premises. Under deregulation Telstra lost its monopoly over both the provision of the exchange line and the first telephone handset. The position from 1 July 1991 was as follows:
- (a) The customer was then free to hire or purchase the handset from a third-party supplier.
(b) While Telstra lost its monopoly in respect of the provision of the exchange line on 1 July 1991, effectively Telstra was the only entity for a number of years after that date which connected customers to the exchange line. Telstra owns and operates a dedicated exchange line which is its own property. When a service provider such as Optus Networks Pty Ltd (‘Optus’) seeks to connect a telephone customer to the telecommunications system, Optus can perform the same function as Telstra either by utilising appropriate interconnect arrangements, or by using a hybrid fibre coaxial cable, which is not a dedicated exchange line. However, that cable provides access to the exchange line in order for the service to be connected. Optus commenced providing this service from around 1997.
2.4 On and from 1 July 1998 Telstra has been registered under Part 2 of the Chapter 6 of the Duties Act 1997 (NSW) (the “Act”) and paid the duty charged under that Chapter on the hire of goods by return as a “commercial hire business.”’
5 In respect of this application, the Commissioner issued to Telstra a Notice of Assessment dated 25 July 2004 for the period 1 December 2003 to 31 December 2003. On 24 March 2004 Telstra objected against the said assessment, which the Commissioner disallowed in a letter dated 15 April 2004. On 7 May 2004 Telstra lodged an application to the Tribunal for a review of the objection decision made by the Commissioner.
6 Telstra holds a carrier license under Division 3 of Part 3 of the Telecommunications Act 1997 (the “Telecommunications Act”) and is required under sections 57 and 61 of the Telecommunications Act, to comply with a number of statutory obligations under the Telecommunications Act and the Telecommunications (Consumer Protection and Service Standards) Act 1999 (the “Standards Act”). The statutory obligation relevant for the present matter is the “universal service obligation” imposed by s 12C of the Standards Act. The “universal service obligation”, inter alia, requires Telstra to take reasonable steps to ensure that “standard telephone services” are reasonably accessible to all people in Australia on an equitable basis, wherever they reside or carry on business. In order to achieve this obligation, it is necessary for Telstra to supply standard telephone services to people in Australia on request.
7 The obligation to provide standard telephone services includes the supply of a telephone handset that does not have switching functions but the customer has the option of hiring the equipment from a third party.
8 The terms on which handsets were hired by Telstra to its customers are set out in the following paragraphs of the parties’ statement of agreed facts:
- ‘4.1 At all times during the period 1 July 1998 to 31 December 2003 (the “ Relevant Period ”) Telstra only agreed to hire a telephone handset to a customer who had agreed to receive, or was already receiving, a VT Carriage Service from Telstra.
4.2 During the period from 1 July 1998 to 3 November 2000, the agreement between each customer and Telstra regarding the hire of the handset was not reduced to writing. The agreement was evidenced by the monthly invoice sent by Telstra to the customer for the VT Carriage Service which included a separate charge for “telephone handset rental” of $2.50 per month. A copy of the form of monthly invoice in use in this period, which is representative of all such invoices, is annexed and marked “D”.
4.3 On 3 November 2000 the position changed. From that date the hire of telephone handsets by Telstra to its customers has been governed by Part 5C of the Telstra Public Switched Telephone Service Section of the standard form of agreement (“SFOA”) which, pursuant to s.479 of the Telecommunications Act, sets out the terms and conditions on which Telstra supplies goods and services to its customers. The SFOA came into force on 1 July 1997, but Part 5C was not inserted into it until 3 November 2000.
4.4 Parts 3, 4 and 5 of the Telstra Public Switched telephone Service Section of the SFOA set out the terms and conditions under which Telstra supplied a VT Carriage Service to its customers during the Relevant Period. Parts 3, 4 and 5 came into force on 1 July 1997 but they have been subject to a number of amendments since that date.
4.5 A copy of the Telstra Public Switched Telephone Service Section of the SFOA as in force from 1 December 2003 is annexed and marked “E”.
5 Amount charged by Telstra for the hire of handsets
5.1 During the period from 1 July 1998 to 30 June 2003 Telstra charged $30 per annum (being $2.50 per month) for the hire of telephone handsets. Telstra did not recover from the customer any amount in respect of hire of goods duty paid or payable under the Duties Act 1997 (NSW). The hire of goods duty paid by Telstra was calculated on the total amount of the hiring charges received in each month and was paid away by Telstra as a cost.
5.2 During the period 1 July 1997 to 30 June 2002 the amount charged by Telstra for the hire of telephone handsets was limited to $30 per annum under clause 11(2) of the Declaration.
5.3 Notwithstanding the removal of clause 11(2) of the Declaration with effect from 30 June 2002 (see para 3.7 above), Telstra continued to charge $30 per annum for the hire of telephone handsets until 1 July 2003, when the charge was increased to $36 per annum, being an increase of $0.50 per month. The charge of $36 per annum for the use of the telephone handset applied during the month of December 2003.
6 Relationship between hire of handsets and Telstra’s voice telephony service
6.1 At all times since 17 December 1991:
- (a) Telstra has only hired telephone handsets to a customer to whom a VT Carriage Service was being provided by Telstra;
(b) a customer who initially, in connection with a VT Carriage Service provided by Telstra, hired a telephone handset from Telstra and subsequently ceased that service, was required to inform Telstra of that fact and return the handset;
(c) Telstra has only charged a customer for rental handsets where that customer was one to whom a VT Carriage Service was being provided by Telstra;
(d) telephone handsets which were hired by Telstra to customers did not have a switching function attached and were a basic telephone apparatus built with the capacity only to receive and answer standard telephone calls.
9 Telstra as a holder of a carrier licence has several statutory obligations. They are, so far as relevant for purposes of this application, set out in the Standards Act. The Standards Act establishes a “universal service regime” which essentially ensures that all people in Australia, wherever they reside or carry on business, should have reasonable access, on an equitable basis, to:
- (a) standard telephone services; and
(b) payphones; and
(c) prescribed carriage services; and
(d) digital data services.
10 This matter only concerns the provision of the standard telephone service by Telstra. “Standard telephone service” is defined in s 6 of the Standards Act as follows:
- “(1) A reference in a particular provision of this Act to a standard telephone service is a reference to a carriage service for each of the following purposes:
- (a) the purpose of voice telephony;
(b) if:
- (i) a voice telephony is not practical for a particular end-user with a disability (for example, because the user has a hearing impairment); and
(ii) another form of communication that is equivalent to voice telephony (for example, communication by means of a teletypewriter) would be required to be supplied to the end-user in order to comply with the Disability Discrimination Act 1992;
(c) a purpose declared by the regulations to be designated purpose for the purposes of that provision:
where:
(d) the service passes the connectivity test set out in subsection (2); and
(e) to the extent that the service is for the purpose referred to in paragraph (a) – the service has the characteristics (if any) declared by the regulations to be designated characteristics in relation to that service for the purposes of that provision; and
(f) to the extent that the service is for the purpose referred to in paragraph (b) – the service has the characteristics (if any) declared by the regulations to be designated characteristics in relation to that service for the purposes of that provision; and
(g) to the extent that the service is for a particular purpose referred to in paragraph (c) – the service has the characteristics (if any) declared by the regulations to be the designated characteristics in relation to that service for the purposes of that provision.
(2) A service passes the connectivity test if an end-user supplied with the service for a purpose mentioned in paragraph (1)(a), (b) or (c) is ordinarily able to communicate, by means of the service, with each other end-user who is supplied with the same service for the same purpose, whether or not the end-users are connected to the same telecommunications network.”
11 What is the “universal service obligation” is set out in s 9 of the Standards Act. So far as it is relevant for this application, the universal service obligation is the obligation found in s 9(1)(a) “to ensure that standard telephone services are reasonably accessible to all people in Australia on an equitable basis, wherever they reside or carry on business”. To the extent necessary to achieve this obligation, the universal service obligation includes under s 9(2)(a) “the supply of standard telephone services to people in Australia on request”. Two other provisions of s 9 are also relevant, which are the following:
- “(4) An obligation does not arise under paragraph (2)(a) in relation to particular equipment, goods or services the supply of a standard telephone service if the customer concerned requests not to be supplied with the equipment, goods or services.
(6) To avoid doubt, an obligation arising under paragraph (2)(a) in relation to customer equipment requires the customer concerned to be given the option of hiring the equipment.”
12 Section 9E of the Standards Act goes on to explain what is included in the supply of standard telephone service as follows:
- (1) A reference in this Part to the supply of a standard telephone service includes a reference to the supply of:
(a) if the regulations prescribe customer equipment for the purposes of this paragraph-whichever of the following is applicable:
- (i) that customer equipment;
(ii) if other customer equipment is supplied, instead of the first-mentioned customer equipment, in order to comply with the Disability Discrimination Act 1992-that other customer equipment; and
- (i) a telephone handset that does not have switching functions;
(ii) if other customer equipment is supplied, instead of such a handset, in order to comply with the Disability Discrimination Act 1992-that other customer equipment; and
(d) services of a kind specified in the regulations;
where the equipment, goods or services, as the case may be, are for use in connection with the standard telephone service.
(2) A reference in this Part to the supply of a standard telephone service includes a reference to the supply, to a person with a disability, of:
(a) customer equipment of a kind specified in the regulations; and
(b) other goods of a kind specified in the regulations; and
(c) services of a kind specified in the regulations;
where the equipment, goods or services, as the case may be, are for use in connection with the standard telephone service.”
13 In addition to the statutory obligations, Telstra enters into individual agreements with customers in providing the basic telephone service. The agreement is the Telstra Public Switched Telephone Service (PSTS) Section of the Standard Form of Agreement (“SFOA”) which sets out the terms and conditions under which Telstra supplies goods and services to its customers. Clause 3.2 defines the basic telephone service which comprises (a) connection to Telstra PSTS network, (b) a telephone number, (c) a free listing of the telephone number in a telephone directory, (d) access to certain call types, (e) a 24 hour fault reporting service and (f) maintenance and repair of equipment and facilities used to provide connection to Telstra’s PSTS network. Under clause 3.8, maintenance of the service is provided to customers by Telstra “both on Telstra’s side and the Customer’s side of the network boundary point”. The connection if requested by a customer is in terms of clause 4.1 is “for an in place connection” Clause 4 also makes provision for reconnection and temporary disconnection of the service including the charges that are to be paid for both connections and disconnections. Clause 5 provides for the levy of annual charges for the basic telephone service. In clause 5A.1 the agreement deals with rental equipment and provides that Telstra rents for use with Telstra’s Standard Telephone Service: (i) Standard Rental Telephone; and (ii) Disability Rental Equipment in accordance with Telstra’s Disability Equipment Program. Besides rental charges, Telstra under clause 5A.6 also charges for delivery and installation of any customer required equipment. Telstra retains pursuant to clause 5A.8 ownership of rental equipment. The agreement also provides for rental equipment replacement service in clause 5A.12 and places an obligation on the customer to keep the equipment in good working order; failure to do so allows Telstra to cancel the rental equipment arrangement. Clause 5A.20 gives the customer a right to cancel the rental arrangements for any rental equipment at any time.
14 Mr Vella’s statement provides some useful technical knowledge as to the role of the handset in the provision by Telstra of the carriage service for voice telephony. In particular he provided the following information:
- “16 Each time a customer accesses various call types, Telstra’s Exchange must perform certain activities. For example, every time a customer makes a call, the exchange provides a dial tone. The Exchange does this by sending electrical signals to the customer’s handset. The speaker in the handset translates the electrical signals to sound and a dial tone is heard by the customer. When the customer dials the required telephone number, the telephone handset translates the tones associated with each dialled number to electrical signals and sends these signals to the Exchange. The Exchange then analyses the received electrical signals and determines the number being dialled. If the number dialled is valid and within the customer’s permitted call types, the Exchange then sends electrical signals within the PSTS network and attempts to establish a connection. If the connection is successful, that is, the telephone associated with the number dialled is answered, Telstra then connects the customer through allowing electrical signals to pass between the telephone handsets. If the number dialled is not within the customer’s permitted call types the Exchange will not connect the call through. In this case a tone or message is transmitted indicating that the number dialled is not available.”
15 Further in paragraph 22 of his statement, Mr Vella concludes as follows:
- “22 If the customer wishes to hire Telstra’s standard handset, Telstra will provide a handset together with the cord necessary to connect the handset into the customer’s telephone socket. Where the customer hires the telephone handset from Telstra, Telstra provides everything necessary for the customer to use the VT Carriage Service. Without the provision of the handset, the VT Carriage Service could not be assessed because to enable voice telephony to occur from end to end, the customer at each end must utilise a handset for the purposes of sending and receiving voice telephony.”
16 The Duties Act imposes under s 180 a duty on the hire of goods. The term “goods” is defined in s 182 to include “all chattels personal and fixtures severable from realty, but does not include money, livestock or things in action”. Both parties agree that handsets hired by Telstra to their customers are “goods” within this definition.
17 What is “hire of goods” is defined in s 183(1) to mean:
- “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.”
18 A number of transactions are excluded under s 186 from the definition of “hire of goods”. So far as it is relevant for the present matter, a hire of goods does not include under s 186(1)(f) the following:
- “an arrangement for the use of goods the provision of which is incidental and ancillary to the provision of a service if the provision of the goods is solely to enable the contractual provision of the service”.
19 Under s 194 a person who hires out goods as a business is called a “commercial hire business”. For purposes of this section, it is immaterial whether or not the hiring out of the goods is the principal business or is ancillary to some other form of business, and whether or not any such principal or ancillary business is carried on wholly or partly outside New South Wales. A commercial hire business must be registered for purposes of the Duties Act if, in any month, the total amount of hiring charges received in the month exceed $14,000. A registered commercial hiring business must pursuant to s 199 lodge on or before the twenty-first day of each month a return and pay the duty on a monthly basis.
20 Telstra has been registered as a commercial hire business since 1 July 1998 and has since that date lodged the returns required and paid the duty on the hire of handsets on a monthly basis.
Submissions
21 Both parties agree that the hire of telephone handsets by Telstra to its customers constitute arrangements for the use of goods by the customers. The arrangements would be dutiable transactions unless s 186(1) (f) applies.
22 The exclusion in s 186(1)(f) only applies if the following two requirements are satisfied:
- (a) the provision of the handset is incidental and ancillary to the provision of a service; and
(b) the provision of the handset is solely to enable the contractual provision of the service.
23 The applicant’s submissions, in relation to the first requirement are as follows:
- ‘12. The first meaning given to the word “incidental” in the Macquarie Dictionary (3rd ed.) is:
- “1. happening or likely to happen in fortuitous or subordinate conjunction with something else.”
14. The word ‘ancillary” is defined in the Macquarie Dictionary (3rd ed.) to mean:
- “1. accessory; auxiliary …
2. an accessory, subsidiary or helping thing or person.”
(a) The handset is provided in conjunction with the VT carriage service,
(b) The provision of the handset is subordinate to the provision of the VT carriage service because the handset merely facilitates the customer to obtain the service, and the customer could use a different kind of handset to obtain the service if he wished.
(c) The provision of the handset is ancillary to the provision of the VT carriage service because:
- (i) the handset (or another kind of handset) is necessary to obtain the benefit of the service and the handset is used (and is only capable of being used) to facilitate the provision of the service: Agreed Facts para.6.1 (d) and Statement of Mr P. Vella dated 27 May 2004 at [22];
(ii) Telstra only hires a handset to a customer to whom it provides a VT carriage service and, in the event that it ceases to provide a VT carriage service to the customer, the customer is required to return the handset to Telstra: Agreed Facts, paras. 6.1(a) – (c);
(iii) The income earned by Telstra from the hire of handsets represents only a small proportion of Telstra’s total revenue (including its income from the provision of the VT carriage service): Agreed Facts, paras 6.2 – 6.5.’
24 The Commissioner accepts that the ‘provision of VT Carriage Services comprise the relevant “service” provided by the Applicant; the hiring of handsets to VT Carriage Service customers is another service’ and accordingly the Commissioner ‘does not dispute that on any ordinary meaning of “incidental” and “ancillary”, the providing of handsets is, in relation to the provision of “the service” (namely, VT Carriage Services), “incidental and ancillary to” the provision of that service’.
25 The applicant in relation to the second requirement submits as follows:
- ’16. The provision of the goods must be solely to enable the contractual provision of the service. The expression “contractual provision of the service”, read literally, requires that the relevant service be provided pursuant to a contract. There is nothing in the context, or in the relevant extrinsic materials, to indicate that any other meaning was intended. Clearly, the VT carriage service is provided pursuant to a contract with the customer.
17. The word “enable” is defined in the Macquarie Dictionary (3rd ed.) to mean:
- “1. to make able; give power, means, or ability to; make competent; authorise …
2. to make possible or easy.”
- “1. as the only one or ones …
2. exclusively or only …
3. wholly; merely”
(a) The handset is provided to enable the contractual provision of the service because:
- (i) the service cannot be accessed by the customer without the aid of a handset (so that the handset makes able or possible, Telstra’s provision of the service);
(ii) the handset is provided by Telstra to the customer pursuant to Telstra’s statutory obligation referred to above to provide the services and, since 3 November 2000, pursuant to the terms of the SFOA. (see Agreed Facts, paras 4.3 – 4.5.)
26 In his objection decision, the Commissioner had taken the view that the exclusion under s 186(1)(f) ‘is only available where the goods must be supplied to meet the contractual obligations for the supply of the service or line to the customer’s premises’ and that in ‘the present case, it is not mandatory that the telephone handsets be provided to enable use of the telecommunications service’. The applicant submits that this ‘ground is not sustainable for the following reasons:
- (a) There is nothing in s. 186(1)(f) to indicate that the goods must be supplied to “meet” the contractual obligations for the supply of the service or that the provision of the goods is “mandatory”. The Commissioner’s contention involves reading into s. 186(1)(f) words which are not there.
(b) If the Commissioner’s contention is to be sustained, it must find support in the second requirement. However, the second requirement simply requires that the goods are provided solely to enable the contractual provision of the service. The word “enable” indicates that the focus is on the function performed by the goods in relation to the provision of the service, not on whether there is some mandatory requirement that the goods be provided. The second requirement is satisfied for the reasons given in para 19 above.’
27 The Commissioner in his written submissions argues that the second requirement is not satisfied by the applicant for the following reasons:
- ‘9. To meet the “solely” requirement the provision of the handset must be “ solely to enable the contractual provision of the service” (emphasis added), meaning: “solely to enable the contractual provision of the service [ by the Applicant ]”. The handset is not a good for the contractual provision of the service but rather a good for the receipt of the service: cf Commissioner of Taxation v The Distribution Group Ltd 2003 ATC 4691 at 4696 para 24-25.
10. The contractual provision of the service (namely, the VT Carriage Services) is met by the Applicant once a working “phone socket” (into which the handset may be “plugged”) is fixed in place at the customer’s nominated site. The customer is then free to use the service via that “phone socket” by connecting to it any approved handset he chooses. The supply of a handset is not solely to enable the provision by the Applicant of the contractual service (namely, the VT Carriage Services) – customers may and do use VT Carriage Services without Telstra-supplied handsets.’
28 The Commissioner also relies on two further arguments. Firstly, the Commissioner takes the view that, in considering the application of s 186(1)(f) to the facts of this matter, the statutory provisions of the law that govern Telstra’s operations are not in issue and that the Tribunal needs only to consider the terms of the SFOA. Secondly, the Commissioner takes the view that when the terms of the SFOA are examined in some detail, it is evident that there are two sets of arrangements between Telstra and the customer – one relates to the service and the other relates to the rental of the handset. The Commissioner accordingly submits that there is no “contractual” requirement that, in the provision of the service by Telstra, it is necessary that a handset be made available to a customer.
29 The applicant has in reply to the Commissioner’s submissions made further submissions. In particular, the applicant submits that the Commissioner’s suggestion in para 10 of his outline that ‘the contractual provision of the VT carriage service is “met” by the installation of a phone socket is simply wrong’ because the ‘service which Telstra is contractually obliged to provide is a continuous service which includes, relevantly, giving the customer the ability to make and receive telephone calls of the relevant “call types”’ and that this ‘service requires the use of a handset in order both for its provision and its enjoyment’.
30 Further, the applicant submits that the ‘decision in The Distribution Group case is distinguishable from, and not relevant to, the present case, for the following reasons:
- (a) The issue in The Distribution Group case was whether it could be said that goods (LAN cable) supplied by the customer were used in the provision of telecommunications services by the supplier of those services. Here the relevant goods (telephone handsets) are provided by the supplier of the service, not the customer.
(b) The issue here is not whether the relevant goods (telephone handsets) are used in the provision of the relevant service (i.e. the VT carriage service) by Telstra, but whether they are provided to enable Telstra to provide the VT carriage service.
c) The LAN cable is not essential to the provision of the service in the way that a handset is essential – as the Full Court noted at [25], the LAN cable is provided by the recipient [not the supplier] of the telecommunications services to enable the recipient of those services to enjoy them in a manner adapted to its own requirements. In contrast, a telephone handset is essential to the provision (and, in consequence, the receipt) of the VT carriage service. It is for that very reason that Telstra has a statutory obligation to supply it.
d) There was no discussion by Goldberg J, or the Full Court, of the nature of the “telecommunications services” being provided by Telstra, as that issue did not arise. That is the key issue in the present case.’
31 The issue for the Tribunal to determine is whether handsets supplied by Telstra under rental arrangements are excluded from hire duty under s 186(1)(f). Sub-paragraph (f) of s 186 excludes from the definition of hire of goods “an arrangement for the use of goods the provisions of which is incidental and ancillary to the provision of a service if the provision of the goods is solely to enable the contractual provision of the service”.
32 The exemption found in s 186(1)(f) applies to an “arrangement” subject to the other requirements stated in the provision. The term “arrangement” is not defined in the Duties Act but has been judicially considered in the context of income tax law. In Jaques v The Federal Commissioner of Taxation (1924) 34 CLR 328 at 359, Isaacs J in the High Court stated that an “arrangement” “is in the nature of a bargain but may not legally or formally amount to a contract or an agreement”. In Bell v Federal Commissioner of Taxation (1953) 87 CLR 548 the High Court described the term to “embrace all kinds of concerted action by which persons may arrange their affairs for a particular purpose or so as to produce a particular effect”. It was more simply described by the Privy Council in Newton v Federal Commissioner of Taxation [1958] AC 450 by Lord Denning at 465 as follows:
- “Their Lordships are of opinion that the word ‘arrangement’ is apt to describe something less than a binding contract or agreement, something in the nature of an understanding between two or more persons – a plan arranged between them which may not be enforceable at law.”
33 It is common ground that, in order for the exemption found in sub-paragraph (f) of s 186(1) to apply, two requirements need to be satisfied. The first is that the provision of the good, the handset, must be incidental and ancillary to the provision of the basic telephone service. Secondly, for the exemption to apply, the provision of the handset must be solely to enable the contractual provision of the basic telephone service. The parties are in agreement that the first requirement is satisfied in the present matter. In these circumstances, the Tribunal needs to only consider the second requirement – whether the provision of the handset is solely to enable the contractual provision of the basic telephone service.
34 In relation to the second issue, the applicant submits that the relevant words in s 186(1)(f) do not require that the provision of the goods must be part of the service; it simply says that the provision of the goods must be to enable the contractual provision of the service. The Commissioner on the other hand, submits that the question that is required to be answered to determine if s 186(1)(f) applies is whether the handset is a good for the contractual provision of the service.
35 Subparagraph 186(1)(f) is a relieving provision and must be construed beneficially in order to promote the purpose of achieving that relief and not negating that relief: FC of T v Murray (1998) 193 CLR 605 at 632; Jetmaster Fireplaces Pty Ltd v FC of T (1989) 89 ATC 4464 at 4468 and Faywin Investments Pty Ltd (1990) 22 FCR 461 at 472-473.
36 The modern approach to statutory interpretations is to first deal with the context and not merely at some later stage when ambiguity in the interpretation of the relevant provision may be said to arise. This direction was given by the High Court in CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384 where the majority of the High Court, Brennan CJ, Dawson, Toohey and Gummow JJ, said at 408:
- “It is well settled that at common law … the court may have regard to reports of law reform bodies to ascertain the mischief which a statute is intended to cure. Moreover, the modern approach to statutory interpretation (a) insists that the context be considered in the first instance, not merely at some later stage when the ambiguity might be thought to arise, and (b) uses ‘context’ in its widest sense to include such things as the existing state of the law and the mischief which, by legitimate, means such as those just mentioned, one may discern the statute was intended to remedy.”
37 I should add that it would greatly assist courts and tribunals if lawmakers would, in the case of any law that cannot be drafted in simple language, indicate at least in clear language the purpose of the law.
38 The Duties Act was introduced to replace the Stamp Duties Act 1920 (NSW). There was no provision corresponding to s 186(1)(f) in the 1920 Stamp Duties Act. When the Duties Act was introduced, the Minister in the Second Reading Speech to the Bill explained the purpose of including s 186(1)(f) as follows:
- “The bill also simplifies the duty imposed on the hire of goods in order to reduce the potential for double duty. Duty will be payable only if goods are used solely or predominantly in New South Wales. The bill also expressly excludes from liability arrangements which are primarily for the provision of services. These changes are a direct result of consultation with the finance industry.”
39 A fairly “skimpy” explanatory note accompanied the Duties Bill 1997. In relation to Chapter 6 of the Duties Act the note observed that the duty was “on the hire of goods” which term is defined “to include all chattels personal and fixtures severable from realty”. It also noted that there “are two kinds of hire, namely, an equipment financing arrangement and an ordinary hire of goods”. The parties did not produce any other extrinsic material to further explain or expand the policy intent of s 186(1)(f).
40 The words used in s 186(1)(f) are in my opinion not used as technical terms and should be given their plain English meanings. I will deal only with the part of that paragraph which I need to consider in determining this matter - “if the provision of the goods is solely to enable the contractual provision of the service”. In construing these words, some assistance is found in the decisions of the Federal Court (Goldberg J) and the Full Federal Court (French, Sackville and Hely JJ) in Distribution Group Limited v FC of T 2003 ATC 4295 and 2003 ATC 4691.
41 The issue in the Distribution Group case was whether a LAN cable was excluded from exemption item 43 of Schedule 1 to the Sales Tax (Exemptions & Classifications) Act 1992 (Commonwealth) by reason of paragraph (4) of item 43, which did not exclude “goods of a kind ordinarily used in the provision of telecommunications or audio visual services”. It was agreed by the parties that “the LAN cable constituted electrical materials of a kind ordinarily used as part of fixed electrical installations in consumers’ premises” which provided an electrical connection between items of data equipment and a central hub and enabled the conveying of electricity between items of equipment. It was also common ground that LAN cable was not used in any part of the network of the providers of telecommunications services, such as Telstra or Optus. The question before the court was whether an entity which set up, maintained or used the LAN cable in a building could be said to be using the LAN cable to provide telecommunications services. In the first instance Goldberg J agreed that the exclusion did not apply and made the following observations:
- ‘32. The words used in Item 43(4) have plain English meanings and are not technical terms. The word “provision”, which is defined in the Macquarie Dictionary 3rd ed (1997) as meaning, inter alia , “the providing or supplying of something, as of food or other necessities” contains within it the notion that some person or entity is making the provision of, or is providing, the goods or services. The use of the word “services” supports this construction, namely that there is to be found within the terms used the fact that some person or entity is providing or, put more loosely, making available, the goods or services. As noted earlier, it was common ground that LAN cable is not used within the networks of Telecommunications providers such as Telstra or Optus.
33. However, can it be said that the person or entity which sets up, maintains or uses the LAN network in a building, which is connected to a telecommunications network provider, is providing telecommunications services? In my opinion, the answer is in the negative. That person or entity is not providing telecommunications services itself, rather it is connecting into a telecommunications network whereby the network or operator provides the telecommunications services to the proprietor or operator of the LAN network in the relevant building. I do not accept that the expression “the provision of telecommunications … services” applies to the entire process of communication or connection between the initial provider, and the ultimate consumer using a computer or part of a LAN network. That “provision” ends at the point at which the delivery system of the provider of the services terminates, namely at the network interface. Although the telecommunication services may be reticulated along and through the LAN network, it does not follow that the proprietor or operator of the LAN network is providing the telecommunications services which have been delivered by the network provider to the network boundary point.
34. Put shortly, using the LAN cable to link computers for the purposes of transmitting information, albeit information provided initially by means of an entity or organization which provides telecommunications services, is not providing telecommunications services itself. The proprietor or operator of the LAN network may be providing a means of connection between the network provider of the telecommunications services and the users of the LAN network, but the proprietor or operator is not, by means of the LAN network providing telecommunications services itself. Rather it acts as a conduit for the provision of those services by the network provider such as Telstra or Optus. As the applicant submitted, an organization using LAN cable to link its computers does not provide telecommunications audio visual services to itself or to its staff or to anyone else.
35. The use of the word “in”’ in the expression “in the provision of telecommunications … services”, shows that the expression contemplates that the telecommunications services are being provided by some entity which “provides” the services or makes them available. The expression contemplates that the goods are ordinarily used by that entity which is a conduit, such as the proprietor or operator of the LAN network, for the passage of the services from the provider of the services to their ultimate consumer.’
42 The Full Federal Court dismissed the appeal lodged by the Federal Commissioner of Taxation against the above decision and in agreeing with the observations made by Goldberg J, said at page 4695:
- ‘22. It is inherent in the nature of a telecommunications service that it has a supply side and a demand side. Suppliers, such as Telstra or Optus, supply or provide the telecommunications service to consumers who receive the service. Goods may be used in connection with the provision of the service, as well as in connection with its receipt. It does not follow that goods which are used in connection with the receipt of a service are necessarily used “ in the provision of” that service. Whether goods are used in the provision of a service, as distinct from in connection with its receipt, may depend upon a number of factors, including whether there is a point prior to the receipt of the service by an end user at which the role of the service provider comes to an end.
23. In the present case the primary judge found, as a matter of fact, that the provision of telecommunications services by the suppliers of those services ends at the point at which the delivery system of the providers of the services terminates, namely at the network boundary point or public network interface. The service provider fulfils its responsibilities by reaching that point. There was no challenge to that finding.
24. The question then, is whether the notion of “provision of telecommunications services”, in the particular context under consideration, is confined to what the provider does in order to provide those services, or whether it extends so as to include things done by the recipient of those services to enable their enjoyment.
25. This is a matter on which opinions might legitimately differ. However, the better view is that the notion of provision of telecommunications services is confined to what the supplier of those services does in order to provide them. It may be necessary for the recipient of telecommunications services to supply a piece of equipment, be it a plug, cable or some other device, to enable enjoyment of the telecommunications services which the supplier has provided. But goods provided by a recipient of telecommunications services to enable the use of those services in a manner adapted to the consumers’ own requirements are not appropriately characterised as goods used in the provision of those services. The LAN cables are goods of that type.’
43 The applicant sought to distinguish the Distribution Group case on a number of grounds. The issue, the applicant submits, in the Distribution Group case was whether it could be said that the LAN cable supplied by the customer were used in the provision of telecommunications services by the supplier but, in the present matter, the handsets are provided by the supplier of the service and not the customer. I think the applicant’s approach here is very simplistic and raises no real distinction. In any case, there was the option with all customers of Telstra under the contractual arrangements to use a handset provided by a third party rather than the Telstra provided handset.
44 The applicant also sought to distinguish the case on the ground that in the present matter the handsets are provided by Telstra to enable Telstra to provide the telecommunications services. In relation to this submission it is useful to look at the statement provided by Mr Vella on behalf of the applicant. In paragraph 4 he explains what the carriage service for voice telephony (“VT Carriage Service”) involves as follows:
- “The VT Carriage Service is called the Public Switched Telephone Service (“PSTS”) in the Standard Form of Agreement (“SFOA”) formulated by Telstra for the purposes of section 479 of the Telecommunications Act 1997. The PSTS includes:
(a) connection to Telstra’s PSTS network;
(b) a telephone number;
(c) access to certain call types; and
(d) maintenance and repair of equipment and facilities used to provide Telstra’s PSTS network.”
45 Mr Vella’s statement as to what constitutes the VT Carriage Service is a summary of what appears in clause 3.2 of the SFOA subject to one important qualification. Clause 3.2 commences with these fairly critical words: “The Basic Telephone Service comprises”. There is no mention in clause 3.2 that the service includes the supply of a handset as part of that service. It is also important to observe that clause 4, which deals with charges for connection of a basic telephone service, and clause 5 which sets out what annual charges are payable for the basic telephone service, do not mention the supply of any handsets or any rental charges for their use. The rental of handsets is governed by what can be described as a fairly independent part of the SFOA. Clause 5A deals with the provision of rental equipment. Clause 5A.1 reads as follows:
- “5A.1 Telstra rents:
(a) for use with Telstra’s Standard Telephone Service:
- (i) Standard Rental Telephones; and
(ii) Disability Rental Equipment in accordance with Telstra’s Disability Equipment Program and
(c) EasyChat Cordless Telephones (but only to customers who currently rent an EasyChat Cordless Telephone as at 1 July 2003. Telstra will not enter into any new rental agreements for EasyChat Cordless Telephones).”
46 I think clause 5A, when read with clause 3 of the SFOA clearly distinguishes the rental of the handsets from what is actually supplied by Telstra under SFOA as the “basic telephone service”. Telstra, in clause 5A of the SFOA, recognises that the distinction exists when the clause speaks of Telstra renting the handset “for use with Telstra’s Standard Telephone Service” (emphasis added). The use of the word “with” would suggest that the basic telephone service is regarded under the SFOA to be a complete arrangement independent of the arrangement for the rental of handsets.
47 Mr Vella in his statement also makes the same point in paragraph 22 of his statement that “without the provision of the handset, the VT Carriage Service could not be accessed”. That statement is correct as the provision or supply of the service is quite independent from any access to it.
48 The applicant further sought to distinguish the facts of this matter from those considered in the Distribution Group case on two other grounds. The applicant submits that the “LAN cable is not essential to the provision of the service in the way that a handset is essential” and that in the Distribution Group case there “was no discussion by Goldberg J, or the Full Court, of the nature of the ‘telecommunications services’ being provided by Telstra, as the issue did not arise” but that “is the key issue in the present matter”.
49 In the Distribution Group case both Goldberg J and the Full Federal Court ruled that the LAN cable was not used to provide telecommunications services. In reaching that conclusion, both Goldberg J and the Full Court made important observations as to the distinction between the “providing” of a service and the “receiving” of a service. It is that distinction that I think is important in the resolution of the current matter. There was no discussion in both instances about the nature of the “telecommunications services” being provided by Telstra. That was simply not an issue in the case. But lack of any such discussion does not in my opinion distinguish the case from the present matter. In the present matter, the relevant service, “the basic telephone service” is defined in the SFOA and no discussion is necessary to ascertain the technical meaning of that service.
50 The Commissioner strongly argued before the Tribunal that, in considering whether the provisions of the exemption found in s 186(1)(f) of the Duties Act applied in this case, it was only necessary to look at the contractual obligations found in the SFOA and not the statutory obligations placed on Telstra by law, in particular the Standards Act. This submission was, of course, made in the context of the words “if the provision of the goods is solely to enable the contractual provision of the service” found in s 186(1)(f).
51 The Commissioner also submitted that under the contractual arrangements, there are two quite independent arrangements: the basic telephone service arrangement, which is the service to the network boundary point and a line rental fee is paid by the customer for that service and a rental equipment arrangement, which includes the rental of the handset. To support this submission, it was pointed out to the Tribunal that clause 5A.20 of the SFOA, which allows the cancellation of the rental arrangement of any rental equipment at any time, did not contain any provision in the clause to cancel the basic telephone service when cancelling a rental equipment arrangement. The rental equipment arrangements, in the Commissioner’s submission, simply had nothing to do with the contractual arrangements to supply the basic telephone service.
52 As I understand the statutory scheme for the provision of standard telephone service, the licensee is required to offer separate parts of the service. The line link is one part and the other part is the handset. Telstra is obliged to supply both parts under the law but the customer is given the choice in respect of the handset part of the service. That statutory position is found in s 9E of the Standards Act. The section speaks of the supply of a standard telephone service to include the supply of either a telephone handset that does not have switching functions or, in the case of a customer entitled to under the Disability Discrimination Act 1992 (for example, because the user has a hearing impairment), to some other suitable equipment to receive and make calls. But s 9(4) of the Standards Act makes it clear that an obligation to provide equipment to a customer as part of a standard telephone service does not arise if the customer concerned requests not to be supplied with the equipment, goods or services.
53 The statutory scheme is, in my opinion, not reflected in the same manner in the SFOA. Under the SFOA the customer enters into an independent arrangement in relation to the standard telephone service. In addition, a customer who chooses to use a Telstra handset or any other equipment with the service, which include the rental of Calling Number Display Rental Telephones and EasyChat Cordless Telephones, enters into a separate rental equipment arrangement. An agreement without a handset from Telstra would merely be the provision of the line link to the customer’s boundary but with the ability to make such calls as agreed between Telstra and the customer. Understanding the relevant statutory provisions, which place obligations on Telstra to provide certain services, is useful background, but I agree with the Commissioner that beyond that role, the statutory provisions do not determine whether the exemption found in s 186(1)(f) applies in any particular case. The essential material to consider against the provisions of s 186(1)(f) is the terms of the SFOA in this matter.
54 I should add that the SFOA reflects the government’s deregulation of telecommunications services. Telstra, as the agreed facts indicate, “separated its previous bundled service charges imposed on the monopoly era and replaced these with individual charges including a service or line rental fee and a fee for rental of the handset.
55 I think the question that needs to be asked to deal with the part of s 186(1)(f) which is in dispute can be best formulated as follows: Is the supply (by Telstra) of the handset exclusively to make possible the contractual supply (by Telstra) of the basic telephone service? In formulating this question I have relied on the definition of “provision” suggested by Goldberg J in the Distribution Group case and the dictionary definitions of the words “enable” and “solely” which were provided by the applicant in its written submission.
56 The question as formulated can only be answered in the negative in the present matter. As submitted by the Commissioner, the handset is not a good for the contractual provision of the service but rather a good for the receipt of the service. The law requires the question so formulated to be answered in the context of the relevant contract and not on any technical basis. I do not think it is necessary to consider the technical use of a handset. All that the provision requires is to determine if the handset enables the contractual supply by Telstra of the service.
57 The use of term “provision” to mean “supply” support the need to identify by whom the supply is being made. There is no condition or term in the SFOA that states that the contractual supply of the service would only be made if the customer rented a Telstra issued handset. The real outcome of deregulation is that customers have a choice as to the kind of handset they would like to use to access the service. That does not affect the supply of the service.
58 In the Distribution Group case, the Full Federal Court did consider the question whether the notion of “provision of telecommunications services” includes things done by the recipient of those services to enable their enjoyment. Although the Full Court recognised that the answer to this question could legitimately differ, the better view was that the notion is confined to what the supplier of those services does in order to provide the service and that goods provided by the recipient to enable the use of those services in a manner adapted to the consumers’ own requirements are not goods used in the provision of those services. Although Telstra provides the handset, it is not supplied as part of the basic telephone service under the SFOA. The handset is used to enable the customers to the enjoyment not the supply of the basic telephone service. The customer also has the choice of obtaining the handset from a third party.
59 The applicant’s submission that the word “enable” found in s 186(1)(f) “indicates that the focus is on the function performed by the goods in relation to the provision of the service” requires the deletion of the words “ contractual provision” and substituted by some other words or word for example, the word “enjoyment”. Clause 5A.1 of the SFOA provides for the rental of various kinds of telephones that can be used with Telstra’s Standard Telephone Service. As the Full Federal Court pointed out in the Distribution Group case, goods to enable the use of the telecommunications services, in a manner adapted to the consumer’s own requirements are not “appropriately characterised as goods used in the provision of those services”. In the present matter, the language of the relevant provision is even clearer in making it necessary that the good should be supplied to make possible the contractual supply of the service. It would exclude any good used to merely access the service.
60 The difficulty that has arisen in relation to the interpretation of s 186(1)(f) may to some extent be due to the difficulty in ascertaining the real purpose of the provision. It was inserted to avoid any double duty, to exclude arrangements, which are primarily for the provision of services as distinct from hire of goods, and essentially to overcome some difficulty the finance industry was going to experience in its absence. The facts relating to the rental of handsets by Telstra are fairly straightforward and none of the concerns, which the provision was intended to address, arise here. The rental of handsets by Tesltra is clearly a rental of goods independent of any basic telephone service that it supplies to its customers. Because the handsets are not part of that service, they are available from Telstra at the option of the customer or independently from any other dealer with the customer not paying any rental charge to Telstra. The charge for the basic telephone service is fixed without regard to the rental charge for a handset. There is no provision in the SFOA, which would suggest the contrary, that the handset is supplied to make possible the contractual supply by Telstra of the basic telephone service. The handset is rented by Telstra under the SFOA “for use with Telstra’s Standard Telephone Service” and not as part of the service.
61 In the circumstances the objection decision under review is affirmed.
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