The High Court by majority of 3:2 recently upheld the taxpayer’s appeal in Automotive Invest Pty Ltd v Commissioner of Taxation [2024] HCA 36.
The case concerned the imposition of the luxury car tax (LCT) imposed under the A New Tax System (Luxury Car Tax) Act 1999 (Cth) (LCT Act). The focus of the debate in this case concerned the meaning of “purpose” in section 9-5(1) and section 15-30(3) of the LCT Act and whether the reference to “purpose” in those provisions is to the objective or subjective purpose of the person whose purpose is in issue (i.e. the car dealer). As is discussed below, the observations of the majority of the High Court in this case may have implications for other provisions in tax law requiring an ascertainment of purpose.
The taxpayer carried on a business of acquiring and then selling luxury and collectable cars. The taxpayer used a novel marketing technique in displaying many of the cars in a “car museum”.
A critical design feature of the LCT Act is that car dealers ordinarily do not become liable to pay LCT until a car is sold (or imported) at the retail level. The car dealer is entitled to quote its ABN when acquiring or importing a car, if at the time of quoting “you have the intention of using” the car for one of the specified purposes. The specified purposes outlined in the LCT Act included holding the car as trading stock and for “no other purpose”.
The Commissioner’s position was that a car dealer is only entitled to quote its ABN if its sole purpose is to hold the cars as trading stock. In the Commissioner’s view, the taxpayer was not entitled to quote the ABN because, while the cars here were held as trading stock, the cars were always going to be used for the purpose of being displayed in the museum. The result of the Commissioner’s view would require LCT to be paid on acquisition of the car by the dealer (that is, at an earlier point in time than it otherwise would have to pay).
In contrast, the taxpayer contended firstly that the museum was no more than a unique and inventive means of selling stock and that the cars were held solely as trading stock. Secondly, the word “other” in the phrase “no other purpose” in s 9-5(1) should be construed as meaning “alternative” rather than “additional” purpose. Using the cars in the museum was an additional and not alternative purpose. The primary Judge (Thawley J), the majority of the Full Federal Court (Wheelahan and Hespe JJ) and the minority of the High Court (Gageler CJ and Jagot J) were of the view that the language in the LCT Act with respect to purpose required an objective assessment.
The majority of the High Court (Edelman, Steward and Gleeson JJ) found that the ordinary language of s 9-5(1) shows that it is concerned with the purpose for which “you have the intention” of using the car. It is concerned with the intended purpose of use and in this respect is contrasted with the actual purpose of use (see s 15-30(3)). The majority further held that in order to identify the intended purpose of use it is necessary first to identify the intended use and then to identify the purpose of that use.
The majority of the High Court provided two reasons for their view. First the language of s 9-5(1) is focused on the intention of a specific person. This must be the intention of the actual taxpayer. Secondly, s 9-5(1) requires an examination of the purpose of using a car by using ordinary communication directed to “you”. The “you”, their Honours reasoned, is the taxpayer, not an objective construct or reasonable person. To support their analysis, the majority of the High Court took into account the objects of the LCT Act and observed that it is a law that creates a regular and significant impost in the course of commercial activity. They also had regard to sales tax and diesel fuel rebate jurisprudence which contained the following respective propositions: it is important to look at the “substance and reality of the matter”; and one should apply a “commonsense and commercial approach.”
The majority of the High Court accepted that objective evidence about the nature of the car acquired, or how it was to be used, was relevant and could be used to corroborate the stated purpose of the use that was intended or to demonstrate that the taxpayer’s evidence of intended use was in some way false. However, the majority also noted that if direct evidence from the taxpayer was accepted (as it had been by the primary judge in this case), corroboration was unnecessary.
Similar reasons apply to the consideration of purpose in s 15-30(3). The object of s 15-30(3) is with a change in the use of a car for a purpose which is not a quotable purpose. The section requires consideration of how a car has been used since its acquisition. The majority of the High Court remarked that it would be a “remarkable and surprising interpretation of s 15-30(3) if, as an allied provision to s 9-5(1), s 15-30(3) were, without any express language to suggest a change, somehow to have switched from a focus on the purpose of the taxpayer to a focus on the “objective” purpose of a reasonable person in the position of the taxpayer.
The majority of the High Court agreed with Logan J (who was in dissent at the Full Federal Court) regarding the museum being only a means to achieve an end, namely the business of selling cars. Justice Logan’s view was that it was incongruous for tax to be imposed before cars are sold at the retail level whilst they remained trading stock. Given that the LCT Act imposed a single stage tax, it was appropriate to exclude uses which were merely incidental or subservient to a continuing use of a car as trading stock and to exclude that which is merely a means to an end.
Consistent with these views, the majority of the High Court found that the museum and activities related to its operation, large as they were, was not intended by the controlling mind of the taxpayer to be an “independent” purpose, end or object. While it may have been an elaborate and extensive marketing exercise designed to promote the taxpayer’s business of being a car dealer, the substance and reality, applying a commonsense and commercial approach, was that ultimately the taxpayer’s business was just to sell cars. The museum was simply the taxpayer’s means of achieving that purpose.
Prior to this case, the ATO had adopted a narrow view of the quotable purpose test for the purposes of the LCT Act. It remains to be seen whether the ATO will align its approach with the High Court decision, particularly in cases where cars may be held for a purpose other than holding the car as trading stock, such as for promotion or sponsorship purposes or for executive or staff use. The decision of the majority contains an interesting and useful discussion of “purpose”. There are several noteworthy aspects here:
This analysis may have implications for interpreting other provisions in tax legislation, outside of its immediate application to LCT. Many of the integrity and anti-avoidance provisions import a concept of purpose, albeit at different threshold levels. For example, in the Income Tax Assessment Act 1936 (Cth) the general anti-avoidance rule contained in Part IVA of that legislation is focused on a “dominant purpose”, whereas the diverted profits tax (DPT) in s 177J requires consideration of a lower threshold of a “principal purpose”. In the context of these provisions, the legislation states that it will apply to a scheme “…if it would be concluded (having regard to the matters in [the specified subsection]…” that the person did so for the specified purpose. It is well established that the inquiry required by Part IVA is an objective, not subjective inquiry (Commissioner of Taxation v Hart [2004] HCA 26 at [37]).
A more recent example is set out in the recently introduced debt deduction limitation rule for debt deduction creation contained in s 820-423D of the Income Tax Assessment Act 1997 (Cth) which adopts the following language in relation to its purpose test: “…it is reasonable to conclude that one or more entities…entered into or carried out a scheme for the principal purpose of…”. Notably, the new debt deduction creation integrity rule mirrors heavily the language used in Part IVA and DPT, with two differences. The first is that it requires a lower level of certainty about the conclusion (“reasonable” rather than “would”), while still requiring that conclusion to be ascertained objectively. And the second is that the legislation does not specify any particular criteria to have regard to in making the enquiry into purpose.
Accordingly, it is important to carefully consider the particular construct with which the law is concerned in order to ascertain whether the purpose or intention is of the subjective taxpayer or is to be determined objectively as well as the relevant applicable purpose threshold.
If you have any questions or comments about this decision or our analysis of the case, please contact partners Kathryn Bertram and Annemarie Wilmore from our Tax team.
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