Mulla v. Commissioner of Taxation

[2006] AATA 860
QT 2004/234

---

• The impact of this case on ATO policy is discussed in Decision Impact Statement: Mulla v Commissioner of Taxation (Published 6 December 2006).

(Decision by: Senior Member B J McCabe)

Re Remzi Mulla, Applicant
v Commissioner of Taxation, Respondent

Tribunal:

Member:
Senior Member B J McCabe

Subject References:
CUSTOMS AND EXCISE
licensing
Tobacco producer licence
cancellation
licence conditions
valid export market
physical security of tobacco leaf
protection of Commonwealth excise revenue
cost of regulatory supervision
cancellation decision affirmed

Legislative References:
Excise Act 1901 - 39G; 39L; 39Q; 105
Excise Laws Amendment (Fuel Tax Reform and Other Measures) Act 2006 - the Act

Case References:
Ahmad Abdul Razzak Hazim and Commissioner of Taxation - [2005] AATA 1183
Attorney General v Walker - (1849) 154 ER 833
Ha v New South Wales - (1997) 189 CLR 465
Martino and Australian Taxation Office - [2002] AATA 1242
State Drug Crime Commission v Chapman - (1987) 12 NSWLR 44

Decision date: 6 October 2006

Sydney

---

Decision by:
Senior Member B J McCabe

REASONS FOR DECISION

INTRODUCTION

1. Mr Remzi Mulla has grown tobacco on his family's north Queensland property for nearly 40 years. The Commissioner of Taxation cancelled Mr Mulla's Tobacco Producer's Licence issued pursuant to s 39L of the Excise Act 1901 (the Act) on 12 March 2004 after both Australian cigarette manufacturers indicated they would not buy any more tobacco grown in north Queensland. The applicant says he should be permitted to keep his licence because there is a chance he could find and develop a market for his crop overseas. The Commissioner doubts there is an export market. He fears the crop will be diverted onto the black market where it will be sold as cigarettes without paying excise. The Commissioner says the applicant's plan to grow a crop represents an unacceptable risk to the revenue.

2. The applicant objected to the Commissioner's decision pursuant to s 39Q of the Act but the objection was unsuccessful. He has asked the Tribunal to reconsider the objection decision.

3. The applicant argued the Tribunal was free to impose conditions on the applicant's licence if that was thought necessary to alleviate the risk to the revenue. The power to vary, revoke or impose fresh conditions on a licence is found at s 39DA of the Act. But this power was introduced into the Act after the cancellation decision was made. The Commissioner says the Tribunal must apply the law as it stood at the time of the cancellation decision.

4. Since the hearing, the law has changed again. The Excise Laws Amendment ( Fuel Tax Reform and Other Measures ) Act 2006 amended a number of provisions of the Act. In particular, there is a new ground for suspension (and thus cancellation) introduced into s 39G(1), namely s 39G(1)(ia). As amended, that provision says the Commissioner may suspend a licence if "the licence holder does not have a market for goods of a kind the licence relates to". After being invited to make further submissions following the changes in the law, the applicant agreed with the respondent that the new s 39G(1)(ia) did not have retrospective effect.

THE MATERIAL BEFORE THE TRIBUNAL

5. The Tribunal was provided with the documents required under s 37 of the Administrative Appeals Tribunal Act 1975 . It was also provided with a range of statements from officers employed by the Australian Tax Office (the ATO) and other witnesses, expert reports and photographs of the applicant's farm showing the security arrangements. The Tribunal heard oral evidence from Messrs Nolan, Hedrick, Crowe and Hood, who are all employees of the ATO, and from Mr Mulla.

6. The applicant was represented by Mr Couper, QC. Mr Dorney, QC and Mr Redmond of counsel appeared on behalf of the Commissioner.

THE BACKGROUND TO THE CANCELLATION DECISION

7. Large-scale tobacco farming has been carried on in North Queensland and in Victoria for many years. Apart from a few isolated export transactions, the bulk of the annual crop from both tobacco-growing areas was sold to Australia's domestic cigarette manufacturers. There are only two. Both of them are subsidiaries of large multi-national corporations. They sell cigarettes in the Australian market. The price of the cigarettes is significantly increased by the excise duty imposed pursuant to the Act and collected by the respondent.

8. The amount of excise collected by the Commissioner increased dramatically in 1997 after the High Court's decision in Ha v New South Wales (1997) 189 CLR 465 which struck down franchise fees collected by the states. Under new arrangements worked out between the states and the Commonwealth, the amount of excise was increased from $84.27 per kilogram of tobacco leaf to $251.27 per kilogram. At the time of the cancellation decision, the amount of excise was around $275.55 per kilogram.

9. The imposition of swingeing excise duties on the sale of tobacco products led to the development (or, perhaps more accurately, the expansion) of a black market for tobacco leaf. This tobacco leaf, known as "chop chop", is sold without any excise being paid. Mr Crowe, an officer with the ATO, referred in his statement to reports estimating the chop chop market in 2000 consumed the equivalent of 1500 tonnes of tobacco leaf. That translated into around $300 million in lost revenue. While there is some dispute as to the actual amount of illicit tobacco being sold each year, it is clear the market for chop chop (and the consequent loss to the revenue) is significant.

10. While the market for chop chop is apparently flourishing, the market for legal tobacco shrinks. Mr Mulla confirmed in his evidence that he did not grow all of the tobacco he was entitled to grow on his farm in the year before the licence was cancelled. It appears other farmers in the area were in the same position. The cigarette manufacturers are buying less tobacco leaf because the number of smokers in this country is declining.

11. The two Australian cigarette manufacturers decided to rationalise their buying activities several years ago. One of them announced it would not purchase tobacco grown in north Queensland after the end of 2002. The other manufacturer announced it would cease purchasing tobacco leaf from north Queensland farmers after 2003. They preferred to concentrate on tobacco grown in Victoria.

12. Growers in north Queensland were left without contracts to sell their crops as a result of this development. The Commissioner foreshadowed his intention to cancel all of the licences of growers in north Queensland who did not have contracts for the coming season in a letter dated 2 January 2004. The Commissioner fears that allowing large crops of tobacco to be grown and stored without the prospect of sale would be tempting fate.

(A) THE STATE OF THE MARKET AND EXPORT OPPORTUNITIES

13. The applicant cannot sell his tobacco legally within Australia. The Commissioner also made it clear there was no suggestion the applicant was suspected of supplying tobacco to the chop chop market. His only hope would be to identify buyers. The applicant says he should have his licence restored so he can grow a crop for the purpose of developing an export market.

14. The Commissioner's witnesses referred to literature suggesting it will be very difficult to develop an export market for north Queensland tobacco. The principal problem is price. Mr Crowe, who was called on behalf of the Commissioner, said Australian tobacco was too expensive. The higher costs of production and transport made it uncompetitive with cheaper tobacco grown in Asia. The IBIS World report (exhibit 3) also refers (at pages 7 and 15) to a glut of tobacco grown in countries with lower production costs. Taken at face value, the information provided by the Commissioner suggests he is right to be pessimistic about export opportunities.

15. There was a good deal of evidence about the costs of production in Australia. Mr Mulla said during cross-examination that it currently costs around $3.00 per kilo to produce tobacco in Australia. Mr Crowe and Mr Nolan suggested the true cost of production was much higher. Mr Nolan estimated it cost at least $4.80 - $5.20 per kilogram to grow tobacco in Australia - and that was before transport costs were added to the price at which the tobacco could be landed overseas. His estimates were consistent with some of Mr Mulla's earlier remarks to the media. Mr Mulla had told the press the true cost of production was around $4 or $5 per kilo. In his evidence before the Tribunal, Mr Mulla explained those comments were "political statements" he made in his capacity as chairman of the Queensland Tobacco Marketing Co-operative Association Ltd in an effort to attract government sympathy and support for the industry.

16. Mr Mulla told the Tribunal of ways in which he believed the cost of production in north Queensland could be easily reduced to more competitive levels. He said the industry's cost structure has been dictated by the requirements of the Australian cigarette manufacturers. Those requirements extended to the timing of crops and the type of fertilisers used. Mr Mulla said the loss of a domestic market meant growers had a freer hand than before. They could plant late summer crops, which required smaller quantities of less expensive fertiliser and fewer pesticides. The late summer crops could also be harvested more quickly: the crop was in the ground for about 20 weeks instead of 30 weeks. Labour costs associated with the harvest were lower because it occurred during the cooler months. It was always difficult to find labour to undertake harvesting activities during the hottest part of the summer, he explained. Mr Mulla also spoke of how he pioneered the use of a coal-fired curing process for tobacco leaf which was up to 80% cheaper than diesel-fired curing machinery. He estimated that the input expenses (a large part of the total costs of production) could be reduced to as low as $1.89 per kilo.

17. Mr Mulla also pointed out that north Queensland tobacco was of a high quality. He told the Tribunal the farms in north Queensland produced flavour tobacco with a very high concentration of nicotine. Most of the tobacco that flooded onto world markets - particularly from Indian and Chinese producers - was poor quality filler tobacco with low nicotine content. He explained candidly that cigarette manufacturers valued tobacco with high nicotine content because it was more addictive. He added that north Queensland farmers were able to manipulate the amount of nicotine in each crop through the use of different nutrients. He said tobacco produced here was better and more valuable than most of the tobacco grown around the world. He disagreed with the Commissioner's witnesses who said the international tobacco market was flooded. Mr Mulla argued there was still likely to be a market for his product overseas because it was superior, even if it were more expensive than a least some of the alternatives. Mr Nolan agreed in cross-examination that there may be a shortage of good quality tobacco on the world market.

18. Mr Hood raised a concern about the absence of threshing facilities in north Queensland. He said tobacco that was not threshed was likely to deteriorate and become mouldy in the course of the export process. The only threshing facilities in Australia are controlled by the local cigarette manufacturers and the Victorian growers. They are not inclined to make their threshing machinery available. Mr Hood said exporting was not viable without access to expensive threshing facilities. Mr Mulla was unconcerned. He said north Queensland tobacco had very low moisture content. It did not need to be threshed before export. He said it would not deteriorate for years if it were packed properly.

19. The Commissioner also provided evidence of failed export initiatives in the past. A number of delegations from China in particular had visited Australia in recent years but none of the visits resulted in exports. Mr Mulla suggested contact with at least one of the delegations was continuing but agreed he was unable to point to specific opportunities emerging from any of the visits to date. He said that situation was unlikely to change unless he was able to show potential foreign buyers a crop in the field and samples of his tobacco leaf. But he emphasised that was his point: he wanted his licence restored so he could have some wares to display to the prospective buyers who - not unreasonably - were reluctant to commit themselves to purchase a product they had not sampled. Mr Mulla said prospective buyers were favourably disposed towards the product grown on his farm but he insisted they were unlikely to sign contracts up-front. He said ideally there should be at least a dozen sites in the area growing tobacco and providing samples to prospective customers.

20. Mr Crowe told the Tribunal he was only aware of two exports of Australian tobacco in recent times. One export from a north Queensland farm went to New Zealand in 2004. The consignment was found to be infested with bugs, and was destroyed. The other sample was despatched from Victoria. It was found to be mouldy. It was also unsaleable. I assume this is the transaction described by Deputy President Forgie in the course of her decision in Martino and Australian Taxation Office [2002] AATA 1242.

21. I do not think evidence about the aborted attempts of others to export tobacco products assists me in this case. Mr Mulla's evidence appears to address the concerns over transport and deterioration that were discussed in Martino . The balance of the evidence I heard does not suggest Australian tobacco is inherently unsaleable overseas. On the contrary, it seems Australian tobacco is of good quality, although it has been prohibitively expensive. That last fact explains why exports have been limited until now.

22. Mr Couper criticised the evidence of the Commissioner's officers. He pointed out they did not have specialist qualifications: they were investigators and general researchers and field officers. They were not experts in this area, although Mr Hood in particular had experience in dealing with the tobacco industry as a regulator. Mr Couper said their lack of specific expertise in production and marketing meant they did not appreciate the market might distinguish between flavour and filler tobacco. He also said they failed to take into account the relatively high quality of tobacco produced in north Queensland, and he argued they were not in a position to make a sensible comment about the prospects of reducing the costs of production in the ways Mr Mulla described. Mr Couper illustrated his submissions by referring to an exchange that occurred during cross-examination of Mr Crowe. Mr Crowe had asserted world tobacco prices were falling. He subsequently agreed the basis of this claim was an article published in The Guardian newspaper talking about tobacco producers in Malawi. While I accept there was other evidence pointing to a glut of tobacco and falling world prices, the exchange suggests some of the information provided by the Commissioner - and the analysis of that material by the Commissioner's witnesses - was not compelling.

23. I preferred the evidence of Mr Mulla. He presented as a careful and knowledgeable witness. He has extensive experience in growing and selling tobacco. And he is not just a farmer: he has for many years been a senior officeholder in the Queensland Tobacco Marketing Co-operative Association Ltd. His position there affords him a wider view of the industry and potential markets. I accept his account of the ways in which the cost of production might be reduced so that north Queensland tobacco could be offered on the world market at more competitive prices. I also accept his evidence about the quality of his tobacco and its potential appeal in the international market relative to cheaper filler tobacco grown elsewhere. I also accept his explanation that north Queensland tobacco can safely be stored or exported without deterioration in quality if it is packed appropriately. The product does not need to be threshed beforehand. I also accept his argument that, as a practical matter, he and his fellow growers are unlikely to find an export market unless a number of them have the opportunity to grow samples which can be inspected and tested by prospective purchasers.

24. In light of all those findings, I accept Mr Mulla's evidence that there is a reasonable prospect of developing an export market for tobacco leaf grown in north Queensland. I prefer the applicant's commercial judgement on this point to the evidence offered by the Commissioner. I acknowledge the applicant has made apparently inconsistent statements in the past to the media and government, but I accept his explanation that those statements were made in his capacity as an industry advocate with a particular agenda. I accept he was telling me the truth when he gave evidence before the Tribunal under oath.

(B) SECURITY AND RISK TO THE REVENUE

25. The respondent provided evidence describing the operation of the chop chop market and the estimated costs to the revenue of the illegal trade in tobacco leaf. Mr Crowe's statement includes references to reports suggesting distribution of tobacco leaf is now managed by organised crime syndicates. There is no reason to doubt that evidence, and it is a worrying development. Mr Hood suggested in his statement that most of the illicit tobacco making its way onto the chop chop market in Queensland came from licensed growers. Mr Hedrick's statement contained a similar claim.

26. The parties appeared to proceed on the basis that the real risk of "leakage" from producers arose after the crop was harvested and cured. At that point, the crop can be baled and transported or stored. There is little point stealing immature plants. Deputy President Forgie explained the risks in the course of her decision in Ahmad Abdul Razzak Hazim and Commissioner of Taxation [2005] AATA 1183 at paragraph 37.

27. Illicit tobacco leaf might leak from licensed farms in a number of ways. A grower might secretly set aside part of the crop for illegal sale; alternatively, quantities of leaf might be stolen by strangers or employees, with or without the knowledge of the grower. Mr Hood pointed out growers were likely to be reticent about reporting thefts. They were aware they might be required under s 105 of the Act to pay the equivalent of the excise that is lost as a result of the theft or diversion.

28. The attraction of the chop chop market becomes obvious when one examines the impact of excise duties on the price of tobacco leaf. Each bale of tobacco weighs around 100 kilograms. Mr Hood estimated in his statement that $27,000 in excise was payable on a single bale. (I note the Tribunal suggested in Hazim in late 2005 that the amount of the excise might be as much as $29,689.80 per bale.) The statements of Mr Hood and Mr Hedrick refer to reports suggesting a bale of illicit tobacco sells for up to $7,000 on the chop chop market. Mr Crowe suggested the "street value" of a bale of illegal tobacco was as high as $13,650. Mr Hedrick said a bale of tobacco sold on the legal market fetched around $720 at the time of the cancellation decision. I was given no reason to doubt these figures, and I accept them.

29. There was some uncertainty about the amount and value of illegal tobacco that was "leaking" from licensed farms onto the chop chop market. Mr Hood's statement includes a note of a conversation in which the applicant apparently agreed up to 2000 bales per year were diverted. If that were so, and the amount of excise on each bale was around $27,000, the amount of excise that was lost was in the order of $54 million. The same note reported an estimate by manufacturers that up to 2.7 million kilograms each year (the equivalent of 27,000 bales) were unaccounted for. If that last figure were correct, it suggests an enormous loss of revenue. Mr Crowe's statement included a copy of a report prepared in 2001 by PricewaterhouseCoopers suggesting losses from the illegal trade ran to over $300 million in 2000 and up to $450 million in 2001.

30. While we do not know for sure how much tobacco was being lost to the chop chop market from licensed farms, we do know how much illegal tobacco was seized by the respondent in the course of enforcement activities in north Queensland. Mr Hood's statement reported 440 bales were seized in the final quarter of 2002. If those bales had not been seized, and excise of $27,000 per bale had not been paid, the Commonwealth would have been deprived of $11 million in excise duty. A further 305 bales were seized in 2003, which saved $8 million dollars in excise duty. Cutting equipment, vehicles and other equipment were also seized in these raids.

31. Mr Mulla downplayed the amount of tobacco that was being diverted onto the illegal market, but he would not necessarily be in a good position to know. The threat of a notice being issued under s 105 of the Act requiring a grower to make good any loss creates an incentive for growers to conceal any leakage. The respondent's witnesses have access to more intelligence about the chop chop market generally. While Mr Hood, for example, said it was impossible to be sure how much illegal tobacco made its way onto the market, I accept the evidence of the respondent's witnesses that the amount of tobacco the respondent seized probably represented only a small fraction of the amount of tobacco that actually made its way from licensed north Queensland farms onto the black market. It follows tens of millions of dollars - if not hundreds of millions - have been lost each year.

32. I have already noted Mr Mulla is not suspected of illegally diverting tobacco leaf from his own farm. But there is still a risk of theft and mishandling. The applicant says he has gone to some lengths to respond to that risk. Before the cancellation of his licence, he took steps to upgrade the security of storage facilities on his farm. He erected a lockable facility and installed security lighting. He acquired a dog, although the evidence suggested the dog was not very fierce. Mr Mulla also indicated a preparedness to install more sophisticated alarm systems, including a back-to-base alarm system which would alert a remote monitoring centre of any problems. It appears Mr Mulla's facilities are relatively sophisticated compared to the facilities in place at some other farms in the area. Mr Couper says the quality of the applicant's facilities has been recognised by the respondent in the past. Mr Couper pointed out the respondent directed that another grower store his tobacco inside Mr Mulla's lockable storage shed on at least one occasion before the cancellation decision.

33. The respondent is concerned that any crop the applicant harvests might be placed in storage for an extended period if he is unable to finalise a sale. The Commissioner pointed out in his statement of facts and contentions that the applicant's farm could produce a crop that would yield at least 20 tonnes of tobacco leaf. That would be the equivalent of around 200 bales of tobacco - which would fetch around $1.4 million on the chop chop market and deny the Commonwealth around $5.4 million in excise. Mr Mulla did not dispute the Commissioner's estimation of his farm's capacity. The Commissioner says the applicant's crop was even bigger in previous years. In the year ending 30 June 2002, for example, the crop was 36,397 kilograms.

34. The Commissioner suggested the risk to the revenue from loss or theft grows the longer the crop remains in storage. Mr Couper disputed this proposition. He says the risk remains the same, although he added the applicant has no interest in storing the crop for longer than necessary. The applicant presumably wants to sell it overseas as soon as possible. The same logic suggests the applicant would not necessarily produce a large crop. Indeed, it would be as small as possible consistent with the applicant's objective of having a test crop available for prospective purchasers to inspect. Mr Hood recognised the commercial logic of producing a relatively small crop in the circumstances during the course of cross-examination.

35. While I agree it is not in the applicant's interest to store a large crop longer than necessary to finalise an export transaction, I think the Commissioner is right to worry that a storage shed - even a secure shed - containing bales of tobacco leaf might present a tempting target for thieves. The opportunities for the thieves to familiarise themselves with their target and arrange a theft presumably increase if the tobacco bales remain in the shed for a longer period of time. But even if the tobacco leaf was stored in the shed for a short period, the risk is not insignificant.

36. There was some discussion of the incidence of larger scale thefts of bales of tobacco in north Queensland and Victoria. I have already noted it is likely farmers have not reported all of the thefts which have occurred. Mr Hood's statement included a memorandum recording the details of a theft of 21 bales of tobacco from a facility in Mareeba owned by the Queensland Tobacco Marketing Co-operative Association Ltd. Another report in the materials referred to a man being sentenced to gaol for transporting 10 bales of illegal tobacco leaf, although it is unclear whether the man in question stole them from a farm or came into possession of them by some other means. There was also reference to at least one larger theft in Victoria. None of this is surprising. Given the profits to be made on the chop chop market, there is a real risk of thefts occurring from even relatively secure facilities in the future.

37. I accept the chop chop market results in a serious loss to the Commonwealth - perhaps as much as several hundred million dollars each year. I accept there is no evidence to suggest Mr Mulla would illegally divert his own tobacco leaf onto the chop chop market. But I also accept there is a real risk that part or all of the crop might be stolen from the storage facility on Mr Mulla's property despite his improvements. I also accept there is no evidence that Mr Mulla's security arrangements are less rigorous than those which apply on other farms in north Queensland or in Victoria; indeed, it appears his security arrangements compare favourably to those prevailing on some other farms in the region. I accept there are more opportunities for thieves to raid a storage facility if a larger crop is stored inside the facility for a longer period of time. I also accept the applicant's self interest dictates he will grow a smaller crop and make every effort to sell it as quickly as possible.

(C) THE COST OF POLICING COMPLIANCE

38. The ATO has devised a compliance program that is intended to ensure that growers comply with their licence obligations and prevent leakage from occurring. Aspects of the evolving plan were described in the Tribunal's earlier decisions in Martino and Hazim . It was discussed in more detail in the statement of Mr Crowe. Mr Crowe explained the compliance program forms part of an initiative commenced in 2001 called the Aggressive Tobacco Strategy. The Strategy includes a program of audits entailing an inspection of the property at various points in the production process and cross-checking with producer records and licence requirements. In Martino , it was suggested the ATO pays particular attention to farms which appear to have unusually low yields of tobacco leaf per hectare to ensure that actual yields are not being understated to facilitate the diversion of tobacco leaf to the illegal market.

39. Mr Crowe explained in his statement that the ATO still relied heavily on the paperwork of the individual growers. There was no suggestion the Commissioner has experienced difficulties with Mr Mulla's record-keeping in the past.

40. Mr Crowe also pointed out the ATO incurs significant costs in administering the compliance program. He said the costs would be determined in part by the size of the applicant's crop and the number of other tobacco producers in the same area. If the applicant were the only grower or one of a small number, it would still be necessary to fly at least two officers from Sydney to Cairns for field inspections on at least two occasions each season, with each visit lasting two days. Additional visits while the crop remained in storage would also be required. If a larger number of farms resumed production, Mr Crowe said it might be necessary to re-open the Cairns field office of the Tobacco Industry Group (the unit within the ATO that monitors compliance). Mr Crowe said he envisaged between four and six officers would be required in Cairns over the 18 week growing season in that event.

41. I was provided with a summary of the ATO's costs incurred in monitoring compliance in the 2003 season. The summary suggests the compliance program cost $363,800.95. The summary was annexed to Mr Crowe's statement. He also annexed an estimate of the ATO's costs of supervising the production of the crop if Mr Mulla resumed production. Mr Crowe estimated it would cost $8,287.08 to supervise Mr Mulla if he were the only grower and he produced a small crop. If a large number of growers were to produce large crops, the cost would in the order of $240,502.32. The reality is that the cost is likely to be somewhere between these two figures. Mr Mulla made it clear he would not bother growing anything if he were the only one to have a licence because foreign buyers would want to see the product from a number of different farms from within the region. But even if a number of growers were to resume production, there is no reason to assume they would each produce large crops. Like Mr Mulla, their self-interest would be best served by producing small crops.

42. I accept that monitoring the production and storage of a number of growers is almost inevitably an expensive process. The elaborate compliance program is not cheap. The costs would increase if the excise regime remains unchanged and the applicant and his fellow growers were successful in developing an export market - a market that would not yield any excise revenue for the government. Even so, the costs are not exceptionally high.

(D) THE APPLICANT'S POSITION IF THE LICENCE IS CANCELLED

43. The applicant has a significant amount of money tied up in his tobacco farm. It does not appear he is in the same parlous financial position as some of his neighbours, given he can afford to invest in a test crop to develop the export market. A lot of the infrastructure, like curing facilities, can only be used to grow tobacco leaf. It is unclear whether it would be possible to grow other crops on the farm. I note the applicant is not a young man, and he has spent much of his life as tobacco farmer. He may not wish to continue working the property. If the property were to be sold, it would presumably have to compete on a property market against other farms being sold by former tobacco farmers who are leaving the industry because their licences have also been cancelled. The outlook for the applicant is therefore grim if his licence is not restored.

ANALYSING THE LEGISLATION

44. Section 39L of the Act says the Collector (ie, the Commissioner) is entitled to cancel a producer licence if he would be entitled to suspend the licence under s 39G. Section 39G sets out the grounds on which a licence may be suspended. The respondent relies on s 39G(1)(m) which permits suspension where "it is necessary for the protection of the revenue...". A similar form of words appears in s 39G(2) which says the Collector is not entitled to suspend a licence on some of the grounds identified in s 39G(1) (apart from s 39G(1)(m)) unless he is satisfied suspension is "necessary...to protect the revenue."

45. Deputy President Forgie considered the meaning of the words in s 39G(2) in the course of her decision in Martino . That discussion is relevant in this case. The Deputy President began at paragraph 50 by considering the word revenue . It includes all of the monies the crown would be entitled to collect as excise duty under the Act. But there is more to it than that: revenue arguably means the amount to which the crown is entitled net of the costs of collecting those monies and operating the regulatory regime.

46. The Deputy President recognised this broader concept when she discussed the expression protect the revenue . She explained (at paragraph 51):

[A] licence may only be cancelled if it is necessary to take care of the money belonging to the Crown in right of the Commonwealth. That has the aspect of ensuring that the Commonwealth receives all that it should in the form of any excise that is ultimately payable in respect of tobacco originally grown on [the licensee's] farm and keeps all that it receives. It also has the aspect of not spending more of the Commonwealth's money than need be spent in carrying out its supervisory duties and responsibilities under the Act and in ensuring that the tobacco is not marketed illegally in Australia, and so avoid the payment of excise duty, if it cannot be marketed legally.

47. The Deputy President next considered the word necessary : at paragraph 52. She adopted the analysis of Allen J in State Drug Crime Commission v Chapman (1987) 12 NSWLR 447. In that case, his Honour said the word necessary did not mean essential : at 552. His Honour explained:

The word is to be subjected to the touchstone of reasonableness. The concept is one as to what reasonably is necessary in a commonsense way.

48. His Honour quoted (at 552) the decision of Pollock CB in Attorney General v Walker (1849) 3 Ex 242; 154 ER 833, which said:

It may be stated as a general rule that those things are necessary for the doing of a thing which are reasonably required or which are legally ancillary to its accomplishment.'

49. Deputy President Forgie went on in Martino to consider the standard and onus of proof. The learned Deputy President referred to the authorities and explained (at paragraph 54):

All that is required is that the Collector, and so this Tribunal, is satisfied. Satisfaction, for all practical purposes, equates with the civil standard of proof which may be expressed as "the balance of probabilities". It equates with the interpretation of the expression "reasonable satisfaction" adopted by the Full Court of the Federal Court in Repatriation Commission v Smith (1987) 15 FCR 327 (Northrop, Beaumont and Spender JJ; and see page 335, per Beaumont J).

50. The parties in this case agreed that Deputy President Forgie's decision in Martino sets out the correct approach to the issues in this case. I agree. I must consider whether cancellation of the licence is reasonably necessary in light of the risks I have identified and the Commissioner's costs of supervision, and in light of any other circumstances. I note the learned Deputy President followed the same approach in her later decision in Hazim .

51. I also note the amendments to the Act that introduced the new s 39G(1)(ia). Both of the parties agreed s 39G(1)(ia) did not have retrospective effect. I agree. It follows the new provision is irrelevant to my consideration of the issues in this case.

IS CANCELLATION OF THE LICENCE REASONABLY NECESSARY IN ALL THE CIRCUMSTANCES?

52. I start from the assumption in the evidence that the Commissioner does not suspect the applicant has acted unlawfully in the past, and there is no reason to believe he would divert tobacco leaf from his crop onto the chop chop market. There was no suggestion the Commissioner believed the applicant would fail to carry out his obligations under the compliance regime, or fail to co-operate with the Commissioner's officers in the execution of their duties. This case can therefore be distinguished from the facts in Martino and Hazim , where the producers failed to comply with the regulatory regime in various respects.

53. Mr Mulla is confident he could send unthreshed tobacco overseas without it deteriorating. His explanation was reasonable and I accept it. In those circumstances, I am satisfied the applicant has adequately addressed the questions the producer failed to answer in Martino concerning the packing and export of tobacco leaf.

54. I have already indicated I accepted the applicant's argument that there is a reasonable prospect of developing export markets for high quality north Queensland tobacco if he can reduce his costs of production. I have also accepted he is in a good position to reduce his costs. While the international tobacco market is flooded with product, I accept the applicant's claim that north Queensland growers should be able to survive and thrive in that market if given the opportunity to do so. But I must also acknowledge that the applicant's success or failure does not depend on his efforts alone. He made it clear he was unlikely to plant a test crop unless a number of other growers in the region did the same so that prospective buyers had a range of product to consider. This introduces much greater uncertainty into the process and increases the regulatory challenge.

55. I have already observed the Commissioner will not face exceptionally high costs in supervising a relatively small number of growers as they produced and marketed a small test crop. Those costs will grow quickly if the growers are successful and the demand for north Queensland tobacco leaf justifies the activation (or re-activation) of more producer licences. The costs of supervision would still be small when compared to the amount of excise collected - but they would also be sunk costs in the sense they would be expended on crops that do not yield excise revenue because they are sold overseas. The Commissioner's costs of protecting the existing stream of excise revenue flowing from tobacco grown in Victoria would therefore increase.

56. I have also expressed the view that the applicant is unlikely to store large amounts of tobacco leaf on his farm for a long period if his licence is re-activated - because it would be economically rational for him to produce a smaller test crop and because he will make every effort to realise a return on his investment by securing export sales at the earliest opportunity. Even so, I acknowledge there is a possibility the tobacco leaf might languish in the storage facility for some time. The bales of tobacco will offer a tempting target for thieves. The security arrangements on the applicant's farm are better than some, and apparently no worse than those on many other farms in north Queensland and Victoria. It would be unfair to hold him to a higher standard in respect of those arrangements. But I fear those arrangements may nonetheless prove inadequate given the growth in the chop chop market and reports of the involvement of organised criminal gangs. I accept the Commissioner could recover from Mr Mulla the amount of excise the Commissioner would otherwise be entitled to collect if any part of the crop were stolen. The evidence suggested many growers are in financial difficulty. That means they would have difficulty meeting large demands pursuant to s 105 of the Act. It was ultimately unclear whether Mr Mulla had sufficient resources to meet a demand for excise in the event of a theft. The answer to that question would of course depend on the size of the theft, and Mr Couper emphasised the applicant would be unlikely to have a large number of bales in storage in any event because he only wishes to grow a small test crop.

57. Mr Couper says this case is ultimately about whether the applicant should be permitted to back his commercial judgement that it is possible to develop a viable export market for north Queensland tobacco leaf. He says the applicant's judgement is reasonable and preferable to that of the respondent in light of problems identified with the quality of the evidence offered by the Commissioner's witnesses. I agree with his assessment. He also says the Commissioner's concerns about storage are unjustified. I disagree with Mr Couper on this point. I think there is a serious risk of theft - although I accept the risk may be less serious given the likelihood the crop will be small and (if Mr Mulla is right) it will not languish in the secure storage facility for long. Mr Couper adds the Commissioner's estimates of the cost of supervision are probably too high. I disagree. While it may be possible to achieve some economies, there is no doubt that administering a compliance program for even a relatively small number of growers in north Queensland will cost a substantial amount.

58. I am also conscious of the implications for Mr Mulla's future (and, presumably, the future of other licence holders who are interested in this decision) if the licence is not restored. As I have already observed, the consequences for the applicant are very serious if the cancellation decision stands.

59. The choice is finely balanced. I am ultimately persuaded it is reasonably necessary to cancel the applicant's producer's licence to protect the revenue because it is not simply a matter of allowing the applicant to back his own commercial judgement. On his own admission, it will be impossible to develop an export market without the co-operation of other growers. He says at least 12 farmers from the district must grow a test crop, and it will presumably be necessary to pick those other growers carefully. They will have to co-ordinate their activities to ensure they have the best chance of success. It is not clear how that co-ordination can be achieved. As more growers produce crops, the risk to the revenue grows as a result of theft and other forms of leakage. The cost of supervision also grows.

DOES THE TRIBUNAL HAVE THE POWER TO IMPOSE FRESH CONDITIONS?

60. If the applicant were able to take steps to develop an export market from his own efforts, I would have restored his licence. But that is not the case. It is possible the balance might have been tipped in his favour if one were able to devise a set of conditions that could be imposed on his licence and the licences of a small group of other growers to facilitate the production and marketing of a test crop. Do I have the power to impose fresh conditions pursuant to s 39DA in this case?

61. Mr Dorney submitted I am unable to impose conditions as that power did not exist at the time of the cancellation decision. I note that was the approach followed in Hazim : at paragraph 222. The applicant put a different view at the hearing. Mr Couper argued I could vary, revoke or impose fresh conditions pursuant to s 39DA even though the power did not exist when the cancellation decision was made. He relied in particular on the decision in Azevedo v Secretary, Department of Primary Industries (1992) 106 ALR 683.

62. I think the respondent is right. The Tribunal is required to address the same decision as that which faced the person who made the reviewable decision: see the Full Court's decision in Hospital Benefit Fund (WA) v Minister for Health, Housing and Community Services (1992) 39 FCR 225 at 234 per Wilcox, Burchett and French JJ. That decision was a cancellation decision made under s 39L. The question of whether or not fresh conditions might be imposed pursuant to s 39DA entails what is effectively a separate (if related) decision.

63. It may be that the discussion is moot in any event. The amendments to the Act also introduce a provision which says all licences are taken to end on 30 September 2006 if they have not been cancelled earlier. It would be pointless to restore a licence that is bound to expire in any event.

CONCLUSION

64. The cancellation decision under review is affirmed.