FEDERAL COURT OF AUSTRALIA - GENERAL DIVISION

INN LEISURE INDUSTRIES PTY LTD (In liq) v D F McCLOY PTY LTD AND McCLOY

French J

17 December 1990, 15 February 1991 - Perth

French J

Introduction

In August 1986 a boatbuilder carrying on business in Western Australia delivered a newly constructed 17 metre luxury launch called "Condor" to a NSW based purchaser. The contract price included an allowance for sales tax payable by the builder. The purchaser maintained, however, that the proposed uses of the boat for charter fishing and corporate entertainment purposes meant that the transaction was exempt from sales tax by virtue of the Sales Tax (Exemptions and Classifications) Act 1935 (Cth). The boatbuilder did not pay the sales tax and refunded to the purchaser so much of the contract price as had been allocated for that purpose, some $91,484.

In 1988, following an audit by the Australian Taxation Office, the boatbuilder conceded that it was liable to pay the sales tax on that and other boats it had built, and following its concession paid the tax and a penalty assessed by the Commissioner of Taxation. The boatbuilder now claims that the purchaser wrongly represented that sales tax was not payable and thereby engaged in misleading or deceptive conduct in contravention of the Trade Practices Act 1974 (Cth). It claims that the refund made to the purchaser was paid in reliance on the purchaser's representation, and that it is entitled to recover the loss sustained as a result. Alternatively, the boatbuilder says it paid the refund to the purchaser under a mistake of fact or law, and is entitled to recover it for that reason. In that regard it relies upon s 124 of the Property Law Act 1969 (WA). Before turning to the history of the matter in more detail, it is useful to set out the relevant statutory provisions.

Statutory framework

The liability upon a manufacturer of goods to pay sales tax is imposed by s 17and 19 of the Sales Tax Assessment Act (No 1) 1930 (Cth). Subsection 17(1) is in the following terms:

"17(1) Subject to, and in accordance with, the provisions of this Act, the sales tax imposed by the Sales Tax Act (No 1) 1930 shall be levied and paid upon the sale value of goods manufactured in Australia by a taxpayer and sold by him or treated by him as stock for sale by retail or applied to his own use."

It is not in issue in the present case that the Condor constituted "goods manufactured in Australia by a taxpayer and sold by him". Liability is imposed directly by s 19 of the Act, which provides:

"19. Sales tax shall be paid by the manufacturer of goods manufactured in Australia and-
(a) sold by the manufacturer to an unregistered person or to a registered person who has not quoted his certificate in respect of the sale;

(b) treated by the manufacturer as stock for sale by retail; or

(c) applied by the manufacturer to his own use."

It is not in issue that the purchaser was an unregistered person for the purposes of this section.

The liability imposed by s 19 is qualified by s 20:

"20. Notwithstanding anything contained in section 19, sales tax shall not be payable under this Act by the person specified in that section upon the sale value of goods the sale value of which is, by virtue of the Sales Tax (Exemptions and Classifications) Act 1935-1973 , exempt from sales tax under this Act."

The Sales Tax (Exemptions and Classifications) Act 1935 provides in s 5(1):

"Notwithstanding anything contained in any Sales Tax Assessment Act, sales tax shall not, subject to this section, be payable upon the sale value of any goods covered by any item or sub-item in the first column of the First Schedule, under any Act specified in the second column of that Schedule opposite that item or sub-item."

Sub-item 119(1) of the First Schedule to the Act defines the following class of exempt goods:

" 119 (1) Ships and other vessels, but not including those to be used exclusively or principally for purposes of pleasure, sport, recreation, private transport or accommodation either by the owner thereof or by any other person or persons, whether or not that use is to be in accordance with a charter or other hiring agreement or otherwise for reward."

And the exemption thus established applies to liabilities otherwise imposed under the Assessment Acts 1 to 9. Sub-item 119(1 AA) relates to vessels to be used in the course of a business which has as one of its objects the providing, for the public, of transport of passengers for reward otherwise than on sight-seeing tours. Sub-item 119(1 A) exempts:

" 119 (1A) Ships and other vessels licensed to carry not less than 12 adult passengers and to be used exclusively or principally-
(a) by the relevant owner or relevant owners;

(b) in the course of a business carried on by the relevant owner or relevant owners, being a business having as its object, or as one of its objects, the providing, for the public, of transport of passengers for reward on sight-seeing tours; and

(c) for the purpose of providing, for the public, transport of passengers for reward on regular and scheduled sight-seeing tours."

Also relevant for present purposes is s 124 of the Property Law Act 1969 (WA) which provides for recovery of payments made under mistake of law:

" 124 (1) Subject to the provisions of this section, where relief in respect of any payment that has been made under mistake is sought in any court, whether in an action or other proceeding or by way of defence, set off, counterclaim or otherwise, and that relief could be granted if the mistake were wholly one of fact, that relief shall not be denied by reason only that the mistake is one of law whether or not it is in any degree also one of fact.

"(2) Nothing in this section enables relief to be given in respect of any payment made at a time when the law requires or allows, or is commonly understood to require or allow, the payment to be made or enforced, by reason only that the law is subsequently changed or shown not to have been as it was commonly understood to be at the time of payment."

Section 125 of the Act provides for circumstances under which payments under mistake of law or fact are not recoverable or may be recovered by instalments:

" 125 (1) Relief, whether under section 124 or in equity or otherwise, in respect of any payment made under mistake, whether of law or fact, shall be denied wholly or in part if the person from whom relief is sought received the payment in good faith and has so altered his position in reliance on the validity of the payment that in the opinion of the Court, having regard to all possible implications in respect of the parties (other than the plaintiff or claimant) to the payment and of other persons acquiring rights or interests through them, it is inequitable to grant relief, or to grant relief in full.

"(2) Where the Court makes an order for the repayment of any money paid under a mistake, the Court may in that order direct that the repayment shall be by periodic payments or by instalments, and may fix the amount or rate thereof, and may from time to time vary, suspend or discharge the order for cause shown, as the Court thinks fit."

Factual background

The applicant company was incorporated in Victoria on 22 October 1982 and subsequently named Inn Leisure (Properties) Pty Ltd. It was then, or became, a subsidiary of one of the Queensland based Quintex group of companies. In December 1984 it was the vehicle for the acquisition of the Perth based boatbuilding business known as Precision Marine and changed its name to Precision Marine Holdings Pty Ltd (PMH). The Precision Marine business thus acquired had been carried on previously as a division of a company called "Precision Mouldings Pty Ltd". PMH changed its name to Inn Leisure Industries Pty Ltd on 13 September 1990 and on 12 October 1990 the Supreme Court of Queensland appointed its provisional liquidators. The first respondent, D F McCloy Pty Ltd (DFM), was incorporated in NSW. While the full range of its activities does not emerge from the evidence, it is apparent that as early as 1986 one of them was a boat charter business conducted under the name "Condor Charters". Donald Francis McCloy was at all material times a director of the company.

The present proceedings arise out of events following the making of a written agreement entered into on 10 December 1985 between PMH and DFM under which PMH was to construct and supply, by September 1986, a "Precision 17 metre off-shore gamefishing charter vessel" for $637,173. The agreement was set out on an order form under the letterhead "Precision Marine", described on the form as "A Division of Precision Mouldings Pty Ltd". This was old stationery which pre-dated the acquisition of the business by Inn Leisure (Properties) Pty Ltd, and it was common ground that it reflected an agreement between the PMH and DFM. It is also common ground that the price of the vessel included an allowance for sales tax payable by PMH in respect of the sale.

When the Quintex Group acquired the Precision Marine business and Inn Leisure (Properties) Pty Ltd became PMH, Robert Blom was appointed as a director of the company and manager of its marketing until late 1986, when he became managing director. He had a previous association with the business, having been employed as a commission salesman for about 8 to 10 years until 1980, when he formed his own company, Westcoaster Pty Ltd, to carry on a boat building business in competition with his former employer. He had had extensive experience in negotiating contracts for the sale of boats, some 1000 or so up to 1990. He had prepared quotes, sometimes including an allowance of sales tax and sometimes not. Blom had negotiated with representatives of DFM for about 5 months prior to the written agreement and largely, it seems, with Donald McCloy. During that time the question of sales tax was not specifically discussed. Blom said that his company's "stance" was that sales tax would be payable unless and until it was satisfied that the vessel could attract an exemption.

Construction of the boat pursuant to the agreement commenced, and it is common ground that it was delivered to DFM in August 1986. It was named "Condor" by the purchaser which, as already mentioned, had established a business under the name "Condor Charters". Its operator was to be one of Donald McCloy's sons, Steven, who had a master's ticket. During the construction period, various progress payments were made, as evidenced by a "Final summary of account" dated 27 August 1986. An increase in the contracted price to $658,687 arose from a number of variations to the original specification. The precise amount paid under the contract was in issue on the pleadings, but in the event was not directly material.

Prior to delivery of the vessel and while it was still under construction, Blom had a number of conversations with representatives of DFM, mainly members of the McCloy family, relating to the question whether the sale of the vessel by PMH would attract a liability on its part to pay sales tax. Not long after the contract was signed, Donald McCloy told Blom that he would be seeking an exemption from sales tax in respect of the vessel and that he was taking advice in that regard. Subsequently, in October 1986, according to Blom, Graham McCloy, who was the general manager of DFM at the time, told him that his company claimed an exemption and that PMH should not pay any sales tax to the Australian Taxation Office. No tax had been paid by PMH at that time. The conversation, of which Blom had only a vague recollection, was followed by a letter dated 22 October 1986 from J R McCloy who signed as managing director of DFM. It was addressed to the Manager, Precision Marine and marked for Blom's attention. It was in the following terms:

"Further to your telephone conversation with our Graham McCloy of last week, we ask that you keep us informed of developments re the Sales Tax position on our vessel.

"As discussed it is imperative that no further Sales Tax be paid on Condor, as we will send you the required paperwork that gives us our exemption."

Following this letter there was some further discussion between Blom and either Donald or Graham McCloy, in the course of which Blom was told that the McCloys had received advice that the vessel was exempt. He was also told that they were having "a bona fide sales tax certificate" issued to PMH. He had a vague recollection that at that time a firm of accountants, Nelson Wheeler, were carrying out the annual audit for his company. He said he thought he had asked the partner in charge of the audit for his views on the claimed exemption and was told that he was probably bound to accept it. In any event, on 13 November 1986, Donald McCloy sent him a letter addressed to the Commissioner of Taxation in the following terms:

"I hereby certify that the vessel purchased from Precision Marine (A division of Precision Mouldings Pty Ltd) on 10 December 1985 is to be used for business purposes only and exemption is accordingly claimed under Item No 119(i) in the First Schedule to the Sales Tax (Exemption and Classification) Act."

The reference to Precision Mouldings Pty Ltd reflected the terms of the letterhead used on the written agreement of 10 December and the date of purchase specified was that of the agreement. Blom responded on 14 November with a fax acknowledging receipt of the letter and advising that "[r]efund of sales tax will be returned in TNT Air Bag on Monday 17 November". It is common ground that on 17 November, PMH sent a cheque for $91,484 to DFM. The way in which that sum was calculated was not expressly addressed on the evidence, but I take it to have been an estimate of that part of the purchase price, as varied, which had been included on the assumption that sales tax would be payable.

In the course of discussions with members of the McCloy family during the construction period, Blom was told that the boat was to be chartered to one of the syndicates in the America's Cup Challenge race competition to be conducted off Fremantle in the last quarter of 1986. And that was the fact as evidenced by a written agreement dated 21 September 1986 between DFM trading as "Condor Charters" and the Heart of America Challenge Syndicate. It was signed for DFM by Steven McCloy. Blom also recalled that during discussion with Donald McCloy he was told that the vessel was to be used subsequently for charter fishing operations. He understood charter fishing operations to involve "…say 5 to 10 people, whatever the vessel was licensed to carry, rolling up at a given point, at a given time and paying money and doing a day's fishing". He also said that as he "understood" it the vessel was to be used on a scheduled run from a home port. At another point he was asked whether Donald McCloy's sons had said anything about their positions or roles within the company and the operation of the vessel. He replied:

"Well, I was under the impression it was going to be used on a scheduled run as a business and it was set up, you know, purely as a business as such, which a lot of charter boats are. I think most of the discussions I probably had was I think with Graham McCloy who was one of the executives of McCloy Pty Ltd."

There was no more direct testimony than this of any representation that scheduled runs were contemplated. In a memorandum to Blom dated 26 November 1985 from one Nic Doig of Precision Lloyd's in NSW in relation to a proposed visit by Don McCloy to Perth, it was said that "Don owns a Cresta 46, regularly fishes at Lizard Island and wants a surveyed gameboat/mothership for his son Steve to run". Blom speculated in evidence that this probably referred to a scheduled run at Lizard Island "which in my eyes would be an exempt vessel and…he wanted a boat to replace that other vessel". I am not satisfied that any specific representation was ever made that the Condor was to be used on scheduled runs. The evidence suggests that it was intended to use the vessel for charter operations, initially in connection with the America's Cup, but subsequently and principally for fishing and corporate entertainment purposes.

Blom accepted that it was his company's responsibility as manufacturer to make its own assessment of its liability to pay sales tax. He said he said he formed the view that the tax was not payable after discussions with Donald and Graham McCloy, John Baldock, a marketing manager with PMH, Michael Sudbury of Nelson Wheeler "and probably the best of my judgment". He said at one point that he "might have been under the impression" that DFM's advisers had obtained a ruling from the Australian Taxation Office in Brisbane. Asked in cross-examination whether he would differ from McCloy's contention that there was no such ruling nor any mention of it, he said:

"No, I would not. As I said [to] you I was very vague on that, but I probably [had] that belief myself through other things that might have been mentioned in that particular point in time. Because it was a fair while ago, and as I said, you know, when you are dealing with a thousand contracts over a period of time, you know, you do not know every individual item."

Blom was familiar with the provisions of the exemption in sub-item 119(1) of the First Schedule to the Sales Tax (Exemptions and Classifications) Act 1935. He had read it, but the only adviser with whom he had discussed it was Sudbury of Nelson Wheeler in 1986. Asked why he thought charter fishing was covered by the exemption, he referred to his own experience with the practice of the Taxation Office in relation to similar vessels in previous years.

The sales tax audit

In 1988, the Australian Taxation Office (ATO) undertook an audit of PMH in relation to its liability for sales tax on vessels built and sold since at least 1985. The precise scope of the audit did not emerge, although it was said to relate to boats for which an exemption from sales tax had been wrongly claimed. It was conducted principally by Michael Wong of the ATO. PMH engaged Messrs Michael Munro and Russell Maynard of Arthur Andersen & Co to advise and assist it in connection with the audit. Also involved was Michael Atkinson, an accountant employed as the company's financial controller from May 1988 to September 1989. On 28 September 1988 a list of 25 vessels in contention was prepared by Barry Giles, who was then contract manager for PMH. The list included an estimate of the likely sales tax and additional tax if they were to be payable on each sale. The maximum projected liability on this basis was in excess of $1m. Michael Munro of Arthur Andersen & Co had the task of contacting the owners of the various boats to determine the uses to which they had been put after purchase with a view to deciding whether or not they were properly within the exemption for which sub-item 119(1) of the Sales Tax (Exemptions and Classifications) Act 1935 provides. He spoke to Donald McCloy in relation to the Condor, designated as vessel 711. McCloy told him that it had initially been used as a tender boat for the Heart of America Syndicate and to tow its yacht to and from the race area. This use had lasted for a period of about 3 months. In September 1987 it was sent to Cairns where it was used for fishing and business trips off the Barrier Reef. These trips, it was said, were fairly irregular and no regular or scheduled trips were undertaken. McCloy told him that the boat was not used for any pleasure or private purpose. The exemption claimed under sub-item 119(1) was based upon advice from McCloy's accountants. He told Munro he would send him a copy of the advice, but no such copy was ever received.

Munro prepared a memorandum dated 17 November 1988 setting out a summary of his inquiries. On 5 December, Maynard and Munro tendered a summary of their work and their discussions with the Australian Taxation Office. They put the various transactions under inquiry into three classes:

(a) Where a strong case for exemption was indicated;

(b) Where there was insufficient information to determine whether an exemption would apply;

The McCloy boat was in the third class. Following a summary of the information provided to Munro by McCloy the memorandum went on:

"Accordingly the exemption claimed under Item 119 is unlikely to apply based on the above use of the vessel."

The memorandum then continued:

"With respect to those vessels upon which a sales tax liability clearly arises we suggest that Precision Marine consider lodging a supplementary sales tax return and pay the outstanding sales tax assessed. After lodging the supplementary return Precision Marine can then consider invoicing the purchasers of those vessels in question to seek recovery of the amount of sales tax payable."

And further:

"By conceding the sales tax liability on those vessels where it is clear that a liability exists then the ATO will be open to negotiation on the other vessels. With respect to those vessels upon which it is still not clear as to whether a sales tax liability exists we may be given more time to resolve the matter. This would avoid the issue of an assessment being raised by the ATO for all amounts of sales tax outstanding. The issue of an assessment by the Taxation Office will result in additional time and costs in resolving the matter and as the amount involved will become due and payable prior to the objection/appeal process being exhausted this may have adverse cash flow consequences. We suggest that settlement of the above matter by negotiation with the Taxation Office may be the most favourable alternative, provided the ATO in fact proceed on the basis indicated."

According to Blom, he approached Wong on what he described as a "without prejudice" basis and took him to lunch "to arrange a commercial settlement and reduce the fine to Precision Marine". He formed the opinion that Wong had a budgeted figure of what tax to collect from PMH and saw it as his task to reduce that figure. The "bottom line" he said, "really was that they wanted half a million dollars from Precision Marine". He went through the list of boats in contention and conceded that tax should be paid on some of them which he and Wong identified between themselves. He said he did not necessarily have regard to the advice from Arthur Anderson & Co in the selection he made. In the course of the discussion, Blom conceded that tax was payable in respect of the DFM vessel. Asked why he made the concession to the ATO, he said in his evidence-in-chief that it was "probably just to round the figures up". When he had authorised the refund of sales tax in 1986 he had done so in the belief that the boat was exempt. In answer to a question from the court, he said that he had not changed his mind about its tax exempt status when he conceded liability:

"It was really a matter of going down through the list with the tax office and saying yes, no, yes, no, yes, no - a bit of an agreement on: yes, we will allow this one, and: no."

However, in a memorandum of 19 December 1988 to Atkinson directing the lodgment of a supplementary return in respect of the conceded transactions, he said of the DFM boat that:

"For some unknown reason best known to previous management, sales tax was paid on this vessel and subsequently refunded to the client a couple of months later.

"Mr McCloy enjoys leisurely fishing aboard this vessel, and again, by his own admission to the ATO, the vessel is not on scheduled runs and is not in line for any exemption claim. However, an indemnity was given to us by this client which the Tax Department now wants us to enforce."

This part of the memorandum was largely self-protective. He accepted in cross-examination that he was covering his own position as the person who had made the decision to refund sales tax to DFM, and that there was no indemnity in the McCloy contract. It is evident that Blom's credibility has to be treated with caution. I accept, however, that there was probably an element of bargaining in his discussions with Wong and that he was concerned to contain the total sales tax liability of his company to a manageable level, rather than to give any close consideration to the position under individual transactions. Having said that, and despite his disclaimer to the contrary, I think it quite likely that the advice from Arthur Andersen & Co was a factor influencing him to make the concession that PMH was liable to pay sales tax on the McCloy transaction.

A Supplementary Sales Tax Return, disclosing a total liability for sales tax of $523,507, was lodged on 16 January 1989. On 15 March 1989, an assessment for additional tax of $108,680.44 issued. The total liability as assessed was $627,982.84, a sum which reflects a discrepancy of $795.40 between the amount shown on the return and the primary liability as assessed. There was no direct evidence of whether, and if so how, the additional tax had been allocated to individual transactions. It is likely that it was assessed globally and by reference to the total primary liability. On 17 April, Atkinson wrote to the ATO requesting an extension of time to pay and offering to make a payment of $300,000 at the end of June 1989 and the balance in August. The proposal was accepted, as evidenced by a reply from the ATO on 17 May. Payments of $300,000 and $327,982.84 were made pursuant to the arrangement.

The pleaded case

By its further amended statement of claim, PMH pleaded the agreement of 10 December 1985, the construction and delivery of the vessel to DFM and the inclusion of sales tax in the purchase price. All of these facts were admitted. Payment of the purchase price of $658,687 was also pleaded. The refund of that portion of the price of the vessel attributable to sales tax was alleged, although it was said to have been in the amount of $94,411.80 whereas the evidence indicated a payment of $91,484.

It was alleged that between 23 October 1986 and 14 November 1986, DFM made certain express representations to PMH, they being:

(a) That the sale of the vessel by PMH to DFM was exempt from sales tax pursuant to the provisions of Item No 119(1) of the First Schedule to the Sales Tax (Exemptions and Classifications) Act 1935.

(b) The vessel was intended to be used for business purposes only.

The latter representation was said to have been made in the letter of 22 October 1986 from DFM to PMH. The other representations were allegedly made to PMH by delivery to it of a copy of the letter from DFM to the Commissioner of Taxation dated 13 November 1986.

Further implied representations were said to have been made by DFM between 23 October and 14 November that:

(a) The vessel was intended not to be used principally or exclusively for purposes of pleasure, sport, recreation, private transport or accommodation whether by the owner or some other person or persons;

(b) The second letter constituted a certificate of exemption sufficient to satisfy the Commissioner of Taxation that the sale of the vessel was exempt from sales tax;

(d) The vessel would not be used principally or exclusively for purposes of pleasure, sport, recreation, private transport or accommodation, whether by the owner or some other person or persons;

(e) The use of the vessel by DFM or some other person or persons for business purposes was sufficient to entitle the sale of the vessel to exemption from sales tax under Item No 119(1) of the First Schedule to the Sales Tax (Exemptions and Classifications) Act 1935.

The implications were founded upon the terms of the two letters, and DFM's conduct in forwarding the second letter to PMH and in demanding a refund of sales tax. It was also alleged that Mr Donald McCloy represented that DFM had obtained a ruling from the Commissioner of Taxation that the sale was exempt from sales tax. As to this, I have already noted that there was no reliable evidence of the alleged representation.

The pleaded representations were said to have been false, and it was alleged that DFM did not have reasonable grounds for saying that the vessel would be used for business purposes only and that it would not be used principally or exclusively for purposes of pleasure, sport, recreation, private transport or accommodation. The conduct of DFM in making the representations was said to have been misleading or deceptive, in contravention of s 52 of the Trade Practices Act 1974, and to have induced a refund of that part of the price of the vessel attributed to sales tax. The ultimate liability of PMH to pay the tax and the assessment of additional tax was also pleaded. Of the latter, some $21,210.32 is said to have been attributed to the McCloy vessel. PMH's payment to the Commissioner for the sales tax plus additional tax was also pleaded. The amount of primary tax attributed to the McCloy vessel was $94,411, which together with the additional tax made a total of $115,622.12. Damages and interest are claimed under s 82 of the Trade Practices Act 1974 against both DFM and Mr Donald McCloy. The latter is said to have been knowingly involved "in the contravention of the Act".

An alternative plea based on contract was not pursued at trial. A further alternative plea, which was pursued, was that PMH refunded the sales tax component of the purchase price to DFM under a mistake. Although the pleading covered mistakes of fact and law, the case as conducted reduced to the contention that the payment was made under a mistake of law, and reliance was placed on s 124 of the Property Law Act (WA).

The applicability of sales tax exemptions

The exemption for which sub-item 119(1) provides is conditional. It applies to "ships and other vessels" subject to the condition that they are not "to be used exclusively or principally" for specified purposes. The purposes are expressed disjunctively, so that if the vessel is "to be used exclusively or principally" for any of them the exemption will not apply. Whether a vessel is "to be used for" a disqualifying purpose is determined at the time of the transaction upon which the liability for sales tax, if any, depends. In this case the relevant transaction was the sale by PMH to DFM, which was the last wholesale sale - DCT (SA) v Ellis & Clark Ltd (1934) 52 CLR 85 at 89 (Dixon J). There does not appear to be any reported authority directly on the operation of the words "to be used for" in this context, but the analogous collocation "for use in" has been judicially considered. In DFCT v Lincoln Industrial Cleaners Pty Ltd [1975] 2 NSWLR 499; 5 ATR 558, Sheppard J held that a carpet cleaning powder with insecticidal properties was within the class of goods exempted from sales tax by Item 139 of the First Schedule relating to "preparation and materials for use in the destruction of insect pests". His Honour accepted the submission of the Commissioner that the words "for use in" are intended to denote "some quality apparent in the article itself to persons who know its character which shows that it is specially fit for the particular purpose specified rather than for any other". He rejected the alternative propositions that the purpose of the ultimate purchaser or the manufacturer at the time of manufacture was determinative. Given that the tax is imposed on the last wholesale sale it would be difficult to tie liability to the purchaser's purpose. His Honour went on at (NSWLR) 121:

It is perhaps not so difficult to approach it upon the basis of what the manufacturer's purpose was in manufacturing the article, but I think the third interpretation of this kind overcomes such problems as looking at purposes or intentions of users or manufacturers poses and commits one to look at the problem more objectively.

The Supreme Court of Victoria later commented that it appeared to have made no difference in that case which of the three interpretations was applied. In FCT v Hamersley Iron Pty Ltd (1981) 12 ATR 429; 37 ALR 595 the question was whether parts purchased by the operator of iron ore mines, for equipment used to mix different types of ore, were "…for use in the mining industry in carrying out mining operations and in the treatment of the products of those operations". A recognition of the relevance of the purposes of manufacturer and purchaser was evident in the judgment of Lush J (Kaye and Brooking JJ agreeing) at 605:

The machines in question in this case were intended to perform, built to the respondent's order to perform, and did perform particular operations in a continuing process. The expression "for use in" is purposive, and this conjunction of facts, all relevant to purpose, leads to the conclusion that, if the operations of the machines constituted in a significant degree "treatment", the machines and parts were "for use in treatment".

In DCT (SA) v Stewart (1984) 154 CLR 385; 15 ATR 387 the question was whether lottery ticket vending machines which were supplied free of charge, but on a non-exclusive basis, to public benevolent institutions were exempt under Item 81(1)(c) as "goods for use … and not for sale, by … a public benevolent institution". Gibbs CJ, with whom Dawson J agreed, observed at (CLR) 390 that the First Schedule to the Sales Tax (Exemptions and Classifications) Act describes exempted goods in two main ways - by reference to the nature of the goods themselves and by reference to the use to which it is intended to put them:

In many cases of the second kind the words "for use" indicate the purpose to which it is intended the goods shall be put, rather than the use for which the goods were designed.

It is apparent from his discussion of the facts of the case that Gibbs CJ regarded the intention of the manufacturer as relevant. Brennan J referred to the intentions of both the manufacturer and the relevant institutions in deciding that the goods fell within the exemption (at (CLR) 398). Deane J at (CLR) 401 noted that, in those items where it is required that goods be "for use by" a particular organisation, there is no designation of any person, such as the manufacturer or the purchaser of the goods, by reference to whose purposes or intentions the question whether the relevant requirement is satisfied must be determined:

While the subjective intentions of manufacturer or purchaser are relevant and may well be conclusive, what is required is an objective characterisation of the goods themselves in the light of all the relevant circumstances. That characterisation must be made as at the time when liability for sales tax would otherwise attach. It will, in an appropriate case, be made with the benefit and in the context of knowledge of the actual use which was subsequently made of the goods.

The dicta cited from these three cases do not yield any clear test for deciding whether goods are made "for use in" a particular way. There are, as Sheppard J pointed out, difficulties in using the intentions of the ultimate purchaser as the criteria. And there is an evident reluctance to tie the question of liability to the subjective intention of the manufacturer. The approach explicitly adopted by Deane J requires some "objective characterisation" of the goods. I take this to mean that characterisation of goods by reference to their purpose or intended use depends upon the view taken by an independent observer having regard to the intrinsic characteristics of the goods (which could be evidence, but not elements, of their purpose), the intention of the manufacturer, and that of the person, if any, for whom the goods are manufactured. This may reduce logically to the imputation of intention or purpose to the manufacturer, for neither can be divorced from some human agency. But that process does not require a judgment based solely upon the manufacturer's subjective intentions. These observations must be subject to the caveat that each item in the First Schedule is to be read according to its own language and that the application of purposive terms in different contexts may differ. But the general approach adopted by Deane J is, in my respectful opinion, the proper one to be taken to the application of the purposive words "to be used for" in the disqualifying condition upon the exemption in Item 119.

In this case the written agreement indicates that both PMH the manufacturer, and DFM the purchaser, were contemplating the construction and sale of a vessel designed for game fishing purposes. Its general configuration, as appeared from a sketch in evidence, was consistent with that purpose. The charter fishing uses contemplated by the purchaser were disclosed to the manufacturer prior to sale. Applying the objective test to which I have referred, it is clear on the evidence that at the point of sale in August 1986 the vessel was "to be used for" the purposes of pleasure, sport and recreation. The fact that these purposes related to its use under charter arrangements by persons other than the owner does not affect the application of the disqualifying condition.

In my opinion the exemption under sub-item 119(1) did not apply to the sale of the Condor, and PMH was liable to pay sales tax on it.

The certificate dated 13 November 1986 provided by DFM of itself had no legal effect. The provision of so-called certificates of conditional exemption reflects administrative procedures developed by the ATO whereby persons claiming exemption on the basis that goods are for use in exempt circumstances provide certificates to the supplier as evidence that the goods have been sold for exempt use. The purpose of the certificates and the procedures relating to their use are set out in Sales Tax Ruling ST 2442, issued by the Commissioner of Taxation on 6 October 1988. While that ruling was issued after the events in question in this case, it did not purport to be breaking new ground, and the general purpose of the certificate issued by DFM was consistent with the purpose of such certificates generally.

[His Honour then proceeded to deal with matters not relevant to this report.]