Emmett J

Federal Court, Sydney


Judgment date: 5 July 2011

Emmett J

1. The applicant, Reglon Pty Ltd ( the Taxpayer ), has appealed to the Court under Part IVC of the Taxation Administration Act 1953 (Cth) ( the Administration Act ) in respect of an objection decision by the respondent, the Commissioner of Taxation ( the Commissioner ). The Commissioner disallowed an objection by the Taxpayer to a notice of assessment of goods and services tax ( GST ) under the A New Tax System (Goods and Services Tax) Act 1999 (Cth) ( the GST Act ). The assessment was issued under s 105-5(1) of Schedule 1 to the Administration Act for the quarter ended 31 March 2008.

2. The Taxpayer contends that the assessment is excessive because the Commissioner incorrectly changed the GST net amount from a credit of $8,696 to a debit of $125,679 by making a debit adjustment of the sum of $134,375. The sum of $134,475 is one-eleventh of the sum of $1,478,125. In order to explain those figures and the circumstances in which the notice of assessment was issued by the Commissioner, it is necessary to say something more about the Taxpayer and its circumstances.

3. The Taxpayer was incorporated in New South Wales on 29 June 1995. In about September 1995, the Taxpayer was involved in a joint venture, in the furtherance of which it made a loan to an unrelated party. The Taxpayer thereafter incurred expenses and made a tax loss for the year ended 30 June 1996. In the subsequent period from 1996 to September 2004 the Taxpayer did not carry on any business. It received no interest from the loan to the unrelated party. The loan was written off in the year ended 30 June 2009 after all legal avenues for recovery had been exhausted.

4. On 21 September 2004, the Taxpayer entered into a contract to acquire approximately 117,000 individual items of scaffolding for a total purchase price of $1,478,125. The Taxpayer borrowed $1,093,833 from J. Smit & Sons Pty Ltd and $450,000 from J. Smit & Sons Contracting Pty Ltd in order to finance the acquisition of the scaffolding. The loans were interest-free and were repayable at call.

5. On 13 December 2004, the Taxpayer agreed to enter into a hire agreement ( the Hire Agreement ) with ACS Hire Pty Ltd ( ACS Hire ). Under the Hire Agreement, the Taxpayer agreed to hire its scaffolding to ACS Hire for 10 years, with the intention that ACS Hire would itself hire out the scaffolding to users in the building and construction industry.

6. ACS Hire has a connection with Action Construction Services Pty Ltd ( Action Construction ), in that both ACS Hire and Action Construction were controlled by a Mr Baker, who had previously been involved with Rildean Pty Ltd ( Rildean ), another scaffolding company. Action Construction also owned items of scaffolding acquired by it from the receiver of Rildean in 2004. The whole of the purchase price for the acquisition of the scaffolding from Rildean was borrowed by Action Construction from Citadel Financial Corporation Pty Ltd ( Citadel ). Action Construction granted a fixed and floating charge to Citadel over its assets, including its scaffolding assets, to secure the borrowing ( the Charge ).

7. The Taxpayer's purchase of scaffolding was completed on or before 31 January 2005. Employees of Action Construction supervised the transfer of the Taxpayer's scaffolding to premises occupied by ACS Hire at Wetherill Park, New South Wales. Action Construction's scaffolding was also moved to Wetherill Park. At the Wetherill Park premises, ACS Hire caused the Taxpayer's scaffolding to be intermingled with Action Construction's scaffolding. Thereafter, Action Construction used the Taxpayer's scaffolding, intermingled with its own scaffolding, in its business of hiring out scaffolding to users in the building and construction industry.

8. ACS Hire paid hire fees to the Taxpayer until September 2005. Action Construction in turn reimbursed ACS Hire the amount of those fees. However, in September 2005 ACS Hire defaulted in the payment of hire fees to the Taxpayer.

9. In December 2005, all of the scaffolding that was not out on hire by Action Construction to users in the building and construction industry was moved from the Wetherill Park premises to a holding yard at St Peters. That scaffolding included scaffolding owned by the Taxpayer and scaffolding owned by Action Construction.

10. On 29 December 2005, Citadel appointed Mr Grahame Hill as receiver and manager of the assets of Action Construction under the Charge. On 12 January 2006, the Taxpayer's solicitors informed Mr Hill that part of the scaffolding located at the holding yard at St Peters belonged to the Taxpayer. At that stage, the Taxpayer's scaffolding could not be separately identified and differentiated from the scaffolding of Action Construction.

11. On 18 January 2006, Mr Hill took possession of the intermingled scaffolding and granted a licence of the business of Action Construction to Action Construction Services NSW Pty Ltd ( Action NSW ). Action NSW had been incorporated two days earlier. A Mr Maiolo was the sole director of both Citadel and Action NSW. The terms of the licence granted by Mr Hill permitted Action NSW to use all of the intermingled scaffolding, including the Taxpayer's scaffolding. Possession of the intermingled scaffolding was given to Action NSW.

12. On 16 February 2006, the Taxpayer commenced a proceeding in the Supreme Court of New South Wales against Mr Hill and Citadel. Apart from a claim for interlocutory relief, the Taxpayer claimed an order that the defendants deliver up the Taxpayer's scaffolding or, in the alternative, an order that the defendants pay to the Taxpayer damages for conversion of its scaffolding. There was also a claim for an order for an accounting, the terms of which were subsequently amended. Under the amended prayer, the Taxpayer claimed an order for an enquiry as to the quantum of damages for the loss of any potential hiring charges or rent for the scaffolding that the Taxpayer had lost as a result of the conversion of the scaffolding.

13. J. Smit & Sons Pty Ltd funded with interest-free loans the costs incurred by the Taxpayer in relation to the proceeding in the Supreme Court of New South Wales. During the year ended 30 June 2007, the loan balance owing to J. Smit & Sons Pty Ltd increased to $1,749,458, taking into account an assignment of the $450,000 originally lent by J. Smit & Sons Contracting Pty Ltd to the Taxpayer.

14. On 13 April 2006, ACS Hire went into liquidation, and on 27 April 2006, Action Construction went into liquidation. On 15 May 2006, Mr Hill retired as receiver of the assets of Action Construction. Citadel, as mortgagee, then entered into possession of the assets of Action Construction. In that capacity, Citadel purported to take possession of the whole of the intermingled scaffolding, including the Taxpayer's scaffolding. On 15 May 2006, Citadel granted a new licence to Action NSW, on similar terms to the licence of 18 January 2006. That licence also permitted Action NSW to use all of the intermingled scaffolding, including the Taxpayer's scaffolding.

15. On 11 December 2006, judgment was entered in the Supreme Court proceeding in favour of the Taxpayer, for the sum of $1,331,212 plus interest. It is clear from the terms of the reasons for judgment that the judgment was given for conversion of the Taxpayer's scaffolding. The sum of $1,331,212 was arrived at by reference to expert opinion as to the auction value of the Taxpayer's scaffolding, which was accepted as being its market value. That value was $1,478,125. However, the Supreme Court reduced that sum by 10 per cent, on the basis that it was reasonable to make some allowance for loss of scaffolding and for damage to the scaffolding that had occurred prior to conversion.

16. The defendants appealed to the Court of Appeal from the judgment of the Supreme Court, and the Taxpayer cross-appealed in respect of the reduction. The appeal was dismissed, but the cross-appeal was upheld in part, with the consequence that judgment for the Taxpayer was entered in the sum of $1,478,125 plus interest. An application for special leave to appeal to the High Court was subsequently dismissed.

17. At some stage prior to 31 March 2008, the judgment sum of $1,478,125 plus interest was paid to the Taxpayer. The Taxpayer applied most of the moneys so received to reducing the loan balance owing to J. Smit & Sons Pty Ltd, and, as at 30 June 2008, the balance owing on that loan was $189,588. That left the Taxpayer with assets of some $499.

18. It is against that background that the Commissioner's assessment was issued to the Taxpayer. On 4 May 2010, the Commissioner commenced an audit of the Taxpayer. The Commissioner finalised the audit on 23 July 2010, concluding that the Taxpayer had made a taxable supply within the meaning of s 9-5 of the GST Act, in that it had made a supply to Citadel of the Taxpayer's scaffolding for a consideration of $1,478,125, and had therefore understated, in its Business Activity Statement for the relevant period, GST on sales in the amount of $134,375.

19. The Taxpayer no longer has any business assets. Since the default under the Hire Agreement, the Taxpayer has not been involved in any business or activity other than prosecuting the proceeding in the Supreme Court. The Taxpayer now continues in existence for the sole purpose of prosecuting the present appeal.

20. Under s 7-1(1) of the GST Act, GST is payable on taxable supplies . Section 9-5 provides, in effect, that a taxpayer makes a taxable supply if the taxpayer makes the supply for consideration and the supply is made in the course or furtherance of an enterprise that the taxpayer carries on. The supply must also be connected with Australia and the taxpayer must be registered or required to be registered. Those last two requirements were satisfied in the present case. The question in this appeal is whether the first two requirements were satisfied, namely, whether the Taxpayer made a supply for consideration and, if so, whether that supply was made in the course or furtherance of an enterprise carried on by the Taxpayer.

21. The concept of supply, as used in the GST Act, is a very wide one. Under s 9-10(1), a supply is any form of supply whatsoever. Section 9-10(2) provides that, without limiting s 9-10(1), supply includes:

  • • a supply of goods;
  • • a supply of services;
  • • a creation, grant, transfer, assignment or surrender of any right.

22. Section 9-15 relevantly provides that consideration includes any payment in connection with a supply of anything. It does not matter whether the payment was voluntary or whether the payment was in compliance with an order of a court.

23. Section 9-20 relevantly provides that an enterprise is an activity, or series of activities, done:

  • • in the form of a business;
  • • in the form of an adventure or concern in the nature of trade; or
  • • on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property.

It also includes other matters which are not presently relevant.

24. There are, in effect, two separate questions raised in the appeal. The first is whether, in the circumstances that I have described, it can be said that the Taxpayer made a supply for consideration. The second is whether any such supply was made in the course or furtherance of an enterprise carried on by the Taxpayer. The first question in turn raises, in effect, two sub-issues. The first sub-issue is whether the Taxpayer made a supply, and the second sub-issue is whether, if it did, it made the supply for consideration. In the course of argument, it was suggested that there may be two sub-issues within that first sub-issue. However, I find it more helpful to analyse the provisions on the basis that there is one concept of making a supply .

25. In the Supreme Court proceeding, the Taxpayer pursued claims in detinue and conversion in the alternative. For the reasons given by Windeyer J at first instance, and by the Court of Appeal on appeal, the prerequisites for succeeding in detinue were not established. Nevertheless, it is clear that in the proceeding, the Taxpayer sought to recover the scaffolding in specie.

26. The effect of the payment in full by Citadel of the judgment in conversion against it was to vest in Citadel the ownership of the Taxpayer's scaffolding. However, the mere obtaining of judgment in conversion against a defendant does not of itself affect the ownership of the converted goods. Nor does the formal entry of judgment. It is the satisfaction of the judgment that effects a transfer to the defendant of property in the goods that were the subject of the conversion. A proceeding in conversion is not an action in rem. Rather, it is to recover, prima facie, the value of the goods. If the goods are returned, judgment would be given for nominal damages only, although substantive damages might be given for detention or demurrage. The only way in which judgment in conversion can have the effect of vesting property in a defendant is by treating the judgment as having been an assessment of the value of the goods, and treating the satisfaction of the damages as payment of the price as upon a purchase of the goods (see
Brinsmead v Harrison (1871) LR 6 CP 584 at 587-588).

27. Judgment in conversion may be contrasted with judgment in detinue. The plaintiff in detinue asserts a right to recover the goods in specie. In the case of non-delivery, the plaintiff can recover their value. In effect, the option of giving up the goods, or paying their value, remains with the defendant, who, by refusing to deliver the goods, becomes liable to pay their value. The sum assessed for value is not damages but a mere substitution in money for the goods retained by the defendant, if the defendant so elects. The sum assessed for the value of the goods may be contrasted with damages for detention, or demurrage. Damages for detention or demurrage refer to the loss occasioned by delay in return of the goods. The amount depends upon whether the plaintiff has, in fact, sustained any damage (see
Heavener v Loomes (1924) 34 CLR 306 at 319-320).

28. In an action in detinue, a plaintiff who becomes a judgment creditor is unable to obtain money until execution has issued. Until the judgment is satisfied, property in the goods remains in the judgment creditor, since the judgment creditor cannot be entitled both to the goods and to their value. Thus, the mere issue of a writ of fieri facias is not itself sufficient to divest the judgment creditor of property in the goods. It is the satisfaction of the writ that effects a transfer. That is to say, it is the payment of the full value as assessed that vests property in the defendant. The principle is that, in such a case, there is in effect a purchase of goods: solutio pretii emptionis loco habetur (see Judge Jenkins, Eight Centuries of Reports, 4th Century Case 88 (1504);
145 ER 126). That is to say, the satisfaction of the price is taken to be in place of purchase. The theory of judgment in an action of detinue is that it is a kind of involuntary purchase of the plaintiff's goods by the defendant. That must always be so in a judgment in detinue, because judgment is always given for the value and never for damages, except damages for detention or demurrage. However, in conversion only damages can be recovered. If the value is given as damages, then satisfaction of the damages will in effect be satisfaction of the price, by way of purchase (see Heavener v Loomes at 320-321).

29. The Roman contract of sale, emptio/venditio or purchase/sale, recognises the different positions of buyer and seller. It is curious that the 9th edition of Black's Law Dictionary (page 1873) incorrectly translates emptio, when used in the Latin maxim quoted above, as 'sale'. In the 6th edition (page 1394), the word is correctly translated as 'purchase'. The difference may have some significance in the present case. Thus, payment of a judgment in conversion, where the value of the converted goods is given as damages, is taken to be a purchase , not a sale .

30. In one sense, the use of the maxim in the context of a judgment in detinue or conversion is curious. The maxim is taken from a decision of the 16th century, a time at which English judges had some familiarity with the civil law. There is reference in both the Institutes (2.1.41) and the Digest (1.18.19) to the proposition that, where there is a sale followed by delivery, ownership does not pass until the price is paid. It may be that the maxim refers to that notion. Be that as it may, the maxim has been taken to be appropriate in relation to the transfer of ownership of converted goods to the defendant upon satisfaction by the defendant of the judgment for conversion in full.

31. Whether its doing so was misconceived or otherwise, it is clear that the Taxpayer was pursuing the recovery of its scaffolding in the Supreme Court proceeding. It would have been open to the defendants to deliver up the scaffolding. However, they did not. One difficulty that presented itself, of course, was that of identifying which of the scaffolding belonged to the Taxpayer. In any event, the Taxpayer's scaffolding was not delivered up to the Taxpayer, and judgment was entered in favour of the Taxpayer. That judgment was satisfied in full, resulting in the Taxpayer being divested of the scaffolding and the scaffolding being vested in Citadel.

32. The Taxpayer was reimbursed for the value of its property, which was, first by Mr Hill and then by Citadel, taken injuria, that is, without justification. It is possible that each of those conversions was preceded by a different conversion, by Action Construction, when it received the Taxpayer's scaffolding from ACS Hire. In any event, it is clear that there was an unjustified interference by Citadel with the Taxpayer's ownership, insofar as Citadel took possession of the scaffolding and wrongfully refused and failed to deliver it up to the Taxpayer. As a consequence, judgment was entered against Citadel for conversion of the scaffolding. The payment made in satisfaction of that judgment resulted in ownership of the scaffolding vesting in Citadel. That is, the transfer of ownership to Citadel, and the extinguishment of the Taxpayer's ownership by operation of law, occurred without assent and was triggered by the payment of the judgment sum by Citadel. That payment did not depend upon any action of the Taxpayer. I do not consider that, in those circumstances, the Taxpayer may be said to have made a supply . There was no taxable supply by the Taxpayer.

33. That conclusion is sufficient to dispose of the appeal in favour of the Taxpayer. That is to say, the assessment by the Commissioner was excessive. However, it is strongly arguable, if the circumstances that I have described can in fact properly be characterised as the making of a supply by the Taxpayer of the scaffolding, that the payment of the judgment sum was a payment in connection with that supply. It would, therefore, have been consideration within the meaning of s 9-15 of the GST Act, such that one would be able to conclude that the Taxpayer had made the supply for consideration within the meaning of section 9-5 of the GST Act. In view of the conclusion I have reached, it is unnecessary to express a final view as to whether there was consideration within the meaning of s 9-15.

34. It also follows from the conclusion that I have reached that it is unnecessary to determine whether any supply made was made in the course or furtherance of an enterprise carried on by the Taxpayer. The Taxpayer contends, in effect, that it ceased to carry on an enterprise either on 18 January 2006 or on 15 May 2006, when its scaffolding was converted. However, so far as its entitlements were concerned, it continued to be entitled to be paid a hire fee by ACS Hire under the Hire Agreement. ACS Hire, of course, went into liquidation on 13 April 2006. Nevertheless, hire fees doubtless continued to accrue after that time, at least until the Taxpayer terminated, or the liquidator disclaimed, the Hire Agreement.

35. There can be a course of business, even if there is nothing more than an intention to carry on a business (see
Russell v Commissioner of Taxation (2011) 274 ALR 545 at [87]). The Taxpayer accepts that, if the scaffolding had been returned to it, it would have resumed its scaffold hiring activity. It says, however, that following the acts of conversion, its sole activity has been the prosecution of the Supreme Court proceeding, and, subsequently, the present appeal. Nevertheless the fact that it did press its claim in detinue, albeit unsuccessfully, suggests that it was still engaged in the enterprise of hiring out scaffolding. The fact that ownership of its scaffolding passed to Citadel upon satisfaction of the judgment did not mean that it could not thereafter acquire more scaffolding to enable it to pursue the enterprise in which it was engaged. Had it been necessary to resolve the question, I would have been disposed to conclude that, had the circumstances been such that it could be said that the Taxpayer had made a supply of the scaffolding for consideration, that supply was made in the course or furtherance of an enterprise that the Taxpayer carried on.

36. It follows from what I have said that the appeal should be upheld. The objection decision of the Commissioner should be set aside. The objection decision should be remade in accordance with law. The Commissioner should pay the Taxpayer's costs of the proceeding.

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