FRAME SET & MATCH PTY LTD v FC of T

Judges:
Wilcox J
RD Nicholson J
Goldberg J

Court:
Full Federal Court

MEDIA NEUTRAL CITATION: [2000] FCA 1168

Judgment date: 23 August 2000

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Wilcox, RD Nicholson and Goldberg JJ

Introduction

1. The issue raised on this appeal is the classification for sales tax exemption purposes of a telecine machine purchased by the appellant on 27 February 1995 for use in its business of providing certain ``post-production facilities'' to producers of motion picture films. The appellant claims that the assessable dealing, which was otherwise subject to sales tax pursuant to the provision of the Sales Tax Assessment Act 1992 (Cth), was not taxable because the appellant's application of the machine to its own use, which did not consist of the granting of a lease (``a non-lease AOU''), satisfied exemption Item 26(1) in Schedule 1 the Sales Tax (Exemptions and Classifications) Act 1992 (Cth).

2. On 27 February 1995 the appellant purchased an ``Ursa Gold'' telecine machine and applied the machine to its own use. The respondent issued a sales tax assessment in respect of the machine. The appellant objected to the assessment and the objection was disallowed. The appellant appealed to the Court against the objection decision. The primary judge found the appellant applied the machine mainly to transfer cinematograph film, which had been exposed and developed, to videotape cassette and that this was done for the purpose of an editing process which might involve, for example, colour grading of the film [reported at 2000 ATC 4339]. His Honour found that in the editing process the appellant uses the machine to transfer cinematograph film to videotape.

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ATC 4591

3. Against this factual understanding his Honour concluded, for the purposes of Item 26(1), that the appellant's business was not one engaged mainly in producing motion picture films. His Honour reached this conclusion on the basis that motion picture film must be distinguished from videotape and that the appellant did not produce motion picture films by the use of the machine. His Honour found it unnecessary to decide whether by using the machine the appellant ``produced'' a videotape.

4. The primary judge concluded that the appellant's use of the machine did not fall within the description in Item 26(1) of ``goods for use by a person mainly in producing motion picture films in the course of business''. His Honour held that the appellant did not produce motion picture films by use of the machine.

The legislative provisions

5. The following definitions in s 5 of the Sales Tax Assessment Act are relevant for present purposes:

```AOU' means application to own use;

...

`non-lease AOU' means an application to own use that does not consist of the granting of a lease.''

6. Section 25 provides:

``A non-lease AOU is not taxable if the applier, at the time of the AOU, intends to deal with the goods so as to satisfy an exemption Item that is in force at the time of the AOU.''

7. Section 4(2) of the Sales Tax (Exemptions and Classifications) Act provides that if all the requirements of an exemption item are satisfied at or before the time of an assessable dealing, the dealing is not taxable and that a non-lease AOU is not taxable if, at the time of the AOU, the applier has the intention of satisfying the requirements of an exemption item. Exemption Items 25 and 26 are in the following terms:

``25(1) The following goods for use by a person mainly in producing motion picture films in the course of a business:

• (a) unexposed cinematograph film;
• (b) cinematograph film that has been exposed but not developed;
• (c) negatives, positives and reversals produced on cinematograph film.

(2) This Item does not cover goods that (with or without further processing) are for use as exhibition copies of motion picture films.

(3) In this Item, `motion picture film' does not include a film that is for the private, domestic or personal use of the person by whom or for whom the film is produced.

26(1) The following goods for use by a person mainly in producing motion picture films in the course of a business:

• (a)...
• (b)...
• (c) apparatus and the materials for use by the person mainly in developing, editing or otherwise processing goods that are covered by exemption Item 25.''

The expression ``mainly'' is defined in s 3(2) of the Act as meaning ``to the extent of more than 50%.''

8. Section 16 of the Sales Tax Assessment Act provides:

``(1) Table 1 sets out all the assessable dealings that can be subject to sales tax.

(2) If the time of an assessable dealing (as specified in column 4 of the Table) is on or after the first taxing day, and no exemption applies under Division 2 of this Part, then:

• (a) the dealing is a taxable dealing;
• (b) the person specified in column 3 is the person liable to the tax;
• (c) the tax becomes payable at the time of the dealing, as specified in column 4.''

In Table 1 the assessable dealing in category AD3c is:

``AOU by a person who is not the manufacturer of the goods, but who obtained the goods under quote.''

The person liable to the tax is the applier and the tax becomes payable at the time of AOU.

Reasoning on appeal

9. The primary judge's description of the use to which the machine was put was the subject of explanation before the Court. Counsel for the appellant informed the Court without objection from the respondent, that the primary judge's description of the manner in which the machine operated and was used, did not fully or appropriately describe its function or use. The Court was told that the machine is a scanning

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ATC 4592

machine which scans negatives produced on cinematograph film by means of sensors and converts the images on the negatives to electronic impulses or signals in a digital or analogue format. It was said that the machine then transfers these electronic impulses or signals onto either a videotape in another machine or a computer hard disk. The result in either case is that the images may be viewed in positive format for the purposes of editing. At this point of transfer the function and use of the machine ceases. The appellant then uses a different machine to carry out editing functions in relation to the positive format on the videotape or the electronic images stored on the hard disk. The edited images are then recorded on a videotape and given to the film-maker on a videotape. The film-maker uses yet another machine to translate the edited images onto cinematograph film. The telecine machine does not alter in any way the negative cinematograph film which it scans. It does not appear that this fuller explanation of the use of the machine was given to the primary judge.

10. There was evidence before the primary judge that, at the time of the acquisition of the machine, the intention of the appellant was to use it mainly for the transfer of motion picture films to video; effectively that was all the machine would do. What his Honour was not told, and what is important for present purposes, is that the machine itself does not transfer the images on the negative cinematograph film to videotape. That transfer, as explained to us, involves at least two stages; first, the conversion of the images on the negative cinematograph film to an electronic form or signal (which the machine undertakes) and secondly, the transfer of that electronic form or signal from the machine to another machine which records the electronic form or signal on a videotape or hard disk (for editing purposes). We consider this to be a critical distinction and a determining factor in this appeal.

11. The critical issue to be determined in this appeal is whether the machine, in the relevant terms of Items 25 and 26(1) was acquired for use in processing negatives produced on cinematograph film and was so acquired by the appellant for use ``mainly in producing motion picture films in the course of a business''.

12. The appellant submitted that its acquisition of the machine came within Item 26(1) because the appellant itself produced motion picture films in the course of its business. This involved the proposition rejected by the primary judge that the words ``motion picture films'' included videotape images. It became unnecessary to pursue this submission when the respondent accepted that, for the purposes of Item 26, the production of motion picture films can be carried out by a person other than the applicant for exemption. In the alternative the appellant submitted that its clients, the organisations which had shot the cinematograph film and produced the negatives, produced motion picture films and that it was sufficient to satisfy Item 26(1) that the appellant was engaged in activities which formed an integral part of the process of producing motion picture films, albeit that those motion picture films were produced by its clients, and that it was engaged in those activities as part of its business. The appellant submitted that the manner in which it intended to use, and did in fact use the machine, was by way of the ``processing'' of negatives produced on cinematograph film by its clients. In this context the appellant relied on the expression ``otherwise processing goods that are covered by exemption Item 25'' in Item 26(1)(c).

13. The respondent submitted that there was no ``processing'' of the negatives produced on cinematograph film by the machine because after the machine had carried out its function there was no change or alteration in the negatives. The argument was that ``processing'' necessarily involves a physical change to the thing processed. The respondent also submitted that the machine was not used by the appellant ``in producing motion picture films'' in the course of its business.

14. It may not have been made clear at first instance that the activity or function undertaken by the machine and its use in relation to negatives produced on cinematograph film was part of a process which had as its ultimate end the production of an edited positive (as distinct from negative) cinematograph film. It does not appear that there was any particular evidence directed to this issue before his Honour but this circumstance was understood or accepted by the appellant and the respondent as common ground, as appears from the appellant's objection to the assessment and respondent's reasons for disallowing the objection.

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ATC 4593

15. On 1 July 1998 the respondent issued an assessment to the appellant under the Sales Tax Assessment Act in respect of the machine assessing the amount of tax payable as $211,586.25. On 4 September 1998 the appellant objected to that assessment and among the grounds of which it relied were the following:

``1. The Applicant is in business as a post- production facility. It is interalia, engaged in editing or otherwise processing cinematograph film to produce mini-series, documentaries, feature films, commercials, etc.

2. The production of a mini-series, documentary, feature film, commercial, etc. is an involved process which begins with exposing the film in a cinematograph camera, the subsequent developing of that film and concludes with the production of release copies to be viewed by the public.

3. The Applicant purchased the goods for use mainly, if not exclusively, in transferring the cinematograph film to videotape and, to edit or otherwise process (ie colour grade) the final edited version of the cinematograph film.

4. When the cinematograph film has been exposed and developed, the film producer hires a post-production facility similar to that operated by the Applicant to edit or otherwise process the film. The Applicant uses the goods to transfer the film to videotape. Once transferred, the film is edited on a number of occasions until it meets the producer's requirements. The Applicant's final involvement with the production of a motion picture film which may be a mini-series, documentary, feature film or commercial is to use the goods to colour grade the film. The film remains on videotape and is then sent for copying.''

Paragraphs 3 and 4 conceal the fact, as the Court was informed, that the process of transferring the cinematograph film to videotape is a two-stage process involving the machine and a video-recording and recording machine or computer hard disk. It is the latter recording machine which transfers the electronic impulses or signals created by the machine by scanning the negative cinematograph film to a videotape or hard disk. The statement in par 4 ``the applicant uses the goods to transfer film to videotape'' is misleading in the sense that the machine does not itself transfer the film directly to videotape but carries out the first stage of that process in the manner to which we have earlier referred.

16. On 30 September 1998 the respondent disallowed the appellant's objection, and in its reasons for decision noted, inter alia, the following:

``From the information supplied with your initial ruling request dated 1 February 1995 and Notices of Objection, it is understood that the `... final output of the goods is on videotape.'

The Telecine Machine purchased by you therefore does not satisfy exemption Item 26(1)(c).

...

For you to be entitled to exemption on goods under item 36, you must be carrying out an activity on behalf of a principal who satisfies Item 18 in Schedule 1. Presumably, the activity undertaken by the principal is the production of motion picture films.''

As explained by counsel for the appellant, the appellant does carry out an activity, the use the machine, on behalf of principals who produce motion picture films. We have observed earlier that although the process or activity undertaken by the use of the machine creates an electronic representation or signal of the negative produced on cinematograph film which is transferred by another machine onto videotape, the ultimate end sought to be achieved by the use of the machine albeit by the use of later editing facilities is a final edited version of the cinematograph film ready for showing. This was common ground on the hearing of the appeal.

17. The appellant drew our attention to the respondent's Sales Tax Determination STD 98/3 issued 1 April 1998 which was a ruling for the purposes of s 77 of the Sales Tax Assessment Act in relation to the following issues:

``1. What is meant by the term motion picture film in Items 25 and 26 of Schedule 1 to the Sales Tax (Exemption and Classifications) Act 1992 (Cth) (ST(E&C) Act)?

2. Are freelance contractors, engaged by motion picture film producers, entitled to an

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ATC 4594

exemption for goods covered by Items 25 and 26 if the goods are used mainly in producing motion picture films?

3. Is there an entitlement to exemption under Item 26 for goods used mainly in producing motion picture films where images and/or sound contained on cinematograph film have been transferred onto another medium, for example digital tape?

4. When does production of a motion picture film finish?''

The decision contained in the Determination is in the following terms:

``1. Motion picture film means a tangible good that is cinematograph film containing a succession of still images in sequence, which is capable of being projected onto a screen by a projector with or without sound.

2. Freelance contractors engaged by motion picture film producers are entitled to exemption from sales tax for the following goods, if they are used mainly in producing motion picture films in the course of a business:

• • unexposed cinematograph film;
• • cinematograph cameras;
• • cinematograph film editing or processing equipment;
• • sound recording equipment;
• • sound reproducing equipment; and
• • sound editing equipment.

3. Exemption can be claimed for goods mainly used in editing or processing a work print copy of the cinematograph film. The exemption applies where the contents of that film have been transferred onto a different medium (for example, digital tape) for the purposes of editing or processing. Important restrictions are that the medium used in the original filming must have been cinematograph film and the final output medium must be cinematograph film.

4. For the purposes of Items 25 and 26, the production of a motion picture film finishes when a final master of a cinematograph film is produced. Consequently, the exemptions under Items 25 and 26 do not apply to goods for use after this stage.''

18. In the reasons set out in the Determination there appears the following:

``Freelance contractors

Activities undertaken by freelance contractors are integrally related to the production of the motion picture film. Although the equipment they use is not used directly by the producers of the motion picture film, it is used by a person mainly in producing a motion picture film. Consequently, exemption from sales tax is available to freelance contractors for goods covered by Items 25 and 26 which are used mainly in producing motion picture films in the course of a business.

...

Editing or processing using a medium other than cinematograph film

Where producers of motion picture films and freelance contractors edit and process digital tapes copied from negatives or reversals that were originally produced on cinematograph film, it is accepted that they are editing the original cinematograph film. Consequently, exemption can be claimed for goods used in editing or processing a work print copy of the cinematograph film that has been transferred onto a different medium, for example, digital tape.''

The appellant submitted that the Determination was inconsistent with the stand taken by the respondent on the appeal. The Determination is not binding on the Court but we find in the determination statements which support the conclusion we have reached that the appeal should be allowed.

19. His Honour asked the question whether the appellant's business could be viewed as one engaged mainly (in the statutory sense) in producing motion picture films. He answered the question ``no''. He concluded that the appellant did not produce motion picture films by the use of the machine which transferred cinematograph film to videotape.

20. We do not consider that his Honour's question was the appropriate question to ask. Nor do we consider that it was correct to say that the machine transferred cinematograph film to videotape. The use and purpose of the machine as explained to the Court (to which we have earlier referred) and the acceptance by the respondent (in our view correctly) that an applicant for exemption can come within Item 26(1) even though the production of the motion

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ATC 4595

picture films is by someone other than the applicant for exemption, show that the issue is not whether the appellant's business is one engaged mainly (in the statutory sense) in producing motion picture films. Rather, the relevant question is whether the machine is used mainly (in the statutory sense) in processing negatives produced on cinematograph film.

21. In our view, the answer to that question is in the affirmative. Once it is accepted that the function carried out by the use of the machine is one step along the way towards achieving the ultimate outcome of producing a cinematograph film for screening, the position is reached that the machine is used to perform an integral step in the processing of the negatives produced on cinematograph film. Adopting the words of the respondent in the Determination ``the final output medium [is] cinematograph film''.

22. The respondent submitted that the machine was not used in ``producing'' motion picture films or in ``processing'' the negatives produced on cinematograph film as there was no change in the film in any way once it had passed through the machine. The respondent emphasised that the expression used in Item 26(1) was ``in producing'' rather than ``in relation to producing'' or ``in connection with producing''. We accept that a narrower expression was used in the Item. But here the function carried out by the machine was integral to the production of cinematograph films. We read Item 26(1) as requiring that the use of the machine has to be in the course of the process of the production of motion picture films and it matters not that the person using the machine is not the person who produces the final output medium, but is rather an independent contractor to that person. This conclusion is recognised by the respondent's decision in the Determination referred to in par 17 above and in its reasons in par 18 above.

23. The respondent relied on
FC of T Hamersley Iron Pty Ltd 80 ATC 4509; (1980) 33 ALR 251 (affirmed on appeal 81 ATC 4582; (1981) 37 ALR 595) in support of the submission that the term ``processing'' involved some change in the nature, form or condition of the article the subject of the processing. That decision is of little assistance as the expression then under consideration was ``processing or treatment''. In the present case we are concerned with a process which has a number of steps or stages in the processing of the negatives to achieve a cinematograph film. In particular the film has to be edited and then rendered into positive form. The negatives are processed when they are edited and then rendered in edited form into positives. Part of that process involves putting the negatives into a form where they are able to be edited. That function is carried out by the two-stage process to which we have referred. It is an integral part of that process of putting the negatives into a form in which they may be edited that an electronic form of the images on the negatives be prepared to enable the editing to occur on videotape or by use of a hard disk. It follows that the machine is used ``in... processing'' the negatives. We do not have to read Item 26(1) as if it read ``apparatus... for use... in relation to... the processing of'' the machine to reach this conclusion. We are satisfied that the machine is used ``in... processing'' negatives on cinematograph film.

24. The appeal will be allowed; the order of the primary judge dismissing the application set aside and in lieu thereof it is ordered that the decision of the respondent disallowing the appellant's objection against its assessment to sales tax is set aside and that it is ordered that the appellant's objection is allowed. The respondent should pay the appellant's costs of the appeal and the proceeding before the primary judge.

THE COURT ORDERS THAT:

1. The appeal be allowed.

2. The order of Beaumont J on 13 April 2000 dismissing the appellant's application with costs be set aside.

3. The decision of the respondent disallowing the appellant's objection on 4 September 1998 against its assessment to sales tax be set aside.

4. The appellant's said objection be allowed.

5. The respondent pay the appellant's costs of the appeal and the proceeding before Beaumont J.