Brambles Holdings Limited v. Federal Commissioner of Taxation.

Members: Barwick CJ

Gibbs J
Mason J
Jacobs J
Murphy J

Tribunal:
Full High Court

Decision date: Judgment handed down 2 November 1977.

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Gibbs J.: This is an appeal from a decision of a Board of Review which, by a majority, upheld a decision of the respondent Commissioner disallowing an objection against the determination, adversely to the appellant, of a claim by the appellant for a rebate of pay-roll tax for the rebate year ended 30th June 1971.

By the Pay-roll Tax Assessment Act 1941-1969 (Cth) (``the Act''), pay-roll tax was levied and paid on all wages paid or payable by any employer, and was paid by the employer who paid or was liable to pay the wages (sec. 12, 13). Provision for the allowance of rebates was made by Div. 2 of Pt. III of the Act. The general nature of that Division was indicated by its title:

``Rebate of Tax by Reference to Exports''. The provisions of the Division were detailed and complex, but it is unnecessary to discuss them in detail. Speaking broadly, they allowed a rebate of tax to an employer whose export sales had increased. They were obviously designed to induce persons to engage in export rather than domestic trade. But the inducement which was offered was not held out only to persons who themselves made export sales; it was extended also to persons who supplied goods either to the exporter himself, or to another supplier who supplied the exporter. This scheme was given effect in the following way. The rebate allowable to an employer was of an amount equal to his ``rebate entitlement'': sec. 16F. The rebate entitlement depended, amongst other things, on the rebate value of export certificates issued to the employer in relation to the rebate year in question: sec. 16E(1). If an employer who had not made export sales held an export certificate, and had not himself issued an export certificate in relation to the rebate year in question, his rebate entitlement for that year would be the rebate value of the certificate: sec. 16E(1). However the provisions of sec. 16E and 16F were both stated to be ``Subject to this Division''. By sec. 16G(1) a rebate could not exceed the amount of the employer's tax for the relevant years. Provision for the issue of export certificates was made by sec. 16S. The provisions of subsec. (2) of that section were as follows:

``Subject to and in accordance with this section a person being -

• (a) a person who has, in a rebate year, acquired from a supplier of components goods of the same kind as -
  • (i) prescribed goods that have, in that rebate year, been exported from Australia and in relation to which that person was the producer for export; or
  • (ii) goods that have been physically included in goods referred to in the last preceding sub-paragraph; or
• (b) a supplier of components who has received an export certificate in relation to a rebate year in respect of goods and

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  has, in that rebate year, acquired from another supplier of components goods of the same kind as the goods to which the certificate relates or goods of the same kind as goods that have been physically included in the goods to which the certificate relates,

may, during or after the end of the rebate year in which he so acquired those goods from the supplier of components, issue to the supplier of components an export certificate in relation to that rebate year.''

Some of the expressions used in this subsection are defined in sec. 16A, but the definitions need not concern us. Section 16S went on to impose restrictions on the rebate value that could be specified in a certificate. The total of the rebate values of all certificates issued by any person to all suppliers in respect of goods of a particular kind could not exceed a specified proportion of the total of the amount paid by that person to all suppliers for goods of that kind: sec. 16S(3)(a). The total of the rebate values of all certificates issued by any person to a particular supplier who had supplied less than one-tenth in value of the goods of a particular kind could not exceed a specified proportion of the total of the amount paid by that person to that supplier in respect of goods of that kind: sec. 16S(3)(b). The total of the rebate value of all certificates issued by any person could not exceed the total of the rebate values of the increase in export sales of that person for the rebate year and of any export certificates issued to him in respect of that rebate year: sec. 16S(6). Within these limits (which it is unnecessary to define more precisely) a person entitled to issue certificates had a discretion as to whether he would issue them, and if so whether he would issue a certificate to one eligible supplier of components rather than to another also eligible. By sec. 16T(1) it was provided as follows:

``(1) Where the Commissioner is satisfied that arrangements have been made between any persons with a view to the affairs of those persons being so arranged or conducted that this Division, or the Division for which this Division was substituted, would have effect more favourably in relation to one of those persons than would otherwise have been the case, the amount of any increase in export sales, or of any rebate entitlement, of that person shall not exceed the amount that would, in the opinion of the Commissioner, have been the amount of that increase in export sales or of that rebate entitlement if those arrangements had not been made.''

In the present case the appellant was a public company which engaged in supplying services to industry, particularly in providing transport and in hiring earthmoving plant and other machinery. Harris Daishowa (Australia) Pty. Ltd. (``H.D.A.''), a company in which the appellant held an interest of about 12 per cent, milled timber to provide woodchips for export to Japan. H.D.A. held a special licence under the Forestry Act, 1916 (as amended) (N.S.W.) which gave it authority to obtain and remove timber from specified land in southern New South Wales. H.D.A. entered into two agreements with the appellant which were in force at all material times although they were not formally executed by H.D.A. until a later date. By one agreement - the sub-licence agreement - H.D.A. granted the appellant authority to enter upon the land the subject of the special licence and to obtain and remove therefrom timber and other products suitable for pulpwood, on payment of royalties fixed by the agreement. By the other agreement - the sales agreement - the appellant agreed to sell to H.D.A., and to deliver to its mill, all the timber and other products suitable for pulpwood (therein called simply ``pulpwood'') got and removed from said land. H.D.A. agreed to buy all timber delivered by the appellant in conformity with the agreement. The price stipulated by the agreement was a sum calculated as the cost per ton of pulpwood delivered at the mill, and it was provided that the following costs were to be taken into account to determine the price per ton -

• (i) the royalty payable by the appellant to H.D.A.;
• (ii) the amount paid or payable by the appellant to any contractor;
• (iii) all reasonable costs paid or payable by the appellant for site administration; and
• (iv) 15 cents per ton of pulpwood supplied.

The sales agreement further provided that so long as H.D.A. issued to the appellant export certificates under the Act (as another provision of the agreement obliged it to do) the appellant would allow H.D.A. a discount of 26 cents per ton of pulpwood supplied. The effect

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of the sales agreement therefore was that in return for supplying the timber to the mill the appellant was reimbursed for the amount of royalties paid to H.D.A. and any amount which it paid to any contractor, and it recovered its reasonable costs of site administration, but it paid to H.D.A. a net amount of 11 cents per ton in return for the benefit of getting the export certificates. The sales agreement made provision for the employment by the appellant, with the approval of H.D.A., of sub-contractors to carry out the actual forestry work including delivery to the mill.

Some time before the sales agreement was made, H.D.A. had sent a letter of intent to another company, Cocks Heffernan Pty. Ltd., advising it that a contract would be ``issued'' to it for the extraction of pulpwood for delivery to the mill, but adding that it might be necessary to introduce the appellant as the principal in the contract. In fact Cocks Heffernan Pty. Ltd. did supply pulpwood to the mill, and was paid by the appellant, but it was not until after the end of the year in question that any formal agreement was made between the appellant and Cocks Heffernan Pty. Ltd. The appellant also joined in forming a company, Pulp Wood Forest Services Pty. Ltd., in which it had a 75% interest, which also supplied pulpwood. The appellant fulfilled its duties of site administration, and for that purpose appointed a manager (a qualified forester) and an accountant. It is incontestable that one purpose the parties wished to achieve by entering into the sub-licence agreement and the sales agreement was to obtain for the appellant the benefit of a rebate under Div. 2 - a benefit which the appellant agreed to share with H.D.A. Indeed, before, the agreements were made, the appellant's accountant had written to the Commissioner stating that the appellant was prepared to participate in the venture with H.D.A. only on the basis that pay-roll tax rebates for export would accrue to it. On the other hand, the parties had other reasons as well for entering into the agreements. The appellant wished to gain experience and reputation in the field of forestry management. From the point of view of H.D.A., it was useful to have available the managerial skills of the appellant, which was experienced in organising contractors for field service work and haulage.

On the 4th April 1972 H.D.A. issued to the appellant an export certificate for a rebate value of $103,336.35, and the appellant claimed to be entitled to a rebate in that amount. The Commissioner disallowed the claim. He said that he was satisfied that arrangements had been made between H.D.A. and the appellant with a view to the affairs of those persons being so arranged or conducted that Div. 2 of Pt. III of the Act would have effect more favourably in relation to the appellant than would have otherwise been the case, and that in his opinion, if those arrangements had not been made, the appellant would not have been entitled to any rebate entitlement. He accordingly reduced the appellant's rebate entitlement to nil.

On appeal, all members of the Board appear to have considered that the crucial question was whether the arrangement between the appellant and H.D.A. could properly be regarded as a normal commercial transaction. The majority answered that question in the negative. Mr. Burke pointed out that the purposes which the parties wished to achieve, other than the obtaining of the rebate, might have been achieved in other ways, and he concluded that the agreements lacked commercial reality once the rebate aspect was put aside. Mr. Fairleigh said that there was no commercial reason for an arrangement to pass the property in the timber from H.D.A. to the appellant and back again to H.D.A., and that this was only explicable as a way of giving the appellant a more favourable position under the Act than would otherwise have been the case. Both were satisfied in terms of sec. 16T. Mr. O'Neill on the other hand held that the sales agreement was an ordinary business dealing.

The Board had power to review the decision of the Commissioner and for that purpose had all the powers and functions of the Commissioner in making assessments, determinations and decisions under the Act: sec. 38 of the Act. If the decision of the Board involves a question of law - and in the present case it plainly does - there is a right of appeal to this Court: sec. 40(5) of the Act. On the appeal the whole of the decision of the Board, and not merely the question of law involved, is open to review: cf.
Ruhamah Property Co. Ltd. v. F.C. of T. (1928) 41 C.L.R. 148 . And, if it matters, this Court is concerned with the satisfaction of the Board rather than with that of the Commissioner. cf.
Denver Chemical Manufacturing Co. v. C. of T. (N.S.W.) (1949) 79 C.L.R. 296 , at p. 312 . The extent of the

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powers of the Court in cases where the allowance of a deduction from assessable income has depended upon the Commissioner being satisfied of certain matters has been considered in such cases as
Avon Downs Pty. Ltd. v. F.C. of T. (1949) 78 C.L.R. 353 and
Kolotex Hosiery (Australia) Pty. Ltd. v. F.C. of T. 75 ATC 4028 ; (1975) 132 C.L.R. 535 . Under sec. 16T the position is different - the requisite satisfaction is a condition of a disallowance of a rebate, and not of the allowance of a deduction. It may be that the powers of the Court are wider in an appeal involving sec. 16T than in cases such as Avon Downs and Kolotex, but for present purposes it is not necessary to decide whether that is so. It is clear that there is at least a power of review if the Board, in reaching the requisite satisfaction, was affected by a mistake of law, or took into account an extraneous consideration, or failed to take into account some factor which it should have considered, or if the satisfaction was one which could not reasonably have been entertained on the material before the Board.

The words of sec. 16T obviously were suggested by those of sec. 260 of the Income Tax Assessment Act 1936 (as amended) (Cth) and the Board apparently thought that they should be given a somewhat similar interpretation. But sec. 16T appears in a context and against a background quite different from that which the Income Tax Assessment Act provides for sec. 260. It is of course obvious that the Parliament wished, if it could, to prevent any person from defeating, evading or avoiding any duty or liability imposed by the Income Tax Assessment Act, to mention only some of the abuses at which sec. 260 was aimed. On the other hand it is equally clear that the Parliament, in enacting sec. 16T, did not wish to prevent persons from so arranging their affairs that one of them would become entitled to a rebate of pay-roll tax. The whole point of allowing export certificates to be issued, and to form the basis of a rebate entitlement, was to encourage suppliers to supply goods to an exporter, preferably at a cost which would allow the exported product to be competitive in the market. Any such supply must inevitably require that an arrangement of some kind be made between the supplier and the exporter. Section 16T cannot sensibly be understood as having had the result that any supplier who responded to the inducement offered by Div. 2, and made arrangements to supply goods to an exporter rather than commit them to domestic trade, made arrangements which fell within the section. It is true that the section is not self-executing; it only operates if the Commissioner is satisfied and forms an opinion. However, if sec. 16T can be applied to the circumstances of the present case, it would seem to me that the Commissioner would be bound to be satisfied, and to form the requisite opinion, in almost every case in which a supplier had arranged to supply goods to an exporter, with a view to obtaining a rebate of pay-roll tax. The rebate entitlement would then be lost in many cases in which it was obviously intended to be available.

Moreover the words of the section, even if read alone, are not entirely clear. The first matter of which the Commissioner must be satisfied is that arrangements have been made between two or more persons, one of whom is the person whose rebate is in question. It is not however necessary that the arrangements should have been made between a supplier and an exporter. For example, arrangements between an exporter and an overseas buyer might come within the section. The arrangements to which the section refers must have been made for the purpose specified in the section: the words ``with a view'' import a notion of purpose, and, I would think, mean that the requisite purpose must have been the dominant purpose with which the arrangements were made. The purpose of the arrangements must be that ``the affairs of those persons'' be so arranged or conducted as to achieve the result that the Division ``would have effect more favourably in relation to one of those persons than would otherwise have been the case''. Within the words of the section there lurk a number of ambiguities. ``Affairs'', of course, simply means ``business'' or ``transactions''. However it is a question whether the ``affairs of those persons'' are intended to mean their respective affairs - that is, separate transactions to which one of those persons is a party but the other is not - or to the affairs of them both - that is, common or joint affairs. The question also arises whether the Division applies ``more favourably'', within the meaning of the section, when it applies to the person concerned for the first time, or whether what is meant is that the Division is already applicable, but that if the purpose of the arrangement is achieved the Division will have

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a more favourable application. These ambiguities must if possible be resolved in a way that will render sec. 16T harmonious with the other provisions of Div. 2. The fact that some of those provisions are expressed to take effect ``subject to this Division'' does not mean that sec. 16T should be given a construction which would defeat the object of those other sections and render them practically ineffective, if it is possible to avoid that result.

As I have already suggested, on one possible construction of sec. 16T that section would apply in any case in which a supplier arranged to supply goods to an exporter for the purpose of obtaining a rebate under Div. 2. But the provisions of the Division are designed to encourage just such an arrangement. To deny a rebate in such a case would make nonsense of the inducement intended to be offered by the provisions relating to export certificates. To avoid this result, it seems to me proper to give a strict construction to the words ``would have effect more favourably... than would otherwise have been the case''. Strictly understood, those words imply that the Division would have had effect, but less favourably, if the arrangements had not been made. On this construction sec. 16T does not apply to a case in which an employer, before making the impugned arrangements, received no benefit at all from the operation of Div. 2. The section presupposes that the employer is within the purview of the Division, but makes arrangements so that the effect of the Division will be more favourable. For example a person who is already an exporter, or a supplier to an exporter, may contrive to increase the price of his goods, not for commercial reasons, but simply to gain the benefit of an increased benefit, part of which he might share with the other party to the arrangement. But a person who, for the first time, arranges to commit goods to the export trade does not thereby make an arrangement that may be struck down under sec. 16T. The difficulties presented by any construction of sec. 16T are great. However for the reasons given I would follow the guidance which the words of the section provide and limit its operation to cases where a person who is already entitled to a rebate under Div. 2 makes arrangements for the purpose of increasing his entitlement.

If the proper approach were to enquire whether the arrangements were capable of explanation by reference to ordinary commercial dealing, without necessarily being labelled as a means to gain a rebate under Div. 2 - to echo the well-known words of Lord
Denning in Newton v. F.C. of T. (1958) 98 C.L.R. 1 , at p. 8 - I am far from satisfied that the arrangements in the present case would come within the section. It does not seem to me out of the ordinary for a person who holds timber rights to arrange for another person to cut and supply the timber, even if the latter person is a head contractor whose role is to manage the work of other contractors; and if in such a case the head contractor is issued with export certificates, for which in effect he pays, that does not necessarily show that the arrangement is only a means to get the benefit of the rebate. It is however unnecessary for me to express a final opinion on that question, because if sec. 16T is construed in the way I have suggested, it cannot have any application in relation to the appellant in the present case.

The conclusion which I have reached also makes it unnecessary to decide whether the section can only apply if the persons who make the arrangements are already in some business relationship, or in other words if the section applies only to a re-arrangement of existing affairs to which the persons who make the arrangements are parties. Since one would hope that if the section is still of practical importance its obscurities will be removed by the Parliament, I do not attempt to resolve this question.

For the reasons I have given the Board was in error as to the meaning and effect of sec. 16T of the Act, and could not properly be satisfied that the arrangements between the appellant and H.D.A. were of the kind to which sec. 16T of the Act refers. The Board should have allowed the objection and allowed the rebate.

I would allow the appeal.