Case Q40 (Public hearing: Nimrod Theatre Company Ltd. v. F.C. of T.)

Judges: HP Stevens Ch

BR Pape M
TJ McCarthy M

Court:
No. 1 Board of Review

Judgment date: 13 May 1983.

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B.R. Pape (Member)

In this reference the issues which fall to be decided are whether the Nimrod Theatre Company Limited (formerly known as Nimrod Street Theatre Co. Ltd.) (the company) is a manufacturer within the meaning of sec. 3(1) of the Sales Tax Assessment Act (No. 1) 1930 (the Act) and if it is whether it has a liability to sales tax upon the sale value of goods manufactured in Australia by it and applied to its own use during May 1979.

2. By notice of assessment dated 3 April 1980 the Commissioner assessed the company for sales tax under sec. 25(2A) of the Act. The Commissioner alleges that the company is liable to pay sales tax in respect of scenery and props manufactured by it and applied to its own use for the production of the play The Sea during the period 1 May 1979 to 31 May 1979. He assessed the sale value of the props and scenery alleged to have been manufactured by the company to be $11,117.16 and the tax payable in respect of this sale value at $1,667.57. Thereupon the company objected against the sale value of the goods by a notice of objection dated 4 June 1980. On 14 May 1982 the Commissioner disallowed the objection and by letter dated 11 June 1982 the company requested the Commissioner to refer his decision on the objection to a Board of Review. It was agreed between the company and the Commissioner that if the Board found that the company was a manufacturer then the sale value of the props and scenery was $6,374 and the tax applicable thereon at the rate of 15% was $956.10.

3. The company was incorporated on 2 December 1970 in New South Wales under the Companies Act, 1961 as a company limited by guarantee. Its objects are set out in cl. 4 of the memorandum of association. Insofar as relevant they are as follows:

• (a) to promote and encourage either directly or indirectly the knowledge, understanding, appreciation and enjoyment of drama, opera, ballet, music and other arts of the theatre in all their expressions forms and media;
• (b) to produce, present and manage plays, opera, ballet and other forms and kinds of theatre or entertainment;
• (c) to establish and conduct schools, lectures, courses, seminars and other forms of education in drama and other arts of the theatre;
• (d) to teach, train and instruct persons and promote education and research in drama and other arts of the theatre;
• (e) to promote, encourage and support the dissemination by all means including lectures, printing, records and transmission by radio and television of knowledge and information concerning drama and other arts of the theatre.

The evidence of Mr. Bell, a co-artistic director of the company, was that its activities which were in accord with its objects, were heavily subsidized by the Federal Government through grants received from the Australian Council and from grants by the N.S.W. Government. I think it is fair to say from a perusal of the company's accounts covering the period 1971 to 1980 that without this assistance the company could not have survived.

4. At all relevant times the company carried on its activities at 500 Elizabeth Street, Surry Hills and at a warehouse in Glebe. The premises at Surry Hills comprised two theatres, an upstairs theatre which had an audience capacity of about 300 people and a downstairs theatre which had an audience capacity of about 70 people. During the year

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ended 31 December 1979 the company produced some seven house productions which were performed in the upstairs theatre. One of these house productions was the play The Sea which ran for seven weeks from 9 May 1979 and comprised some 45 performances. The direct stage costs for this play excluding labour totalled $9,347. Of this amount $2,194.87 was for new materials purchased and used in the manufacture of scenery and props. A scale model of the set for The Sea was tendered as an exhibit (Exhibit C). This set was constructed at the company's warehouse in Glebe in such a way that it could be transported to and from the theatre at Surry Hills. Both new material and used material from stock was used in the construction. This material included metal frames, plywood and canvas covering. The work was carried out by three carpenters and two scenic artists at the Glebe workshop using the various hand tools of the carpenter's trade, welding equipment, staplers for affixing plywood and spray painting equipment.

5. It is common ground between the company and the Commissioner that the set used in the play The Sea was first assembled in the company's warehouse on 3 May 1979 and was first erected in its theatre on or about 5 May 1979 and was first used for rehearsal on 7 May 1979. The first public performance of the play The Sea was on 9 May 1979.

6. Counsel for the company made the following submissions:

• 1. The sales tax legislation when read as a whole makes it clear that it is a requirement for a person being a manufacturer to be either a business in itself or at the very least an activity which is more than something which is incidental to another business, not itself being manufacture.
• 2. Alternatively or in addition a company is not relevantly a manufacturer unless the activity of manufacture in which it engages is one directed towards the sale of goods, not necessarily being the goods it manufactures but an activity directed towards the sale of goods.
• 3. An activity of a taxpayer cannot be broken up into its component parts to determine whether a person is a manufacturer.

In addition and also in the alternative he further submitted that if the Board found that the company was a manufacturer:

• 4. When the activity of the taxpayer is looked at it is not an activity of manufacture.
• 5. That goods as defined were not manufactured.
• 6. That under sec. 18(3) of the Act the sale value required to be determined produces a result which is inconsistent with the legislation.

The thrust of these submissions, as I understand them, is that the set was not brought into existence for sale as a commodity but in the course of the company carrying on its business of providing public entertainment through the performance of plays.

7. On the other hand counsel for the Commissioner submitted that the proper interpretation to be given to the Act is a literal one. It is submitted that the company engages in the manufacture of goods in the course of carrying on its business of producing plays and as such falls within the taxing provisions of the statute. The words of the statute are to be given their ordinary natural meaning and they are not to be departed from unless there is some compellable circumstance such as other provisions in the Act or the Act when read as a whole. It was submitted that sec. 17 of the Act is not to be read as referring to the business of carrying on the manufacture of goods. These words are not to be read into the statute. Counsel for the Commissioner submitted that sec. 17(2) of the Act is clear in that the goods manufactured need not be goods manufactured in the course of carrying on the business of manufacture. They can be goods manufactured in the course of carrying on any business.

8. The principal issue before the Board is whether goods manufactured by a person are brought to tax because he has manufactured those goods or whether such goods are brought to tax only if he is carrying on a business of manufacturing goods. In other words, what is the proper construction to be

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given to subsec. (1) and (2) of sec. 17 of the Act?

Subsection (1) provides:

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

(Emphasis added.)

Subsection (2) provides:

``The reference in sub-section (1) to goods manufactured in Australia by a taxpayer and applied to his own use shall be read as a reference -

• (a) to goods manufactured in Australia by a manufacturer in the course of carrying on a business and applied to his own use, whether for the purposes of that business or for any other purpose and whether or not the goods are of a class manufactured by the manufacturer for sale; and
• (b) to goods manufactured in Australia by a manufacturer as provided in sub-section (3) and applied to his own use.''

The words ``manufacture'' and ``manufacturer'' are defined by sec. 3(1) of the Act as follows:

``In this Act, unless the contrary intention appears -

• ...
• `Manufacture' includes -
  • (a) production;
  • (b) the combination of parts or ingredients whereby an article... is formed which is commercially distinct from those parts or ingredients, except such combination... as, in the opinion of the Commissioner, it is customary or reasonably practicable for users or consumers of those articles... to undertake...
  • `Manufacturer' means a person who engages, whether exclusively or not, in the manufacture of goods, and includes...''

(Emphasis added.)

9. The meaning to be given to the word ``engages'' in the definition of manufacturer in sec. 3(1) appears in my view to hold the answer to the question raised by these references. Do the words ``engages... in the manufacture of goods'' mean carrying on business in the manufacture of goods? The Oxford Dictionary defines ``engage'' inter alia to mean to ``embark in any business''. O'Bryan J. in
Buntine v. Hume (1943) V.L.R. 123 at p. 128 said:

``A person may be `engaged' in an occupation even though he is occupied therein for a short period, but in another context the word may `exclude mere casual or intermittent employment as occupies the whole or at least a substantial part of the person's time.''

10. In
Southern Estates Pty. Ltd. v. F.C. of T. (1966-1967) 117 C.L.R. 481 the taxpayer who was not otherwise engaged in primary production claimed that expenditure incurred by it in improving virgin scrub land was an allowable deduction under sec. 75(1)(b) and (e) of the Income Tax Assessment Act 1936. Those paragraphs provided that:

``Expenditure incurred in the year of income by a taxpayer engaged in primary production on any land... in -

• ...
• (b) the destruction and removal of timber, scrub or undergrowth indigenous to the land;
• ...
• (e) ploughing and grassing the land for grazing purposes;
• ...

shall be an allowable deduction.''

Taylor and Owen JJ. in dismissing the taxpayer's appeal said at p. 491 (supra) :

``Section 75(1) proceeds upon the basis that at the time when the expenditure is incurred the taxpayer is actually engaged in carrying on the business of a primary producer on the land upon which the

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improvements are effected.''

(Emphasis added.)

In this context Taylor and Owen JJ. have ascribed ``engaged in primary production'' to be one of carrying on the business of primary production.

11. Windeyer J. said at p. 492 (supra) :

``Whether a man is `engaged in primary production on any land' within the meaning of sec. 75 does not depend simply on the activities carried on by him on that land. It depends rather on the purpose for which he engages in those activities, the end to which they are directed. What is his business on or with the land? Is it that of a primary producer or of a dealer or speculator in land? The need to determine the character of a taxpayer's undertaking in this way may be said to raise a difficult and sometimes an elusive question. Yet the distinction is one which this Court has constantly recognized. It is the distinction between, on the one hand, the man who holds property as an investment (in the case of land, in order to derive rents and profits from it by letting it or working it) and, on the other hand, the man who acquires and holds similar property for the purpose of selling it at a profit when a suitable opportunity to do so comes. It is the distinction between an investor and a dealer; between a landowner or landlord and a land-jobber, as in the earlier cases he was called...''

(The emphasis is mine.)

Therefore if one adopts the reasoning of Windeyer J. in the above passage, and I concede the difficulties of reasoning by analogy, and applies it to the definition of manufacture, whether a person is engaged in the manufacture of goods depends upon the purpose for which he engages in those activities and the end to which they are directed. I think it is clear that the end to which the set was used was in the course of producing a play. It was not a good manufactured in the course of carrying on a business of manufacture. The activity in constructing the set was in my view inseparable from the activity of producing plays for public entertainment. I think it is accurate to say that the character of the company's undertaking is one of producing plays for public entertainment and not one of the manufacture of goods. It is the business purpose in manufacturing the goods which determines whether a person is engaged in the manufacture of goods: see Windeyer J. at p. 494 (supra).

12. The conclusion I have reached is in my view supported by the reference to ``carrying on business as a manufacturer'' in sec. 13 of the Act. This section makes it an offence for a person carrying on business as a manufacturer who fails to become registered as a manufacturer under sec. 11. The importance of registration is critical to the working of the sales tax legislation. It is the quotation or non-quotation of the certificate of registration by a person which determines who is to pay the sales tax liability: see sec. 19. Moreover the importance of registration to the working of the Act is reflected by a penalty of $200 for each day on which the manufacturer is not registered.

13. Section 3(7) of the Act also provides support for the conclusion that a manufacturer is a person carrying on business as a manufacturer. The reference in this subsection to ``goods held in stock'' in my view adds further weight to the view I have reached. In
Canada Sugar Refining Co. v. R. (1898) A.C. 735 Lord Davey at p. 741 said:

``Every clause of a statute should be construed with reference to the context and other clauses of the Act, so as, as far as possible, to make a consistent enactment of the whole statute or series of statutes relating to the subject matter.''

14. Before the assent of Act No. 78 of 1936 (7 December 1936) which first added subsec. (2) to sec. 17 and which commenced operation retrospectively from 18 August 1930, it appears that the words ``goods manufactured in Australia by a taxpayer and applied to his own use'' referred to goods which were manufactured for the purpose of sale. It then seemed that the decision by the manufacturer to apply the goods to his own use was one made after the goods had been manufactured. I think this construction was supported by the fact that at the commencement of the Act a manufacturer was not required to quote his certificate in respect of goods purchased or imported for use in the manufacture of goods to be

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applied to his own use. It was not until the commencement of Statutory Rule No. 60 of 1933 that he was required to quote his certificate for the purchase of raw materials which were to be used in the manufacture of goods to be applied to his own use.

15. To adopt the contrary view is to say that from the commencement of the Act sales tax was planned to be paid by instalments where a person manufactured goods of a class not sold by him and which were applied to his own use. Such a result is in my view one not intended by the Act or the regulations. The provisions relating to the quotation of the sales tax certificate were and are in my view an exclusive code to determine who is to pay the sales tax chargeable. In such a case as posed above the sales tax on the raw materials would have been paid by the vendor and the balance of the sales tax on the goods applied to the manufacturer's own use paid by the manufacturer after being allowed a refund by way of rebate for the sales tax paid by the vendor of the raw materials: vide reg. 48(1) until amended by Statutory Rule No. 34 of 1934.

16. The addition of subsec. (2) to sec. 17 by sec. 9 of Act No. 78 of 1936, gave legislative force to the effect of Statutory Rule No. 60 of 1933. It had the effect of widening the class of goods which were subject to tax. From then a manufacturer who decided at the outset to manufacture goods for his own use, which he otherwise could have purchased or imported, was liable to tax upon the sale value of those goods as provided by sec. 18(3). This widening of the class of goods which are liable to sales tax has had the effect of imposing a purchase or consumption tax upon goods, which were not of a class manufactured by the manufacturer for sale. The reference to manufacturer in sec. 17(2)(a) in my view does not affect the meaning attributed by sec. 3(1) of the Act to manufacturer. It does not in my opinion alter the view I have previously expressed that a manufacturer for the purpose of the Act is a person who is carrying on business as a manufacturer. All it does is widen the class of goods which are liable to sales tax.

17. It therefore seems that a person who manufactures goods and is not carrying on business as a manufacturer does not by the act of manufacture itself come within the provisions of the Act. However a person who manufactures goods for the purpose of his own use and is carrying on business as a manufacturer is chargeable with sales tax on the sale value of those goods which are applied to his own use. Whilst the conclusion I have reached leads to an inconsistent result, it is in my view not an irrational one. Section 17 has the effect of imposing a purchase or consumption tax on goods, which could have been purchased or imported by the manufacturer, but the manufacturer has decided to manufacture them himself. Yet a person who is carrying on any business, and who decides to manufacture goods for his own use as against purchasing or importing them, is not chargeable with sales tax on the sale value of the goods manufactured. He would only be chargeable if he was carrying on business as a manufacturer, which is a question of fact: see
Martin v. F.C. of T. (1953) 90 C.L.R. 470 ;
Ferguson v. F.C. of T. 79 ATC 4261 ;
Hope v. Council of City of Bathurst 80 ATC 4386 .

18. To this extent the operation of the Act in my view has the effect of discriminating between persons carrying on business as manufacturers who manufacture goods for their own use, which they could have otherwise purchased, leased or imported, and persons who are not carrying on business as manufacturers but yet decide to manufacture goods in lieu of purchasing, leasing or importing them. The much referred to passage of Lord Russell of Killowen in
I.R. Commrs. v. Duke of Westminster (1936) A.C. 1 at pp. 24-25 is apposite to my view:

``The subject is not taxable by inference or analogy, but only by the plain words of a statute applicable to the facts and circumstances of the case.''

19. Accordingly and for the above reasons I am of the opinion that the company was not a manufacturer as defined by sec. 3(1) of the Act and consequently it was not liable to sales tax under sec. 17(1) of the Act.

20. I would reverse the Commissioner's decision on the objection and reduce the sale value to nil.