Telstra Corporation Limited v Chief Commissioner of State Revenue (No 2) (Rd)

[2006] NSWADTAP 8

Appeal Panel - Internal

CITATION:	Telstra Corporation Limited v Chief Commissioner of State Revenue (No 2) (RD) [2006] NSWADTAP 8
PARTIES:	APPELLANT Telstra Corporation Limited RESPONDENT Chief Commissioner of State Revenue
FILE NUMBER:	049041
HEARING DATES:	14/09/2005
SUBMISSIONS CLOSED:	09/14/2005
DATE OF DECISION:	03/07/2006
BEFORE:	O'Connor K - DCJ (President) at 1; Seve J - Judicial Member at 55; Bennett C - Non Judicial Member at 86
CATCHWORDS:	Duties Act - duty on the hire of goods
MATTER FOR DECISION:	Merits
FILE NUMBER UNDER APPEAL:	046026
DATE OF DECISION UNDER APPEAL:	08/31/2004
LEGISLATION CITED:	Duties Act 1997 Stamp Duties Act 1920 Taxation Administration Act 1996 Telecommunications (Consumer Protection and Service Standards) Act 1999 (Cth) Telecommunications Act 1997
CASES CITED:	Telstra Corporation Limited v Chief Commissioner of State Revenue (RD) [2005] NSWADTAP 28 Commissioner of Taxation v The Distribution Group Limited [2003] FCAFC 182; [2003] ATC 4691 Australian Fencing Hire v Chief Commissioner of State Revenue [2005] NSWSC 1286 Esso Australia Resources Limited v The Commissioner of Taxation [1999] HCA 67
REPRESENTATION:	APPELLANT M Richmond of counsel instructed by Mallesons Stephen Jacques, solicitors RESPONDENT H Sorensen of counsel instructed by Crown Solicitor's Office
ORDERS:	1. Appeal allowed; 2. Decision under review set aside

1 PRESIDENT: The appellant, Telstra, supplies telephone handsets under a hire arrangement to some of its telephone customers. On and from 1 July 1998 it has been registered under Part 2 of Chapter 6 of the Duties Act 1997 (the Duties Act) and paid the duty charged under that Chapter on this hire arrangement by return as a ‘commercial hire business’. Previously, as from 1 July 1991 it had paid hiring arrangement duty under the Stamp Duties Act 1920.

2 It has objected to the imposition of duty under the Duties Act on the basis that the hire arrangement satisfies the terms of an exclusion from duty found in that Act. The Commissioner has disallowed the objection. Telstra applied for review by the Tribunal. The Tribunal dismissed its application. Telstra appealed to this Appeal Panel. In an earlier decision, we allowed the appeal on a point of law, and gave leave to extend the appeal to the merits: Telstra Corporation Limited v Chief Commissioner of State Revenue (RD) [2005] NSWADTAP 28 (Telstra No 1).

3 A ‘hire of goods’ is defined by s 183(1) of the Duties Act as ‘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’. A hire of goods can be an ‘equipment financing arrangement’ or ‘an ordinary (that is, any other) hire of goods’: s 186(2). The rates of duty are different for the two kinds of hire. This case relates to an ordinary hire of goods.

4 The dispute relates to the interpretation and application to the circumstances of the exclusion found at s 186(1)(f), i.e.:

‘(1) A hire of goods does not include any of the following: …

(f) 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.’

5 The parties agree that the ‘service’ the subject of this case is the provision of access, via a connection point, to the telecommunications system and the operation of that system. In the case Telstra described this system as the ‘voice telephony carriage service’ (the VT Carriage Service).

6 The unusual feature of this hire of goods arrangement, as compared to the usual commercial setting, is that Telstra regards itself as obliged by law to supply a basic handset to those customers of the VT Carriage Service who ask for a basic handset. Telstra considers that it is not a matter of choice for Telstra whether to trade in these goods, it must do so to meet a legislative requirement, commonly described in this case as the ‘universal service obligation’. Customers can go elsewhere and buy a compatible handset in the general market; thereby avoiding the hire charge. The Commissioner regards as significant the fact that the handsets supplied by Telstra can be used to access all telephone subscribers, whether or not they are customers of Telstra.

Earlier Decision

7 The Commissioner was originally of the view that the hire arrangement did not form part of the contract for the provision of the service (only some customers requested Telstra to supply the basic handset), and accordingly did not satisfy the terms of the exclusion. The Tribunal at first instance reached the same conclusion, having regard not to the terms of the contract of supply but to whether, as a practical matter, it could be said that the goods formed part of the service. The Tribunal engaged in an examination of the functional and technical characteristics of the service. The Appeal Panel disagreed with these approaches, observing:

‘21 The position being adopted would appear to be that the supply of the goods is separate from supply of the service, and therefore the supply of the goods does not fall within the scope of para (f). In their insistence that the goods must ‘form part of the service’ the Commissioner and the Tribunal, we consider, have misconstrued the provision. It is apparent from the words of the first limb of para (f) that the goods need not form part of the service. The first limb of para (f) speaks of ‘an arrangement for the use of goods the provision of which is incidental and ancillary to the provision of a service’ (our emphasis). It is not material that the goods form part of the service whether as a practical matter (the Tribunal’s emphasis), or as an incident of the principal contractual terms (the Commissioner’s emphasis).

22 The provision is seeking to address a situation where goods are supplied in addition to the service. The words ‘ancillary’ and ‘incidental to’ bring this out. This interpretation is consistent with the one indication that is found in the extrinsic materials as to the background to this exclusion. In the Second Reading Speech on the Bill (Hansard, LA, 12 November 1997), the Minister representing the Treasurer said: ‘The bill also expressly excludes from liability arrangements which are primarily for the provision of services.’

23 The word ‘primarily’ brings out that the Parliament was trying to provide exclusion from duty for situations where the principal element of the transaction with the customer was one of provision of services but there was an incidental or secondary element involving the provision of goods. As we see it the objective is not to impose duty if there is only an incidental goods element to the transaction, viewed as a whole (and provided also the second limb of para (f) is satisfied).’

8 The Appeal Panel noted that the Commissioner and the Tribunal had also interpreted the contractual relationship between Telstra and the customer as one where supply of a handset was not mandatory, and gave that factor weight in reaching their conclusion. The Appeal Panel disagreed, referring to the statutory obligation on Telstra to supply basic handsets to customers of this service, if they so elected. The Appeal Panel also considered that the Commissioner and the Tribunal had wrongly relied in interpreting para (f) on a Federal Court decision (Commissioner of Taxation v The Distribution Group Limited [2003] FCAFC 182; [2003] ATC 4691) involving a differently expressed provision in federal sales tax law.

9 We then discussed the interpretation to be given to the words ‘solely to enable’, appearing in the second limb of para (f). We concluded at [41] that ‘it is not correct (contrary to the Commissioner’s submission) to confine the operation of the word ‘solely’ to the question of whether the goods supplied were the only ones capable of ‘enabling’ the service effectively to be provided’. As to the words ‘contractual provision of the service’. We said:

‘44 … In our view, the word ‘contractual’ does not require that the provision of the goods must be part of the contract for the provision of services; rather it describes the ‘provision of the service’ and requires that it is according to a contract. The rental terms may be in the form of a separate contract; or, as here, an annexure or addendum to the main contract.

45 The question is whether the only purpose of supply is to enable the contractual provision of the service; not whether the contractual provision of the goods is only possible with the relevant provision of the goods.’

10 We then made some specific points in response to each of the grounds of appeal. The Appeal Panel’s discussion of one of these points was mentioned in Telstra’s submission to this hearing:

‘56 The eighth point [of the appellant’s appeal] is:

8. That the Tribunal erred in concluding that no regard should be had to ‘the technical use of a handset’ (at [56]).

The Tribunal said at [56]:

‘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.’
This overstates the position. While it will often be necessary to have regard to the function performed by the goods in connection with the service, ultimately the question is not one dependent on technical considerations, but on the purpose of the supply of the goods. That purpose is to be discerned by having regard to all the circumstances, including functionality.’

11 After discussing the specific points, we indicated that our decision on the merits would be assisted by a further hearing:

‘61 As noted, the second limb of para (f) requires the provision of the goods in question to be ‘solely to enable the contractual provision of the service’. The difficulty we have in this case is that the customer is free to use the telephone not only to access the Telstra carriage service but also the carriage services provided by other carriers such as Optus. If the purpose of supply is to be determined simply by reference to the purpose of the supplier, then this may not be a problem. Telstra has submitted that the sole purpose of its supply is to enable the customer to use its carriage service.

62 If, however, the purpose of supply is to be judged by reference to all the circumstances, including the way in which the customer is permitted to use the goods, then it might be argued that the purpose of supply does not have the necessary quality of being ‘solely’ to enable the supply of the service. This interpretation, so far as we can see, has not been the subject of submissions.’

Agreed Statement of Facts

12 The evidence in this case is the subject of an agreed statement of facts. There is additional evidence filed by Telstra in the form of affidavits. There is no additional evidence filed by the Commissioner.

13 While the earlier decisions of the Tribunal and the Appeal Panel have referred to much of the evidence, it is helpful to refer to it again. The following text comprises excerpts from the agreed statement of facts, as amended, with some minor changes.

14 Deregulation: 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 basic handset. As noted earlier in these reasons, 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.

15 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 customer was then free to hire or purchase the handset from Telstra. The customer was also free to hire or purchase the handset from a third-party supplier.

16 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.

17 At all times since 1 July 1991, Telstra has retained its legal obligation to provide the exchange line from the telephone exchange to the customer’s premises. A separate rental fee is charged in respect of this service.

18 At all times since 1 July 1997 Telstra has held a carrier licence under Division 3 of Part 3 of the Telecommunications Act 1997 (Telecommunications Act). As the holder of a carriers licence, Telstra is required, pursuant to ss 57 and 61 of the Telecommunications Act, to comply with both the Telecommunications Act and the Telecommunications (Consumer Protection and Service Standards) Act 1999 (Standards Act ).

19 The Universal Service Obligation: At all times since 1 July 1998:

(a) Telstra has been subject to the obligation known as the ‘universal service obligation’ imposed in the period up to the enactment of the Standards Act, by former s 151 of the Telecommunications Act; and now imposed from the enactment of the Standards Act, by s 12C of the Standards Act; and

(b) Telstra has been either the ‘national universal service provider’ or, following the enactment of the current Part 2 of the Standards Act, the ‘primary universal service provider’ for the whole of Australia in respect of the universal service obligation relating to standard telephone services referred to below.

20 The universal service obligation is defined (see former s 149 of the Telecommunications Act and s 9 of the Standards Act) to include the obligation to take all reasonable steps:

(a) to ensure that ‘standard telephone services’ (defined to include a carriage service for the purpose of voice telephony (see former s 17 of the Telecommunications Act and s 6 of the Standards Act)) are reasonably accessible to all people in Australia on an equitable basis, wherever they reside or carry on business;

(b) to the extent necessary to achieve the obligation mentioned in (a), to supply standard telephone services to people in Australia on request.

21 Requirement to Supply Handsets: The agreed statement of facts notes that the obligation referred to in (b) includes the supply of a telephone handset that does not have switching functions (see former s 142(1)(b) of the Telecommunications Act and s 9E(1)(b) of the Standards Act) (this is the ‘basic handset’ referred to in these reasons). In relation to customer equipment (as defined in s 21 of the Telecommunications Act), including telephone handsets, the law requires Telstra to give the customer concerned the option of hiring the equipment (See former s 149(10) of the Telecommunications Act and s 9(6) of the Standards Act).

22 It is helpful to set out the whole of s 9 of the Standards Act, the key provision being s 9(6):

‘ Universal service obligation

(1) For the purposes of this Act, the universal service obligation is the obligation:

(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; and

(b) to ensure that payphones are reasonably accessible to all people in Australia on an equitable basis, wherever they reside or carry on business; and

(c) to ensure that prescribed carriage services are reasonably accessible to all people in Australia on an equitable basis, wherever they reside or carry on business.

(2) To the extent necessary to achieve the obligation mentioned in subsection (1), the universal service obligation includes:

(a) the supply of standard telephone services to people in Australia on request; and

(b) the supply, installation and maintenance of payphones in Australia; and

(c) the supply of prescribed carriage services to people in Australia on request.

(3) The Minister may make a written determination that the universal service obligation includes the supply, installation and maintenance of payphones at specified locations in Australia. The determination has effect accordingly and a copy of the determination must be published in the Gazette.

(4) An obligation does not arise under paragraph (2)(a) in relation to particular equipment, goods or services the supply of which is treated under section 9E as the supply of a standard telephone service if the customer concerned requests not to be supplied with the equipment, goods or services.

(5) An obligation does not arise under paragraph (2)(c) in relation to particular equipment, goods or services the supply of which is treated under section 9F as the supply of a prescribed carriage 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.’

23 As to the nature of the handset to be supplied, s 9E(1)(b) provides materially:

‘ Supply of standard telephone services

(1) A reference in this Part to the supply of a standard telephone service includes a reference to the supply of: …

(b) (i) a telephone handset that does not have switching functions;’

24 Rental Charge: The obligation imposed on Telstra is reflected in the following actions by the Government. As permitted by s 63(3) of the Telecommunications Act, the responsible Minister made the Carrier Licence Conditions (Telstra Corporation Limited) Declaration 1997 (the Declaration ): Govt Gazette, 30 June 1997. As permitted by para 11(2)(a)(i) of the Declaration, the Minister declared that if the licensee [ie Telstra] provides a customer with a standard telephone service, but does not supply a rental telephone handset for use with the service, the licensee’s charge to the customer must be for at least $30 less than the annual charge for supplying the standard telephone service. (Clause 3 (and item 2 of Schedule 1) of the Carrier Licence Conditions (Telstra Corporation Limited) Declaration 1997 (Amendment No. 2 of 2002) omitted the required $30 ceiling from Telstra’s carrier licence conditions from 30 June 2002: Govt Gazette, 18 June 2002.)

25 Agreement with Customer: At all times during the period from 1 July 1998 to 31 December 2003 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. As between 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 in evidence. As from 3 November 2000 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.

26 Parts 3, 4 and 5 of the Telstra Public Switched Telephone Service Section of the SFOA sets 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.

27 A copy of the Telstra Public Switched Telephone Service Section of the SFOA as in force from 1 December 2003 is in evidence.

28 Summary: The agreed statement of facts includes the following summary:

‘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 of a telephone handset 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.’

29 Further Evidence: In light of the Appeal Panel’s observations at paras [61] and [62] of the earlier decision, Telstra has now filed an affidavit from Andrew Walther, Group Manager, Pricing dealing with the limited circumstances in which a rental handset can be used by a customer to access the services provided by other providers of telecommunications service, such as Optus. Detailed reference is made to this affidavit in the reasons of Seve JM. Telstra submitted that this additional evidence demonstrated that even in circumstances where the handset is used to connect to the Optus system (for example, a customer might have their local account with Telstra but have their out of zone telephone account with Optus), Telstra is still providing the customer a service through the transmission of electrical signals between the handset and the Telstra exchange (all exchanges are operated by Telstra) and beyond.

Appellant’s Submissions

30 Telstra’s principal submission is that the determination whether the exclusion is to apply should be made by having regard to the ‘purpose’ of supply of the goods, the emphasis in para (f) being on ‘provision’. Telstra makes two points – practically, the purpose of supply of the handset is to enable connection to its network; and by law it is obliged to supply a handset to any customer for the VT Carriage Service who so elects. Whichever way the matter is viewed and whichever of these factors is given emphasis, the supply is done ‘solely to enable the contractual provision of the service’. Its primary submission is that the end-use to which the customer chooses to put the goods is not relevant.

31 In the alternative, Telstra submitted that if it is the view of the Appeal Panel that the manner in which the handset is used or capable of being used by the customer is relevant, the rental handset is, for various reasons, provided solely to enable the contractual provision of the service provided to the customer. In support of this submission, Telstra referred to the following: the terms of the contract provide that the rental handset is provided ‘for use with Telstra’s standard telephone service’; Telstra only hires the handsets to a customer to whom Telstra is also providing the carriage service; once the carriage service ceases the customer is required to return the handset; it can only be used for making standard telephone calls (local, STD, international); even where the handset is used to access other carriers, it continues to make use of the network capabilities for which Telstra is alone responsible; the last factor does not mean that Telstra has an independent purpose in providing the handset; and in any case the provision of the handset is mandatory on Telstra if requested by the customer.

32 The submissions acknowledge that the functionality of the goods is a relevant matter for determining whether the goods are supplied ‘solely’ for the purpose of contractual provision of the service. Telstra submits that where goods have a variety of possible functions that may bear on a conclusion as to whether the goods were, viewing the situation realistically, had been provided ‘solely’ in connection with the contractual provision of the service.

Respondent’s Submissions

33 The Commissioner submits that the words ‘is solely’ indicate that what is required is an objective examination of the circumstances. The question is not what the provider of the goods might have intended subjectively. In the Commissioner’s submission Telstra is seeking to have its ‘subjective’ intention adopted whereas an objective examination of the circumstances would lead to a different conclusion. The Commissioner accepts that it is not relevant what the customer may or may not have done with the goods once received. I understand the Commissioner’s point to be that the actual use to which customers put goods is something neither the taxpayer nor the Commissioner can be expected to know or take into account. This is to be distinguished from the notion of ‘useability’, a matter about which there is evidence in this case.

34 Taking an ‘objective’ approach the Commissioner says that these are the matters of importance:

(a) the handset is the means of access to the telephone carriage service – the handset has no other function;

(b) during the relevant period (1 July 1998 to 31 December 2003) the handset could (and was) used in New South Wales to access the Telstra telephone carriage service and that of other providers, such as Optus;

(c) under the agreement for hire of the handset, the customer was ‘free’ to use that handset for, e.g., making Optus calls – there was no prohibition against the customer so using the handset;

(d) a customer with a hired handset was required to return the handset if he or she terminated his or her telephone carriage service.

35 As I understand the Commissioner’s submissions, factors (a) and (d) support a conclusion in favour of Telstra, but (b) and (c) support a negative conclusion. In my view factor (c) seems to involve a consideration of potential actual use, an approach which the Commissioner has said was not appropriate earlier in his submissions.

36 The Commissioner’s submissions then refer to the monopoly service provider role that Telstra possessed prior to 1 July 1991. The Commissioner’s view is that during the monopoly era – had the present law applied – it could properly be concluded that the use of the handset to access Telstra’s service was the sole proper use of the handset, and, to quote the Commissioner’s submissions, the ‘is solely’ requirement was therefore satisfied. The submissions continue: ‘Once other service providers entered the market, the Telstra handset was properly useable to access the Telstra and also (at least) the Optus carriage service – the ‘is solely’ requirement is therefore not satisfied’.

37 It is clear, I think, that the Commissioner’s only substantial reason at this point of the case for disputing the applicability of the exclusion is that the handsets were ‘useable’ to access other carriage services. So far as the terms of para (f) are concerned, the Commissioner accepts, as I read the submissions, that the basic handset can be regarded as incidental and ancillary to the provision of the VT Carriage Service. However, the ability of the customer to use the handset to access other carriage services meant that Telstra had failed to demonstrate that the arrangement for use of the basic handset is ‘solely’ to ‘enable the contractual provision of the service’.

Conclusions

38 In my view the issues are ones of mixed fact and law.

39 Both parties accepted that what was required was the making by the Tribunal of an ‘objective’ assessment of the circumstances. There was less agreement on what considerations might be relevant to the making of an ‘objective’ assessment. Telstra, understandably, emphasised the circumstances that left it with a requirement to supply a handset in certain circumstances. It accepts that the functionality of its basic carriage service does not depend on the customer having the particular handset supplied by Telstra. Any handset that was compatible with the Australian network would be effective. The choice was with the customer as to whether he or she bought a handset or exercised their right under the universal service obligation obligating Telstra to supply a handset.

40 The only Parliamentary information giving some indication as to what the reach of the exclusion might be is to be found in the Second Reading Speech for the Duties Bill 1997 where the Minister said (emphasis added):

‘This 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.’

41 What these words tend to suggest is that the concern of the Parliament was simply to protect from duty contracts for the provision of services which had an incidental goods-provision element. Obviously there was a danger that two separate transactions, one for services and one for goods, might be joined together when they really had little or nothing to do with each other. The joining together of the two transactions might simply, on this scenario, have been done to avoid hire of goods duty. This is not, as I see it, the situation here. Telstra supplies a basic telephony carriage service and incidentally to that supply supplies goods with particular technical capabilities (the handset) without which the customer would not be able to make use of the service. The goods are not unique, and can be obtained from other suppliers.

42 In my view, the transaction has the primary characteristic referred to in the second reading speech, that is, the arrangement is primarily one for the provision of services.

43 To reiterate, the words of para (f) are:

(f) 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

44 The first words ‘arrangement for the use of goods’ are, in my view, simply a condensed form of the definition of ‘hire of goods’ found in s 182, i.e. ‘an arrangement under which goods are or may be used at any time by a person other than the person hiring out the goods’. The next words of the para (f) then seek to capture the idea of a relationship between the goods and an overarching service to which the goods are ‘incidental or ancillary’. In this instance the Appeal Panel has been satisfied that the basic telephone handset has that characteristic (the service would be inoperable without a handset).

45 Para (f) then limits the operation of the exclusion to an arrangement where the goods were supplied ‘solely to enable the contractual provision of the service’. In my view this is a single concept. The term ‘contractual provision’ refers, as I see it, to supply as required by or according to contract. In the present case it is clear that were Telstra free to contract as it might chose it may well have not supplied a basic handset. However its contractual arrangements were restricted by Commonwealth regulation and it was required to supply the customer with a basic handset. I do not think the provision can be construed, at least ordinarily, so as to allow the useability of the goods in the hands of the customer to be brought forward in determining whether the goods were supplied ‘solely to enable’ the contractual provision of the service.

46 Ordinarily, the matter will be determined by the contents of the contract and the context in which the supply occurs. I do not wish to exclude the possibility that a case might be presented where the terms of the contract are misleading or a sham as to the true position, and the true position is to be found by reference to the broader context.

47 In this case, though, it seems to me that the contractual arrangements are consistent with an objective assessment of the circumstances. The supplier is the exclusive provider of the network connection, is a supplier of the service and has available a telephone that will enable the network and the service to be used. The supplier is bound by law to supply the telephone to certain customers of the service. These factors all support the conclusion that the supply is only to enable the provision of the service in accordance with the contract. There is nothing, in my view, to suggest that the supply of the goods has any purpose other than to enable contractual provision of the service.

48 I have noted the different view of my colleague, Seve JM.

49 I do not agree that the absence of any restriction by the supplier on the end-use of goods (in this instance, the absence of a restriction on the use of the hand-set for making calls utilising the facilities of other telephone companies) is of any significance. It would not, I think, be unusual for there to be no special end-use restrictions. The supplier’s interest would often be adequately served by a requirement that the hirer return the goods in good condition or pay an insurance premium or pay a penalty for damage or loss to the goods. I do not think it was the intention to disqualify from consideration hire arrangements that might have that characteristic.

50 There was a good deal of evidence put before the Tribunal at first instance and the Appeal Panel relating to Telstra’s role as the network provider and the way in which the handset’s technology and dialling function interacts with the network. I have not found that evidence of any great assistance in reaching a decision in this case.

51 There is nothing in the evidence, as I have said, to suggest that Telstra is supplying the handset other than to make the service functional. I do not think one could conclude, objectively, that there is any purpose of supply demonstrated which differs from or is additional to that required for contractual provision of the service.

52 That the goods have functionalities which enable them to be used by the customer in other ways (here, for example, receiving calls from non-Telstra customers and making calls to them) is not, it seems to me, of any particular significance. One can conceive of situations where the supplied goods have a number of functions which have nothing to do with the reason contractually the goods were supplied. As noted earlier, the surrounding context might justify a conclusion that the hire arrangement really involved a separate supply unrelated or insufficiently related to the service contract such that it should be treated as an ordinary hire of goods. I do not see this is a case of that kind. For example it was accepted at hearing that Telstra did not otherwise hire out telephones. This was the only context in which that occurred. It did have a sales arm selling a wide range of telephones. This points to the situation under notice being one linked to contractual and regulatory obligations.

53 I have noted in referring to the Commissioner’s submission that his view would be different were we still in the monopoly era and the present law applied. His view would have been that Telstra’s hiring practice would be non-dutiable as the ‘is solely’ test would be satisfied on an objective basis. In my view this submission tends to support, rather than detract from, Telstra’s case. As I see it, Telstra’s continuing practice of hiring out handsets to basic carriage service customers is a remnant of the monopoly era. Through the universal service obligation, Telstra is obliged to continue to supply the handset and, in that way, it remains necessary and ‘is’ done ‘solely’ to enable the contractual provision of the service.

54 In my opinion the correct and preferable decision is that the exclusion applies in the present circumstances. Accordingly the Commissioner’s decision should be set aside.

55 JUDICIAL MEMBER SEVE: I have read the decision of the President and I agree that the issue in this case is one of mixed fact and law but I respectfully disagree with the conclusions on that issue. In my view, the facts of this case do not satisfy the second limb of s 186(1)(f) of the Duties Act1997 (Duties Act) and the exclusion in that section does not apply for the reasons hereunder.

Purpose of the provision of the goods

56 On an ordinary interpretation of s 186(1)(f) of the Duties Act, the second limb of that section is concerned with the purpose ‘for use’ of the provision of the goods.

57 A ‘hire of goods’ is defined in s 183(1) of the Duties Act as ‘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’ (emphasis added).

58 Section 186(1)(f) of the Duties Act points to ‘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’ (emphasis added).

59 The first limb of s 186(1)(f) refers to ‘goods the provision of which…’. This expression can not be read in isolation. The goods referred to in the first limb are goods provided under an arrangement ‘for use’ of the goods. The second limb of s 186(1)(f) refers to the provision of ‘the’ goods. That is, the second limb is refering to the goods provided under the ‘arrangement for use of goods’.

60 The purpose specified in the second limb of s 186(1)(f) is a purpose of ‘use’ of the goods. The provision of the goods must be ‘solely to enable the contractual provision of the service’.

61 Accordingly, in the context of:

· the definition of ‘hire of goods’ in s 183(1) of the Duties Act which refers to ‘use’;

· the opening words of s 186(1)(f) which again refers to ‘use’;

· the reference to ‘the’ goods in the second limb of s 186(1)(f), being a reference to the goods provided under the ‘arrangement for use of goods’; and

· the purpose specified in the second limb of s 186(1)(f) being a purpose of ‘use’,

the second limb of s 186(1)(f) is concerned with the purpose ‘for use’ of the provision of the goods.

62 If the second limb of s 186(1)(f) is not interpreted as concerned with the purpose ‘for use’ of the provision of the goods, but as concerned with the purpose ‘generally’ for the provision of the goods, then, whenever fees are charged for the use of goods, since the earning of such fees would inescapably be one of the purposes for the provision of the goods, the sole purpose requirement of s 186(1)(f) could never be satisfied. Telstra submitted that this would have the result of denying s 186(1)(f) operative effect. I agree that this is technically correct, because hire of goods duty is not payable where there are no hiring charges for the use of the goods (s 188 of the Duties Act) and the anti-avoidance s 192 of the Duties Act only applies if there is an amount received as hiring charges in the first place. However, as referred to in the President’s decision, in the Second Reading Speech on the Duties Bill, the Minister said: ‘The bill also expressly excludes from liability arrangements which are primarily for the provision of services’ (emphasis added). Under the predecessor hiring arrangement duty provisions of the Stamp Duties Act 1920, there was no equivalent to s 186(1)(f) of the Duties Act. It was clear under those predecessor provisions that hiring arrangement duty was payable in respect to fees charged and received specifically for the use of goods. It was not clear under those predecessor provisions whether hiring arrangement duty was payable in respect to all or part of fees charged and received, not specifically for the use of goods, but generally under an arrangement that included both the provision of a service and the provision of goods. Perhaps the purpose of s 186(1)(f) of the Duties Act was to make express what was not clear under the Stamp Duties Act 1920, namely, that the relevant provisions do not apply where fees are not charged specifically for the use of goods but are charged generally under an arrangement that includes both the provision of a service and the provision of the goods, where the conditions of s 186(1)(f) are satisfied? That this was the purpose of s 186(1)(f) of the Duties Act is not clear. Furthermore, it appears to require a strained interpretation of s 186(1)(f) to achieve such purpose. In my view, the ordinary interpretation of s 186(1)(f) of the Duties Act first mentioned is the interpretation that should be adopted because, amongst other things, it gives the second limb of s 186(1)(f) of the Duties Act operative effect without unnecessary strain in construction.

63 If the purpose of s 186(1)(f) of the Duties Act is as mentioned above and an interpretation that achieves such purpose is adopted, then, on the facts of this case, the second limb of s 186(1)(f) of the Duties Act was not satisfied. In addition to fees having been charged and received specifically for the use of the goods, the provision of the handsets was also not ‘solely’ to enable the contractual provision of the service because compliance with the requirement to hire out the handsets pursuant to s 9(6) of the Telecommunications (Consumer Protection and Service Standards) Act 1999 (Cth) appears also to have been a purpose for the provision of the goods.

64 However, if the second limb of s 186(1)(f) is interpreted (as I believe it should be) as concerned with the purpose ‘for use’ of the provision of the goods, this is not only consistent with the scheme of s 186(1)(f) and Chapter 6 but also gives the exclusion in s 186(1)(f) operative effect without strain in construction. On such interpretation, a purpose of earning income whether directly or indirectly from the provision of the goods does not prejudice availability of the exclusion.

65 The fact that goods have multi-function capability or capacity beyond the service being provided does not prevent the provision of such goods from being able to satisfy the second limb of s 186(1)(f). So long as the permitted use of the goods under the arrangement is limited to use ‘solely to enable the contractual provision of the service’, the second limb of s 186(1)(f) can be satisfied.

66 In the recent NSW Supreme Court decision of Australian Fencing Hire v Chief Commissioner of State Revenue [2005] NSWSC 1286 (16 December 2005), which concerned Chapter 6 of the Duties Act, Gzell J focussed on the fact that the Chapter is directed at bailment. Gzell J held (at 44) that:

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

67 Goods can generally have a multiplicity of possible purposes of use. However, under a bailment, notwithstanding the possibilities, the use of goods may be restricted. One of the four principal duties of a hirer under a bailment is to comply with limitations on use of the chattels (Palmer, Bailment, 2nd ed, The Law Book Co Ltd, Sydney, 1991 at 1249).

68 As earlier mentioned, in the Second Reading Speech on the Duties Bill, the Minister said: ‘The bill also expressly excludes from liability arrangements which are primarily for the provision of services’. The legislature has defined what was meant by ‘arrangements which are primarily for the provision of services’ in s 186(1)(f) of the Duties Act by requiring that two limbs be satisfied, namely, (1) that the provision of the goods is incidental and ancillary to the provision of a service and, (2) that the provision of the goods is solely to enable the contractual provision of the service. The interpretation of the second limb of s 186(1)(f) as being concerned with the purpose ‘for use’ of the provision of the goods, means that where goods are provided and the use of the goods is not restricted ‘solely to enable the contractual provision of the service’, the arrangement is not within the defined meaning of arrangement ‘primarily for the provision of services’. This is not an absurd or unreasonable interpretation.

69 Accordingly, in my view, in order to satisfy the second limb of s 186(1)(f), the purpose of the provision of the goods must be ‘for use’ solely to enable the contractual provision of the service. ‘The service’ is the service in respect to which the provision of the goods is incidental and ancillary as required by the first limb of s 186(1)(f) and the second limb requires that that service be provided under contract.

70 The use of goods that is permitted under a hire of goods is objective evidence of the purpose ‘for use’ of the provision of those goods. A provider of goods on hire can not permit a use of the goods for a particular purpose and at the same time, successfully assert that the provision of the goods is for use ‘solely’ for another purpose. Such an assertion would be nonsense because it would contradict objective evidence of a contrary intention.

71 It is implicit in the second limb of s 186(1)(f) that in order to satisfy it, the permitted use of the goods under the arrangement must be restricted to use ‘solely to enable the contractual provision of the service’.

72 Actual use of goods under a hire of goods need not reflect permitted use but can evidence it and to that extent, can be material in determining whether the second limb of s 186(1)(f) is satisfied. However, it is the conduct of the person who hires out the goods that determines whether s 186(1)(f) is satisfied because it is that person who can limit and determine permitted use.

Solely

73 The legislature chose to use the expression ‘solely’ in s 186(1)(f) of the Duties Act and not the wider expression ‘solely or predominantly’ as used in s 181 and s 193 of Chapter 6 of the Duties Act. This indicates that a narrow test was intended for the second limb of s 186(1)(f).

74 A ‘sole purpose test’ in contrast to a ‘dominant purpose test’ has been considered in the context of common law legal professional privilege. In that context, it has been held that a ‘sole purpose test’ is narrower than a ‘dominant purpose test’ (Esso Australia Resources Limited v The Commissioner of Taxation [1999] HCA 67) in that just one other purpose in addition to a subject purpose, regardless of how relatively unimportant that other purpose may be, will defeat a sole purpose test whereas it will not necessarily defeat a dominant purpose test. The same applies in this context. If just one other purpose for use in addition to the purpose for use specified in the second limb of s 186(1)(f) exists, then regardless of how relatively unimportant that other purpose may be, it will defeat the sole purpose test.

Merits of this case

75 Both Telstra and the Commissioner agreed at first instance and it was not disputed on appeal, that the relevant ‘service’ for the purposes of s 186(1)(f) of the Duties Act in this case, was the provision of ‘VT Carriage Services’ by Telstra (para [24] of the decision at first instance). Both Telstra and the Commissioner also agreed at first instance and it was not disputed on appeal that the first limb of s 186(1)(f) of the Duties Act was satisfied in respect to that service (para [33] of the decision at first instance). The ‘VT Carriage Service’ is local, STD, IDD and mobile carriage services for the purpose of voice telephony (para [2] of the decision at first instance). Therefore, ‘the’ service for the purposes of the second limb of s 186(1)(f) of the Duties Act, is VT Carriage Services provided by Telstra (not VT Carriage Services provided by other carriers).

76 Clause 5A.1 of the standard Telstra customer agreement provided that each handset was provided to the customer ‘for use with Telstra’s standard telephone service’. However, Telstra admitted (at paragraphs 3(b) and 9(f) of Appellant’s Supplementary submissions dated 5 August 2005), and it is accepted as fact, that Telstra also permitted use of the handsets by hirers to access standard telephone services provided to hirers by other carriers. This means that Clause 5A.1 of the standard Telstra customer agreement was not an ‘exclusive use’ provision, or, if it was, in practice, it was waived by Telstra to also permit the use of handsets to enable the provision of standard telephone services to hirers by other carriers.

77 The sworn affidavit of APJ Walther that was tendered by Telstra indicated (at paragraph 4) that hirers of handsets could use the handsets to access the services of other carriers in the following 5 situations:

(a) general operation – when a hirer makes an ordinary call, the voice path may transit one or several networks operated by other carriers, for example, a Telstra customer in Sydney making a call to a person in Paris. Telstra has separate contractual arrangements with other carriers that govern the interconnection and call conveyance beyond Telstra’s network;

(b) pre-select another carrier – when a hirer pre-selects another carrier for long distance (STD), international and fixed to mobile calls. Telstra is required to make changes to the routing of these call types such that each call is routed via an interconnection point operated by the carrier nominated by the hirer. Whilst Telstra enables the customer to make and receive these calls, the charging for these calls is subject to separate contractual arrangements between the end customer and the other carrier;

(c) override – when a hirer dials particular digits when initiating a long distance (STD), international or fixed to mobile call and thereby chooses to use another carrier for that long distance (STD), international and fixed to mobile calls. The operation is otherwise as described in (b) above;

(d) re-sale or churn – when a hirer chooses to change its supplier of voice telephony services and the hirer’s account or service is transferred to another carriage service provider. Telstra continues to provide the voice telephony carriage service and the handset but instead of billing the hirer, Telstra bills the new carriage service provider who then bills the hirer; and

(e) competition voting – when a hirer makes a call to an advertised number to vote in a television, radio or newspaper competition in which case, the hirer may utilize another carrier’s telephone service for call conveyance.

78 At least 2 of the above 5 situations (ie pre-select another carrier (b) and over-ride (c)) involve the hirer of the handset contracting with another carrier for voice telephony services, with the hirer using the handset provided by Telstra to enable the provision of those services by that other carrier. It is not clear as to whether re-sale/ churn (ie (d) above) involves the hirer contracting with another carrier for the provision of voice telephony services and for the hire of the handset (with that other carrier hiring the handset from Telstra) or whether it involves the hirer still contracting with Telstra for the provision of the service and the handsets but agreeing with Telstra and the other carrier to pay the fees for the service and for the hire of the handset to that other carrier or whether it involves some other variation on these alternatives. It is unnecessary for this to be decided here because it is clear that at a minimum, in the 2 situations of pre-select another carrier and over-ride, services of other carriers are contractually provided to hirers of the handsets. It is unclear as to whether competition voting involves the hirer of the handset contracting with the other carrier for the provision of a voice telephony service. Again, for the same reason mentioned, it is unnecessary for this to be decided here. In the ordinary Telstra call situation where the voice path transits one or several networks operated by other carriers (ie (a) above), since it is Telstra and not the hirer of the handsets who has the contractual arrangement with the other carriers in this circumstance, it appears that it is still only Telstra who provides the services to the hirer. Services provided by the other carriers in this circumstance appear not to be services provided by the other carriers to the hirer, but rather, services provided by the other carriers to Telstra, being the person with whom such other carriers have their respective contracts. Again, for the same reason mentioned, it is unnecessary for this to be finally decided here.

79 Telstra submitted that where a hirer accessed the carriage service of another carrier, Telstra still provided a service to the hirer through the transmission of electrical signals between the handset and the Telstra exchange and beyond. It was not clear from the evidence whether the service being provided by Telstra in these circumstances was a service by Telstra to the hirer or, a service by Telstra to the other carrier, or a combination of both. However, irrespective of the person to whom Telstra contractually provided its service, under the arrangement between Telstra and the hirer of the handset, Telstra did not limit use of the handset to use ‘solely’ to enable the contractual provision of the service by Telstra. Telstra permitted use of the handset also to enable the contractual provision of services by other carriers to the hirer such as in pre-select another carrier (b) and over-ride (c) above-mentioned.

80 By permitting handsets to be used to enable the contractual provision of services to hirers by other carriers, the purpose for use of the provision of the handsets ipso facto included the purpose of enabling the contractual provision of services to hirers by other carriers. The existence of that other purpose prevented the purpose of enabling the contractual provision of the service by Telstra from being the ‘sole’ purpose of the provision of the handsets. The arrangements could not and did not satisfy the second limb of s 186(1)(f) of the Duties Act.

81 It was an agreed fact that Telstra did not provide handsets other than where a service agreement with Telstra was entered into (paragraph 9(b) of Appellant’s Supplementary submissions dated 5 August 2005). Yet Telstra submitted that where it provided handsets, it was required by Government regulation to permit use of its handsets to enable the provision of services by other carriers (paragraphs 3(b) and 9(f) of Appellant’s Supplementary submissions dated 5 August 2005). I have reservations about this submission given that, amongst other things, s 9E(1)(a) (i) and s 9E(1)(b)(i) of the Telecommunications (Consumer Protection and Service Standards) Act 1999 (Cth) refer only to use in connection with ‘the’ standard telephone service. However, it is unnecessary to decide this here because whether or not the submission is accepted does not affect the outcome. If the submission is correct, it means that Telstra was incapable of satifying the sole purpose requirement of the second limb of s 186(1)(f) of the Duties Act without breach of Commonwealth Government regulation and for that reason, Telstra did not satisfy the requirement. If the submission is incorrect, it means that although Telstra was not prohibited from satifying the sole purpose requirement of the second limb of s 186(1)(f), it did not to do so. Under either scenario, on the facts, the second limb of s 186(1)(f) was not satisfied.

82 Even if I am wrong on the interpretation of the second limb of s 186(1)(f) of the Duties Act and permitted use is not determinative of purpose, and the President’s interpretation of the second limb of s 186(1)(f) is correct, in my view, on the facts in this case, the provision of the handsets was still not ‘solely’ to enable the contractual provision of the service by Telstra. Looking at the evidence including the statement of agreed facts and the standard Telstra customer agreement, the purpose of the provision of the handsets by Telstra was not ‘solely’ to enable the contractual provision of the service by Telstra. The handsets were provided (and fees were charged for the hire of the handsets) irrespective of whether or not the handsets were to be actually used to enable that part of the service that could be enabled by the handsets. This was a matter in the discretion of the hirer who was not obliged under the standard Telstra customer agreement to use that part of the service that could be enabled by the handsets. Whether or not the handsets were to be actually used to enable that part of the service that could be enabled by the handsets did not affect the provision of the handsets (and the charging of fees for the handsets). Accordingly, to enable the contractual provision of the service by Telstra could not have been the sole purpose for the provision of the handsets.

83 Telstra’s submission that the provision of the handsets was ‘solely’ to enable the contractual provision of the services by Telstra contradicts the facts and must be rejected.

84 Under s 100(3) of the Taxation Administration Act 1996, it is Telstra that had the onus of proving its case in its application for review. Telstra has not established that the second limb of s 186(1)(f) of the Duties Act was satisfied.

85 For the foregoing reasons, in my view, the correct and preferable decision is that the objection decision of the Commissioner under review should be affirmed because the second limb of s 186(1)(f) of the Duties Act was not satisfied and the exclusion in s 186(1)(f) did not apply.

86 NON-JUDICIAL MEMBER BENNETT: We have already decided that the handset’s provision is incidental to the ‘service’ that is provided by Telstra. I am satisfied that it is a fact that the Telstra handset is solely used to connect to the service network that is provided to all users (including the other providers) by Telstra. There are a number of ‘service providers’ that may be used (not connected directly to) by the renter of the handset after it is connected.

87 The rental handset is always and only connected to the service provided by Telstra (so perhaps the words ‘other service providers’ are a misnomer) even if a later decision is made to deal with those ‘service providers’ who are able lawfully to enter into contracts of that kind and who may charge for calls from the handset.

88 My view is that the handset cannot be directly connected to a separate ‘service provider’ so the handset’s use is always limited to connecting with the Telstra network no matter whether the calls come via Optus or are sent out via Optus or another. When the customer asks for a handset Telstra must obey because of the Federal regulations.

89 Since the handset rented to a customer may only be used to dial out or receive calls from the Telstra network regardless of the customer’s contractual arrangements with other ‘providers’ I believe that the sole purpose is clear and that the ‘purpose’ is one involving ‘use’. I do not regard other ‘purposes’ of a commercial character, such as profit, to be relevant. I see the compulsion flowing from the regulations as another purpose. I do not see how there could ever be a sole purpose in renting out anything.

90 I cannot see that the Telstra decision to recognise the ‘permitted use’ has a bearing since the only use as I see it is the physical facility to connect to the Telstra owned and operated service network. Whilst the monopoly is now gone, so far as who the customer may deal with as a service provider the network is still one that is an intact monopoly. There seems to be no reason to partition the activities of Telstra between network and service provision when looking at the issue of the handset. In my view the Telstra owned and operated service network infrastructure must be used by all users to make or receive any calls and this strongly points to a sole purpose (use) by Telstra for the supply of the handset. A user (renter) has no choice when dialing or receiving but to access Telstra’s service.

91 Consequently, I agree with the Orders proposed by the President.

Order

1. Appeal allowed.

2. Decision under review set aside.