Hostess Marine Pty Ltd v Commissioner of Taxation
Document type: Decision Impact Statement
Venue: Federal Court of Australia (VID 85 of 2004)
Judgment date: 30 November 2006
Date published: 30 March 2007

Summary of decision:
Outlines the Tax Office's response to this case which concerned whether the Applicant's application of a motor yacht to own use, was exempt from sales tax, on the basis that the yacht was for use mainly for purposes other than pleasure, sport, recreation, private transport or accommodation.

Overview of facts:
The Applicant claimed exemption from sales tax under Item 59 in Schedule 1 to the former Sales Tax (Exemptions and Classifications) Act 1992 in relation to its application of a motor yacht to own use. The Commissioner considered that the requirements for exemption - namely, that the yacht be for use mainly for purposes other than pleasure, sport, recreation, private transport or accommodation for the whole of the statutory period of 2 years commencing when the yacht was applied to own use by the Applicant - were not satisfied. | The Applicant adduced evidence of arrangements it entered into for the demonstration of the yacht to prospective purchasers. These included the manufacturer's appointment of the Applicant as joint distributor and Victorian and Tasmanian agent for the sale of yachts of this type and a marketing strategy which included a media launch, individually targetted marketing and participation in various boat shows at which the yacht was demonstrated to potential purchasers. There was also evidence of extensive modifications to the yacht to ensure its continuing suitability for demonstration purposes. One commission payment of $30,000 less advertising expenses was received by the Applicant. | The Commissioner contended that there were no real prospects that the Applicant would sell sufficient vessels to make a profit. The Commissioner pointed to the absence of proper analysis of the likely profitability of the business before the yacht was purchased, certain informality in the distribution arrangements and the insurance policy of the vessel, taken over from a policy on another vessel, being endorsed only for private purposes until this matter was raised by tax officers. | The business was closed down when sales did not achieve expectations and following receipt of an unsolicited offer for purchase of the yacht at an attractive price. | Quantitatively, the time which the yacht spent at her moorings constituted an overwhelming proportion of the two year statutory period. The total personal use of the yacht was quantified as approximately 7%. | Issues decided by the court or tribunal | The Court confirmed that item 59 would be satisfied in the circumstances of this case if the Applicant intended, at the time it applied the yacht to its own use, that the yacht would be used mainly for purposes other than pleasure, sport, recreation, private transport or accommodation for the whole of the 2 year statutory period. While actual use over the statutory period may be evidence of intended use, it is the intention at the time of first application to own use that must be determined. | Having heard evidence from the controlling mind of the Applicant, the Court concluded on the preponderance of probabilities that the Applicant genuinely intended to use the yacht mainly for the purpose of displaying and demonstrating the range of yachts. | In doing so, the Court noted the 'elaborate, expensive and time-consuming' preparation and execution of the marketing strategy. The Court also noted that although criticisms had been made that the distributorship arrangements lacked sophistication, it had not been suggested that they were a sham. In relation to the failure to endorse the insurance policy for use for demonstration purposes, the Court considered this to be explicable as an oversight. | While agreeing in general with the Commissioner's contention that the Applicant did not have a realistic prospect of generating substantial profits within a reasonable time after application of the yacht to own use, the Court considered that an applier could have an intention to use a yacht for business purposes notwithstanding that the business is unlikely to generate much, if any, profit. The confidence with which a court can impute the presence or absence of a business intention depends on the weight to be attached to all the surrounding circumstances. In any case, the critical intention in this case was for the vessel to be used mainly for purposes other than pleasure, sport, recreation, private transport or accommodation. | The Court also considered that the 'down time' the yacht spent at moorings, in dry dock or a contractor's berths for repairs and modifications cast no light on the use to which the Applicant intended the vessel would be put. This is because the down time would have been broadly the same whether the Applicant intended to use the yacht for demonstration purposes or for pleasure, sport or recreation.

Issues decided:
The Court confirmed that item 59 would be satisfied in the circumstances of this case if the Applicant intended, at the time it applied the yacht to its own use, that the yacht would be used mainly for purposes other than pleasure, sport, recreation, private transport or accommodation for the whole of the 2 year statutory period. While actual use over the statutory period may be evidence of intended use, it is the intention at the time of first application to own use that must be determined. Having heard evidence from the controlling mind of the Applicant, the Court concluded on the preponderance of probabilities that the Applicant genuinely intended to use the yacht mainly for the purpose of displaying and demonstrating the range of yachts. In doing so, the Court noted the 'elaborate, expensive and time-consuming' preparation and execution of the marketing strategy. The Court also noted that although criticisms had been made that the distributorship arrangements lacked sophistication, it had not been suggested that they were a sham. In relation to the failure to endorse the insurance policy for use for demonstration purposes, the Court considered this to be explicable as an oversight. While agreeing in general with the Commissioner's contention that the Applicant did not have a realistic prospect of generating substantial profits within a reasonable time after application of the yacht to own use, the Court considered that an applier could have an intention to use a yacht for business purposes notwithstanding that the business is unlikely to generate much, if any, profit. The confidence with which a court can impute the presence or absence of a business intention depends on the weight to be attached to all the surrounding circumstances. In any case, the critical intention in this case was for the vessel to be used mainly for purposes other than pleasure, sport, recreation, private transport or accommodation. The Court also considered that the 'down time' the yacht spent at moorings, in dry dock or a contractor's berths for repairs and modifications cast no light on the use to which the Applicant intended the vessel would be put. This is because the down time would have been broadly the same whether the Applicant intended to use the yacht for demonstration purposes or for pleasure, sport or recreation.

ATO view of decision:
The Commissioner accepts that the decision was one available to the Court on the evidence presented in the case.

Administrative treatment:
Implications on current Public Rulings & Determinations | None

Legislative references: Sales Tax Assessment Act 1992 (Cth) (repealed) 25 Sales Tax (Exemptions & Classifications) Act 1992 (Cth) (repealed) 5 Item 59 in Schedule 1
Case references: Davis v Federal Commissioner of Taxation 2000 ATC 4201 44 ATR 140 Thomas v Federal Commissioner of Taxation (1972) 46 ALJR 397 72 ATC 4094 3 ATR 165 Puzey v Federal Commissioner of Taxation 131 FCR 244 2003 ATC 4782 53 ATR 614 BRK (Bris) Pty Ltd v Federal Commissioner of Taxation 2001 ATC 4111 46 ATR 347 Hart v Federal Commissioner of Taxation (2003) 131 FCR 203 2003 ATC 4665 53 ATR 371
Subject references: sales tax yacht exempt use item 59 application to own use mainly statutory period pleasure, sport, recreation, private transport or accommodation
Other references: Sales Tax News and Views (Volume 3 - Aug/Oct 1993)