Hill J

Lehane J
Hely J

Full Federal Court

Judgment date: 19 March 1999

Hill, Lehane and Hely JJ

During the period 1 August 1996-31 January 1997 (``relevant period'') the appellant (``Colgate'') paid Woolworths Ltd (``Woolworths'') a number of allowances, one of which was styled a co- operative allowance, in relation to goods purchased by Woolworths from Colgate. The sole issue which arises for determination on this appeal, is whether the trial judge erred in rejecting Colgate's claim that payments which it made to Woolworths in the relevant period by way of the co-operative allowance reduced ``the price... for which the goods were sold'' for the purposes of the Sales Tax Assessment Act 1992 (``STAA''), in particular Schedule 1 Item AD1a [reported at 98 ATC 4748].

2. In
Queensland Independent Wholesalers Limited v FC of T 91 ATC 4492; (1991) 29 FCR 312 (``QIW'') a Full Court of the Federal Court considered whether volume discounts which were passed on to customers by way of rebate operated, in the circumstances of that case, to reduce ``the amount for which the goods are sold'' in terms of s 18(1)(a) of the Sales Tax Assessment Act (No 1) 1930. It was there held that:

  • • The amount for which goods are sold is a question of fact.
  • • It will usually, but not invariably, be the contractual purchase price arrived at between buyer and seller.
  • • The fact that rebates are deferred and are discretionary would not prevent them being taken into account in determining the amount for which goods were sold, provided that the nature and manner of the rebate remained sufficiently proximate to, and connected with, the sale transaction to enable them to be accounted for in that way.
  • • For a rebate to reduce the amount at which goods are sold, it must appear that the rebate does effect a reduction in the sale price as a matter of commercial reality, and that it is not directed at some other end.

3. Neither party contended that the substitution of price for amount in the statutory language produced any substantive change. Both parties accepted that the principles enunciated in QIW were applicable to the resolution of the question for decision in the present case. The substantial issue between the parties is whether, to adopt the language of QIW, the co-operative allowance is directed at another end than providing a discount to Woolworths.

The nature of the co-operative allowance

4. Manufacturers are concerned to maximise sales of their products. For this reason, large manufacturers of product lines typically stocked in supermarkets want the products supplied by them included in promotions conducted in the stores of major supermarket retailers.

ATC 4291

Promotions often involve goods being sold to consumers at specially reduced prices for agreed periods of time. Goods on promotion are also often displayed more prominently within the store, in addition to the normal shelving position.

5. It was admitted on the pleadings that the co-operative allowance comprises:

  • • An allowance agreed in anticipation of the purchase of goods by Woolworths and by reference to the anticipated $ amount of purchases to be made by Woolworths during the ensuing six month period.
  • • Such additional amounts as may from time to time during that period be agreed between the appellant and Woolworths as being payable by the appellant to Woolworths as or by way of co-operative allowance.

6. The vendor trading terms which regulated the contractual arrangements between Colgate and Woolworths provided for various allowances, some of which were ``off invoice'' (ie directly deducted from the list price on Colgate's invoice) and others which were ``off remittance'' (ie Woolworths calculated the allowance and deducted it from its remittance for the goods as supplied by Colgate). The vendor trading terms also included provision for the co-operative allowance. It was shown as having a value of × percent (× is used to maintain confidentiality of the actual figure). It was common ground that the vendor terms specified a minimum percentage. The vendor trading terms did not identify either the final amount of the co-operative allowance during any particular period, or the details of any particular promotions to be undertaken by Woolworths during that period.

7. The evidence established that:

  • • Woolworths had, and made available to suppliers such as Colgate, schedules of promotional types and charges which indicated the charges made by Woolworths for particular types of promotional activity.
  • • Those charges included a special Christmas month surcharge of 20 percent, to which the attention of suppliers was specifically directed.
  • • Colgate submitted its proposed promotional programs to Woolworths for the relevant period. Those programs specified the nature of the promotional activity to be undertaken by Woolworths and, under the heading ``co-op'', the fee payable to Woolworths for each promotional activity to be undertaken.
  • • A summary of each program stated that the program ``is targeted at increasing Colgate's sales with Woolworths NSW by 10 percent'' on a specified benchmark.
  • • The particular promotions offered by Woolworths and proposed by Colgate took a number of forms. They often involved reduction in the price charged by Woolworths for goods the subject of a promotion, but whether there was a reduction, and if so as to what extent, was a matter for Woolworths. They also involved, depending upon the type of promotion, special ticketing, advertising or display of goods to particular advantage.
  • • Woolworths approved Colgate's promotional programs for the relevant period with some variations to those submitted by Colgate, but the approved programs were very similar to those submitted.
  • • From time to time Colgate took advantage of opportunities to increase the amount it would spend on co-operative promotions by Woolworths. For example, if a ``gondola end'' became available as an addition to the agreed program, it might be offered by Woolworths to Colgate, and taken up by Colgate for a specified fee. The trial judge said (at p 4755), of an offer of that type, that it illustrates ``the nature of the promotional activities that could arise from time to time and the fact that Woolworths saw its suppliers as potential purchasers of those opportunities''.
  • • The percentage of the co-operative allowance ultimately paid by Colgate to Woolworths was greater than the minimum percentage specified in the vendor terms.
  • • Colgate regularly took steps to monitor compliance with the program agreed upon, and forms were devised for reporting upon non-compliance with the agreed program. Depending on the significance of Woolworths' failure to comply, the matter would be taken up with the Woolworths' buyer, and in the words of Mr Eastick of Colgate, Colgate would ``be looking for something to recover the lost sales''.

    ATC 4292

Payment and accounting treatment of co- operative allowance

1. The vendor trading terms indicated that the co-operative allowance was not to be deducted from the remittance. The following description by the trial judge (at p 4755) of the ordinary course of dealing between the parties was not the subject of challenge on appeal:

``... Colgate invoiced Woolworths on or about the date of delivery in respect of goods delivered. When the goods were the subject of a particular promotion for which an amount had been agreed in the approved promotion program (or by a subsequent arrangement), Woolworths sent to Colgate an `Adjustment Note'. This form, which was usually generated by Woolworths shortly after the date of delivery of the goods, contained a promotion number and identified both the particular form of promotion (for example, Floor Stack) and the products covered by the promotion. It also specified the sum which Colgate was to pay Woolworths in respect of the particular promotion, that being the amount previously agreed. Colgate ordinarily paid Woolworths by cheque the specified amount within fourteen days of receipt of the adjustment note....''

The following description by the trial judge (at p 4756) of the method by which the co-operative allowance was brought to account by the parties was also not the subject of any challenge on appeal:

``Woolworths took the co-operative allowance received from Colgate (and from other suppliers) into account in setting its gross profit budget for goods sold by the particular product division. Similarly, Woolworths treated the co-operative allowance as a purchase adjustment for the purposes of calculating gross profit. The grocery division, for example, reduced the co-operative allowance as a component of `DEFRD DISC & DEALS' (deferred discounts and deals), in assessing gross profit before charges. Other allowances and rebates were treated in the same manner.

For its part, Colgate deducted co-operative allowance paid by it, whether to Woolworths or any other customer, as a deduction from `full potential sales' to reach a figure for `reported sales'. Other discounts and allowances were dealt with in the same way.''

Other discounts and allowances

As earlier indicated, the vendor trading terms provided for a number of discounts and allowances, in addition to the co-operative allowance. The nature of those allowances and the circumstances in which they were payable are set forth in the judgment of the trial judge. The Commissioner accepted that those rebates and allowances, with the exception of the co- operative allowance, should be deducted from the invoice price of the goods sold by Colgate to Woolworths, for the purposes of determining ``the price... at which the goods were sold''. The Commissioner took this view regardless of whether the rebate or allowance was off invoice or off remittance.

We do not, however, propose to detail the circumstances in which those rebates or allowances were payable, or to compare and contrast them with the co-operative allowance, because whether the co-operative allowance should be deducted from the invoice price of goods sold by Colgate to Woolworths, for the purpose of determining ``the price... for which the goods were sold'', depends upon the application of the law to the facts, rather than upon a consideration of the similarities or differences which the co-operative allowance bears to other rebates or allowances accepted by the Commissioner as deductible.

The trial judge's decision

The essential thrust of the reasoning process which led the trial judge to reject Colgate's claim emerges from the following passages in his Honour's decision (at p 4761):

``... The co-operative allowance was made up of a series of payments by Colgate to Woolworths, in return for Woolworths agreeing to provide particular promotional services in respect of nominated Colgate products. Woolworths made available to Colgate particular marketing opportunities that only Woolworths could provide. These included, for example, the provision of particularly advantageous store space to display Colgate's products; special displays within the Woolworths stores of Colgate products; and the ticketing of price reductions applicable to Colgate products. The amounts payable by Colgate reflected `prices' set by Woolworths for particular

ATC 4293

promotional services provided by it. In other words, Woolworths made commercially valuable opportunities available to Colgate for a price. Subject to the minimum percentage specified in the Vendor Terms, it was a matter for Colgate to decide how many of the particular promotional opportunities offered by Woolworths it took up. The inevitable inference from Colgate's decision to spend more than the minimum co-operative allowance during the relevant period is that it considered there was a commercial advantage to purchasing the marketing opportunities offered by Woolworths....

The marketing opportunities provided by Woolworths to Colgate, in return for the co- operative allowance, gave Colgate a marketing advantage over competitors supplying goods to Woolworths.... From Woolworths' point of view... it was in the retailer's interests to sell the use of valuable space to its suppliers. While it may well be that Woolworths preferred one supplier rather than another to use a particular space at a particular time, it is clear from the offer (as one would expect) that Woolworths' main interest was in deriving revenue from the promotional opportunity it was able to provide, in that instance a Gondola End.''

The case on appeal

The appellant submitted that:

  • • The co-operative allowance was directed at providing a discount to Woolworths. The principal reason why this was said to be so, is that the vendor trading terms fixed the minimum percentage value of the co- operative allowance at x percent of actual sales. The minimum discount was agreed upon in advance, and the arrangements were not conditional on the conduct of specific promotional activities by Woolworths.
  • Prima facie, an amount of that type operates to reduce the price of goods sold unless the granting of the allowance is ``directed at another end''.
  • • The allowance was not directed at some other end (such as Woolworths providing a service to Colgate) because Woolworths' promotions were directed towards the sale of its own products, as property in the goods sold by Colgate had already passed to Woolworths.
  • • The fact that Colgate may derive a benefit from those promotions is beside the point. The nature of discounts and rebates is such that the giving of them is expected to benefit the giver, as well as being welcomed by the receiver: cf General Motors Corporation, Frigidaire Division v United States (1960) 277 F 2d 929. Volume rebates and discounts for prompt payment benefit both the party giving, as well as being welcomed by the receiver. The fact that a benefit is expected by Colgate from the arrangements pursuant to which the co-operative allowance is paid does not mean that Woolworths, as the recipient of the allowance, is providing a service to Colgate, as the party paying it.
  • • The method by which the parties accounted for the co-operative allowance reflected the underlying reality.

Decision on these contentions

The starting point must be that the parties have, by their contract, distinguished between the price payable by Woolworths for the goods sold by Colgate, and sums payable to Woolworths by way of a co-operative allowance. Some reason must be shown for departing from that treatment, and for eliding matters which the parties have treated as distinct. In the case of some allowances or rebates, such as volume allowances, or allowances for prompt payment, there is a sufficient connection with the sale transaction to regard them as operating in diminution of the price.

Whether that is so in relation to the co- operative allowance involves, at least to some extent, matters of impression and degree. The evidence before the trial judge clearly established that the co-operative allowance was calculated to operate as an inducement for Woolworths to provide Colgate with promotional opportunities designed to increase the sale of Colgate's goods. That was the end to which the payment was directed. The trial judge correctly characterised the situation as being one in which Woolworths made commercially valuable opportunities available to Colgate for a price.

A characterisation of the co-operative allowance as a payment directed towards providing a discount to Woolworths does not give adequate expression to the factual context in which the allowance was paid. As the trial judge correctly recognised (at p 4762),

ATC 4294

Woolworths was able to derive revenue from making available to its suppliers marketing opportunities with little or no marginal cost to it. Viewed in that light, the co-operative allowance was not in the nature of a rebate off the price of goods for some matter incidental to the sale transaction. Rather it was a sum paid to secure a benefit to Colgate in relation to its brand, or in relation to the sale of goods in the future.

Whilst the manner in which Colgate and Woolworths accounted for the co-operative allowance is a relevant factor in assessing the price at which Colgate's products were sold to Woolworths, it cannot be determinative of that question. When regard is had to the substance of the relationship between the parties, the accounting treatment cannot alter the fact that the co-operative allowance was directed at another end than the payment of a discount to Woolworths, namely the securing of a real independent commercial benefit to Colgate.


The appeal should be dismissed with costs.


The appeal is dismissed with costs.

This information is provided by CCH Australia Limited Link opens in new window. View the disclaimer and notice of copyright.