Case U59
Members:BJ McMahon SM
Tribunal:
Administrative Appeals Tribunal
B.J. McMahon (Senior Member)
In its income tax return for the year ended 30 June 1981, the applicant made certain claims for investment allowances under legislation (since repealed) which will be examined later in this decision. An amount of $10,815 was claimed in respect of a number of individual phonos, $10,585 in respect of certain itemised pinballs and $65,831 in respect of videos as set out in the return. Each of these classes of equipment may be generally styled amusement machines.
A phono is a device for reproducing the sound of records selected by the customer upon insertion of a coin by the customer and the pressing of the appropriate selection button. The entertainment provided by the record lasts only as long as the record itself.
Pinballs consist of an amusement machine, which upon the introduction of a coin by the user provides a number of balls which the user can manipulate by means of a cue on a spring which hits the balls in various directions and causes a score to be recorded depending upon the number and identity of electronic signals hit by those balls. The period of the entertainment to be derived from such a pursuit rests upon the skill of the player in keeping the balls "alive".
A video is an electronic game designed around a particular theme. Upon insertion of a coin by the user, he may control electronic signals in relation to the electronic pattern on the video screen so as to effect the purpose of the game. This purpose may be, for example, a simulated attack upon a space vehicle. The entertainment provided by this diversion depends upon a combination of the skill of the operator and the length of time that the electronic pattern is displayed.
ATC 383
All of the machines were acquired by the applicant after the coming into effect of Act No. 159 of 1980 ("the amending Act"). Prior to that amendment, there were excluded from the benefits of investment allowance entitlement, plant or articles for use in or primarily and principally in connection with amusement or recreation. This was provided for in the then sec. 82AF(2)(f)(i) of the Income Tax Assessment Act ("the Act"). By sec. 12 of the amending Act that subsection was repealed.
As soon as possible after the acquisition of the machines (and certainly within 12 months), the applicant sought to derive income from them by placing them principally in hotels. A few of them were placed in registered clubs.
The typical arrangement with hotels and clubs was described in evidence by the applicant's managing director and by an experienced hotel licensee. It seems to be agreed between the parties that the arrangements were uniform in respect of all machines and throughout the relevant period.
There is no written agreement between the applicant and the hotel. Normally the applicant approaches the hotel to induce the licensee to enter into an arrangement, but sometimes (as hoteliers move from one to another hotel) a former client will get in touch with the applicant to renew the arrangement.
The machine is supplied free of all cost to the hotelier. It is located in the hotel premises in an area agreed upon between the hotelier and the applicant. The hotelier, in addition to providing space, also provides electricity to power the machine. The hotelier's staff may also be called upon from time to time to provide change for patrons in order to use the machine.
In return for this, the hotelier receives an agreed percentage (usually 50%) of the gross revenue from the machine.
The applicant is responsible for the cost of delivery and installation of the machines including the installation of extension speakers in the case of phonos.
The applicant provides a seven day, 12 hours per day maintenance service at no cost to the hotelier and in addition provides a preventative maintenance program. In the case of major faults, the machine will be picked up and taken to the applicant's workshop where all spare parts will be provided free of charge to the hotelier.
The applicant provides all replacement records for phonographs.
Each of the machines contains a cash box which can be opened only with a key. This is kept by the applicant company. The machine is cleared regularly by the company's representative, who (sometimes in the presence of the hotelier or his employee) counts the takings, checks the metering card and pays the hotel its share of the takings. In the case of small hotels, they are usually paid in cash on the spot. In the case of larger hotels or larger amounts, a cheque is sent shortly afterwards.
Either party has the power to terminate the arrangement without prior notice. If a hotelier wishes to relocate a machine or to have it removed, he must request the applicant to carry out this process as damage can occur from inexperienced handling of some units. If an agreement cannot be reached whether or not the unit should be removed, ultimately the wish of the applicant will prevail.
Each unit has a sticker attached to it stating that it is owned and operated by the group of which the applicant is a member and setting out the telephone numbers for service.
The claim for the investment allowance is made pursuant to sec. 82AA of the Act in the case of those machines immediately installed, and under sec. 82AG of the Act in the case of those installed within 12 months. In each case the relevant test to be applied is the same.
Section 82AA was in the following terms at the relevant time:
"82AA. Subject to the following provisions of this Subdivision, this Subdivision applies in relation to a unit of eligible property acquired or constructed by the taxpayer that is -
- (a) in the case of any taxpayer, for use by the taxpayer wholly and exclusively -
- (i) in Australia; and
- (ii) for the purpose of producing assessable income otherwise than by -
- (A) the leasing of the eligible property;
ATC 384
- (B) the letting of the eligible property on hire under a hire-purchase agreement; or
- (C) the granting to other persons of rights to use the eligible property; or
- (b) in the case of a taxpayer being a leasing company, for use wholly and exclusively -
- (i) in Australia; and
- (ii) for the purpose of producing assessable income,
by another person to whom the taxpayer has, on or after 1 January 1976, leased the eligible property under a long-term lease agreement that was entered into by the taxpayer in the course of carrying on business in Australia and was so entered into by the taxpayer and the other person at arm's length."
The evidence was that the units were neither leased nor let on hire. They were used wholly and exclusively in Australia and for the purpose of producing assessable income. They were, therefore, property to which the section applies, unless they were acquired by the applicant for the purpose of producing assessable income by the granting of rights to other persons to use the eligible property (sec. 82AA(a)(ii)(c)) or unless, even if not so acquired, within 12 months after their first use or installation ready for use, the applicant granted a right to other persons to use them (sec. 82AG(1)(b)). The question that arises under both sections is the same, namely did the applicant grant to other persons rights to use the eligible property within the meaning of those sections?
The applicant's claim for the allowance was refused on two bases, either alternatively or cumulatively. It was said that by installing the units in hotels under conditions outlined above, the applicant gave the hotelier a "right to use the eligible property". Alternatively, it was argued that the applicant gave to the ultimate consumers a right to use the eligible property for their amusement upon the insertion of coins. Counsel for the applicant referred to these as the macro argument and the micro argument.
The leading authority is
Tourapark Pty. Ltd. v. F.C. of T. 82 ATC 4105, a decision of five Judges of the High Court.
In that case the taxpayer company carried on the business of a tourist caravan and camping park on land in Canberra. On the land it provided caravans and motel units which were available to members of the public wishing to occupy them and for which they paid a charge. The caravans were mounted on concrete blocks but retained their wheels and were capable of being moved from site to site. They were connected to an electricity supply and water supply. Customers paid a stated amount per day and were provided with a key to a particular caravan. Each customer was granted a licence to occupy a caravan and to make use of the communal facilities provided on the site.
The High Court held that the taxpayer's use of the caravans fell precisely within the ordinary and natural meaning of the words of the relevant sections and that there was no sound basis for departing from the ordinary meaning of the words. The principal judgment of the Court (given by Gibbs C.J.) held that although the taxpayer company itself used the caravans as plant for the purpose of producing assessable income, it nevertheless granted to each customer a right to use the caravans and therefore the excluding provisions applied.
The first task of the applicant, therefore, was to distinguish the facts of the present case from those of Tourapark.
Two obvious differences were pointed out by counsel for the applicant. Firstly, the customers in Tourapark signed a written licence agreement at the caravan park office before being allowed to use the caravan. Secondly, the signing of such a licence gave them the right to use the whole of the caravan. Neither of these features applied in the present circumstances.
It was argued that the indicia of a right to use did not exist in the present circumstances. Dealing with the macro argument, counsel for the applicant pointed out that the hotelier had no access to the coin box or to the workings of the unit. He himself could not remove the unit, although he could request removal. Similarly, he did not control the siting of the unit, although he could make suggestions for its most effective placement. Evidence was given that the units were installed to be used only for their designed purpose. Any attempt, for example, to interfere with a pinball machine so as to give a better result would lead to possible removal of the machine by the applicant. The
ATC 385
hotelier therefore had no proprietary rights in the units, it was said. He could not deal with them to the exclusion of the applicant in any way that he wished. He could not take possession of the unit and handle it except in an agreed way.Counsel for the respondent argued that the hoteliers did in fact use the machines and benefited from their use by a possible increase of sales in their bars and certainly by receiving a percentage of the gross takings. In reply, counsel for the applicant argued that benefit to hoteliers was not the test. He drew an analogy with an agistment contract under which the agister would obtain a benefit but would certainly have no right to use the stock.
Counsel for the respondent argued that the arrangement between the applicant and the hotelier was one of gratuitous bailment similar to that considered in
W.A. Hughes Pty. Ltd. v. F.C. of T. 81 ATC 4317. The evidence was that generally units were in position for as long as they were profitable and usually for months rather than weeks. From this, the respondent argued that the bailment extended over lengthy periods which took away the necessary element of whole and exclusive use by the taxpayer of the units in question. Again this was met by counsel for the applicant in reply with the analogy of other bailment agreements. The test, he said, is whether the taxpayer has granted a right to use the eligible property, not whether he has entered into a bailment contract. For example, counsel argued that if a motor car was left at a car parking station, this would not give the proprietor of the station the right to use the vehicle, notwithstanding the undoubted bailment agreement.
Counsel for the applicant sought to derive some comfort from the amending Act and from the explanatory memorandum that accompanied it when it was introduced into Parliament, together with the second reading speech. If, he argued, a legislative policy is to be discerned by revoking the exclusion of amusement machines from the category of eligible property, it would be putting too narrow an interpretation upon the revocation if the Commissioner were to restrict the further application of the Act by excluding amusement machines in the present circumstances. The present arrangements, according to the evidence, were not unusual in the industry. I do not find this a persuasive argument. Firstly, I do not consider it essential to the functioning of the amusement machines that they should be placed in the premises of third parties. I see no reason why the owner of amusement machines should not also be the direct operator of them by installing them, for example in rented amusement arcades. It does not seem to me to be an essential feature of amusement machines that they should be located in the field, although no doubt this commonly happens. More importantly, however, I am not persuaded that the legislative history indicates an intention on the part of Parliament to derogate from the ordinary and natural meaning of the words in the relevant section. The High Court in Tourapark found no difficulty in giving meaning and content to these words. No ambiguity or obscurity is to be found so as to trigger the possible application of sec. 15AB(1)(b)(i) of the Acts Interpretation Act 1901. An attempt to read down the provisions of the legislation (as it existed at the relevant time), in the light of its former legislative history must, in my view, fail having regard to the observations of Gibbs C.J. in Tourapark.
Counsel for the applicant then turned to the micro argument. He submitted that it was absurd to suggest that the use of the machine by the ultimate consumer for transitory periods was the type of use contemplated by the subsection. This point was specifically reserved in Tourapark for decision in a subsequent case. In that case, analogies were drawn with self-service petrol bowsers at service stations, automatic lockers at transport terminals, lifts and escalators and aircraft and buses. All of these items of plant are commonly used by patrons. Some depend for their derivation of income from such use. For the purpose of deciding Tourapark, Gibbs C.J. and those Judges that agreed with him, found it was not necessary to decide whether that was the sort of use contemplated by the subsection. Counsel submitted in the present application that if it were, then it would be inconsistent with the practice of the respondent in granting investment allowance in respect of, for example, owner-operated buses or water-slides.
He sought to derive comfort from three cases decided prior to the amending Act. They were
W. Smith v. F.C. of T. 82 ATC 4240,
Hamilton Island Enterprises Pty. Ltd. v. F.C. of T. 82 ATC 4302 and
Kearney v. F.C. of T. 84 ATC 4295 (Supreme Court of Victoria), and
F.C. of T. v. Kearney 85 ATC 4183 (Federal Court).
ATC 386
Smith was concerned with a game fishing boat, Hamilton Island Enterprises with a helicopter, and Kearney with a catamaran. In each case the thrust of the decision was to determine whether or not those items fell within the then applicable exclusion of articles for use in amusement or recreation or sport. In each case it was intended that the equipment should be available to charterers or members of the public. In the present proceedings counsel argued that because none of the judgments deals with the question whether the taxpayer had granted or intended to grant rights to use the eligible property to members of the public, that therefore the respective courts had taken the view that the granting of such rights would not be the granting of the sort of right contemplated by the subsection presently under consideration. It seems to me that such a conclusion is not open. The cases cited are authorities for what they decide, not for what they do not decide. There is no way of telling whether the arguments were raised, and if they were not raised, and if they were not raised, why they were not raised. From the terms of the decision it is not possible to hold that because a proposition is not mentioned, it must therefore be taken to have been endorsed.Counsel for the respondent in the micro argument argued that there was in fact a contract between the applicant and patrons of the machines. The sticker indicated an offer to the public at large to play the machines. Acceptance of the offer occurred when money was put in the slot. In consideration of the insertion of the coin, the user obtained the exclusive right to use the machine for provision of amusement during a certain period. He would, it was argued, have certain rights against the applicant if the machine failed to provide that amusement, whether or not it was practical to enforce such rights.
For reasons which will appear later, I do not consider it necessary to resolve the micro argument one way or the other. In my view, the relationship between the applicant and the hotelier is such as to amount to a granting to the hotelier of a right to use the eligible property within the meaning of the subparagraph.
The word "use" can have a very wide meaning. In the High Court decision of
Council of the City of Newcastle v. Royal Newcastle Hospital (1956-1957) 96 C.L.R. 493, Taylor J. said at p. 515:
"The word `use' is, of course, a word of wide import and its meaning in any particular case will depend to a great extent upon the context in which it is employed. The uses to which property of any description may be put are manifold and what will constitute `use' will depend to a great extent upon the purpose for which it has been acquired or created."
In the Privy Council appeal, reported at (1959) 100 C.L.R. 1, Lord Denning gave examples of the wide range of activities relating to land that could fairly be described as a use of that land. At p. 4 he said:
"An owner can use land by keeping it in its virgin state for his own special purposes. An owner of a powder magazine or a rifle range uses the land he had acquired nearby for the purpose of ensuring safety, even though he never sets foot on it. The owner of an island uses it for the purposes of a bird sanctuary even though he does nothing on it, except prevent people building there or disturbing the birds."
The compatibility of use and inactivity was stressed in
Ryde Municipal Council v. Macquarie University (1978) 139 C.L.R. 633. Stephen J. drew a distinction between active and passive use. An example of the latter was given by Gibbs A.C.J. at p. 639 in the following terms:
"Where use, and not occupation, is in question, I can see no reason to disregard the indirect use which an employer makes of a house by providing it as a residence for the use of his employees. If, for example, a university considered it desirable in its own interests that the vice-chancellor should live in particular premises which the university owned, the university would, in my opinion, use those premises if it made them available as a residence for the vice-chancellor, and this would be so whether the premises were let or occupied under licence.
In my opinion, therefore, land may be `used' by a university, in the ordinary and natural meaning of that word, if the university grants a lease of the land for the purposes of the university."
ATC 387
The wide meaning of "use" is appropriate in the present subsection. This was confirmed by the approach of Gibbs C.J. in Tourapark. In the present circumstances the hotelier can fairly be said to use the equipment in the carrying on of his business of a hotel. He would derive income directly from the operation of the machine and indirectly from the increased popularity of his premises reflected in increased sales. There would, in fact, be no reason why he would agree to the installation of the machine unless he anticipated that the operation of it would in some way contribute to the profits of his enterprise generally. I agree that the obtaining of benefits, as such, is not sufficient to bring the circumstances within the relevant exception. However, the operation of the machine as an integral part of the business by the hotelier is a use by him of the machine for his own purposes. It need not be a "hands on" active use of the whole of the machine. A passive employment of its revenue raising capabilities would, in my view, amount to a use. The hotelier's right to use it is to be explained in similar wide terms.
As Deane J. put it in Hughes (at p. 4322):
"Quite apart from the foregoing, it is, in my view, incorrect to approach the construction of sec. 82AA(a)(ii)(c) on the Hohfeldian basis that the `rights' referred to must be both formally defined and capable of being asserted and vindicated by legal proceedings. As was said in
F.C. of T. v. Tourapark Pty. Ltd. (80 ATC 4503 at p. 4507), the word `granting' in subpara. (C) is not used in a technical sense but in the sense of `an authoritative bestowal or conferring'. The `rights to use' mentioned in the subparagraph include a right in the nature of a licence, that is, `an authority to do something which would otherwise be wrongful or illegal or inoperative'
(F.C. of T. v. United Aircraft Corporation (1943) 68 C.L.R. 525 at p. 533)."
As Gibbs C.J. pointed out in Tourapark, the Parliament intended "that the allowance should not be payable unless the taxpayer kept both the property and the exclusive right to use it, and did use it only for the purpose of producing assessable income". In my view the use of the equipment by the hotelier is incompatible with that requirement.
It is therefore not necessary to decide whether the use of the property by the ultimate consumer is the type of use contemplated by the subparagraph. I would, however, point out that if such a result were to ensue, it has certainly been decided that this would not be absurd or unjust. In Tourapark at p. 4108 Gibbs C.J. said:
"Counsel for the taxpayer in the course of argument gave a list of examples of property in respect of which it was said that if the Commissioner's construction of the Act is correct, a taxpayer would not be entitled to the investment allowance. The list included self-service petrol bowsers at service stations, automatic lockers at transport terminals, lifts and escalators and aircraft and buses. It is unnecessary to consider whether it would be correct to say that a taxpayer grants to another person a right to use property of the kind mentioned in the examples, and undesirable to do so since the question may fall for decision in other cases. However, if the conclusion is that the allowance is not payable in respect of property of that kind, the result is neither absurd nor unjust. It is apparent that the investment allowance is made available for the purpose of encouraging particular behaviour which the Parliament regarded as desirable, namely, the expenditure of money on certain plant, which (except in case of leasing companies) is intended to be used and is in fact used by the taxpayer himself wholly and exclusively for the production of assessable income and which others have no right to use. The Parliament attached conditions to the right to the allowance, no doubt with a view to preventing the right being used simply as a means of tax avoidance, and no reason appears why the words imposing the conditions should be given any other than their ordinary and natural meaning."
In fairness, I should observe that I do not consider there is any element of tax avoidance in the present circumstances.
In Tourapark, Aickin J. in a separate judgment observed at p. 4111:
"It seems to me that the purpose of sub-sub-para. (C) is to operate as a `drag-net' provision to pick up any other right to use which might be devised or which might arise in the conduct of some particular kind of business."
ATC 388
Later in the same page his Honour commented that sub-subpara. (C) added:
"... a `catch all' provision in quite general terms to pick up cases where there is no grant of possession but there is a right to use. An example would be the grant of a right to enter an owner's premises and there use the owner's machine tools or other equipment, and the ingenuity of financiers and manufacturers might provide other examples."
Although these views do not go so far as to suggest that transitory use by consumers is sufficient to bring otherwise eligible property within the exception contained in the subparagraph, they suggest that such an argument would be difficult to meet. In the circumstances, however, I do not offer any concluded view.
It is sufficient to hold that the arrangement between the applicant and the hoteliers amounted to the granting of such rights as were contemplated by the subparagraph, thus excluding the items in question from the general conditions of eligibility required by sec. 82AA for the investment allowance.
For these reasons the decision under review is affirmed.
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