FEDERAL COURT OF AUSTRALIA Lee Group Charters Pty Ltd v Commissioner of Taxation [2016] FCA 322 File number: QUD 615 of 2015 Judge: LOGAN J Date of judgment: 7 April 2016 Catchwords: TAXATION – Income Tax – whether losses or outgoings claimed by taxpayers fell within exception under s 26-47(3)(b) of Income Tax Assessment Act 1997 – whether boat was used mainly for letting it on hire in ordinary course of carrying on a business Held – losses and outgoing claimed did fall within exception – boat used mainly for letting on hire in ordinary course of business – appeal allowed. Legislation: Corporations Act 2001 (Cth) Income Tax Assessment Act 1997 (Cth) Sales Tax (Exemptions and Classifications) Act 1992 (Cth) Taxation Administration Act 1953 (Cth) Cases cited: Hostess Marine Pty Ltd v Commissioner of Taxation (2006) 155 FCR 504 Nelson v Federal Commissioner of Taxation 2014 ATC 475 Salomon v A Salomon & Co Ltd [1897] AC 22 Spriggs v Federal Commissioner of Taxation (2009) 239 CLR 1 Dates of hearing: 30 November, 1, 2 and 3 December 2015 Registry: Queensland Division: General Division National Practice Area: Taxation Category: Catchwords Number of paragraphs: 132 Counsel for the Applicants: Mr J De Winjn QC with Mr D Atkinson Solicitor for the Applicants: Kinneally Miley Law Counsel for the Respondent: Mr N Williams SC with Ms M Brennan QC Solicitor for the Respondent: McInnes Wilson Lawyers ORDERS QUD 615 of 2015 BETWEEN: LEE GROUP CHARTERS PTY LTD First Applicant KERRI LEE CHARTERS PTY LTD Second Applicant AND: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent JUDGE: LOGAN J DATE OF ORDER: 7 APRIL 2016 THE COURT ORDERS THAT: 1. In respect of the first applicant: (a) the appeal against the respondent's objection decision made on 27 May 2015 in respect of the first applicant's objection dated 5 February 2015 against the respondent's amended assessments of income tax and assessments of shortfall penalty for the income years ended 30 June 2009 and 30 June 2010 is allowed; (b) the respondent's objection decision is set aside; and (c) in lieu thereof and in respect of both the amended assessments of income tax and the assessments of shortfall penalty, it is ordered that the first applicant's objection be allowed in full. 2. In respect of the second applicant: (a) the appeal against the respondent's objection decision made on 27 May 2015 in respect of an objection dated 5 February 2015 made against the respondent's amended assessments of income tax and assessments of shortfall penalty for the income years ended 30 June 2010, 30 June 2011, 30 June 2012 and 30 June 2013 is allowed; (b) the respondent's objection decision is set aside; and (c) in lieu thereof and in respect of both the amended assessments of income tax and the assessments of shortfall penalty, it is ordered that the second applicant's objection be allowed in full. 3. The matter is remitted to the respondent for the purpose of making all necessary amendments or, as the case may be, further amendments to the assessments concerned so as to give effect to the allowance of the objections. 4. Liberty to apply is reserved in respect of any issue relating to the making of those amendments on that remitter. 5. The respondent is to pay the costs of the first and second applicants of and incidental to the appeals, to be taxed if not agreed. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. REASONS FOR JUDGMENT LOGAN J: 1 In making his income tax assessments in respect of Lee Group Charters Pty Ltd (LGC) for the 2009 and 2010 income years, the Commissioner of Taxation (the Commissioner) concluded that s 26-47 of the Income Tax Assessment Act 1997 (Cth) (ITAA97) was applicable such that income tax deductions claimed by LGC in respect of boat chartering activities conducted by it during those years should be quarantined to the extent that those deductions exceeded its assessable income for those years. 2 The expressed object of s 26-47 is, "is to improve the integrity of the taxation system by preventing deductions from boating activities that are not carried on as a *business being offset against other assessable income": s 26-47(1) of the ITAA97. In the ITAA97 an asterix before a word signifies that it is defined. "Business" is defined by s 995-1 of that Act in an inclusory way: "business" includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee. 3 The section creates a rule, expressed in s 26-47(2), to which there are exceptions only one of which, found in s 26-47(3), need be considered in this case: Rule (2) This Act applies to you as if so much of the amounts relating to using or * holding boats that you could otherwise deduct for an income year as exceeds your assessable income from using or holding boats for that year: (a) were not deductible for that income year; and (b) were an amount (a quarantined amount) relating to using or holding boats that you can deduct for the next income year. Note: A quarantined amount may be reduced under subsection (5) (for boat capital gains), reduced under subsection (7) (where you deduct part of a quarantined amount under subsection (6) for boat business profits), reduced under subsection (8) (about exempt income) or affected by subsection (10) (about bankruptcy). Example: Ian does not use his boat in a business. In Year 1, Ian would be able to claim $100,000 in deductions for the boat (but for this subsection), including interest, depreciation and running costs. He earns only $40,000 of income from the boat. He can only deduct $40,000. He carries the remaining $60,000 forward to Year 2 (the quarantined amount). In Year 2, Ian has $95,000 of expenses and $30,000 of income for the boat. He can deduct $30,000. The quarantined amount is now $125,000: the quarantined amount from Year 1 plus the excess of expenses over income from Year 2. In Year 3, Ian has $60,000 of expenses and $150,000 of income from the boat. The expenses from Year 3 plus the quarantined amount is $185,000. Therefore, Ian claims a deduction of $150,000 and carries forward $35,000 to Year 4. Exception: business use (3) The rule in subsection (2) does not apply to amounts that are attributable to one or more of the following: (a) *holding a boat as your *trading stock; (b) using a boat (or holding it) mainly for letting it on hire in the ordinary course of a *business that you carry on; (c) using a boat (or holding it) mainly for transporting the public or goods for payment in the ordinary course of a business that you carry on; (d) using a boat for a purpose that is essential to the efficient conduct of a business that you carry on. Note: Even if this exception applies to you, you may still have to quarantine losses under Division 35 (deferral of losses from non-commercial business activities). 4 The Commissioner reached a like conclusion about the application of s 26-47 of the ITAA97 in respect of boat chartering activities conducted by Kerri Lee Charters Pty Ltd (KLC) in the 2010, 2011, 2012 and 2013 income years. Accordingly, in making his assessments in respect of KLC for those income years, he quarantined the deductions claimed by it in respect of those activities to the extent that they exceeded that company's assessable income from those activities. 5 Related to these income tax assessments, the Commissioner also made assessments of tax shortfall penalty for each of these income years in respect of both LGC and KLC (collectively, the taxpayers). 6 The taxpayers contend that each of their respective income tax assessments is excessive because, in the circumstances, s 26-47 of the ITAA97 did not apply so as to quarantine the deductions claimed. 7 As to the penalty assessments, the taxpayers' primary contention is that there was no tax shortfall because, for the reasons given, their income tax assessments were excessive. Even if that is not correct, they contend that it should be concluded that they nonetheless took reasonable care in making the statements in their income tax returns such that the defence specified in s 284-215(1) of Sch 1 to the Taxation Administration Act 1953 (Cth) (TAA) is attracted. A further contention they make is that their position as to the inapplicability of s 26-47 to quarantine the deductions claimed was reasonably arguable such that s 284-75(2) of Sch 1 to the TAA was inapplicable. Accordingly, they submit that s 284-90 of Sch 1 to the TAA did not operate so as to impose a base penalty amount of 25% of the assessed income tax shortfall. Yet further, they submit that the Commissioner erred in law in not exercising the discretion conferred on him by s 298-20 of Sch 1 to the TAA so as to remit the shortfall penalty either to nil or at least to an amount less than 25%. 8 As I raised with counsel in the course of the hearing, given the requirement for deduction found in s 8-1(b) of the ITAA97 that a loss or outgoing be "necessarily incurred in carrying on a *business for the purpose of gaining or producing your assessable income" and the references to business in paragraphs (b), (c) and (d) of the exception found in s 26-47(3) of the ITAA97, there may well be some intriguing questions touching upon the inter-relationship between and reconciliation of these two provisions. However that may be, neither side was disposed to explore these subjects. Instead, attention came to focus upon whether the losses or outgoings claimed by the taxpayers fell within the exception found in s 26-47(3)(b). Neither side contended that, in the circumstances of this case, there were some expenses which, for example, would fall into the exception found in s 26-47(3)(d) but not into that found in s 26-47(3)(b). 9 In these circumstances, questions which emerged were whether either or each of the taxpayers was carrying on a business and, if so, whether the vessel concerned was used or held mainly for letting it on hire in the ordinary course of that business? 10 The existence of a business will, as was stated in Spriggs v Federal Commissioner of Taxation (2009) 239 CLR 1 at 19: … depend on a number of indicia, which must be considered in combination and as a whole. No one factor is necessarily determinative … Relevant factors include, but are not limited to, the existence of a profit making purpose, the scale of activities, the commercial character of the transactions, and whether the activities are systematic and organised, often described as whether the activities are carried out in a business-like manner … 11 Questions of fact and degree are entailed in reaching a conclusion as to whether or not a particular activity can be said to amount to the carrying on of a business: Nelson v Federal Commissioner of Taxation 2014 ATC 475 at [18]. 12 In its use of the word, "mainly", the language of the exception found in s 26-47(3)(b) is redolent of a sales tax exemption found in Item 59(1) of Sch 1 to the Sales Tax (Exemptions and Classifications) Act 1992 (Cth) but that word was defined by s 3(2) of that Act to mean, "to the extent of more than 50%". As used in s 26-47(3) of the ITAA97, that word is not expressly defined. In submissions, the taxpayers adverted to Hostess Marine Pty Ltd v Commissioner of Taxation (2006) 155 FCR 504, where the meaning of that word as used in the context of sales tax legislation was considered by Ryan J. It is evident from his Honour's judgment in that case (at 519) that, as so used, its meaning had been attended with some past controversy. Care must be taken in this case not to be distracted by past controversies in respect of the use in other legislation and in a particular context of a word defined for the purposes of that legislation. Here, it is just an ordinary English word used in its ordinary, adverbial sense. As so used, it means, "[f]or the most part; in the main; as the chief thing, chiefly, principally." ("mainly, adv.": Oxford English Dictionary (online edition) http://www.oed.com/ viewed 12 March 2016). The Macquarie Dictionary (Online) affords the word a like meaning. 13 "Mainly" must also not be read in isolation from the clause which follows it and the presence of its governing preposition, "for", which is purposive and indicates that the using or holding must be "mainly" for the purpose nominated in the clause. That purpose must not just be letting the vessel on hire but "in the ordinary course" of the business concerned. Thus, it is not just a business which must exist. The nature and scope of that business must be identified so as to ascertain what is in its ordinary course. The latter consideration assumed some importance in the Commissioner's submissions, in an endeavour to draw a distinction between particular types of charter to which the vessels came to be subject. 14 This apart, another issue raised by the Commissioner was whether the letting on hire of the vessels to the sole director of each of the taxpayers, Mr Trevor James Lee or his family was such that they were not used or held within the ordinary course of a business. As to this, it is necessary to recall that the exception is not, in contrast with the sales tax exemption mentioned, subject to a qualification which excludes it from application in respect of pleasure, sport, recreation or private accommodation or transport. Further, s 26-47 does not ignore the legal personality separate from its shareholder, which is a hallmark of a company registered under the Corporations Act 2001 (Cth) or earlier, analogous legislation: Salomon v A Salomon & Co Ltd [1897] AC 22. It may be accepted that particular uses and rates of hire, if any, are relevant to an evaluation of whether or not a business is being carried on and for what purpose. But, if there is a business and the using or holding is mainly for letting or hiring in the ordinary course of that business, the exception is not rendered inapplicable because Mr Lee or his family and friends have, while chartering and aboard the vessel, derived pleasure or engaged in sport or recreation or been accommodated or transported during the course of that charter. 15 The resolution of this case necessarily involves a wide factual survey and then an evaluation of the facts informed by the considerations mentioned above. 16 Mr Lee was the sole director of each of the taxpayers both during the income years in question and beforehand. He was the principal witness for the taxpayers. 17 Though it was convenient to follow the practice of receiving his evidence in chief by affidavit, Mr Lee was required to and did attend for cross-examination by the Commissioner. That proved to be searching. So I had the benefit of observing Mr Lee give oral evidence over an extended period. Considered in conjunction with the content of his oral and affidavit evidence and with contemporaneous correspondence and other documents concerning the vessels in question, MV Keri Lee II and MV Keri Lee III and a predecessor, MV Keri Lee I, as well as the related use of those vessels, those observations led me to reach a number of conclusions about Mr Lee. I set these out at the commencement of these reasons for judgment, because they go a long way to explain the taxpayers' actions and their reactions to the course of events, as well as the end to which these vessels were used or held. 18 First and foremost, Mr Lee is an honest man who gave generally reliable evidence, to the best of his recollection. Secondly, Mr Lee is, characteristically, laconic. Thirdly, though he is entrepreneurial and decisive in matters of business, he seeks out what he considers to be sources of relevant advice and experience before making decisions. Fourthly, he has a very particular respect for the taste, business judgment and attention to detail of his wife, Mrs Keri Craig Lee, especially in matters of decoration, presentation, durability and suitability of fit out for charter operations and standards of crew turnout and service. Theirs is a long and enduring marriage. They will celebrate their 30th wedding anniversary this year. It is a feature of their relationship that business acumen and experience are by no means confined to Mr Lee, a fact of which he is well aware and values. Fifthly, even before the acquisition of the Keri Lee I, neither Mr Lee nor his wife was a stranger to nautical recreational pursuits and, in particular, cruising on large luxury motor vessels or "super yachts" as they are apt to be termed. Each enjoyed the experience and enjoyed enjoying the experience together, both before and after the Keri Lee I and her successors were acquired. So I have no doubt that there was an element of aspirational fulfilment and related satisfaction for Mr Lee (and his wife) in having reached a stage in business and in life where the success of other business pursuits meant that he was able to control a company which owned and operated such a vessel. That said and seventhly, though Mr Lee's prior experience and enjoyment were each part of what informed his initial decision to cause LGC to acquire the Keri Lee I, that decision was also informed by other considerations and resulted in a settled intention on Mr Lee's part that the Keri Lee I be operated as a business to take advantage of what he saw as an opportunity to develop and exploit a niche market in Australia and the South Pacific. The later acquisitions and operations of the Keri Lee II and the Keri Lee III were both opportunistic and reactive to changes in economic conditions or revelations about particular characteristics of a vessel but always to that same end of operating the vessel concerned as a business. Eighthly, the same experience which had seen Mr Lee and his wife introduced to and enjoy cruising on luxury motor vessels, as well as the social circles in which they moved, persuaded Mr Lee that there was a niche market of the kind mentioned which could be developed and exploited. Ninthly, from the very outset and consistent with his intention that they be operated as a business, Mr Lee's settled approach to the ownership and operation of each of the vessels was that he would pay a reasonable commercial rate for any use he or his family made of the vessels, an approach to which he caused the taxpayers to adhere. Any interrogative notes about this adherence are readily answered once the nature of operating such vessels and prevailing market conditions or vessel characteristics are understood. Tenthly, though he was never garrulous, Mr Lee very occasionally showed, I thought, some all too human and readily understandable, mild resentment, or perhaps better put exasperation, in the course of cross-examination, in respect of the questioning relating to his use of the vessels and his motivations. This, I equally thought, was the reaction of an honest man, used to the habits of command in business (see, for example, his email of 25 August 2005 to Fort Lauderdale in relation to the modification of the Keri Lee I) and not used to having his word or expressed motivations called into question. 19 There is another feature of this case that ought to be mentioned at the outset. There was no allegation in the Commissioner's appeal statement that any of the charter agreements to which Mr Lee or others were a party with one or the other of the taxpayers were shams. Some of the questions put to Mr Lee in cross-examination provoked the thought that such a case was, after all, being advanced but the Commissioner expressly disavowed this. Of course the onus lies on the taxpayers to prove the facts upon which they rely on the balance of probabilities. Even though this is the formal onus and standard, it might be thought to do the taxpayers and Mr Lee an injustice if I did not record that, though these agreements were at times attended with a degree of informality, I am quite certain that they were intended by Mr Lee, both in his capacity as the sole director of each taxpayer and otherwise, to record, and that they did record, a given charter from LGC or, as the case may be, KLC of the vessel concerned by a given person(s) for a given period for a given charter fee. They were not a charade. 20 The taxpayers approached their task of proving the assessments to be excessive on the basis that their activities in the income years in question were but part of a continuum, which had its origins in how and why it came about that Mr Lee caused LGC to acquire and then operate the predecessor vessel, Keri Lee I. The Commissioner did not object to the evidence on this subject. It is relevant. So the factual survey and related findings I make in relation to the course of events and transactions must commence much earlier than the 2009 income year and also take into accounts events after the income years in question. 21 Mr Lee and his wife founded a group of companies known as the Australian Country Choice Group (ACC Group) in 1996. This was not the first venture into business for either of them. 22 Mr Lee is the Chairman of the ACC Group. The ACC Group is presently owned by interests associated with Mr Lee and his family. Mr Lee owns the shares in KLC in his capacity as trustee of the KLC Trust. During the income years in which it actively operated, Mr Lee owned the shares in LGC in his capacity as trustee of the Australian Country Choice Finance Trust. 23 The principal business which the ACC Group conducts is vertically integrated red meat production. That means that, within the group, operations range from the breeding and grazing of cattle to slaughtering and then to packaging meat which is, in turn, supplied to both domestic and export markets. There is also an in-house finance entity within the group. This principal business is a successful one and was so in the income years in question. 24 The origins of Mr Lee's interest in luxury cruising and of the potential of Great Barrier Reef waters for luxury motor cruising may be traced to the year after he and his wife married. There was, thereafter, a long gestation period, prior to the acquisition in 2005 of the Keri Lee I. Over that period, gradually, his interest in and experience of super yachts grew and his belief in the feasibility of conducting a charter operation using such a vessel based in Queensland firmed. 25 It was in 1987 that Mr Lee met Mr Keith Williams, who was, in his time, a major developer in the Queensland tourism industry. I infer that that meeting came about because of the longstanding interest which Mr Lee and his wife each have in yachting, which brought them to Hamilton Island, one of the tourism development projects undertaken by Mr Williams. In the period between 1987 and 2005, Mr Lee came to have regular contact with Mr Williams. Initially, their discussions concerned the success of the Hamilton Island Resort, the charter income able to be derived from Mr Williams' then motor yacht, "Achilles", at that time the largest in Australian waters, which was based at Hamilton Island, and the potential of Great Barrier Reef waters for chartering operations by a large, luxury motor vessel. Over time, their discussions evolved to include discussions about the acquisition by Mr Lee of a successor to "Achilles", "Achilles II", another large motor yacht operated by Mr Williams, to jointly inspecting other vessels which might be acquired and then converted to super yacht standard for chartering operations and to discussing the merits for such operations of particular super yachts. 26 Mr Lee's interest in super yacht charter operations was heightened by his experience of chartering both "Achilles" and "Achilles II" in the early 1990s, related discussions with the captains and crew of these vessels and the access which he enjoyed, with Mr Williams' blessing, to their books. One item of information which came to Mr Lee's attention in the course of discussions with the captain of "Achilles" was that the vessel was not actually registered for commercial operations. Appropriateness of registration remained a concern of Mr Lee both when considering the acquisition of a vessel from Mr Williams and when, later, he came to control the taxpayers. This aside, these discussions, the access which he enjoyed to the ship's books, his discussions with Mr Williams and his own impressions engendered a belief by Mr Lee that a profitable charter market existed for a large, luxury vessel, a "super yacht", based in Queensland. 27 In 1999, Mr Lee and his wife cruised in the Mediterranean. The cruise was recreational but also something of a reconnaissance in relation to super yacht charter operations. Mr Lee took note of the comparative merits of port and other destinations there relative to observations which he had by then made of the growing port and related infrastructure in North Queensland suitable to accommodate super yachts, particularly at Townsville, Cairns, Airlie Beach and Hamilton Island and of the pristine and remote yet secure alternatives offered by locations around the Great Barrier Reef such as The Whitsundays, Lizard Island and Bedarra Island. A like cruise which Mr and Mrs Lee took in 2002 in the Caribbean offered like opportunities to combine recreation with an assessment of the merits for charter operations of various destinations there relative to those which might be offered if a super yacht were based in Queensland. On a further trip to the Caribbean in 2004, Mr Lee and his wife made a particular point of visiting and assessing various yachting facilities to the end, as I understood Mr Lee's evidence, of better understanding how super yacht charter operations were supported either at home ports or other destinations. 28 At the time, and to this day, the Mediterranean and the Caribbean were and are the two main cruising destinations for super yachts and related charter operations. 29 Other destinations which Mr Lee came, as a result of observation and experience when travelling, to consider would be attractive and feasible alternatives to the Mediterranean and the Caribbean destinations via a super yacht based in Australia were the Kimberley region off the coast of Western Australia, the Solomons, Fiji, Vanuatu, Papua New Guinea, New Zealand, New Caledonia and Indonesia. 30 Gradually, in the first half of last decade, Mr Lee came to form the view that a super yacht charter operation based in Australia would be viable. He found it helpful in reaching this view over this period to discuss the idea with another businessman, Mr Michael Williams (unrelated to Mr Keith Williams), who owned a 65 foot motor vessel based at Sanctuary Cove. This Mr Williams controlled very successful businesses in the United States, Europe and New Zealand. Mr Lee spent much time with him discussing the viability of such an operation. 31 Mr Lee also conducted discussions over this period about such an operation with various persons, in Australia and abroad, involved in the large luxury motor yacht industry as brokers or charter agency operators and otherwise. He was recommended to two of these, Mr Grant Torrens of Grant Torrens International Marine Pty Ltd (Grant Torrens Marine) and Mr Geoff Lovett of Geoff Lovett International Pty Ltd by Mr Michael Williams on the basis that they operated the two largest boat broker businesses in Australia. Another of the Australians Mr Lee consulted was Mr Keith Lloyd. Mr Lloyd controlled a luxury boat building business, based in Brisbane, known as "Lloyd Yachts". This business, Mr Lee understood, was the builder at the time of the most prestigious vessels in Australia. Of particular value to Mr Lee in the discussions which he had with Mr Lloyd was the better understanding he acquired of the likely operating costs of a super yacht. Mr Lee's earlier discussions had not given him what he described as a "level of comfort" on this subject. With the benefit of the discussions he had with Mr Lloyd, Mr Lee came to the view that operational costs would be sufficiently manageable to allow a super yacht chartering business based in Australia to run at a profit. 32 Another source of information upon which Mr Lee drew, to the end of better informing himself about charter markets, was a number of yachting magazines to which he subscribed. He took particular note in these of charter rates and standards of presentation and services offered by advertised super yachts. 33 During this preliminary period Mr Lee also made a number of inquiries of the Great Barrier Reef Marine Park Authority about restrictions which would be applicable in respect of the commercial operation of a vessel in Great Barrier Reef waters. He also made an enquiry of the Queensland State Department of Transport about the regulation of a vessel operating commercially in these waters. He also made enquiries about registration for travel in international waters. The understanding to which he came was that any operation based in Australia would require the vessel used for charter operations to be registered with the Australian Maritime Safety Authority, to be separately registered for commercial operations with the Queensland Transport Department's Maritime Safety Branch (MSQ) and that for these purposes for the vessel would have successfully to complete a commercial survey. 34 Another event which informed Mr Lee's thinking about the viability of a super yacht operation based in Australia was the terrorist attack on the World Trade Centre in New York on 11 September 2001. His assessment, the basis for which included personal observation, was that one sequel to this event was that wealthy persons interested in cruising were reluctant to travel anywhere outside safe cruising areas. He believed that Australian and South Pacific waters offered just such areas. 35 The view to which Mr Lee came was that, if a company formed for the purpose of owning and operating a super yacht for charter operations, purchased a super yacht for between US$3,000,000 and US$6,000,000, it could yield a charter rate of up to US$75,000 per week. He calculated that, if the vessel achieved eight to 12 weeks of chartering to third parties and this was supplemented with 10 weeks of chartering to family and associates, the chartering business would return a profit. Whilst his aim was to maximise the number of weeks the vessel could be chartered, his research lead him to believe that it might not be practical to charter a super yacht in Australian waters for more than about 24 weeks per year. 36 In accepting Mr Lee's evidence, I accept that he and his wife moved in circles which included other high wealth individuals as a result of which he formed a view that, in such circles, there existed a potential clientele with both an interest in and ability to afford super yacht charters. 37 Having formed these views, Mr Lee briefed Mr Torrens and Mr Lovett in detail about his plans and the underlying assumptions. Each advised him that these were reasonable and achievable. Each also offered to assist in the promotion and management of the vessel. Mr Lee considered that their advice was reliable as each stood to make large financial gains if the venture was successful. Based on these discussions, Mr Lee considered that a suitable super yacht vessel ought to have the following characteristics: (a) Optimal length of about 35m; (b) Built in or after 2000 to ensure prestige for market, plus reduced operating and maintenance costs; (c) Tri-deck, which means main deck at the hull with two decks above (this was because, from his research, this gave the most internal volume and it had become a benchmark for top, new super yachts, as well as being proportionally good value in terms of purchase cost, operating cost and resale value); (d) Cruising range of 3,000 nautical miles to be able to travel between the Galapagos Islands and Tahiti and to cover anticipated chartering locations without the delays and cost of passing in and out of other countries just to refuel; (e) Price range of US$3,000,000 to US$6,000,000; and (f) Facilities on board to carry two tenders, two jet skis, fishing platform and diving and fishing equipment, because they were likely to make the vessel more attractive to charter parties. 38 Mr Lee commissioned, primarily, Mr Torrens' and Mr Lovett's companies to source potentially suitable vessels. He also involved, to a lesser extent, other brokers in the sourcing of suitable vessels. Via this process, he came, inferentially as a result of feedback from these sourcing agents, to conclude that there were no suitable vessels available in Australia. The search was therefore widened to the sourcing of suitable vessels overseas. As potentially suitable vessels were identified, Mr Lee made enquiries about them on subjects such as likely charter rates and operating costs, often checking those rates against advertised rates, considered whether the promoted charter rates and charters were achievable when measured against purchase and operating costs, all with a view to considering the feasibility of a new business utilising that particular vessel. 39 An indication of the end to which these sourcing commissions was directed is offered by a facsimile communication of 20 July 2005 from Mr Grant Torrens of Grant Torrens Marine to Mr Lee enclosing details about one particular vessel and adding, "which I feel will be of interest to you [in] relation to an upmarket charter business opportunity" (emphasis added). Taking, as I do, Mr Lee at his word, in relation to the course of events and evolution of thinking that led him to this point by 2005, this course of events and his plans are consistent only with a settled intention on his part to operate the super yacht under contemplation of purchase as a business. It is necessary now to turn to later events to see whether that intention was fulfilled in practice. 40 Around the beginning of August 2005, Mr Lee received correspondence (enclosing a related brochure) from Grant Torrens Marine advising that a super yacht then named, "Melreni" was available for sale. [Mr Lee recalled in his affidavit that the vessel was Cayman Islands registered (or "flagged"), although the subsequent contractual documentation describes it as British registered at the Port of London. Nothing was made of this difference in cross-examination and nothing turns on it.] The Melreni was then located in Fort Lauderdale, Florida in the United States of America. 41 Mr Lee discussed the suitability of the vessel for charter operations with Mr Torrens and also Mr Keith Williams. Mr Lee's assessment of the information provided about this vessel was that it had all of the characteristics he had developed for a vessel for use in the proposed chartering business. He particularly noted its range (3,000NM) and relatively recent construction (2000). His understanding, which I infer came from Mr Torrens, was that, at the time, the vessel met an American Bureau of Shipping (ABS) private registration standard but that this could easily be altered to ABS commercial registration for a modest fee and that this would allow the vessel to be chartered in many locations overseas but not in Australia. 42 On 6 August 2005, Mr Lee made an offer either to purchase, either personally or via a nominee, the Melreni for the sum of US$5,500,000. Notably, the offer was subject to sea trial and mechanical inspections satisfactory to the purchaser, to be conducted on or before 20 August 2005. 43 The vendor accepted the offer on 8 August 2005. At the same time, and on advice from Mr Torrens, Mr Lee sought a fee proposal from and then commissioned a marine survey company based at the Gold Coast, KPS Maritime, to undertake a survey of the Melreni at Fort Lauderdale. The end to which that survey was directed was not just the state and seaworthiness of the vessel but also its suitability for operation as a charter vessel in Queensland waters. An insight into Mr Lee's intentions for the vessel is offered by an email sent by Mr Nick Lockyer of KPS Maritime to Mr Lee on 8 August 2005 following a conversation which he had with Mr Lee that day and preceding the commissioning of the company to undertake the survey: It was a pleasure to receive your call this morning and I hope we can be of service to you. I have spoken to Grant Torrens and Peter Kidd from our office, the surveyor who will be handling this work, has also spoken to Bill Lloyd in NZ about the original building specification of the vessel. Accordingly, we are well versed as to what is involved and needed. As I understand it, you require us to make an assessment of the vessel's suitability to enter commercial registration for operation as a charter vessel in Queensland waters and also to enter Certificate of Survey (if possible) for operation in all state and territorial waters. The vessel was built to scantlings specified by ABS but does not have a build certificate. 44 Mr Peter Kidd was the marine surveyor who, in the result, came to survey and report upon the Melreni. Mr Bill Lloyd, also referred to in the passage quoted, is revealed by a "Yachting International" article in respect of the Melreni, also sent to Mr Lee by Grant Torrens Marine, to be the "owner and president" of the company which built that vessel. Based on his discussions with Mr Lockyer and Mr Kidd of KPS Maritime, Mr Lee understood that KPS Maritime was accredited with MSQ such that ship survey assessments made by that company would be accepted by MSQ. 45 Also on or about 8 August 2005, Mr Lee instructed his solicitors, Kinneally Miley (inferentially, from the specification of that firm on the certificate of incorporation subsequently issued by the Australian Securities and Investments Commission (ASIC)) to cause a company to be registered for the purpose of owning and operating the vessel. Consequentially, on 10 August 2005, LGC was registered by ASIC under the Corporations Act 2001 (Cth) and taken to be registered in Queensland. Steps were also taken to secure an Australian Business Number for LGC, operative from 10 August 2005. 46 Shortly thereafter, Mr Lee flew to Florida in order personally to inspect the vessel. By 20 August 2005, Mr Kidd had undertaken the required survey. Mr Lee mentions in his affidavit being handed a list of modifications by Mr Kidd on 17 August 2005 and conducting related discussions with him. I infer that Mr Lee was present during the survey. 47 The survey Mr Kidd handed to Mr Lee on 17 August 2005 contained a list of modifications of the Melreni required for the purpose of obtaining a certificate of survey for Class 1C USC (Uniform Shipping Laws) in Australian waters. Mr Lee discussed these along with the condition of the vessel with Mr Kidd. As a result of these discussions, he formed the view that the vessel was sound and could satisfactorily be modified so as to conduct charter operations and secure Class 1C certification. Accordingly, he caused LGC to complete the purchase of the Melreni. 48 It was a term of the purchase contract that the name Melreni would be retained by the vendor. Not by coincidence, the replacement name which Mr Lee chose for the vessel was "Keri Lee". Given subsequent vessel acquisitions, it is convenient to call this vessel, "Keri Lee I". A more formal report (dated 25 August 2005) concerning the result of Mr Kidd's survey was given by KPS Maritime to LGC (via Mr Lee). This more detailed report was also needed for insurance purposes. It is a feature of the report that it was cast on the basis that the vessel would be modified as recommended. It is a feature of the insurance that LGC subsequently obtained and maintained in respect of the Keri Lee I that it covered charter operations. 49 KPS Maritime also furnished LGC, via Mr Lee, with a formal, pre-purchase inspection report on 5 September 2005, prior to the completion of the sale of the vessel on 12 September 2005. Even prior to the formal completion of the sale but in contemplation of that, Mr Lee had on 25 August 2005, in response to the report of that date and Mr Kidd's modification list and related discussions, commissioned the undertaking of the recommended modification works. In addition to these works, Mr Lee formulated a list of other works which he considered were necessary in order to bring the Keri Lee I up to a standard suitable for the undertaking of charter operations. Mango Marine Inc, based in Fort Lauderdale, Florida, was selected to undertake all of these works for LGC. In September 2005, on behalf of LGC, Mr Lee appointed Mr Torrens to supervise the work being undertaken by Mango Marine Inc and to ensure that the vessel would meet MSQ commercial registration requirements. Mr Torrens travelled to Florida for this purpose. 50 Initially, Mr Lee was undecided as to whether to send Keri Lee I to Australia on board a specialist carrier vessel or to have her sail to Australia. As to the former option, he sought quotes from a specialist carrier (Dockwise) but, over the period September — December 2005, came to opt for the alternative of the Keri Lee I sailing to Australia. He made this decision because of the opportunity it offered to attract charter income in the Caribbean and in the South Pacific during the voyage and for the vessel to be introduced in the Caribbean to charter agents. This option also allowed him to charter the vessel in the Caribbean before it sailed for Australian waters. 51 The Caribbean charters in December 2005 — January 2006 proved to be amongst those about which Mr Lee was taxed in the course of his cross-examination. I thought Mr Lee's evidence on this subject, both in his affidavit and orally, was particularly candid and credible. To understand this evidence it is necessary first to relate other events which occurred in the period September 2005 — December 2005. 52 By this time and in relation to commercial chartering of super yachts, Mr Lee's research and personal experience was that most charters were arranged through charter agents, rather than directly between the owners and the charterers. His observation was that it was an expectation in the commercial charter industry that recommendations by charter agents of a particular vessel were based on an inspection by the agent's staff of the vessel and an interview of her crew. Another observation which he made was that, though most super yachts available for charter had promotional websites and brochures and were sometimes advertised in yachting magazines, almost all bookings were secured through charter agents. 53 While Mr Lee was still in Florida and after settlement of the purchase of the Keri Lee I completed in September 2005, Mr Torrens arranged for Mr Lee to meet with several of the major charter agents located there. These included Chamberlain Yachts, Luke Brown Associates and Ardell Yacht & Ship Brokers Inc., each of which had charter departments. Mr Lee subsequently met with representatives from each of these charter agents. He did so both to better understand the business upon which LGC was embarked with the Keri Lee I and also because of the possibility of securing charter income for the Keri Lee I once the modification works had been completed and before it left or sailed for Australia. 54 Another observation which Mr Lee had by then made of the commercial charter industry was that it was usual for one particular agent to assume for an owner the role of "central agent" in respect of a vessel. The central agent is responsible for the world-wide listing of a vessel on specialist, subscription-based listing websites accessible by subscription to other charter agents throughout the world and for promotions of the vessel to other charter and booking agents. Mr Lee originally had it in mind that LGC would appoint a central agent for charters of the Keri Lee I in the Caribbean and during its voyage to Australia but that LGC would assume that role itself once the vessel reached Australian waters. The reason for this was that it would result in savings in agent commission fees. In the result though, as a result of the discussions which occurred in Florida and because of a particular interest which Chamberlain Yachts had shown in the development of a commercial charter market in South Pacific and Australian waters, Mr Lee caused LGC to appoint Chamberlain Yachts as central agent for the Keri Lee I on or about 23 September 2005. He also had it in mind that Grant Torrens Marine would act as an agent for charters of the Keri Lee I. 55 As a result of this appointment and reflecting that particular interest, Chamberlain Yachts placed a photograph of the Keri Lee I on the front cover of their charter magazine, Chamberlain Yachts International Charter with the following by-line, "Keri-Lee 121' Sovereign 2000 Making her charter debut in the Caribbean & South Pacific". A webpage for the vessel was developed for that charter agent's website. 56 Chamberlain Yachts' Ms Dozier corresponded with Mr Lee about the marketing of the Keri Lee I and suggested rates of charter. A caveat Mr Lee placed on the arrangement with Chamberlain Yachts was that it would not receive a commission in respect of charters which LGC arranged for his family, friends or associates. 57 The modification works to the Keri Lee I commissioned by Mr Lee took longer than expected to complete but were completed by early December 2005. The delay in the completion of the works meant that a planned showing of the Keri Lee I at the Antigua Charter Yacht Show had to be withdrawn. This show is an annual event in December each year. It showcases the world's best charter yachts for the upcoming Caribbean charter season, usually December to May. It had been part of Mr Lee's thinking to hold the Keri Lee I in Caribbean waters until about April 2006 to take advantage of this season before bringing her to Australian waters. 58 Once the modification works had been completed, LGC registered the Keri Lee I in the Australian Register of Ships. The vessel obtained a commercial registration in Class 2C, which is for vessels carrying 12 or fewer passengers. Mr Lee explained (and I accept) that Class 2C came to be chosen in preference to Class 1C (as originally envisaged) because Class 1C was for up to 49 passengers (which I infer was considered unnecessary) and had more onerous safety requirements (which I infer were also considered unnecessary, given contemplated operations and passenger numbers). LGC also obtained and maintained insurance for the vessel which extended to charter operations. 59 What is evident over this period (as it is also in respect of the later ownership and operation of the Keri Lee II and Keri Lee III), is that Mr Lee was not rigidly following a pre-ordained business plan in respect of charter operations for the vessels. He was reacting to circumstances and to an ever growing understanding of the super yacht charter industry. That is not to say that he did not engage in any forward planning about profitability. There is evidence of his engaging with Chamberlain Yachts in February 2006 in relation to revenue estimates and operating costs and of a related request by him of LGC's accountant, Mr Keith Harvie, to update that company's business plan in respect of the operation of the Keri Lee I. Mr Lee related in his evidence that he had formulated earlier charter plans but was unable to locate these. I accept his evidence both as to the existence of earlier plans and as to his inability to now locate these. He had no particular reason at the time to preserve each and every version of written charter operation plans for the vessel. Mr Lee had no reason at the time to think that the Commissioner might later be inquisitive. Further, LGC was not a major public company with related archival protocols and a board of directors of whom Mr Lee was but one. 60 More fundamentally, cases such as this are not to be resolved by resort to some mechanical annotation of a checklist for the presence or absence of factors, one of which is the presence or otherwise of an anterior business plan. There is nothing in s 26-47 of the ITAA97 which mandates that there must be some sort of formal business plan for dedications not to be quarantined. Even were there a formal plan written in advance, if the evidence in practice showed an unexplained disregard of that plan and uses inconsistent with the operation of the vessel as a business, form could not triumph over substance in terms of the conclusion to be drawn. On the whole of the evidence in relation to the period from when the idea of a super yacht operation first occurred to Mr Lee to the first charter of the Keri Lee I, the irresistible conclusion, in my view, is that Mr Lee did not cause the acquisition of or operate that vessel as a private venture, as opposed to for and as a business. Further, his end, which was that of LGC, was that the vessel would be operated at a profit. 61 It might be thought that the drawing of that conclusion is immediately challenged, or at least that, whatever may have been the original intention, a different course came to be followed, because the very first charter was to Mr Lee. That is an apt note on which to return to Mr Lee's evidence about the charters and use of the vessel in the December 2005 — January 2006 period. 62 Mr Lee chartered the Keri Lee I for the whole of the period from 14 December 2005 to 18 January 2006, save for the period from 4 January 2006 to 11 January 2006. Originally, the charter was to commence a week earlier but this had to be deferred because of the delay in the completion of the modifications to the vessel. For part of this initial period under which the Keri Lee I was under charter to Mr Lee, P & D Craig (the Craigs) (inferentially, relations of his wife and his by marriage) were on board. His wife was on board as well. Mr Lee candidly admitted in his evidence that this was a family holiday. Even so, the presence of Mr Lee and his wife and relations on board the Keri Lee I came at a cost, and intentionally so on the part of Mr Lee. He paid $250,300 to LGC for the charter, the Craigs a further $29,700. 63 That an overall charter fee of this order came to be paid was not happenstance. It was in keeping with the advice which Mr Lee had sought and been given by Chamberlain Yachts as to charter fees which the Keri Lee I might command (a rate of US$65,000 per week was 'very competitive' and a high rate of US$75,000 per week was not 'out of reach': see email of 24 September 2005 to Mr Lee from Ms Dozier of Chamberlain Yachts; and see also letter of 28 September 2005 from Chamberlain Yachts to Mr Lee specifying rates). In turn, this advice was in keeping with Mr Lee's preliminary research about charter fees upon which he had formed his views that it would be possible to conduct a super yacht charter venture profitably. 64 Revealed also by this initial charter is a practice which Mr Lee came to adopt in respect of successor vessels when under charter to him and when joined by wider family, friends or associates. Though Mr Lee carried the major proportion of the charter fee, others on board contributed. None of the Keri Lee I, Keri Lee II or the Keri Lee III was operated either as a charity or private venture. In keeping with his original intention, LGC and, in turn later, KLC, operated the vessel concerned as a business. 65 It is convenient also at this point to make another finding of enduring relevance about the operation of these vessels, revealed by this initial charter. Details of the charter operations in terms of length of charter, charter parties and charter fees are set out in Exhibit 7. None of these was a sham. 66 The charter fees charged for the vessels were carefully formulated by reference to prevailing fees for such vessels in the international market. Mr Lee continued to pay attention to this subject from the very moment of acquisition of the Keri Lee I and throughout the income years the subject of this appeal. He still does. As to charters to him, his family or associates, he explained in his evidence the policy which he adopted for LGC (and to which he adhered with KLC) in this way: I endeavoured to ensure that my family paid the company a reasonable commercial rate for the yacht. I assessed that rate having regard to the numbers of charters being taken out by my family and associates, the length of the charter, the location of the charter and the utility of having my family move the vessel from one location to another. Another factor which, as a result of experience, he came to take into account, in fixing charter rates for family and associates, was the benefit of a minimised risk of wear and tear to or damage of furniture and fittings when he, family or a trusted friend or associate was the charter party. 67 The evidence about charter fees in the open market was that there was considerable scope for variation according to prevailing demand (reflecting, in turn, prevailing economic conditions) with owners of vessels amenable to negotiation about advertised fees for the sake of securing a particular charter or even a charter at all. I detail evidence given by Mr Lee about some particular charters which featured in cross-examination, later. For the present, it suffices to record that I thought that these were honest and reasonable explanations. Taking into account these explanations, his stated policy, the observance of that policy and considered as a whole, especially once the scope for legitimate fee variation is recognised, the pattern which emerges is that the charter fees charged for the Keri Lee I and her successor vessels reflected market rates. This was not coincidence but a manifestation of a policy set by Mr Lee on and from the very first charter. 68 There was another feature of this initial charter to which Mr Lee referred in his evidence, the importance of which for a person controlling a new business venture of this kind, which involved a substantial outlay of capital, cannot be over-stated. With the assistance of Chamberlain Yachts, LGC had engaged an experienced captain, Captain Adam Lambert and a crew of five used to working with him to be the initial ship's company for the Keri Lee I. This initial charter presented an opportunity for Mr Lee to discuss in detail various aspects of the chartering and operation of the vessel with Captain Lambert, to observe the performance and standards of captain and crew and, no less importantly to him, to have the benefit of his wife's informed observations and advice on these subjects. During the course of his cross-examination about this initial period of super yacht ownership, I was prompted by the course of questioning to put certain questions to Mr Lee. This is the exchange which occurred: HIS HONOUR: Mr Lee, had you managed a company which engaged in superyacht charters before?--- No, never, your Honour. And how important did you see it to gain experience hands-on as the owner of that vessel, ultimate owner, in terms of filtering through the various shareholdings and the like? How important was that for you?---Well, it was critical. If you're starting any business, your Honour, you need to understand it. So taking a – visiting your asset and spending time on a training crew ascertaining charter areas, gaining knowledge, was all part of the – the learning curve. And then there was also, your Honour, the getting to know the charter areas, having a look at them, seeing what's available. Once you have the knowledge, you're – you're in a better position to make a better business decision. So that whole process was what that – that was about, and then the third factor, your Honour, was that there was a timing factor of when you could cross the Pacific safely. So there was a timing factor of hoping to arrive around May at the Galapagos. HIS HONOUR: So there's a pleasure element to this?---Well, that was the idea of chartering. I – I was – if you pay a couple of hundred thousand dollars to charter, you – you want to have some fun. Yes?--- Yes, your Honour. But it's literally a combination of – for you, anyway – business and pleasure, in observing how that motor yacht performs and how the crew performs in serving those who are onboard? --- Absolutely critical. The more I learnt about the superyacht charter business, it's all about your crew. It's all about the captain. It's all about the facilities and it's all about how they conduct themselves. 69 These answers were candidly, honestly and spontaneously given by Mr Lee. I have no hesitation in accepting the truth of what he stated. For Mr Lee this first charter period was, quite literally, a voyage of discovery about a new business venture. Of course there must have been an element of satisfaction for him, particularly in the presence of his wife and the Craigs, about for the first time being on board a super yacht not just as a charterer but also this time as the sole director of the company which owned and operated the vessel. And, as he said, there was an element of "fun". But it is no empty adage to describe this as a voyage where business was mixed with pleasure. And, it bears repetition to record that even the element of "fun" came at a business price. 70 The evidence discloses that, apart from this initial charter period, Mr Lee also informed Chamberlain Yachts that the vessel would be under charter to his family and friends from 30 March 2006 to 19 April 2006, 2 June 2006 to 8 June 2006 and 22 June 2006 to 14 July 2006. Such reservations are not inconsistent with the carrying on of a business. Of course they sound an interrogative note but it is possible for a business to exist even where that business has but one or predominantly one client. And it is telling that subsequent charters by Mr Lee were undertaken at commercial rates. 71 Further, the Keri Lee I was hardly kept away from the wider market. In his evidence and by way of example, Mr Lee referred to the publicly accessible internet website of 'charterworld.com', on which the Keri Lee I was advertised from at least early December 2005 as available for charter in 2006. He cited a WaybackMachine snapshot dated 10 December 2005 of the related advertisement, which stated, inter alia: Luxury motor charter yacht Keri-Lee (ex Melreni) was designed Jack Sarin and built by Sovereign yachts of New Zealand with serious world cruising in mind. Keri-Lee will be cruising across the South Pacific Ocean next year. This is a fantastic opportunity to charter this yacht in the Caribbean at beginning Jan 20-May, 2006 and the South Pacific (Tahiti, Tonga, Fiji Australia) from July-Sept 2006. 72 Another early charter of the Keri Lee I came from Mr Lee's friend, Mr Michael Williams. This charter was secured as early as November 2005, prior to the completion of the modifications. Mr Williams chartered the vessel from LGC for one week (4 January 2006 to 11 January 2006) from and back to San Juan, Puerto Rico for the sum of $56,000. The form of letter and the related charter contract used for this charter were typical of those initially used by LGC when the vessel was chartered directly by that company to Mr Lee personally or to an associate or friend. Different charter documentation was used when a charter was sourced from an external agent. Over time, LGC changed its practice so that all of its charter contracts followed the Mediterranean Yacht Brokers Association (MYBA) standard form charter contract. This practice was continued by KLC. 73 The charter to Mr Williams and his wife also shows that Mr Lee's expectation that one source of charter clientele for a super yacht might be found in the high wealth circles in which he and his wife mixed was not completely misplaced. Having regard to the range of charter fees which Chamberlain Yachts had by then supplied to Mr Lee and to the other considerations I have mentioned, the charter fee paid by Mr and Mrs Williams to LGC was, in my view, at a market rate. 74 Between 11 and 18 March 2006, the Keri Lee I was chartered out of St Maarten to a Mr John Bertsch for cruising in the Caribbean for a charter fee of US$55,985 pursuant to a standard MYBA charter contract. The occurrence of this charter at that time also contradicts a suggestion, put to Mr Lee in the course of cross-examination, based on an email of 18 October 2005, that he was not prepared to be flexible about or to facilitate charters arranged by LGC's appointed central agent during holiday periods. The Bertsch charter occurred during a period nominated in the email concerned. Inferentially from this, the earlier inquiry about a charter over this same period just did not progress. Later in time but also inconsistent with the notion that LGC did not carry on a business, during the period of LGC's ownership of the Keri Lee II, Mr Lee deliberately interrupted a pre-planned family charter of that vessel (at a commercial rate) so that LGC would be in a position to take up a lucrative opportunity to charter the vessel to Warner Brothers. Of course if it could be seen that there was a predominant pattern of charters at less than market rates by Mr Lee, particularly in conjunction with an unexplained withdrawal of the vessel concerned from availability for charter by others that might suggest that the company concerned was not carrying on a business, but that is not this case. 75 At the end of March 2006, Mr Lee took up a charter in another of the reserved periods earlier notified to Chamberlain Yachts. In conjunction with his wife, he, the Craigs and some Australian associates chartered the Keri Lee I from 30 March 2006 to 19 April 2006, from Port of Spain, Trinidad & Tobago to Panama City. Once again, this charter was, I find, at a commercial rate of $110,000. 76 The choice, at this time, of Panama City as an end point for the charter was very likely not a coincidence. That is not wholly explained by that location being one terminus of the Panama Canal (a fact of which I consider I may take judicial notice) and thereby convenient access to the Pacific. Other events were also in train which influenced that as a destination for the Keri Lee I. It is desirable to interrupt the narrative of the voyages of the Keri Lee I while under LGC's ownership to relate these events and related plans. 77 When he was in Florida in 2005 for the inspection and subsequent purchase of the Keri Lee I, Mr Lee was shown another vessel, then known as "Status Quo". Status Quo was a 138 foot, 2004 built, Sovereign motor yacht then under Cayman Islands Registry. It was in almost as-new condition and well fitted out internally. Its then asking price of US$25,000,000 was, though, outside the budget which Mr Lee had fixed for the acquisition of a vessel for the charter business he had been planning. 78 The owner of that vessel, a Mr Davis, remained in touch with Mr Lee and in 2006 an opportunity arose for LGC to acquire the Status Quo on attractive terms. LGC was to be the purchase vehicle because Mr Lee envisaged a continuation of the charter business on which LGC was embarked, with Status Quo becoming the charter vessel. Status Quo was not just newer than the Keri Lee I (with anticipated, related lower maintenance costs), it was bigger. And, as Mr Lee explained in evidence and I accept, in the super yacht charter market, bigger is better. That is not because more passengers are usually accommodated, 12 being about the maximum, but rather because they can be offered more room and also smoother passage in rough waters. For these reasons, a larger super yacht tends to be more in demand than a smaller one and can command a higher charter fee. Mr Lee's then apprehension was that the operating costs of the Status Quo would not be significantly greater than those of the Keri Lee I. [He anticipated that the Status Quo would be able to be chartered for at least 20 weeks per year in the Australian/South Pacific waters market for which the Keri Lee I was already destined.] He considered that it would take three to five years for the vessel to generate a profit and that, after that initial period, it would achieve sustained profitability. 79 In mid-April 2006, via the agency of Mr Torrens, LGC made an offer to Mr Davis for the purchase of Status Quo. It was contemplated that the Status Quo could be delivered to Panama City and berthed alongside the Keri Lee I before a settlement occurred on 9 May 2006. For present purposes, notable features of these negotiations were Mr Lee's requirements that the purchase contract should include an express confirmation that the Status Quo had the particular range and fuel capacity represented and that a survey report be provided as soon as possible to show that the Status Quo was in current American Bureau of Shipping (ABS) class (email to Mr Bosshardt of Bosshardt & Miller LLP on 22 April 2006 refers). There was nothing feigned about these requirements. For Mr Lee they were important for a seamless transition of LGC's charter business from using the Keri Lee I to using the Status Quo. 80 The survey report in respect of the Status Quo was furnished by Pliske Marine Inc., which Mr Lee understood to be a reputable American company. That report indicated that the vessel was built to ABS standards, had an ABS interim class certificate and was considered fit for ABS classification as "A1, Yachting Service, AMS". At the time, Mr Lee understood this meant that the Status Quo's ABS classification allowed for international commercial chartering and would also make it easy to register the vessel for commercial purposes in Queensland. Also included in this survey report was the following advice (at p 38) in respect of the Status Quo, '... the present day market value of "STATUS QUO" is approximately $17,000,000.00 with a replacement value today of approximately $21,000,000.00', having regard to yachts of similar "type, age, and condition, considering all extras and accessories on board". The authors also specifically reported that the Status Quo was "well built" and "in very good condition". 81 By an agreement dated 16 April 2006 but not finally executed until 22 May 2006, between Status Quo Inc. of Georgetown, Cayman Islands as seller (inferentially, a company controlled by Mr Davis which owned the Status Quo) and LGC as buyer (Status Quo Purchase Agreement), Status Quo Inc. agreed to sell the Status Quo, a 138 foot 2004 Sovereign motor yacht then under Cayman Islands Registry, for US$14,865,118, and to buy the Keri Lee I, a 120 foot 2000 Sovereign motor yacht under Queensland registry, for US$6,000,000, with the balance of the purchase price of US$8,865,118 payable by US$500,000 deposited in an escrow account, US$4,500,000 payable at settlement, and a promissory note for US$3,865,118 payable on 1 July 2007. Settlement ("closing") of the agreement was to occur (and did occur) on or before 12 June 2006 in Fort Lauderdale, Florida. The Status Quo Purchase Agreement expressly recited (at, I find, Mr Lee's insistence) that the Status Quo was being acquired by LGC, "for commercial chartering in Queensland, Australia and Worldwide" (Recital (iii) of the Status Quo Purchase Agreement). That recital was not a contrivance but reflected Mr Lee's intention as to the use to which the newly acquired vessel would be put. 82 Having regard to the condition and value of the Status Quo as described in the report from Pliske Marine Inc., Mr Lee was confident that the vessel would increase in value or at least retain its value. For Mr Lee, another attractive feature for LGC of the bargain struck for the acquisition of the Status Quo was that the exchange price for the Keri Lee I was US$500,000 more than LGC had paid for it at settlement in September 2005. That went some way to compensating for the so recently incurred modification costs necessarily thrown away by its sale. The Status Quo came to be named the Keri Lee II following its acquisition. It is convenient hereafter to refer to that vessel by that name. 83 Mr Lee's expectations as to value in relation to the Keri Lee II make it opportune to deal at this juncture with certain issues which occupied a good deal of time in his cross examination. In cross-examination of Mr Lee and then in later submissions, the Commissioner sought to make something of an asserted failure on the part of Mr Lee to take into account depreciation of the vessels in his planning. As I understood it, this was in furtherance of a submission that neither of the taxpayers carried on a business because, when depreciation was taken into account, a profit could not be obtained. The returns for the income years in question each show a large amount claimed for depreciation. Those amounts were claimed, as Mr Lee confirmed in evidence, on advice as to a statutory entitlement. They are not cash flow outgoings. It was plain enough from his answer in respect of his expectation at the time when LGC acquired the Keri Lee II that he did not necessarily expect that this vessel would prove to be a wasting asset in terms of value on disposal. This was also a factor in relation to the acquisition of the Keri Lee III. Another factor which intruded on Mr Lee's thinking in relation to the Keri Lee III was the relatively high value of the Australian dollar compared to the United States dollar. While that was the case, there were potential advantages flowing from foreign exchange gains upon the later disposal of an asset advantageously acquired and sold at a United States dollar price if the value of the Australian dollar against that currency later fell. 84 The Commissioner took Mr Lee in some detail to the accounts of the taxpayers for the income years in question, highlighting not just the amounts of depreciation claimed but also interest free loans from an in-house finance company within the ACC Group and trust distributions received by one or the other of the taxpayers. These questions, in conjunction with the questions on the subject of depreciation were to the end of putting to Mr Lee that there was no business being carried on with a view to profit. The culmination of this questioning came, I thought, in the following exchange which occurred between senior counsel for the Commissioner (Mr Williams SC) and Mr Lee: Mr LEE: If you go down that trail – I'm involved in the rural business. We make negative profits regularly and, unfortunately, due to drought and other circumstances, I will still lend money if my overall business plan has some sense in the long term and I believe in it. There are – to – to generalise it like that is not possible for me, in the scope of the businesses I deal in. Mr WILLIAMS: But you say over the long term. When you're looking over the long term you're taking some kind of account of the amount of capital that is being used in the business, are you not?---I regularly accept return in my rural properties and will invest at four per cent where 99 per cent of the rest of Australia won't. But you do that because they serve other business purposes within your group. Correct?---That, or I see a long-term position where it will return what I regard as an acceptable profit. And in saying you accept four per cent where the rest of Australia won't, you are, in effect, making a comparison with the kind of return that you could get elsewhere on the funds. Correct?---It's not just the way I look at it, I'm afraid. 85 Once again, Mr Lee's answers were, in my view, honest and candid. They were also revealing. When he came to cause LGC and the KLC to embark upon these ventures, Mr Lee brought a very particular background of experience to bear upon his decision-making. That background lay not just in his gradually developing and evolving belief, described above, that it would be possible to operate a super yacht charter business based in Australia which looked to charters in Australian and South Pacific waters. It also lay in his earlier business experience, derived from the successful operation of a rurally based business, of the vicissitudes that can attend such a business and a correlative disposition on his part to take a long term view as to profitability. I find that this informed and continued to inform his thinking about the super yacht venture. He brought that same disposition to the operations of each of the taxpayers. Mr Lee was, in effect, backing a value judgment which he made in respect of what he considered, in the long term, would eventually prove to be a profitable business. Further, returns which others might not regard as acceptable were, in light of his rural experience, acceptable to him. Yet further, it is not that he ignored the prospect that a vessel might depreciate. Instead, in looking to what might be the value of a vessel on disposal, he formed a view that, by virtue of an advantageous purchase, each of the Keri Lee II and Keri Lee III might at least hold its value, if not see an increase. Another factor which might, he thought, lead to an increase in Australian dollar terms in value with the Keri Lee III were favourable exchange rate movements. Neither view was an ex post facto rationalisation. As it happened, notwithstanding the care which Mr Lee took in relation to its acquisition, the Keri Lee II proved not to be the bargain he anticipated it would be. How this came about requires some further exposition of the events which followed that acquisition. 86 To return then to the history of the Keri Lee I while under LGC's ownership, settlement did not, as events transpired, occur in April. I infer from the execution of the Status Quo Purchase Agreement on 22 May 2006 that it was not until then that details of the purchase were finalised. Thus, it was not until June that LGC gave up ownership and possession of the Keri Lee I. Even so, there was commercial advantage to LGC in its voyage from the Caribbean to Panama City being under charter. 87 While this charter was underway, a party named M Badache entered into a charter contract with LGC on 10 April 2006 in Paris to charter the Keri Lee I for seven days from 27 July 2006 to 3 August 2006 with the ports of delivery and redelivery being in French Polynesia (Tahiti and Taha'a, respectively). In the result, this charter did not eventuate on the Keri Lee I but instead came to be undertaken on the Keri Lee II. 88 Tahiti also became the delivery point for the handing over of the possession of the Keri Lee I under the terms of the contract for the acquisition of the Keri Lee II. From Tahiti, the Keri Lee I was to be transported as cargo on a Dockwise Yacht Transport ship to Florida with the Keri Lee II being transported by that same ship to Tahiti, each at LGC's expense (see cl 10 of the Status Quo Purchase Agreement). Related Dockwise Yacht Transport carriage contracts are in evidence. In early June 2006, prior to being handed over the Keri Lee I was chartered to Mr Lee and then to Mr Spinks at, I find, commercial rates of charter. 89 In all, in a little over six months of operating the Keri Lee I, LGC derived, by 30 June 2006, charter income of $727,053. 90 There was a charter of the Keri Lee II between 22 June 2006 and 14 July 2006 by Mr Lee, his family and friends out of Papeete. Inferentially, this charter commenced at or about the time when the Keri Lee II was delivered to Tahiti by Dockwise Yacht Transport. Again evident in this charter is an allocation of charges as between Mr Lee and others so as to yield, overall, a commercial rate for the charter of the vessel over the period ($121,500 paid by Mr Lee with others paying, in all, $49,300). This charter reveals what proved to be another feature of the conduct of charter operations by LGC and then, in turn, by KLC. That is that any subsidising (in terms of what a strictly equal pro-rata allocation of a total charter fee might suggest) of amounts paid by others who were on board the vessel when Mr Lee had a vessel under charter (or who were co-charters) was at his expense, not that of the company concerned. The overall charter income for a given charter remained at a commercial rate for a given period. This is another indicator that the vessels were operated as a business. 91 This was the first charter of the Keri Lee II while in LGC's ownership. Before that charter occurred, the Keri Lee II was registered by LGC on the Australian Register of Ships as a commercial yacht. LGC also secured insurance with Aon covering trading by the vessel in Australian and French Polynesian and Fijian waters. The vessel was also registered with MSQ under Registration No. TL140Q, expiring 13 June 2007. As to the latter, Mr Lee's then understanding was that the Keri Lee II was initially registered with MSQ on a temporary basis, pending the outcome of stability tests to satisfy the requirements for registration as a commercial chartering vessel in Australia. 92 Shortly after the acquisition of the Keri Lee II, Mr Lee and Chamberlain Yachts corresponded in relation to the marketing by Chamberlain Yachts of charters for the new vessel. This culminated in a Charter Listing and Marketing Agreement dated 18 July 2006 being made between LGC and Chamberlain Yachts pursuant to which LGC appointed Chamberlain Yachts as the central agent to manage the chartering of the Keri Lee II. Once again, there was nothing contrived about this appointment. It was another step taken in furtherance of operating LGC's vessel as a business. 93 In August 2006, Mr Lee requested and received from Mr Torrens an ABS certificate, issued on 26 April 2006 in respect of the Keri Lee II (under its then name Status Quo) and expiring on 29 January 2011, certifying that the vessel had been surveyed in accordance with the rules of the ABS and entered in the record with the class "A1, Yachting Service, AMS". An application for the Keri Lee II to secure commercial registration with MSQ was pursued by LGC via Mr Torrens' company in September 2006. In the meantime, charters of the Keri Lee II to Mr Badache and to Mr Lee, each at what I find were commercial rates, had occurred. As with the Keri Lee I, Mr Lee's chartering of the Keri Lee II soon after its acquisition had the additional purpose of his inspecting and assessing the performance of the captain and crew of the vessel. It was, for him, also something of a reconnaissance of the desirability of waters in and around Fiji for charter operations. 94 On 8 October 2006, at the completion of the charter to Mr Lee and while the Keri Lee II was moored at Nadi, Fiji, it was surveyed by KPS Maritime. The purpose of that survey was to assess the vessel's compliance with requirements for securing a commercial registration with MSQ on its arrival in Australia. The subsequent survey report of KPS Maritime of 10 October 2006 recited (inferentially on the basis of instructions from Mr Lee) what I find were Mr Lee's (and thus LGC's) then intentions in respect of the forthcoming deployment of the Keri Lee II in Australian waters: The vessel is to be used initially in the Cairns/Great Barrier Reef region for a given period of time on a restricted use flag. The amended and advised equipment that needs to be supplied will be available in Cairns and must be fitted prior to charter. A letter advising Maritime Safety Queensland in Cairns of the vessels suitability for intended charter will be generated by our office. An inspection of the highlighted repairs and equipment aboard (see below) will need to be completed by KPS Maritime prior to charter. After charter, the vessel will need to return to Brisbane or the Gold Coast for a full assessment and remaining required work to be completed so an application for Certificate of Survey can be made. 95 There was also nothing contrived about KPS Maritime and, for that matter, Mr Torrens' company each working on Mr Lee's instructions on behalf of LGC to the end of the Keri Lee II being able to secure commercial registration with MSQ. These efforts were in furtherance of Mr Lee's original plan, as now translated into the use of the Keri Lee II, rather than the Keri Lee I, to be based in Queensland for charter operations. 96 Mr Lee set out in considerable detail in his evidence the efforts to which he, Mr Lockyer of KPS Maritime and Mr Torrens in particular went over the course of the balance of 2006 and beyond to try and secure commercial registration for the Keri Lee II with MSQ. What is termed a "temporary flag" was able to be obtained but securing anything beyond that from MSQ came to be bedevilled by an unexpected stability issue with the Keri Lee II in terms of MSQ requirements, which emerged in March 2007. LGC expended much time and treasure in its endeavours to address this issue and those requirements, including effecting modifications to the Keri Lee II. 97 The fate of these endeavours and the difficulties they caused were explained with transparent frankness and with honesty by Mr Lee in his evidence in chief and, in the course of his cross-examination, in response to questions from senior counsel for the Commissioner and from me. That evidence is corroborated by contemporaneous correspondence and other documents. Those endeavours and difficulties became for Mr Lee an evolving "nightmare", to adopt a description with which he agreed. It is necessary to add "evolving" because the elusiveness of a solution did not become immediately apparent. Mr Lee did not reach a settled view about this for at least 12 months after the problem became apparent. Even then, and though pessimistic, he never really gave up entirely on seeking a solution to the stability issue during all of the time LGC owned the Keri Lee II. One indicator of this is offered by LGC's seeking and obtaining from the Commonwealth Department of the Environment, Water, Heritage and the Arts in June 2009 a permit authorising it to carry on commercial tourism activities in the Coral Sea Conservation Zone. Mr Lee deposed and I accept that this permit was sought and obtained because he wanted to retain the option, if the stability problems could be surmounted of conducting charter operations in the waters of this zone. 98 It is not necessary to detail each and every measure which LGC took to address the stability issue, relative to MSQ requirements for commercial registration. Reacting to the unforeseen stability issues, and despite not being able to obtain other than temporary commercial registration, Mr Lee caused LGC to look for its income to charters of the vessel in Australian waters just to himself and associates whom he trusted, as well as by the undertaking of limited charters in international waters. Exhibit 7, which details, inter alios, the particular charters of the Keri Lee II, bears this out. When LGC directly negotiated a charter, it saved the commission otherwise payable to a broker. Taking this and the available evidence as to brokered charter rates into account, as well as the considerable scope for variation in order to ensure that a vessel was kept under charter rather than idle, I am satisfied that the rates for these charters were commercial rates. 99 Of course in so doing Mr Lee was causing LGC to deviate from his original plan but he was reacting to events and doing so to the end, I find, of causing LGC to continue in business. LGC was operating its business in what one might call "damage control mode". All the while and at considerable expense, LGC continued to maintain the Keri Lee II in survey with the ABS, taking steps to change its ABS registration to commercial. This allowed the vessel to be used for commercial purposes outside of Australian waters. That LGC maintained that registration and continued to operate in what I have described as "damage control mode" was an ongoing business value judgement made by Mr Lee. As to this, another fact which bears repeating is that the elusiveness of a solution to the Keri Lee II's stability issues did not immediately manifest itself. Neither was it immediately apparent that the impact of the global financial crisis (GFC) on the super yacht sale and charter market (described below) would prove persistent. Further, and as I have already highlighted, Mr Lee's background in primary production pre-disposed him to take a long term view of business profitability in the face of hardships. 100 Between February 2007 and July 2009, LGC employed Mrs Melissa Seymour as an administration officer, responsible for fielding charter inquiries, liaising with the captain and staff of the Keri Lee II, Chamberlains and others about charter operations and undertaking a variety of other administrative tasks associated with the operation of that vessel, including the rendering of invoices and the receipt of related payments. Mrs Seymour's evidence was not seriously challenged by the Commissioner. I have no hesitation in accepting it. Mrs Seymour's appointment and duties are another indicator that LGC carried on a business. After Mrs Seymour ceased employment with LGC there were successors to her duties either for LGC or, later, KLC. 101 Mrs Seymour was interviewed for the position by both Mr Lee and his wife. This was not, I find, a coincidence but rather yet another indicator of the very particular value which Mr Lee placed on his wife's input into staffing and other presentation issues relating to the operation of each of the vessels. 102 Significantly, I thought, Mrs Seymour's evidence was that, while Mr Lee informed her quarterly in advance when his family proposed to charter the vessel and she endeavoured to find charters for the balance of vessel availability periods, her evidence was also that when an inquiry was made, either she or Mr Lee personally or the vessel's captain did everything possible to secure the charter. Mr Lee put his policy in relation to chartering this way in cross-examination: I didn't prioritise. I booked the boat. When I could or saw a need to, I would change. If I was – people were booked and everything organised and I was paying the charter rate, I saw no reason not to go ahead with it. 103 He expanded upon his policy in response to further cross-examination on this subject, particularly directed to an email from Yachtzoo (a charter broker engaged by KLC): … if they haven't had a charter by March, and they're talking May, I set the boat's itinerary and I chartered it. It's – to then book up people and then say that I'm going to wait for another charter, it – it – it would be an impractical way to run the business plan that I was operating to. This policy is one to which, on the evidence, Mr Lee and thus LGC and, in turn, KLC generally adhered throughout the period in question. Each yacht was publically advertised and its availability for charter placed with what Mr Lee considered to be reputable charter brokers. He did not exclude either himself or his friends and associates from direct charters. Nor did he wait until the last moment to see if a charter might emerge from a charter broker. Considered in conjunction with the allied policy of charging and paying commercial rates, this policy is not inconsistent with the statutory exception for which LGC and KLC contend. 104 Before the stability issue came to the fore and under a temporary commercial registration with MSQ, LGC secured a lucrative charter of the Keri Lee II to Warner Brothers from November 2006 to January 2007 for use in the making of the film, "Fool's Gold". 105 There was a suggestion made on behalf of the Commissioner that this charter was not in the ordinary course of LGC's business. I do not accept this. It was a charter to a third party for reward, as was each and every one of the other charters to which LGC was a party, including those to Mr Lee. The charter was at a commercial rate, the result of arm's length negotiation. Viewed by the experience of Mr Lee to October 2006 when the prospect of this particular charter emerged, it is fair to state that the possibility of the derivation of income via a charter to a third party such as a film production house had not come to mind but that was nothing more than a reflection of the limits of his then experience as to charter opportunities for a super yacht. Later in time, in December 2007, LGC received an inquiry about the chartering of the Keri Lee II for a television commercial to be produced by Walkabout Films. In or about early November 2008, LGC was approached by a Korean company, which sought to use Keri Lee II in a Korean television show. In late 2009 or early 2010, KLC was approached by a movie producing company who advised that they were interested in using the Keri Lee Ill for a movie. Mr Lee recalls that this was part of the "X-Men" movie series starring Hugh Jackman. He further recalls that the producers indicated that they needed a yacht with a helicopter pad because the movie included a pivotal helicopter scene. His recollection is that a charter fee of approximately $3,000,000 for a six week charter was discussed. Unfortunately, the period desired clashed with re-fit works for that vessel. Though these inquiries did not, in the end, result in further charters, they serve to indicate that super yachts can and do attract interest for charter uses other than pleasure cruising. Inferentially, they are also attractive, in ways that more commonly encountered smaller pleasure vessels are not, as a background setting for production houses engaged in the depiction of wealth and luxury lifestyles. This is just another segment of the available charter market for such vessels. 106 It also came to be Mr Lee's experience that the use of the vessel in this way offered, upon the release of the film, a publicity opportunity in respect of the chartering of the vessel by others. Later advertising of the Keri Lee II for charter shows that he caused LGC to take advantage of this opportunity. 107 If the stability issue were not enough of a challenge, in 2008 came the GFC. Mr Lee gave evidence, which I readily accept, of two particular difficulties occasioned by the GFC. One was that the market for the selling of super yachts shrank considerably; the other was that the demand for charters also diminished and has remained diminished. Inferentially, the GFC has reduced the number of persons with sufficient capital or disposable income either to purchase or charter such vessels. 108 In an email dated 21 February 2009 which Mr Lee sent to Mr Kurt Bosshardt of the yacht brokers and charter agents, Merle Wood and Associates, he offered what struck me as a reliable, contemporary insight into his assessment of the impact of the GFC on the market for super yacht sales, "[b]anks at the moment are not keen on lending on boats". The known stability issue presented an added complication in relation to selling the Keri Lee II. LGC had by then spent over a year in various fruitless endeavours to dispose of that vessel. Mr Lee was in February 2009 attending the Miami Boat Show in Florida (the third largest in the world after those at Fort Lauderdale and Monaco) to, as he put it in evidence, "move the process of replacing the Keri Lee II along". Mr Lee expressly made known to Mr Bosshardt his purpose of acquiring a replacement super yacht for commercial charter operations (letter dated 8 March 2013 from Mr Bosshardt, p 703 of the Affidavit of Mr Calagaris). 109 In May 2009, via Mr Torrens, the availability for sale of a 177 foot Trinity vessel then named the "Katharine" came to Mr Lee's attention. The Katharine had been expressly constructed for the purpose of charter operations. By that stage, he had considered about 100 vessels as replacements for the Keri Lee II. Nothing came in May of Mr Lee's attention being drawn to the Katharine. In October 2009, his interest in that vessel was heightened following a series of discussions with Mr Bosshardt about the super yacht charter market, rates of charter and features of super yachts which were attractive to charterers. The latter included a helicopter landing pad and a steel hull as well as zero speed stabilisers to minimise roll while at anchor. 110 Another factor which came to Mr Lee's attention through access via Mr Bosshardt to the latter company's charter book was that, while super yachts of the size of the Keri Lee II cost more than half the cost of a yacht such as the Katharine, the latter were able to command proportionately higher charter fees yet had only marginally greater operating costs. The advice which Mr Lee had from Mr Bosshardt, was, as he recalled it, that if the Katharine were chartered for 10 weeks per year the vessel, "would essentially cover its costs and anything north of that number of charters would lead to a profit". This was not the only advice on this subject which Mr Lee took into account. He also took advice from Mr Mark Elliott of International Yacht Charters (a yacht broker firm), which included a budget for the Katharine prepared in 2008 containing projected charter revenue and expenses for that vessel at that time (email dated 10 November 2009 from Mr Elliott, p 871 of the Affidavit of Mr Lee). This indicated that a profit from the chartering of the vessel could be made if it were chartered for 15 weeks per year. Each of these advices was influential in Mr Lee's thinking about the acquisition of the Katharine. 111 Also influential in Mr Lee's thinking was his view that the Australian dollar was, at the time, trading at an unusually high rate (around 90c to US$1.00) against the US dollar. Mr Lee's thinking on this subject was not uninformed. About 30% of the ACC Group's sales were to the export market. By virtue of this, Mr Lee had long paid particular attention to exchange rate relativities as between the Australian and United States dollars. His view was that the historic rate of exchange was more in the range of 70c to US$1.00. It was, he thought, an advantageous time to acquire a super yacht, given that their sales were usually conducted in US dollars. An acquisition at that time presented, so Mr Lee considered, the prospect of the yacht appreciating in value. This is not an ex post facto rationalisation but a sentiment evident in an email dated 10 October 2009 sent by Mr Lee to Mr Bosshardt and Captain Roy Cooper (LGC's then yacht captain). It is but another manifestation of Mr Lee's acute business sense. 112 Yet another influential factor was that the owner of the Katharine was willing to enter into what was, effectively, a "trade in" arrangement for the Keri Lee II as part of the consideration for the sale of the Katharine. 113 The acquisition of the Keri Lee III was yet another business value judgment made by Mr Lee and influenced by the factors already mentioned and also his pre-disposition to take a long term view. The terms of the acquisition offered the very considerable benefit of bringing to an end all of the unforeseen woes associated with the Keri Lee II and the prospect, so he considered, of commercial advantage. Of course, there was an alternative of just disposing of the Keri Lee II for whatever price possible and putting the likely resultant loss down to experience but that Mr Lee did not choose that path does not mean that the choice that he made was not a business value judgement. 114 Mr Lee decided that, because of lingering concerns which he had related to the Keri Lee II's stability issue, LGC should not be the purchase vehicle for the acquisition of the Katharine. Instead, a fresh company, KLC, became the purchase vehicle. Mr Lee envisaged that KLC would carry on the charter business hitherto conducted by LGC. It is not necessary, in order to resolve these appeals, to determine whether there was a fresh or continued business carried on by KLC, only that the vessel which came to be named the Keri Lee III (ex-Katharine) was, materially, used or held mainly for letting on hire in the ordinary course of a business that KLC carried on. 115 In December 2009, KLC as purchaser entered into an agreement with Katharine Pty Ltd as vendor for the purchase of the Katharine for US$25,000,000. The agreement provided for a deposit of US$2,000,000 and, on the closing date, a payment by KLC of US$14,000,000, a release of the deposit (less a security deposit) and the delivery of title and possession of the Keri Lee II (identified in the agreement as the "Richmond") for a stated consideration of US$10,000,000. Another term of this agreement was that each party was entitled to conduct surveys and sea trials of the other's vessel, to require repairs or credits or make an additional payment for defects at closing, in default of which there was a right to terminate the agreement and return the deposit without any further rights or obligations under the agreement. Yet another was that each party was entitled to the continued use of the other's vessel until 30 January 2010. In the result, the closing date for the agreement came to be 28 December 2009 when it was completed according to its terms. Thereafter, the Katharine came to be named the Keri Lee III. 116 After its acquisition, KLC caused the Keri Lee III to be refitted so as to incorporate design features which Mr Bosshardt had suggested would make it more attractive to charterers. 117 Related to the ongoing impact of the GFC on demand for charters, and also to the nature of its size, appointments and ability to command higher charter rates, Mr Lee has chosen, for the present, to deploy the Keri Lee II's successor vessel to the Mediterranean and the Caribbean. He acknowledged in cross-examination that this was a deviation from his original business plan. The occasion for this lies in the greater likelihood of demand for the vessel in these more traditional charter destinations. This deployment is but a reaction to changed market conditions. It is not indicative that the owner and operator of the Keri Lee III, KLC, is not carrying on a business. Mr Lee also stated in evidence, and I accept, that it remains his intention to deploy the Keri Lee III for charter operations in Australian waters if he assesses that the post-GFC effects on demand will permit this. He does not anticipate any difficulty in respect of this vessel in securing the requisite registration. For the present, the Keri Lee III is British registered in the Cayman Islands, which is all that is necessary for it to conduct commercial charter operations in the waters in which it has to date been operated. 118 Once again, the particular charters of the Keri Lee III undertaken by KLC are detailed in Exhibit 7. A feature of the charters of the Keri Lee III is that the predominant charter party is Mr Lee (other charterers were Lenda Finance SA and a Mr Jeff Jacobs). 119 During the course of his cross-examination, Mr Lee was taken to three of these (at pp 562, 568 and 573 of the Affidavit of Mr Caligaris). These do entail charters for less than the publically advertised rate for the Keri Lee III (US$175,000 per week, fixed in response to the persistent adverse impact of the GFC on demand). Mr Lee's evidence was that there would have been a good commercial reason why those particular charters were below the ordinary rate. At the time when these charters were undertaken, Mr Lee had no particular reason to expect that, some four years later, he would be asked to recall the precise occasion for these particular charters and the particular, related reason for these charter fees. As I have now stated more than once, I regard Mr Lee as an honest witness. On this subject, one reason why I accept his evidence as accurate is that, over the period in question and in respect of both LGC and KLC he was meticulous in ensuring that he paid a commercial charter rate. This is exemplified by other charter agreements in respect of the Keri Lee III also exhibited to Mr Calagaris' Affidavit: Agreement dated 18 August 2011 at a charter fee of US$200,000 plus an Advance Provisioning Allowance (APA) of €20,000 (p 550) Agreement dated 24 August 2011 at a charter fee of US$200,000 (p 556) Agreement dated 9 November 2011 at a charter fee of US$342,857 plus an APA of US$50,000 (p 580) Agreement dated 9 November 2011 at a charter fee of US$285,714 (p 586) Agreement dated 10 November 2011 at a charter fee of US$200,000 (p 592) Agreement dated 10 November 2011 at a charter fee of US$200,000 (p 598) Agreement dated 27 March 2012 at a charter fee of US$142,857 (p 607) Agreement dated 27 March 2012 at a charter fee of US$200,000 (p 609) Agreement dated 22 May 2012 at a charter fee of US$200,000 (p 615). 120 Especially when one takes into account the saving of agent's commission to KLC, these charters are well above the publically advertised rate. Accepting, as I do, Mr Lee as a reliable witness, another reason for the lower than usual charter rates may well lie, as he opined in the course of cross-examination, in a need for he and his wife to deal with staffing (of which a need to dismiss no less than three captains was but one) or other issues associated with the management of the Keri Lee III. Once again, that Mrs Lee assisted her husband in this regard, even though she did not hold formal office in KLC was no coincidence. It was but another indicator of the particular respect which he had for her business judgement. 121 If only for completeness, and because it formed part of the Commissioner's submissions, I should record that it was a feature of KLC's charter agreement with Mr Jeff Jacobs that a closet and two cupboards were to be locked off. As Mr Lee related, these comprised three very small areas on the Keri Lee III where his wife kept personal effects and also valuable products available for re-stocking the vessel's on-board beauty salon. Charterers were not otherwise restricted in access while on board that vessel. Further, the vessel's captain had access to these cupboards and did so, as necessary to obtain any of the products required for the beauty salon. I accept Mr Lee's evidence that these areas were "insignificant in the scheme of the boat". Self-evidently, they had a mixed business and private use. It is necessary also to recall that the focus of the s 26-47 rule and the exception is on a vessel not a closet or cupboard and that it was the vessel, not a particular closet or cupboard which was chartered and available for charter. The reservation of access in respect of an insignificant area does not detract from a conclusion that the vessel concerned was being let on hired in the ordinary course of a business. 122 Mr Lee's approach to the chartering of the Keri Lee III was also informed by an experience in KLC's first year of ownership. In 2010, the vessel was chartered by a Russian party. Mr Lee's post-charter experience was that the interior furnishings of the vessel were damaged. As he put it, "this dented my confidence in the value of those people still in the charter market." It was also Mr Lee's experience that some of the enquiries in respect of the chartering of the Keri Lee III, "were from parties of dubious standing". Mr Lee was not obliged, in order to fall within the exception in question, just to accept any charter from any third party. He was entitled to exercise a business value judgment, informed by experience, intuition or instinct as to whether the potential risk presented by a possible charterer justified a charter either at a particular rate or at all. That his personal circumstances and the place of KLC (and LGC beforehand) in the ACC Group meant that there were benign alternatives doubtless informed that value judgement but that does not mean that it is unable to be characterised as a business value judgement. 123 It bears repetition that the rule and the material exception to the rule established by s 26-47 of the ITAA97 do not preclude charters to related parties. The rule and the exception are neither to be construed nor administered as if they did. That a pattern of related party chartering is evident is neither more nor less than one relevant part of an overall factual matrix against which one must measure whether the activity concerned is within or outside the terms of an exception. When, as here, another feature of that pattern is the great predominance of charters at commercial rates, its role becomes supportive rather than destructive of a conclusion that the vessel is being used or held mainly for letting on hire in the ordinary course of a business being carried on by KLC. 124 A perusal of the charter agreements also discloses that Mrs Lee, who did not hold formal office in either of the taxpayers, has on some occasions signed a charter agreement on behalf of KLC. Given the very particular, informal involvement which Mrs Lee had in assisting Mr Lee in aspects of the management of LGC and KLC it seems to me inherently likely that she considered herself able to sign a record of the terms of a charter to a family member and that Mr Lee approved this. Mr Lee was not dissembling when he remarked in cross-examination on this subject, "she represented me." 125 The evidence also discloses that both LGC and KLC have had the benefit over the years of trust distributions from other entities within the ACC Group. That trust distribution income, charter income, the relativities as between the two and expenses may be summarised in a tabular way as follows (income and expenses shown in $A): Summary Analysis of Lee Group Charters Pty Ltd 2006 – 2010 2005-06 2006-07 2007-08 2008-09 2009-10 AVERAGES NOTES TOTALS REFERENCE TOTALS REFERENCE TOTALS REFERENCE TOTALS REFERENCE TOTALS REFERENCE TOTALS Total expenses (AUD) 1,307,533.50 TJL-123 (1015) 5,807,530.62 TJL-123 (1015) 5,016,498.00 TJL-123 (1026) 5,258,413.77 TJL-123 (1041) 8,367,818.05 TJL-123 (1058) 5,151,558.79 Total expenses without provision for depreciation 1,300,325.50 TJL-123 (375-376) 3,894,370.26 TJL-123 (1014-1015) 3,063,622.00 TJL-123 (1024-1026) 3,438,448.77 TJL-123 (1040-1041) 7,368,963.05 TJL-123 (1057-1058) 3,813,145.92 Total income -51,312.59 TJL-123(1014) 8,378,786.00 TJL-123 (1014) 4,886,676.00 TJL-123 (1024) 5,075,344.00 TJL-123 (1040) 8,205,992.00 TJL-123 (1057) 5,299,097.08 The amount of total income is found in LGC's Detailed Profit and Loss Statements at the 'Total Income' label. Charter income 727,053.49 TJL-123 (1014) 3,853,808.00 TJL-123 (1014) 1,035,547.00 TJL-123 (1024) 2,062,339.00 TJL-123 (1040) 643,365.00 TJL-123 (1057) 1,664,422.50 The amount of charter income is found in LGC's Detailed Profit and Loss Statements at the 'Charter Income' label. % charter income of total income - - 45.99% - 21.19% - 40.63% - 7.84% - 28.92% Income from trust distributions 149,000.00 TJL-123 (1014) 4,499,793.00 TJL-123 (1014) 3,689,000.00 TJL-123 (1024) 2,977,000.00 TJL-123 (1040) 7,477,008.00 TJL-123(1057) 3,758,360.20 The amount of income from trust distributions is found in LGC's Detailed Profit and Loss Statements at the "Distributions from trusts' label. % trust distributions of total income - - 53.70% - 75.49% - 58.66% - 91.12% - 69.74% General Notes for interpretation of all spreadsheets: 1. Reference to whether there is a document, date of payment, expense amount is a reference only to whether those matters appear in the evidence; 2. Refer to "notes" for explanatory comments on specific items where relevant. Summary Analysis of Keri Lee Charters Pty Ltd 2011 - 2014 2010-11 2011-12 2012-13 2013-14 AVERAGES (2011 and 2012 years only) NOTES TOTALS REFERENCE TOTALS REFERENCE TOTALS REFERENCE TOTALS REFERENCE TOTALS Total expenses (AUD) 10,231,537.00 GAC-134 (473) 8,705,086.19 GAC-152 (623) 8,911,770.00 TJL-123 9,396,734.00 TJL-123 (1041) 9,468,311.60 Total expenses without provision for depreciation 5,625,665.00 Exhibit 2 4,486,399.19 Exhibit 2 4,678,469.00 Exhibit 2 5,340,880.00 Exhibit 2 5,056,032.10 Total income 9,874,157.52 GAC-134 (472) 9,038,200.74 GAC-152 (622) 9,695,629.00 TJL-123 10,432,499.00 TJL-123 (1040) 9,456,179.13 The amount of total income is found in LGC's Detailed Profit and Loss Statements at the 'Total Income' label Charter income 2,203,965.02 GAC-134 (472) 3,338,939.34 GAC-152 (622) 2,884,314.00 TJL-123 3,620,892.00 TJL-123 (1040) 2,771,452.18 The amount of charter income is found in LGC's Detailed Profit and Loss Statements at the 'Charter Income' label % charter income of total income 22.32% - 36.94% - 29.75% - 34.71% - 29.31% Income from trust distributions 7,581,599.00 GAC-134 (472) 5,517,350.85 GAC-152 (622) 6,697,363.00 TJL-123 6,735,221.00 TJL-123 (1040) 6,549,474.93 The amount of income from trust distributions is found in LGC's Detailed Profit and Loss Statements at the 'Distributions from trusts' label % trust distributions of total income 76.78% - 61.04% - 69.08% - 64.56% - 69.26% General Notes for interpretation of all spreadsheets: 3. Reference to whether there is a document, date of payment, expense amount is a reference to whether those matters appear in the evidence; 4. Refer to general ledgers for further expenses paid and charters which cannot precisely be linked to specific payments or invoices. General ledgers are found at: FY 10: GAC-121 (p 389 to 455); FY 11: GAC-134 (p 472 to 545); FY12: GAC-152 (621 to 692). 126 It is important not to view this evidence either piecemeal or in isolation from influential events such as the impact of the GFC and the stability issues which came to plague the Keri Lee II. The benefit which each company has enjoyed from favourable trust distributions from within the ACC Group is clear enough. The overall picture is consistent with Mr Lee's evidence about taking a long term view and a related backing of that view. The more recent experience of KLC in relation to the operation of the Keri Lee III was also in evidence. It is yet another relevant part of the overall factual matrix. This discloses a continuing improvement in charters for the vessel. The Keri Lee III was chartered for 12 of the available 16 weeks in the last Mediterranean season. KLC derived charter income of AUD$4,000,000 in the year ending 30 June 2015. Mr Lee's evidence, which I accept, is that he expects that a profit will be made in the current financial year. 127 In seeking to make something of what were termed "related party" charters, the Commissioner put forward elaborate calculations of averages and percentages of use. Depending on how one defines a related party charter, these may or may not be correct. The taxpayers put forward alternative calculations which showed somewhat lesser percentages and averages and which, again, may or may not be correct, depending on how one defines who is a related party. Be this as it may and as I highlighted at the outset of these reasons for judgement, the notion of related party use is, in itself, foreign to the legislative provisions in question. That some and even many charters were to Mr Lee or to a relative or to a company controlled by Mr Lee is but part of an overall factual matrix which one must measure against the terms of the statutory rule and the exception. Considered as part of that overall factual matrix and especially where, as here, both LGC and KLC were operated as businesses with charterers, related to or controlled by Mr Lee or not, charged commercial rates of charter for the use of the vessel, that some charterers were in the former category and some in the latter becomes a distinction without a difference. 128 There were always going to be substantial vessel operating and crewing costs associated with these super yachts so the evidence of the incurring of such costs and of related systems of administration is, in itself, neutral as between whether or not any business was being carried on. Mr Lee was though scrupulous in ensuring that the use of each vessel was at commercial charter rates. When not under charter, each vessel was held for that purpose (for letting on hire). Each of the taxpayers continuously presented themselves to the world at large and operated and was administered internally as a business. That presentation, operation and administration was a reality, not a façade. They were a manifestation of the expectation and purpose of making a profit. 129 It only comes to this. On the whole of the evidence related above, whether one regards the operation of each vessel or of each company as a separate business or but one business commenced in 2005 and then successively transmitted, that business commenced or each successive commencement of business occurred with an expectation and purpose of profit. That business or those businesses were continued to that end. Contemporary documentary evidence makes this conclusion pellucid. It corroborates Mr Lee's reliable oral and affidavit evidence as to this same end. Thereafter, each vessel was used or held, certainly mainly, but in my view, exclusively, for letting on hire in the ordinary course of a business carried on by LGC and by KLC. 130 In each of the income years in question the rule, expressed in s 26-47(2) of the ITAA97, did not apply, because LGC or, as the case may be, KLC fell within the exception found in s 26-47(3)(b). The taxpayers have therefore shown that the income tax assessments are excessive, because there are no quarantined amounts in respect of the deductions claimed. It necessarily follows that the taxpayers have shown there is no tax shortfall and that the penalty assessments and determinations are correspondingly excessive. That will have the following results: (a) in respect of the year ended 30 June 2009, a reduction of the LGC's taxable income by the sum of $3,013,005 and of the shortfall penalty to nil; (b) in respect of the year ended 30 June 2010, a reduction of LGC's taxable income by the sum of $7,562,626 and of the shortfall penalty to nil; (c) in respect of the year ended 30 June 2010, a reduction of KLC's taxable income by the sum of $1,485,227 and of the shortfall penalty to nil; (d) in respect of the year ended 30 June 2011, a reduction of KLC's taxable income by the sum of $7,833,715 and of the shortfall penalty to nil; (e) in respect of the year ended 30 June 2012, a reduction of KLC's taxable income by the sum of $5,179,476 and of the shortfall penalty to nil; and (f) in respect of the year ended 30 June 2013, a reduction of KLC's taxable income by the sum of $5,680,702 and of the shortfall penalty to nil. 131 The result is that, in respect of each of the taxpayers and in respect of each income tax assessment, the Commissioner's objection decision must be set aside and, in lieu thereof, the objection to the assessment must be allowed in full. It necessarily follows from the allowance in full of the objection in respect of the income tax assessments that the Commissioner's objection decision in respect of the penalty assessments must be set aside and, in lieu thereof, the objection to those assessments must be allowed in full. 132 The matter must be remitted to the Commissioner for the purpose of making all necessary amendments to the assessments or as the case may be, amended assessments concerned. The Commissioner must pay the taxpayers' costs. I certify that the preceding one hundred and thirty-two (132) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Logan. Associate: Dated: 7 April 2016