AMWAY OF AUSTRALIA PTY LTD v FC of T & ORS
Judges:Foster J
Court:
Federal Court
Foster J
In these proceedings there were two separate applications for hearing. The first application was commenced by writ of summons in the original jurisdiction of the High Court of Australia on 15 May 1995. It was thereafter remitted to this Court on 14 June 1995 pursuant to O 44 r 23 of the High Court Rules. It became No. NG 436 of 1995 in this Court. The second application, NG 436 of 1996, was filed in this Court on 31 May 1996. It is an appeal pursuant to O 52B r 4(3) of the Federal Court Rules against an appealable objection decision made under the Taxation Administration Act 1953 (Cth) (``the Tax Administration Act''). The two applications were listed for hearing together. Both applications relate to an alleged overpayment of sales tax by the applicant (``Amway'') for the period 1 June 1988 to 31 July 1992 (``the relevant period''). I shall refer to the respondents as ``the Commissioner''.
The first application consists of a common law claim in which Amway alleges that the Commissioner has been unjustly enriched by the receipt from the applicant of $5,723,628, being an overpayment of sales tax in the relevant period. Amway seeks recovery of these moneys as moneys had and received to its use. A claim for interest is also made pursuant to s 77MA of the Judiciary Act 1903 (Cth). At the commencement of the hearing, counsel for the Commissioner filed a notice of motion seeking the summary dismissal of this claim on the ground that the decision of the Full Court of this Court in
Chippendale Printing Co Pty Ltd v FC of T & Anor 96 ATC 4175; (1996) 62 FCR 347 determined that the relevant sales tax legislation, to which I shall make reference later, was an exhaustive code which precluded the bringing of any action under the general law in respect of the same subject matter. On the second day of the hearing counsel for the applicant consented to the dismissal of proceedings NG 436 of 1995, such dismissal to occur at the time of my giving of judgment in proceedings NG 436 of 1996. Accordingly, there was no litigation of the issues raised in proceedings NG 436 of 1995. As I understand the situation, counsel for the applicant, in order to preserve the point, formally submits that Chippendale was wrongly decided. In the result, I order that proceedings NG 436 of 1995 be dismissed with costs.
Proceedings NG 436 of 1996 is an application for judicial review, pursuant to s 14ZZ of the Taxation Administration Act, of an appealable objection decision, made on 8 May 1996 by a delegate of the Commissioner, refusing to allow Amway's objections to a decision made by a delegate on 2 September 1993 disallowing a claim for the refund of sales tax alleged to have been overpaid. Before considering this application, it is convenient to refer to the relevant sales tax legislation, its application to Amway and dealings between Amway and the Commissioner in respect of it.
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The legislation and its application to Amway
Sales Tax Assessment Acts (Nos 1-9) (Cth) (``the Sales Tax Assessment Acts'') were enacted in their original form in 1930. Those relevant to these proceedings are as follows:
``...
No. 2: Goods manufactured in Australia and sold by a Purchaser from the Manufacturer.
No. 3: Goods manufactured in Australia and sold by a Person not being either the Manufacturer or a Purchaser from the Manufacturer.
...
No. 6: Goods imported into Australia and sold by the Importer or applied to his own use.
No. 7: Goods imported into Australia and sold by a person other than the Importer.
...''
Sales Tax Assessment Act (No 1) was the principal statute and certain sections of that Act apply mutatis mutandis to the other Sales Tax Assessment Acts through the operation of s 12 of those Acts. The Sales Tax Assessment Acts together with the Regulations made thereunder provided a sales tax regime for Australia. The scope and operation of this legislation was referred to in
DFC of T (SA) v Ellis & Clarke Ltd (1934) 3 ATD 98; (1934) 52 CLR 85. Starke J provided the following summary of the legislation (at ATD 99; CLR 88):
``... The Acts emphasise that the tax is imposed upon the sale value of goods manufactured in or imported into Australia. Every person who is a manufacturer or a wholesale merchant must register under the Acts. The tax is not levied upon successive sales, but is one tax levied upon the wholesale value of goods. It is not a tax levied upon the retail value of goods. The scheme of the Acts lays a tax upon the sale value of goods preceding retail distri- bution.''
Also, Dixon J said of the legislation (at ATD 100; CLR 89):
``... Although the tax levied by the enactments is called a sales tax, it is not a tax upon all sales of commodities. It is a tax levied upon one only of the transactions which commonly take place in respect of goods before they reach the consumer after they are imported into or produced in Australia.... The general policy of the legislation is to levy this tax upon the last sale of the goods by wholesale, that is upon the sale to the retailer by the last wholesaler. To give effect to this policy, every person who engages, whether exclusively or not, in the sale of goods by wholesale is required to register. Upon registration, he becomes bound to keep proper books, make returns of his sales, and pay the tax.... A sale to a person who quotes his certificate is not the subject of tax, and thus, if there be successive sales to wholesalers, the goods do not incur tax until the last wholesaler resells them to the retailer....''
In relation to a buyer from the manufacturer of the goods, Dixon J summarised the effect of the legislation as follows (at ATD 101; CLR 90):
``... The buyer from the manufacturer, if he is or ought to be registered, must pay tax when he sells, unless the buyer from him is registered and quotes his certificate, and he must pay tax if he takes into his own use or consumption the goods he has bought from the manufacturer. So with any subsequent buyer of goods manufactured in Australia, who resells the goods by wholesale, or who takes into his own use or consumption goods in respect of the purchase of which he quoted his certificate. The tax is levied on the actual sale price, if the sale be by wholesale. If it be by retail a wholesale price ascertained by other means is adopted and the tax is calculated upon that.''
In relation to the tax on imported goods, Dixon J provided the following summary (at ATD 101; CLR 90-91):
``An importer must pay the sales tax upon the merchandise unless he is registered under the legislation... and unless he quotes his certificate upon his entry of the goods with the customs. He must so quote his certificate if he imports the goods for sale by him by wholesale, but he must not do so if he sells principally by retail... The purchaser from the importer is liable to tax, if he sells the goods unless the buyer is a registered person who quotes his certificate... If the taxable sale is by retail, a wholesale value is found....''
When Amway commenced business in Australia in 1971 this was the sales tax regime applying to its operations. Amway had a parent
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company in the USA and conducted in Australia a business similar to that of the American company. It was a business of selling goods by retail, i.e. it sold its merchandise to the ultimate consumer. In so doing, it was in competition with other retail selling organisations in Australia, including major department stores. It did not, however, sell through its own shopping outlets. It did not utilise such a method of retail selling. Instead, it used a highly organised network of individual persons acting as distributors of its merchandise which they sold as its agents. Each individual person acting as a distributor entered into a pro forma agency agreement with Amway which entitled him or her to commissions and bonuses in relation to the sale of Amway's goods to customers obtained by the distributor. Although a retailing organisation, Amway had, therefore, an entirely different organisational structure for selling from that employed by department stores. Also, necessarily, its cost structure was different. It did not have the overheads associated with retail selling through shops or stores but it had costs of its own associated with payments to its distributors and with the maintenance of its distributor organisation. Insofar as it sold to the consuming public the same or equivalent merchandise as sold through the retail stores, it was in competition with those retailers. In order to compete effectively, it was, at least, necessary that it did not exceed the retail prices charged by the other retailers.At first, Amway imported the greater part of its merchandise from the parent company, selling it under the Amway brand. Later it began to purchase appropriate goods from manufacturers or wholesalers in Australia and sell those goods in competition with other retailers. It produced a catalogue largely devoted to these goods, on an annual basis. The goods came to be referred to as ``catalogue'' goods. It made no sales by wholesale. In particular, it did not sell goods to major retailers such as David Jones or Grace Bros. Nor did it, as a result of any special arrangement with those retailers, cause retail sales to be made on its behalf through the use of selling space in their department stores.
Prior to amendments to the sales tax legislation in 1985, to which I shall shortly refer, Amway submits that its position in relation to sales tax was as follows:
``(i) As to imported goods, Amway accepted liability to pay sales tax on a sale value determined in accordance with ss 4(1) of the No. 5 Act as importer, which was the sum of the customs value of the goods plus the customs duty payable, all increased by 20%.
(ii) As to locally acquired goods, since Amway was a retailer who had purchased from a manufacturer or wholesaler, sales tax was paid by the manufacturer or wholesaler from whom Amway purchased the goods which fell to be assessed for sales tax under Acts Nos. 2 or 3 respectively in accordance with ss 4(1) of those Acts, and not by Amway as the retailer. The sale value was thus the price at which Amway purchased the goods.''
The amendments of 1985 produced a different result. They dealt with the position of ``an indirect marketer'' and brought to tax sales made under indirect marketing arrangements as though they were notional sales by wholesale. The reason for the introduction for the legislation was set out in the Explanatory Memorandum to the Sales Tax Laws Amendment Bill 1985 (Cth). Under the heading ``Indirect Marketing Arrangements'' the following paragraphs appear:
``The sales tax law is structured on the traditional approach to the marketing of goods - a manufacturer/importer sells either directly to a retailer or to a wholesaler who generally on-sells to a retailer. The sale to the retailer (the taxable sale) is for a price that includes all of the costs incurred by, and the profit margins of, each party in the distribution chain, up to, but not including, the retailer.
Indirect marketing arrangements, however, seek to eliminate the wholesaler's profit margin from the sale value of goods by technically changing the status of the wholesaler for sales tax purposes to that of a retailer.
Under one arrangement - an agency arrangement - the wholesaler appoints the normal retailer as agent with the result that the wholesaler, as principal, technically becomes the retailer. Simply stated, the effect of an agency arrangement is to move back the point in the marketing chain at which the taxable sale takes place, i.e., the taxable sale is the sale to the wholesaler
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(now the retailer for sales tax purposes). This arrangement eliminates the wholesaler's profit margin from the sale value of the goods sold by retail, and the sales tax payable is accordingly that much lower.There is another equally artificial retail marketing arrangement that could produce essentially the same sales tax reduction. The wholesaler could acquire an interest in, or obtain permission to use (e.g., lease) a section of a traditional retailer's store from which goods might be sold direct to the public, in fact by the wholesaler, but ostensibly by the retail store operator. Again, the wholesaler technically acquires the mantle of a retailer and the wholesaler's profit margin is not subject to sales tax as it should be.
In practice, indirect marketing arrangements mean that goods can be sold to the public at a considerable savings in sales tax in circumstances where, from the customer's point of view, the purchase of the goods is one at the retail level from a traditional retail store. The savings in sales tax can be reflected, wholly or in part, in a price lower than that at which a competitor's comparable goods are being sold. Those who engage in these arrangements can therefore achieve an unfair competitive advantage in the market-place to the detriment of the revenue and those taxpayers who, on principle, choose not to be a party to such arrangements.
On the other hand, some businesses have for many years and for genuine commercial reasons sold their goods to the public through indirect marketing arrangements such as agency arrangements. Although sales tax reduction is not a motive for these agency sales, the revenue is affected in precisely the same manner and to the same extent.
For this reason it will not be a condition precedent to application of the indirect marketing provisions that a sales tax avoidance purpose be present. Rather, where any person (not being the manufacturer of goods) sells goods by retail under an indirect marketing arrangement after the date of Royal Assent to this Bill, that person will, under the new definition of `Wholesale Merchant', be deemed to be a wholesaler.''
It is unnecessary to set out in detail the various legislative provisions which were enacted to achieve these results. They have been summarised, in my view correctly, in written submissions supplied by the Commissioner as follows:
``The mechanism adopted by the 1985 amendments was to include within the definition of `wholesale merchant' in section 3(1) of the Sales Tax Assessment Act (No 1) 1930 a person who sells goods under an `indirect marketing arrangement' as defined in section 3(4A). The consequence of becoming a `wholesale merchant' was that the seller was required to become registered under section 11(1) and to quote his certificate when purchasing goods for retail sale under section 12(1) and regulations 11(c) and (d) and 12 of the Sales Tax Regulations. The seller was then required to pay tax under sections 3 and 5 of each of the relevant Sales Tax Assessment Acts on the subsequent retail sale of the goods. The sale value of the goods in that subsequent retail sale was the amount set out in the proviso to section 4(1) of each of the relevant Sales Tax Assessment Acts as the amount applicable to any retail sale of goods by a person who quoted his certificate at the time of purchasing the goods: `the amount which would be the fair market value of those goods if sold by him by wholesale'.''
There is no suggestion that the indirect marketing procedure adopted by Amway in its business operations had, at any stage, a tax avoidance purpose. Nevertheless, there is no dispute that it was subject to the new sales tax regime and, consequently, became liable to pay, in respect of its retail sale of goods, tax on ``the amount which would be the fair market value of those goods if sold by [it] by wholesale''.
Of course, the new sales tax regime did not alter the nature of Amway's business. It continued to be a retailer dealing, through its distributor agents, with the ultimate purchasers of its goods. It did not, in fact, sell by wholesale and the price charged to its customers was not a wholesale price. Accordingly, the relevant ``fair market value'' could be arrived at only in a hypothetical manner. This was very likely to cause difficulties in practice. It is not surprising that the problem was addressed by the
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Commissioner through the issuing of Sales Tax Rulings. Sales Tax Ruling ST 2140 (``ST 2140'') dated 16 July 1985 was the first such Ruling.ST 2140, after indicating the requirement that indirect marketers now register for sales tax purposes and quote their certificate for goods to be sold under indirect marketing arrangements, then dealt with the question of the ascertainment of the fair market value of goods sold under such arrangements, as if sold by wholesale. It noted that one particular indirect marketing arrangement (which clearly applied to Amway) involved ``the sale of goods by retail on an agency basis other than through retailers, eg, door to door sales, party plan and home demonstration sales, etc''. ST 2140 (at par 7) went on to deal with such indirect marketers by indicating that, as they had not previously been involved in wholesale selling, it was ``a matter of determining what would be the fair market value of the goods if sold by them by wholesale''. ST 2140 then continued as follows:
``... At this stage it has not been possible to examine the circumstances of individual taxpayers so as to set firm sale values. It is considered that, if persons in this category sold the goods in question by wholesale, a mark-up of at least 20% would be required to cover the costs of marketing, warehousing, etc. and return a reasonable profit.
8. Accordingly, for indirect marketers in this category it has been decided, on an interim basis, that a sale value of cost into store plus 20% is acceptable for goods sold by retail through agents. The cost into store should include any separate costs incurred for packaging and other costs necessary to bring the goods into a marketable state. Where royalties are payable in respect of the goods the cost should include the amount of the royalty. With imported goods the sale value will be landed cost plus 20% provided that the goods are landed in a marketable condition. If they have to be, say, packaged the sale value will be landed cost plus packaging plus 20%. Where applicable any amount paid for royalties in respect of the goods should be included in the cost price.''
In the subsequent paragraph it was stressed that this method of ascertaining sale value was an interim one only, which would not be appropriate in all situations and that adjustments would need to be made in individual cases after the Taxation Office had had an opportunity to examine them.
It appears that Amway, although not happy at these changes, did not seek any adjustment in its favour. The new impost in respect of its imported goods was not greatly different from that previously paid and it was prepared to accept the increase in respect of goods purchased by it in Australia. However, a new Sales Tax Ruling ST 2424 (``ST 2424'') dated 16 June 1988, with effect from 1 June 1988, increased the previous uplift of 20 per cent to 35 per cent in respect of both imported and purchased goods. ST 2424 said ``the above sale value applies across the board to indirect marketers who sell goods by retail on an agency basis... however it is possible that in some instances because of lower industry margins a sale value of cost into store or landed costs plus 35% may be too high. If an indirect marketer considers that a lower markup is appropriate, this should be taken up with the local branch of the Taxation Office''.
This additional uplift apparently occasioned Amway concern. It considered that it was commercially disadvantaged by the increase. Accordingly, it took up the invitation in ST 2424 and entered into negotiations with the Taxation Office. The course of these negotiations, which were conducted in face to face meetings and by correspondence, is fully set out in the affidavit evidence of Mr Norris, the corporate controller of Amway in the relevant period, and Mr Hunt, a partner of KPMG Chartered Accountants, who acted for Amway in these negotiations and was sale tax adviser to Amway in the relevant period. A great deal of documentary material is annexed to or exhibited to these and other affidavits. This material was tendered as a separate exhibit and covers in excess of 300 pages. I have read and considered the material with particular reference to those documents specifically relied on by counsel. I do not propose to set out the material in these reasons. Indeed, not a little of it was admitted subject to relevance, it having been brought into existence in relation to the wider issues in the common law proceedings. Not all the material was before the decision- maker when making the decision subject to the application for review. However, it appears to me, on a reading of the material that had been
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placed before him on behalf of Amway, that all Amway's major contentions in relation to the inappropriate nature of the extra 15 per cent uplift had been made, with considerable emphasis, before the impugned decision was given. I find it unnecessary to refer to those contentions otherwise than in summary form.It is clear that, from 1 June 1988 when ST 2424 came into effect, Amway made representations as to the allegedly unfair effect it had upon its business and as to the disadvantage it imposed upon it in relation to competition with other retailers. In a lengthy letter dated 28 September 1988, which reiterated arguments previously put, various points were made. It was emphasised that Amway's business had changed over the years since 1971 with the result that, by the date of the letter, approximately 24 per cent of the value of all products sold by it was attributable to locally purchased products, the balance being imported. It was asserted that ``in respect of locally sourced product, in particular nationally known brands, Amway is placed in a very uncompetitive position vis a vis its direct competitors, i.e. the major retailers such as Coles-Myer, David Jones and Woolworths''. This was because Amway's prices were ``effectively pegged by reference to the prices charged for the same products by its direct competitors''. The point was made that the competitors paid tax at the time of purchase on a sale value equal to the purchase cost which, in most cases, excluded freight, whereas Amway was required to pay tax on a sale value equal to its full purchase cost, including freight, plus a mark-up of 35 per cent. Consequently, it bore a considerably higher sales tax cost as part of its cost of goods sold, than did its direct competitors and, because its prices to the consumer were controlled by the market, it could not pass on its increased sales tax cost to its customers. Accordingly the sales value arrived at as a result of the 35 per cent mark-up could not be said to be a fair market value of the goods if sold by wholesale by Amway.
It was also emphasised that the diversity of the company's product range and the small percentage of the company's overall sales which related to cosmetics, where there was traditionally a ``high mark-up compared to the low cost of manufacture'' and which, consequently, could bear more readily a mark- up of 35 per cent, made it inappropriate and inequitable that a uniform sale value based on 35 per cent be applied to all the company's product. Representations as to a lower rate were, accordingly, made. Also a request was made for a meeting between representatives of Amway and the Taxation Office.
A reply was received from the Australian Taxation Office on 4 April 1989 which indicated that the ``sale value of full cost-into- store increased by 35%, advised in this Office's letter of 20 May 1988, should remain in force''. It was also indicated that a discussion would serve no useful purpose. The point was also made that it was not uncommon for direct competitors to be treated differently for sales tax purposes and that the status of Amway as an indirect marketer was, for those purposes, entirely different from the status of competitors who were ordinary retailers.
It appears that, despite this response, negotiations continued between Amway and the Australian Taxation Office. Whilst these negotiations were on foot Amway continued to pay sales tax on the basis of ST 2424 but specifically paid ``under protest'' the difference between the amount of tax calculated on the basis of a 20 per cent mark-up and that calculated with regard to a 35 per cent mark-up. The negotiations were conducted orally and in writing, to a large extent by Mr Hunt. They were also conducted in the context that it was made known to the representative of the Commissioner that Amway was contemplating proceedings in the High Court for a declaration in relation to its liability to sales tax. Also, Amway made application to the Commissioner on 19 July 1991 for a refund of overpaid sales tax. By agreement, the application was held in abeyance whilst negotiations continued for the purpose of establishing a different sale value.
On 26 June 1991, Mr Hunt put arguments to Mr Scott, on behalf of the Commissioner, on the basis that the same arguments would be used in the High Court proceedings. The first was that the appropriate sale value would be Amway's purchase price, the contention being that if Amway was to be treated as a wholesaler then its customers would be retailers. These customers could buy the goods from a wholesaler who would sell the goods at the same price as the wholesaler charged Amway. Accordingly Amway could not charge a retailer more than the price that it, itself, paid to a wholesaler. At best if there was to be any mark-
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up it should be in the range of 2-3 per cent on purchase price, this being the wholesale gross margin achieved by a major wholesaler, David's Holdings Limited. This argument was not accepted but it was agreed that negotiations would continue, with Amway providing further information.On 15 August 1991, Mr Hunt wrote to the Commissioner providing additional information and further arguments. It was asserted that a sale value based upon into-store cost plus 35 per cent did not produce a ``fair market value'' in terms of the legislation, was not commercially realistic and had placed Amway at a commercial disadvantage in relation to its competitors, ``a position never intended by the legislation''. It was submitted that the sale value envisaged in subs 4(1) contemplated a ``hypothetical sale value set at a value for which the taxpayer could sell their goods by wholesale in a competitive marketplace''. The previous argument was repeated, namely that ``[i]f Amway were to sell by wholesale, presumably retailers would be Amway's customers. Logically those retailers will not purchase at a price above their current cost price, which is the same as Amway's purchase price. In a competitive world it is difficult to envisage Amway making a wholesale sale at any price in excess of its purchase cost''.
Additional information was provided to the effect that it was Amway's policy to price its goods at a level similar to that of its competitors, ``retailers such as David Jones, Myers and Grace Bros''. It continually monitored its competitors' pricing so that it might compete. It was suffering a commercial disadvantage in that its product mix was being influenced ``by the sales tax bias against the company''. The 35 per cent uplift was causing ``a squeeze on margins'' with the result that there was ``a bias in the product lines dealt with by Amway towards sales tax exempt and lower rate products''. Amway could not deal with high sales tax rate goods such as videos, TVs and audio equipment where the sales tax impost would not allow Amway to compete on price.
Similar arguments were adduced in relation to Amway's imported products.
In general, the thrust of Mr Hunt's submissions on behalf of Amway was that the adoption of the 35 per cent sales tax uplift across the whole range of Amway's sale goods produced a consequence that the legislature could not have intended in the indirect marketing amendments of 1985; namely, that Amway, despite being a deemed wholesaler, nevertheless continued to sell by retail in a retail market in competition with other retailers; it was required to purchase its sale goods from actual wholesalers at the same or similar prices charged by those wholesalers to the retailers with whom Amway competed; Amway was required to pay sales tax in respect of those goods at a significantly higher rate than the other retailers; because of the need to compete in the retail market, Amway could not recover the increased sales tax by passing it on in the form of increased retail prices; Amway was, accordingly, forced to abandon some lines of goods which could not be dealt in profitably, change its product mix in favour of goods such as clothing, which attracted a lower sales tax rate and, in respect of most of its goods, absorb the increase in sales tax by reducing its profit margins.
In relation to profit margins, some of the discussions with the Commissioner's representative had focused upon the fact that many of Amway's profit margins were relatively high such that the 35 per cent uplift should not have had any significant detrimental consequence. Amway had countered this suggestion by asserting that Mr Scott's approach was flawed as it did not recognise the fact that Amway sold differing quantities of products.
It is difficult to follow the course of negotiations between Amway and the Commissioner from the material placed before the Court. It is clear that during the early part of 1992, Amway abandoned its previous approach that the appropriate sales value was Amway's purchase price from its suppliers with, perhaps, a mark-up of the order of 2-3 per cent and put, instead, propositions in relation to particular categories of Amway's merchandise. This approach bore fruit. On 3 August 1992, the Commissioner wrote to KPMG Peat Marwick. It referred to the fact that Amway currently sold goods which were grouped into five broad categories, namely (a) Catalogue goods; (b) Health and Fitness goods; (c) Homecare goods; (d) Hometech goods; and (e) Personal Care products. The letter provided a description of the goods falling into these categories. The letter then continued:
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``After careful consideration of the matter, it has been decided that, from the date of this letter, it will be acceptable for the company to account for sales tax on the following sale values for each of the categories of goods:
- a. Catalogue goods - Cost plus 5%.
- b. Health and Fitness goods - Cost plus 17.2%.
- c. Homecare goods - Cost plus 15.6%.
- d. Hometech goods - Cost plus 13.2%.
- e. Personal Care products - Cost plus 35%.
The term `cost' takes the same meaning given to it in Sales Tax Ruling 2424. In relation to imported goods `cost' is to be equated with `landed cost' and must include the imported price of the goods, duty, freight, insurance and handling charges. In relation to locally purchased goods `cost' is the `cost into store' price of the goods as detailed in paragraphs `4' and `5' of the ruling.
This sale value is given on the proviso that the company reviews the sale value of its products every 12 months (the first review being no later than twelve months from the date of this letter) and adjusts the margin, if necessary, on a prospective basis.
Clearly it is the responsibility of Amway to ensure that any new products marketed by the company are allocated to the correct category to ensure that the most appropriate sale value is adopted in relation to those goods.
Further, if a new category of goods is ever marketed by Amway, it will be necessary for the company to approach this office to determine the appropriate sale value for that particular category of goods. Should the company fail to do this, it will be necessary for tax to be accounted for on a sale value of cost plus 35% in line with the current guidelines provided in ST 2424.
Permission is given to your request to average the sale values stated above in order to alleviate administrative problems that the differing sale values would create. It will be necessary however for the company to calculate this average on the `weighted average' method to ensure that the volume of sales for each category of goods is adequately reflected in the figure.
As you are aware, the matter of the refund has not yet been determined and will be addressed pending receipt by this office of a further submission from your firm.''
It appears that in August 1992 an average sale value of 19.2 per cent on all lines except ``catalogue'' lines was accepted as appropriate.
The application for refund
This left outstanding Amway's application for a refund of overpaid sales tax. The relevant legislative provisions dealing with refunds of overpaid sales tax are to be found in all the Sales Tax Assessment Acts. Those in Sales Tax Assessment Act (No. 6) are typical. They are as follows:
``11(1) Subject to sub-section (1A), where the Commissioner finds in any case that tax has been overpaid by a person, the Commissioner shall-
- (a) refund the amount of any tax overpaid; or
- (b) apply the amount of any tax overpaid against any liability of the person to the Commonwealth, being a liability arising under, or by virtue of, an Act of which the Commissioner has the general administration, and refund any part of the amount that is not so applied.
11(1A) Sub-section (1) does not apply in relation to any tax paid by a person unless the Commissioner is satisfied that the tax has not been passed on by the person to another person or, if passed on by the person to another person, has been refunded by the person to the other person.
...''
On 30 October 1992, Mr Hunt wrote to the Australian Taxation Office. He indicated that the purpose of the letter was to ``revise and finalise the refund of sales tax claimed by Amway for the period 1 June 1988 to 30 June 1991'' and ``to lodge a further Application for Refund for the period 1 July 1991 to 31 July 1992''. The letter also sought to detail the basis of the claims. In this regard, reference was made to the agreed rates of uplift and the fact that that agreement was ``on a prospective basis''. Mr Hunt then referred to the statutory provisions relating to refund of sales tax. He pointed out that Amway had paid amounts under protest since 1 June 1988, the total amount up to 31 July 1992 being $4,561,416.
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He then referred to the agreed sale values and said of them that they were ``now the benchmark from which Amway can accurately determine the extent to which it has overpaid tax''.Mr Hunt then addressed the question ``Has the Tax Overpaid by Amway been passed on to its Customers?''. He noted that the Commissioner had not yet accepted that there had been no passing on. This was, then, ``the fundamental issue which needs to be resolved''. The points that Mr Hunt made can be summarised by taking the following excerpts from his letter:
``... Amway does not set the price of its products by reference to a pre-determined mark-up on its full costs of goods sold but rather it is forced to accept the market price.
The adverse impact of sales tax in the selection process is clearly evidenced by the strong bias towards exempt or low tax-rated goods in Amway's catalogue.
Therefore, sales tax is a consideration in the selection of Amway's products not their pricing.
...
... where an amount of tax payable is not identified as a separate amount in taxable sales transactions, as is the case with Amway, it is usually not a function of the vendor's selling price. The amount for which the vendor sells the goods accordingly has no bearing on the amount of sales tax the vendor is liable to pay. Therefore, a comparison of the sum of Amway's costs including sales tax with the gross invoice price is not, in our view, valid for determining whether the tax has been passed on.
...
Obviously, Amway's product cost and overheads are recovered in its selling prices if we accept the proposition that costs are recovered when the selling price exceeds the sum of those costs. As explained above, however, there is a real difference between passing tax on and absorbing or recovering it in existing margins. Ultimately tax would only be passed on if margins pre and post the tax cost increase were the same. This did not occur in Amway's case.
...
... Amway is a price taker so that where sales tax has been reduced on any products e.g. hair care products (August 1988) the company would have matched the revised pricing of its competitors. The company would not unilaterally have reduced its price by simply deducting its sales tax cost saving.''
Mr Hunt also provided a schedule indicating that there had been no sudden uplift in Amway's prices in mid-1988 when the mark-up had been increased from 20 per cent to 35 per cent. Mr Hunt also referred to the decision in
Otto Australia Pty Ltd v FC of T 90 ATC 4604; (1989-1990) 25 FCR 257, to which I shall refer later, and said:
``... it is conceded that if Amway's selling price was computed or calculated by reference to its costs which included the overpaid sales tax then Amway is not entitled to a refund. It is submitted however that Amway did not pass on any of the sales tax paid by it in the products which it sold to customers, or in the alternative, even if it is considered that Amway did pass on sales tax to its customers, then only an amount equal to that properly payable by Amway under the proviso to Section 4(1) of the relevant assessment Acts was passed on and that no portion of the overpaid sales tax for which a refund is claimed, was passed on.''
A copy of the original refund claim of 19 July 1991 and a further claim in respect of the period 1 July 1991 to 31 July 1992 were provided together with an indication that Amway would accept payment of $5,738,487 in full settlement of its claim.
The application for a refund was disallowed by the Commissioner, notice of that fact being given by letter dated 2 September 1993 to Amway. After referring in brief form to the history of the matter and setting out the legislative provisions relating to refunds, the letter states:
``In Amway's situation the matter turns on whether or not sales tax was included in the price for which the goods were sold to the consumer.
In the recent Case Y46,
91 ATC 431, the Administrative Appeals Tribunal (`AAT') determined that sales tax remitted to the Australian Taxation Office by a retailer of
ATC 5076
sports trophies was passed on to customers in the selling price of the goods sold. The AAT reached this decision notwithstanding that the applicant contended that the prices for which the goods were sold were determined by market forces.Similarly, Amway contends that its prices are determined by market forces, but as you are aware, Amway's pricing policy has been to charge different prices for goods sold in conditionally exempt circumstances to those same goods sold in taxable circumstances. In the former situation the price is reduced by an amount at least equal to the sales tax applicable to the goods.
In the above circumstances and after much consideration of the matter, it has therefore been determined that Amway has in fact passed on the sales tax in the price for which the goods were sold to its customers and that the claim for refund of the tax must be disallowed.''
Pursuant to the relevant provisions of the legislation, Amway lodged a notice of objection to this decision on 29 October 1993. The notice refers to the payment by Amway of sales tax in respect of the relevant period. It then continues:
``...
- (d) Throughout the period such tax was calculated on sale values prescribed by the Commissioner in his rulings, being ST 2140, dated 16 July 1985, which was modified by ST 2424 effective from 1 June 1988.
- (e) The Commissioner, in his letter to the taxpayer dated 3 August 1992, ruled that the taxpayer could adopt lower sale values (the revised sale values) for goods sold by it under its indirect marketing arrangement as from 1 August 1992.
- (f) Insofar as the taxpayer paid tax based on the sale values prescribed by the Commissioner in his rulings ST 2140 and ST 2424 rather than the revised sale values, then the taxpayer has overpaid tax throughout the period.
- (g) The Commissioner should be satisfied that the tax has not been passed on by the taxpayer to another person.
- (h) The Commissioner should refund the amount of tax overpaid by the taxpayer pursuant to sub-section 11(1) of Acts No. 2, 3, 6 and 7.
...''
It may be noted that the notice relies on the difference between the amounts actually paid by Amway for sales tax in the relevant period and the amount that would have been payable if the lower sale values accepted by the Commissioner in the letter of 3 August 1992 had applied throughout the relevant period. No claim is made for a refund calculated on the difference between the amount paid and what would have been paid if there had been no increase in uplift from 20 per cent to 35 per cent, although this had been a basis for refund previously asserted. Of course, the latter claim was for a smaller amount than the claim referred to in the notice of objection.
The objection having been considered, an objection report was made on 8 May 1996 by Mr Neil Freeman, an officer of the Commissioner, who had not been engaged in any of the previous correspondence or discussions. On the same day notice was given to Amway by the Commissioner disallowing the objection in full. The objection report reads as follows:
``OBJECTION REPORT
AMWAY OF AUSTRALIA PTY LIMITED
The taxpayer's claim for refund arose out of a determination made on 3 August 1992 determining that the taxpayer could reduce the markup on cost to calculate its saleable value. On 23 October 1992 the taxpayer made a refund request with a submission outlining the basis of the claim.
OVERPAYMENT OF TAX?
The taxpayer argues that it is entitled to a refund as it has overpaid tax which it had passed on. Whilst it is not established that any tax has been overpaid it seems reasonable to proceed on the assumption that is [sic] has.
PASSED ON?
The taxpayer's argument is that it `does not set the price of its products by reference to a pre-determined markup on its full costs of goods sold but rather it is forced to accept market price'. It says that it is a price follower and others in the market are price
ATC 5077
setters. Consequently it argues that it does not recover any costs as the selling price is not computed by reference to costs. As it does not recover any costs if [sic] can not pass them on. The taxpayer concedes that in light of the Otto decisions if sales tax was included in the selling price calculation then there is no entitlement to a refund.The taxpayer develops its arguments specifically in relation to the effect of the variation of sales tax rates on the selling price. At page 5 of the objection submission the taxpayer states `Ultimately tax would only be passed on if margins pre and post the tax cost increase were the same. This did not occur in Amway's case.'.
It also says that it is [sic] direct competition with retailers such as DJs and Grace Bros and that indirect marketers will always pay more tax. Apart from the taxpayer's statements there is no evidence that it is really in direct competition with these retailers. Its marketing method is so different from store based retailers so as to indicate a different market and it is perhaps surprising that there is not some price differentiation. However it is [sic] question of fact whether the taxpayer simply follows the prices set by others, that is the market, or otherwise determines its selling price.
THE ISSUES
The taxpayer's argument that it does not recover sales tax and accordingly can not pass on the sales tax does not seem to be affording a `sensible and practical' meaning to `passed on'. If the taxpayer follows the price of others which incorporates sales tax, then the taxpayer is receiving a price which allows for sales tax recovery. It is basic economic theory that the market selling price represents all the costs and an acceptable return for the sellers. The taxpayer has different costs to retail stores (presumably much lower except for commissions). The fact that it may have a higher sales tax cost than retail stores does not lead to the conclusion that it is absorbing any sales tax. Presumably the rate of return after all costs is commensurate with the risk or the taxpayer would not be in the market.
The Evidence
The taxpayer has supplied much information pursuant to a notice to produce in the Federal Court proceedings. It has consented to this material being used in determining the objection. Notably some of this material was said not to be available to the officer handling the refund claim.
From the material supplied it appears that the selling prices are originally set to produce profit margins in specific ranges. Subsequently prices may be adjusted to reflect market conditions but the overall profit margin of the product group must be maintained.
A comparison of the August 1988 and the August 1989 price lists shows that while price increases were common, there were plenty of products which could not be considered runouts, where the price was unchanged. Also there was a general upward trend in prices displayed in the August 1992 and February 1993 catalogues. Certainly the prices were not generally reduced to reflect the lower sales tax liability.
It is however quite clear from other material that the sales tax cost was allowed for in determining the pricing of the goods in the catalogues. The costing information, the pricing authorities, the pricing calculation sheets all include the sales tax component. After the sales tax rate increase the uplift rate was increased to 35%. The Personal Shoppers Catalogue Merchandise Guide- lines, which appears to [sic] directions to the taxpayer's buyers states that `each product category carries its own MAB goal'. Carol Kleen's memo of 25 October 1990 to Peter Hughes-Hallett states that MAB's should not be used to adjust prices of individual products, but to evaluate the total line. An earlier memo from Peter Hughes-Hallett of 29 April 1988 to Graham Bull considers among other things the sales tax increase. In this memo he notes significant changes in costs which overshadow the effect of the increase in sales tax. It is possible that these other changes enabled the taxpayer to maintain its margins without adjustments specifically for the sales tax increase. It is not apparent from the materials I now have what was the basis for whatever price increases there were but from the last
ATC 5078
sentence of this memo it is clear that costs were a consideration.Whilst it is apparent that the prices were not adjusted immediately to reflect the increased sales tax, any price adjustments and new product prices were calculated with the increased sales tax. This is demonstrated by all the price calculation sheets subsequent to the increase.
The taxpayer sells conditionally exempt goods sales tax free. While the volume is small it is hard to reconcile this with the taxpayer's contention that it does not take sales tax into consideration when determining prices. In setting different prices it seems that the taxpayer or the market is plainly passing on the liability for the tax. The MAB is the same for taxed and tax exempt sales in the examples available.
The materials also include various market analysis comparing the taxpayer's prices to competitors which indicate a variation of selling prices by all sellers even for the `exactly the same product comparison'.
Decision
The taxpayer's argument that it does not pass on sales tax as it merely sells at prices the market determines is unsupported by the evidence. While the market may well have set the pricing parameters, there was generally no one market price. The taxpayer clearly sets its own prices. In so doing it was obviously well aware of the competitive forces of the market place. Its stated policy was that if it could not recover its costs and sufficient profit it would not sell that merchandise. It allowed for the sales tax liability as part of its costs which it recovered in its selling price. The taxpayer has passed on the sales tax cost.
Alternatively if it is to be considered that the market, or the `price leaders', set the price I consider that the charge which the market has set has been computed by reference to costs including sales tax, assuming that most of the vendors are liable for sales tax. If the taxpayer takes a market price I think it would be misconstruing the sensible and practical approach to sales tax which Mr Justice Lockhart discussed in Otto to conclude that the tax could not be passed on.
The taxpayer contends that the sales tax could not be passed on unless the margins were the same pre and post the tax cost increase. It has not established that this was not the case but in any event I doubt if this determines the issue. An increase of tax which affects only some of the retailers in a market may reduce the margins of the affected taxpayers. If these taxpayers stay in the market it is because the return to them is still commensurate with the risk. I doubt if it is correct to say that they are absorbing some of their costs. Rather they are making a lower level of profit. I think this also refutes the taxpayer's argument that, as it pays more sales tax than other sellers, it must be absorbing the extra tax. However there is no evidence that this is necessarily what happened to this taxpayer. In fact the evidence suggests otherwise.
Amway sells a wide range of products which are arranged into various product groups. The pricing of the items in each group is required to produce a specific margin. While the price of each item is not necessarily set to recover the exact amount of sales tax applicable to each sale, it is clearly the taxpayer's intention generally to recover the sales tax liability of the group of goods. In this sense I consider that the sales tax has been passed on.''
On the same day Amway received from the Australian Tax Office a letter entitled ``Notice of Objection Decision''. It read as follows:
``Your objection dated 29 October 1993 against the decision of 2 September 1993 to disallow the taxpayer's Application for Refund of Sales Tax has been considered. It has been decided to disallow your objection in full.
Your objection has been disallowed for the following reasons:
It is considered that sales tax was allowed for in determining the taxpayer's selling prices. The evidence including the price calculation sheets, pricing authorities, information from the costing department and the taxpayer's internal price review communications establishes that the taxpayer allowed for the recovery of costs including sales tax in determining the prices of the goods it sold.
ATC 5079
Additionally it is not considered that the taxpayer's contention, that tax would only be passed on if the margins pre and post the tax increase were the same, is correct in all circumstances. In any event it is not considered that the evidence confirms that the margins were in fact different.''
Amway brought an appeal to this Court against the decision.
The appeal
As already indicated, Amway's appeal is brought to this Court pursuant to s 14ZZ of the Tax Administration Act. Pursuant to s 14ZZO(b)(iii), Amway has the burden of proving that the taxation decision against which it appeals ``should not have been made or should have been made differently''.
Pursuant to s 14ZZP, the Court, in such an appeal, ``may make such order in relation to the decision as it thinks fit, including an order confirming or varying the decision''.
It is trite law, of course, that this Court, unlike the Administrative Appeals Tribunal, does not review discretionary decisions of the Commissioner on the merits. Unlike the Tribunal, it does not stand in the shoes of the Commissioner. The extent to which the Commissioner's exercise of discretionary powers may be examined by a court pursuant to this appeal process is set out in the well-known passage from the judgment of Dixon J in
Avon Downs Pty Ltd v FC of T (1949) 9 ATD 5; (1949) 78 CLR 353. In that case under the relevant legislative provision, it was incumbent on a taxpayer to establish a matter ``to the satisfaction of the Commissioner''. Dixon J said (at ATD 10; CLR 360):
``But it is for the Commissioner, not for me, to be satisfied of the state of the voting power at the end of the year of income. His decision, it is true, is not unexaminable. If he does not address himself to the question which the sub-section formulates, if his conclusion is affected by some mistake of law, if he takes some extraneous reason into consideration or excludes from consideration some factor which should affect his determination, on any of these grounds his conclusion is liable to review. Moreover, the fact that he has not made known the reasons why he was not satisfied will not prevent the review of his decision. The conclusion he has reached may, on a full consideration of the material that was before him, be found to be capable of explanation only on the ground of some such misconception. If the result appears to be unreasonable on the supposition that he addressed himself to the right question, correctly applied the rules of law and took into account all the relevant considerations and no irrelevant considerations, then it may be a proper inference that it is a false supposition. It is not necessary that you should be sure of the precise particular in which he has gone wrong. It is enough that you can see that in some way he must have failed in the discharge of his exact function according to law.''
In
FC of T v Brian Hatch Timber Co (Sales) Pty Ltd 72 ATC 4001; (1972-1973) 128 CLR 28, Windeyer J (at ATC 4010; CLR 57-58) expressed the view that, in relation to the application of the Avon Downs principle:
``... it is the material that was before the Commissioner that this Court has to consider, to see whether it can be said that in failing to be satisfied by that material he must have been moved by some misconception of it or by some extraneous consideration. It is not easy to see how that could be established without evidence from the Commissioner himself of what material was before him or perhaps from some one of his officers who had advised him in the particular matter.''
In the present case there is agreement between the parties as to the material that was before the Commissioner when he made the objection decision under review. There is no need to set it out in detail.
In circumstances where relevant error has been ascertained in the Commissioner's decision, it would appear that the Court may refer the matter back in order that the discretion may be properly exercised according to law. However, in some circumstances it may be appropriate for the Court to reach its own conclusion as to whether the discretion should have been exercised in favour of the taxpayer. If the Court embarks upon this process then, it would appear, it is not restricted to the material that was before the Commissioner at the time of the decision but can also have regard to additional material now before the Court. This appears from the decision of the High Court in
Kolotex Hosiery (Australia) Pty Ltd v FC of T 75 ATC 4028
ATC 5080
; (1975) 132 CLR 535 where Gibbs J, after referring to the Avon Downs principle said (at ATC 4048-4049; CLR 568):``... It seems that a court in deciding whether some ground has appeared to justify a review of the Commissioner's conclusion that he is not satisfied should consider the question on the basis of the material which was before the Commissioner even though further material is before the court - FC of T v. Brian Hatch Timber Co. (Sales) Pty. Ltd., 71 ATC 4093 at p 4095; 72 ATC 4001 at pp 4010-1012; (1972) 128 CLR at pp. 30-31, 57-58, 59. However, it would appear to me that once it is decided that the conclusion of the Commissioner should be disturbed, for example, on the ground that it was based on error, it is right for the court to reach its final conclusion as to whether or not the Commissioner ought to be satisfied by reference to all the material before the court, because if the matter were referred back to the Commissioner to reconsider the question he would obviously be entitled and bound to consider all the information then available.''
Stephen J made comments to the same effect. It may be noted, however, that Kolotex was conducted by both parties on the basis that once it had been decided by the Court that relevant error had been committed then the appeal should be decided by reference to all the material before the Court.
In accordance with the directions given by the Court pursuant to O 52A r 13(2) and O 52B r 3 of the Federal Court Rules the parties have filed their respective statements of facts, issues and contentions. There is no need to refer to these documents in detail. Both state the relevant issues as being whether the Commissioner ought to have found that Amway had overpaid tax in the relevant period and, if so, whether he ought to have been satisfied that the overpaid tax had not been passed on or, if passed on had been refunded.
In relation to the first issue, Amway, in its notice, adopts the position that the sale values adopted by reason of the letter of 3 August 1992 being ``substantially less than the sale value prescribed by the respondent in ST 2424... constituted the Respondent's ultimate conclusion upon the issue as to the applicable sales tax liability of the Applicant on goods sold by it by retail based on a hypothetical sale value expressed to be the fair market value of the goods'' as if they were ``sold by the Applicant on a wholesale basis''. Although the contention is not clearly made in the document, it would appear that the proposition is asserted that the statutory test was relevantly satisfied by the adoption of these sale values and that, accordingly, those postulated in ST 2424 were necessarily wrong.
This contention was not accepted by the Commissioner who answered it by saying in his notice that:
``The respondent contends that:
- (i) the applicant had not established the amount of sales tax it ought to have paid during the relevant period and in particular had not established the sale value of goods sold during the relevant period;
- (ii) the respondent's notification of the sale values referred to in fact 3, above did not mean he was bound to find that the values adopted in ST 2424 were incorrect;
and accordingly the respondent was correct in not finding that sales tax had been overpaid by the applicant during the relevant period.''
It may be said that the passage referring to ``overpayment of tax?'' in the objection report set out above is not a model of clarity. It appears, however, that each side has accepted it as amounting to a decision on the part of the Commissioner that he did not find, pursuant to s 11(1) of Sales Tax Assessment Act (No 6), that there had been a relevant overpayment of sales tax. I have some hesitation as to whether this is a correct interpretation of the passage. It is possible that the Commissioner, having decided that he was not satisfied that passing on had occurred, did not find it necessary to decide the question of overpayment. However, as the question of overpayment has been the subject of written submissions by both sides, I consider it preferable that I put aside any hesitation and decide the issue, on the basis that the Commissioner has made a reviewable decision that overpayment has not been established.
Overpayment
Has the Commissioner committed reviewable error in failing to find, pursuant to s 11(1) that there had been an overpayment of sales tax by Amway? In order for Amway to succeed on this
ATC 5081
issue, it must discharge the onus of establishing that the Commissioner should have found that the amounts of sales tax paid by Amway in the relevant period exceeded the amount which would have been exigible upon a ``sale value'' being ``the amount which would be the fair market value of those goods if sold by [it] by wholesale''. I have already made reference to the hypothetical nature of this inquiry. In its submissions on this issue, Amway has made extensive reference to the evidence which I have endeavoured to summarise earlier in these reasons. It is clear that, in response to the invitation in ST 2424, Amway, through Mr Norris and Mr Hunt put forceful arguments as to the alleged unfairness of the position created by that Ruling in reducing its competitiveness vis-à-vis other retailers. Reference was consistently made to its having been deprived of its ``level playing field''. I consider that, in a general way, Amway was complaining about its having been made the subject of the ``indirect marketing'' legislation. It had not adopted its marketing methods with a view to avoiding sales tax. It was in a different position from those organisations that had altered their marketing methods with the object of reducing the incidence of sales tax upon their operations. It is clear that these considerations were put to the Commissioner's representatives and, indeed, have been reiterated in the submissions to this Court. However, as the passage from the Explanatory Memorandum set out above clearly indicates, the legislation was intended to apply to indirect marketers such as Amway. It is not contended that, as a matter of construction, it does not do so. Even if it be the position that the legislation ``unfairly'' applies to Amway, this fact can have no bearing upon ``the fair market value'' of its merchandise ``if sold by [it] by wholesale''. Nor can it have any effect upon the construction of those words in the statute.It is clear that Amway's major contention in its discussions with the Commissioner's representatives was that because it was in a situation of competition with other retailers such as the major department stores, it could not increase the prices charged for its merchandise to take account of the increases in sales tax payable by it pursuant to the Rulings. As I see it, it was, in effect, arguing that it was in a specially disadvantaged position which should be ameliorated by some relaxation in its favour of the uplift rates imposed by ST 2424. As already indicated, it ultimately succeeded in these representations. However, this does not mean that the uplift rates that it finally achieved as a result of these negotiations constituted the ``fair market value'' postulated by the statute.
It is plain, from the terms of the Commissioner's letter of 3 August 1992, that the percentage uplifts referred to were intended to be prospective only and, moreover, to be subject to annual review. It was quite plain that the question of any refund of sales tax was left in abeyance. Although it is understandable that Amway might be disappointed by a failure on the part of the Commissioner to accept the sales values set out in the letter of 3 August 1992 as a basis for determining whether there had been an overpayment of sales tax in the past, it was nevertheless, at all times, quite plain that this would not be the position.
Indeed, even if agreement had been reached that the uplift factors set out in that letter should be applied to determine the question whether an overpayment had occurred in the past, that agreement could not determine the question whether the payments actually made exceeded the amount contemplated by the statutory formula (
Chamberlain v DFC of T (ACT) (1987) 13 FCR 94 at 98;
Bellinz Pty Limited & Ors v FC of T 98 ATC 4399, affirmed on appeal in
Bellinz Pty Limited & Ors v FC of T 98 ATC 4634).
The question whether overpayment had in fact occurred must, of course, depend upon the construction of the statutory phrase ``the amount which would be the fair market value of those goods if sold by him by wholesale''. I have already referred to the arguments that were put before the Commissioner on behalf of Amway in relation to the proper interpretation of these words. I can find no other submission made in discussion with the Commissioner's representatives or in arguments put to the Court in this case. The submission is that the relevant fair market value must be determined on the basis that Amway as a putative wholesaler would sell to the established retailers with which it was in competition. That being so it could not sell to those retailers at a price in excess of the price at which it purchased from its own wholesalers. As its retail competitors such as the main department stores purchased also from those wholesalers, Amway, as a wholesaler, could not sell to the department stores at a higher price. Some variation in the
ATC 5082
argument was made to the effect that it might be possible for Amway to sell at a markup of, perhaps, 2 or 3 per cent. This was on the basis that major wholesalers, selling in bulk, could operate on such a margin. No calculation was submitted, based upon this interpretation of the legislation, it being submitted that the relevant sale value would necessarily be less than that arrived at as a result of the uplift factors accepted prospectively by the Commissioner in the letter of 3 August 1992. Consequently a refund of the amount calculated on the basis of those factors was amply justified.I am unable to accept that the statutory words admit of this construction. In my view, it is ``an unworkable alloy of the real and the notional'' (per Burchett J in
Estee Lauder Pty Ltd v FC of T 88 ATC 4412 at 4419; (1988) 80 ALR 314 at 323). I am satisfied that what the statutory wording requires is a consideration, in the first instance, of an actual retail sale of goods by an indirect marketer. What is then required is that that sale be regarded notionally as a sale by wholesale rather than by retail. The fair market value of the goods sold must then be arrived at on the basis that it was a wholesale sale to the same purchaser. It is not appropriate to change the whole concept of the sale by converting it into a sale to some other person such as, as is postulated by the applicant's argument, an established retailer. I am satisfied that guidance, in this regard, is provided by the judgments in
Commonwealth Quarries (Footscray) Pty Ltd v FC of T (1938) 59 CLR 111 in which the High Court considered s 18(1)(b) of the Sales Tax Assessment Act (No 1) which is materially similar in its wording. It was the opinion of Starke J (at 119) that ``the sub-section takes the particular sale and substitutes for the amount for which the goods were sold by retail the amount for which they would have been sold wholesale upon the same terms and conditions''. In like fashion it was said by Dixon and McTiernan JJ (at 122) ``... we should interpret the paragraph as requiring that a sale by wholesale should be supposed with the same terms and conditions as the actual retail sale made, except in respect of price and any other term of condition which would be absent or modified in a sale by wholesale''.
In my view, what is required to give effect to the statutory formula is that Amway's actual retail sales in the relevant period be taken and the question posed, what would be the fair market price charged by Amway if it had made those actual sales by wholesale and not retail. This is not to suggest, of course, that such a task of answering this question would be an easy one. However, the approach is correct in principle whereas that advocated by Amway to the Commissioner's representatives and submitted to this Court is, in my view, clearly erroneous.
The Commissioner submits that ``the most obvious practical approach to determining such a fair market price would be to look to the amount actually charged by Amway to its distributors''. This amount, according to the evidence, is called ``the Distributor Deposit'', being the difference between the retail price obtained by the distributor from the retail customer less the amount of the distributor's commission. Some further deductions are made from the ``Distributor Deposit'' by way of additional bonuses made to the distributor at a later point of time. The Commissioner noted that Amway, as a matter of practice, sought to obtain ``a `Margin after Bonus' or `MAB' (being gross profit to Amway expressed as a percentage of the `Distributor Deposit')'' of at least 35 per cent. It is pointed out on behalf of the Commissioner that if this approach were adopted then an ``uplift factor'' in excess of 35 per cent (ie more than that required by ST 2424) would be involved. It appears that the possible use of the ``Distributor Deposit'' as a guide to a hypothetical wholesale price was raised in the discussions and negotiations between the parties but was discarded. This fact, of course, although relied upon in argument by Amway, does not preclude the Commissioner from relying upon it in submissions to this Court.
I find it neither necessary nor desirable to reach a conclusion as to the correct method of ascertaining the wholesale market value of the goods sold. No other basis was put forward by Amway other than the one which I have found to be erroneous. It is clear that no attempt was made to compute a hypothetical wholesale price for the goods sold on any other basis. It was conceded by both Mr Norris and Mr Hunt in their oral testimony that no consideration had been given to an ascertainment of a notional wholesale price other than on the erroneous basis. The statutory test is not answered by hypothesising sales by Amway to its retail competitors rather than to its own customers or,
ATC 5083
perhaps, its distributors in its retail distribution chain. As was submitted on behalf of the Commissioner, in my view correctly, the approach followed by Amway ``ignores entirely the actual retail sales made by Amway and looks instead to the sales that Amway might have made if Amway were selling different goods (apart from catalogue goods) in different quantities to different persons in a completely different market''. Moreover, the expert evidence of Professor Bewley, called on behalf of Amway, in my view, also proceeds upon an incorrect interpretation of the statutory requirement. In these circumstances, it is not necessary for me to consider that evidence in these reasons.In my view, Amway has failed to discharge the onus of establishing that the Commissioner should have found that there was a relevant overpayment.
The decision, thus arrived at, is sufficient to dispose of this appeal. However, as I have received detailed submissions in relation to the Commissioner's finding that he was not, pursuant to s 11(1A), satisfied that the sales tax had not been passed on, I shall consider this aspect of the case.
Passing on
As already indicated, the major contention of Amway in relation to ``passing on'' was that it had not altered its price for its merchandise to take account of the increase in the sales tax impost. It had simply taken the price from the retail market by following, with perhaps slight variations, the prices set by the major retailing organisations such as David Jones and Grace Bros. It had ``absorbed'' the sales tax increase as one of its costs and had therefore borne the burden itself. A refund of the relevant amount of sales tax would merely alleviate the burden which it had wrongfully carried without, through an appropriate price rise, shifting it to its purchasers. There was, therefore, no question of ``passing on'' or of there being any necessity to make a refund to its customers.
Obviously, the simplest form of ``passing on'' is where a wholesaler, bearing the primary burden of wholesale sales tax in respect of any item of merchandise, presents to the retailer purchasing from it an invoice showing the wholesale price, the amount of sales tax attributable to it, the total of the two and an indication that that total was the full price payable by the retailer. It is clear, however, that itemisation of this kind is not essential to the concept of passing on. It is useful, at this point, to consider some decided cases.
In Otto Lockhart J was required to decide whether certain garbage bins were exempted from sales tax as being goods for use by a municipal council. The applicant had imported the bins and paid sales tax upon them. The bins were used by him in connection with contracting work performed for a local council. There were two essential questions: Were the goods ``for use'' by the council and, if so, had the sales tax, if wrongly exacted, been, nevertheless, passed on to the council in Otto's contract price? Lockhart J found that the bins were not, relevantly, ``for use''. However, he also dealt with the second question in the following way (at ATC 4609; FCR 263, 264):
``A second question would arise if I had reached a different conclusion and this concerns the interpretation of sec 11(1A) of the Sales Tax Assessment Act (No 5) 1930 which it was agreed was the relevant Assessment Act relating to sales tax.
Section 11(1) of the No 5 Act provides that subject to subsec (1A), where the Commissioner finds in any case that tax has been overpaid by a person, the Commissioner shall refund the amount of any tax overpaid.
Section 11(1A) provides:
`Sub-section (1) does not apply in relation to any tax paid by a person unless the Commissioner is satisfied that the tax has not been passed on by the person to another person or, if passed on by the person to another person, has been refunded by the person to the other person.'
Counsel for the applicant conceded that the applicant's charge to each council is computed or calculated by reference to its costs which include but are not limited to the landed costs of the Otto carts and that the landed cost itself includes customs duty and sales tax. But counsel argued that sales tax is not charged as a separate item and that in those circumstances it could not be said that there had been a `passing on' of the sales tax by the applicant to the councils of the sales tax paid by the applicant....
...
ATC 5084
`Passed on' in the context of sec 11(1A) must be given a sensible and practical meaning to cover the wide variety of circumstances which may arise in practice in sales tax legislation. It is plain from the facts of the present case that the applicant did in fact `pass on' the sales tax to councils concerned in that, when calculating the contract price for the tender with the councils, the applicant included a component, though not shown separately in the contract documents with the councils, of sales tax paid by it on importation of the Otto carts. In other words the applicant bore the burden of the sales tax and passed it on in the price which it charged the councils for the performance of its contractual obligations. Had the applicant not done so and had the sales tax not been exigible then sec 11(1) would have required the Commissioner to refund the amount of the overpaid tax.''
The case went on appeal to a Full Court in
Otto Australia Pty Ltd v FC of T 91 ATC 4305; (1991) 28 FCR 477. The appeal was dismissed. Sheppard J expressed the following opinion in relation to the construction of s 11(1A) (at ATC 4307; FCR 480-481):
``... Involved is a question of the construction of sub-sec 11(1A) of the Sales Tax Assessment Act (No 5) 1930. Sub- section 11(1) of that Act provides that, subject to sub-sec (1A), where the Commissioner finds in any case that the tax has been overpaid by a person, the Commissioner shall refund the amount of the tax overpaid. Sub-section 11(1A) provides:
`Sub-section (1) does not apply in relation to any tax paid by a person unless the Commissioner is satisfied that the tax has not been passed on by the person to another person or, if passed on by the person to another person, has been refunded by the person to the other.'
It is common ground that the appellant's charge to each council was computed or calculated by reference to its costs which included but were not limited to the landed costs of the bins which included both customs duty and sales tax. The submission which was put to us, which appears to have been different from the one put to the learned primary judge, was that the sub- section does not apply unless there has been passed on to the purchaser an amount equal to the sales tax overpaid which can be shown to be an identifiable increase in the price of the articles in question. Only then can it be said that the amount of the tax had been passed on.
I would reject this submission. Once it is conceded, as it has been, that the charge for each bin was computed by reference to costs which included sales tax, that cost was passed on. The fact that the sales tax was not passed on in an identifiable form is not in my opinion of relevance. In those circumstances, the Commissioner could not have been satisfied that the tax had not been passed on with the consequence that sub-sec 11(1) could not have any application.''
Burchett J agreed with Sheppard J.
Cases decided in the Administrative Appeals Tribunal provide examples of the resolution of the question whether overpaid sales tax has been ``passed on''. In Case 45/95,
95 ATC 395, frequently referred to as the ``Cellar Door Case'', Member DJ Trowse was required to decide whether overpaid sales tax in respect of wine sold by retail at the cellar door of the taxpayer's winery had been passed on to its customers. The taxpayer sold the bulk of its wine by wholesale to wholesale distributors. However, approximately 20 per cent of the wine produced was sold to small retailers and local restaurants with a small proportion being used for sale to the public at the cellar door. It was necessary for the taxpayer to determine a price for the cellar door sales. In doing so, it operated under some constraints. It had to consider competition from other wineries in the district selling at the cellar door. It also had to fix a price which, whilst being attractive to customers would not excite the hostility of the retailers to whom it also sold. It arrived at the price by estimating the likely retail value of the wine and then working backwards taking these factors into account. Sometimes discounts were applied to make the wine competitive with other wines sold locally at the cellar door. It paid sales tax on the amount of the cellar door sales which, it was conceded by the Commissioner included an overpayment. The Commissioner, however, resisted making a refund of the overpaid tax, on the basis that it had been ``passed on'' to the taxpayer's customer. Mr Trowse considered the meaning
ATC 5085
of the phrase ``passed on'' in the following passage (at 398):``The precise task is to ascertain in what sense the expression `passed on' is used in sub-s. 26(1A). In my opinion the expression is used in a non-technical manner and thus its ordinary meaning must prevail. It is my view that the term `passed on' is descriptive of a process whereby the person carrying a liability takes the decision to shift the burden of that liability to some other person and then gives effect to that decision. In short, it refers to the act which provides the relief that stems from the removal of that financial responsibility. The passing on may be in the form of either the handing of the respective account to the other person for his settlement or by way of reimbursement.''
Mr Trowse then referred to Otto and the passages of the judgments of Lockhart and Sheppard JJ which I have set out above. He also referred to Chippendale where Lindgren J had found that overpaid sales tax had, in the circumstances of the case, been passed on to customers and then proceeded (at 399):
``The decisions in Otto and Chippendale make it abundantly clear that sales tax has been passed on where the tax has been brought to account in the calculation of the contract price, and if it has, the fact that the amount of the tax has not been shown separately on the documents of sale is of no consequence. The evidence of the applicants is that the various costs associated with the wine produced for sale at the cellar door, together with the sales tax thereon, were not factors considered by them in the determination of selling prices. My prior acceptance of that evidence would appear to take the matter outside the procedures of calculation and computation which were central to the decisions of Otto and Chippendale.''
He went on to say that ``what needs to be determined is whether... the additional sales tax incorrectly paid has been included as a cost in the process of working out the selling price''. He found that ``the charge for wine sold at the cellar door was not calculated by reference to the sales tax overpaid''. In so concluding, he found that ``a matter of paramount importance'' was ``the decision of the applicants to retain their existing pricing structure notwithstanding the increase in sales tax liability''. He continued (at 400):
``... The fact that prices did remain the same belies any suggestion that the amounts in question were factored into selling prices. The preferable view is that the applicants decided to bear the burden themselves rather than seek relief from their customers. It seems to me to be a classic example of the producer absorbing the extra tax himself in lieu of passing it on to others.''
The Otto cases and Case 45/95 were considered in Case 55/96,
96 ATC 531. The question was whether sales tax had been passed on in the contract price for the construction of swimming pools. The learned Deputy President said (at 537) ``These cases make it clear that sales tax can be passed on if it was a cost included in calculating the contract price''.
After a consideration of the terms of the relevant contracts and other evidence, the Deputy President said (at 538):
``While it is clear that each contract was internally costed after it had been signed, and that the exact amount of sales tax for each pool was not known exactly for some time, this does not exclude the probability, as I find, that an estimate of sales tax was included in the package prices, and was a component in the calculation of the eventual purchase price. It was therefore `passed on' to the purchasers within the principle enunciated in Case 45/95 even though it was not itemised in the contract or the precise amount may not have been known at the time the contract was signed.''
Case Y46,
91 ATC 431 was decided before the Otto cases. Here the taxpayer assembled trophy components and sold the completed trophies by retail. It was accepted by the respondent Commissioner that he was not a manufacturer of the trophies and was liable to account for sales tax on the components when he bought them and not on the retail price of the trophies themselves. The taxpayer had in fact calculated and paid sales tax on the retail price for some years, in circumstances where the Commissioner agreed that tax had been overpaid. However, the Commissioner refused to refund the amount of overpaid tax on the grounds that it had been passed on to the taxpayer's customers. The taxpayer denied that he had passed on the tax. He asserted that his retail prices were determined by market forces.
ATC 5086
He had not added the tax to his normal selling price and, indeed, had incurred losses insofar as his selling price did not cover the amount of the tax. The taxpayer did, however, deduct sales tax from the price when invoicing a body exempt from sales tax.It is clear that there was an issue of fact for the Tribunal to decide as to whether the taxpayer had, in calculating his prices, included the relevant amount of sales tax. The period involved extended over fourteen years and there were copies of invoices from the period which had upon them a notation indicating that sales tax at the rate of 20 per cent had been included in the calculation of the price. The taxpayer asserted that these notations were simply ``internal working figures and advice to customers that they had no further liability as sales tax had been paid on the components''. Claiming that he was not ``passing on'' the sales tax to his customers the applicant maintained that ``he calculated his prices to customers by obtaining price lists and under- cutting his competitors and that his price did not include a sales tax component passed on to his customers. He asserted that market forces dictated his price and he accepted very low margins. He set prices in the hope that he could pay the sales tax and make a profit''. The Tribunal's finding was expressed as follows (at 433):
``It is a question of fact for the Tribunal to decide whether the applicant added the sales tax as an additional item on the top of the price or whether he set his price and then parted with too much of it to the respondent. The respondent has had a windfall. Did the windfall come from the purchasers or from the taxpayer? Having considered all the evidence the Tribunal is more persuaded by the documentary evidence prepared at the time than the oral evidence of the applicant as to his intention at that time. The Tribunal therefore has regretfully come to the conclusion that the objection decision under review must be affirmed. I am satisfied that the applicant did pass on the sales tax in dispute to his customers who have borne the burden. The burden ultimately fell on the applicant because he so cut his margins to remain competitive that he ended up making a loss during part of the relevant period in order to remain in business.''
The reasoning in this case is interesting. The Tribunal, of course, stood in the shoes of the Commissioner. An overpayment of tax was found but a refund was denied on the basis that the disputed sales tax had been passed on to the taxpayer's customers, notwithstanding that, in so passing it on, the taxpayer, in order to remain competitive, had cut his profit margins to the point where he had at times made a loss. It was not held that he had ``absorbed'' the tax rather than passed it on to the customers. Clearly the Tribunal did not consider that the concepts of ``absorption'' of sales tax and ``passing on'' the sales tax were mutually exclusive.
Reference may also be made to
Commr of State Revenue (Vic) v Royal Insurance Australia Ltd 94 ATC 4960; (1994) 182 CLR 51 where, in a different context, the question of ``windfall'' was considered by the High Court, it being held that the fact that an overpayment of stamp duty by a taxpayer had been passed on in its prices to its customers did not provide a defence to a claim by the taxpayer against the taxing authority for a refund of the overpayment on the basis that there had been an unjust enrichment of the authority. Of course, the effect of the present legislation and Chippendale is that ``passing on'' operates as a bar to the taxpayer's recovery from the Commissioner of overpaid sales tax. However, as will be seen, Amway seeks to rely on this case in arguing that ``passing on'' cannot occur unless recovery of the overpaid tax from the Commissioner would result in a ``windfall'' gain to the taxpayer.
It is tempting, of course, to essay the task of formulating a definition of the term ``passed on'' in s 11(1A) which will embrace comprehensively the circumstances in which a taxpayer can be said to have shifted the burden of overpaid tax in a way which absolves the Commissioner from making a refund under s 11(1). The cases suggest approaches to the problem, such as whether the taxpayer has patently transferred the impugned impost to a purchaser by itemising its amount as part of the sale price in the sales invoice, or whether the taxpayer has embarked upon a deliberate computation of its sale price by including as an identifiable but unrevealed component the amount of the tax, or whether, in the circumstances, the amount of the impost has been ``absorbed'' by the taxpayer by reducing its profit margin rather than increasing its price.
ATC 5087
I am satisfied, however, that it is neither possible nor profitable to seek some all embracing formula which would cover the various situations in which the question of ``passing on'' may arise. Undoubtedly considerations of competition in the market place will have a bearing insofar as they may necessarily impose limitations on price rises. This is not to say, however, that the existence of a competitive ceiling or cap must necessarily prevent the passing on of a tax increase as a component of price. There is not, in my view, a necessary logical dichotomy between ``absorption'' and ``passing on''. The section poses a question of fact to be decided in all the circumstances of the case. I find myself in respectful agreement with what Lockhart J said in Otto that the phrase ``must be given a sensible and practical meaning to cover the wide variety of circumstances which may arise in practice in sales tax legislation''.I come then to the arguments in the present case as to whether the Commissioner has committed reviewable error in failing to be satisfied that the overpayment (if any) had not been passed on by Amway to its customers in the prices charged for its merchandise.
Amway's case on passing on
Amway has provided extensive written submissions as to why the Commissioner erred in failing to be so satisfied. To a large extent they refer to and incorporate large sections of the evidence bearing on this topic. As it was always Amway's contention, as advocated by Messrs Norris and Hunt, that Amway had suffered the loss of its ``level playing field'' through inability to pass on the increased sales tax, the evidentiary material tends to be repetitious. It is sufficient, for present purposes, to extract for consideration the contentions upon which Amway regularly relied. They are in fact referred to in Mr Hunt's letter of 30 October 1992 in the passages which I have set out above. They may be summarised as follows:
- • Amway is in competition with other retailers and must price its merchandise competitively.
- • Amway, in this competitive market, is a price-taker not a price leader.
- • Because of the competitive market, Amway could not raise its price on particular merchandise in order to recover from the customer the relevant sales tax rise.
- • Because of increased sales tax Amway moved towards exempt or low tax-rated goods in its catalogue; sales tax was a consideration in the selection of Amway's products not their pricing.
- • Amway's product costs and overheads including sales tax were recovered in its selling prices, the price exceeding the sum of those costs. However, this did not amount to ``passing on'' of the increased tax but rather to ``absorption'' of it through the reduction of profit margins.
- • Tax could only be ``passed on'' if margins pre and post the tax increase were the same. This did not occur. Tax played no part in pricing. If it was reduced, Amway did not unilaterally change its price. It followed the revised pricing of its competitors. The same applied in respect of sales tax increases.
It was submitted that the Commissioner had either not understood these contentions or had failed to take them into account in the decision that he was not satisfied that sales tax had not been passed on. It was submitted that support for these contentions could be found in the objection report.
It further submitted that ``the equity of the statute'' required that ``passing on'' could not be found to have occurred unless a refund of overpaid tax would result in a windfall to the taxpayer insofar as it had already recovered the tax by transferring the burden of it, by appropriate price rises, to its customers, with the necessary consequence that it would receive the amount of the refund twice. Because of the price constraints imposed by competition, it had not been able to transfer the burden. Therefore, a refund to it of overpaid tax would provide it with no windfall. In such circumstances, even if the amount of the tax increase had been recovered in the price actually charged, the absence of a windfall gain necessarily meant that no ``passing on'' had occurred.
It is convenient, in the first instance, to consider whether relevant error has been demonstrated in the objection report prepared by Mr Freeman. The report has been set out in full earlier in these reasons.
In its written submissions Amway first took issue with Mr Freeman's statement that ``[t]he taxpayer concedes that in light of the Otto decisions if sales tax was included in the selling
ATC 5088
price calculation then there is no entitlement to a refund''. It was contended that this statement illustrated a misconception of the submission made in Mr Hunt's letter of 30 October 1992 where Mr Hunt had said ``it is conceded that if Amway's selling price was computed or calculated by reference to its costs which included the overpaid sales tax then Amway is not entitled to a refund''. I reject this submission. In my view, Mr Freeman's statement does not portray any misconception of the concession made by Mr Hunt.The next complaint related to Mr Freeman's statement that ``[a]part from the taxpayer's statements there is no evidence that it is really in direct competition with these retailers. Its marketing method is so different from store based retailers so as to indicate a different market and it is perhaps surprising that there is not some price differentiation''.
In the same context Mr Freeman made the observation, also criticised, that ``[h]owever it is a question of fact whether the taxpayer simply follows the prices set by others, that is the market, or otherwise determines its selling price''.
These statements were criticised on the basis that, in effect, the evidence before Mr Freeman, namely the affidavit evidence and the documentary evidence, was all one way and plainly established the relevant competitive situation and its effect upon Amway's pricing. I do not accept that these portions of Mr Freeman's reasons indicate reviewable error. I think, indeed, that they refer to a difficulty inherent in Amway's arguments on this topic. Amway's oft repeated theme that it had lost its ``level playing field'' was not, as I read the material, necessarily borne out. Amway, clearly enough, followed the prices of the other retailers. It closely researched those prices and it was astute not to exceed them. However, apart from repeated references to ``competition'' there is, as I see it, no material which indicates that, prior to the sales tax increases, it was engaged in any serious struggle to match its competitor's prices. Indeed, as the evidence makes plain it was, for the most part, able to match those prices even after it had received the increased tax impost. It was able to make an acceptable profit whilst maintaining the competitive pricing. This would suggest that prior to the tax impost it would have been able to reduce its prices to the consumer if it had wished to engage in serious competition with the other retailers. So far as I can see there was no evidence placed before the Commissioner's representatives nor before the Court which would enable a comparison of the profit margins available to Amway as against the retailers with whom it asserted it was in direct competition. Clearly it had a fundamentally different cost structure. I think that Mr Freeman's comments are directed to this topic and are in point.
A number of other criticisms are made. I do not find it necessary to consider them in detail as, in my view, they really amount to one consistent complaint. That is that Mr Freeman erred in failing to understand or, if he understood, to accept, that Amway, even though it was able to sell its merchandise competitively whilst paying the increased sales tax did so in circumstances that it was disadvantaged as a competitor in that it was required to reduce its previous profit margins. Insofar as this was necessary, it did not and could not ``pass on'' the sales tax increase but was obliged to ``absorb'' it in its cost structure. I can see no reason for accepting that Mr Freeman did not appreciate the distinction that was made by Amway. I shall consider later whether his failure to accept it as determinative of the question of ``passing on'' amounted to reviewable error.
As to the complaint that Mr Freeman confined himself to ``an assay'' of only the evidence produced by Amway pursuant to a notice to produce, I find no substance in it. The evidence which it is asserted he failed to take into account amounts, in my view, to no more than a constant reiteration of Amway's argument that the need to meet competitive pricing in the market place prevented ``passing on''.
In any event it is necessary to bear in mind that these are the reasons of an administrative decision-maker and ``are not to be construed minutely and finely with an eye keenly tuned to the perception of error'' (
Collector of Customs v Pozzolanic Enterprises Pty Ltd (1993) 43 FCR 280 at 287). I can see nothing to indicate that Mr Freeman was not fully seized of Amway's main contentions. The real question is whether those contentions should necessarily have carried the day in establishing satisfaction that no passing on of the disputed tax had occurred.
ATC 5089
In my opinion, there was quite sufficient basis for failure of satisfaction as to passing on. In my view, neither principle nor authority requires that a finding of passing on can be made only in circumstances where profit margins pre and post the tax cost increase remain the same or where the price to the consumer is deliberately calculated to include the amount of a tax increase. I agree with the submission made on behalf of the Commissioner that Amway's case that sales tax could not be passed on where the amount of the tax was ``absorbed'' into its profit margins was fallacious, in that, taken to its logical conclusion, its effect would be that there could never be passing by a taxpayer who sold goods in a competitive market. As goods are, for the most part, sold in such markets that result would be that sales tax would not ordinarily be passed on.
There was ample evidence before the Commissioner's delegate that Amway took into account in relation to its pricing the incidence of increased sales tax. Indeed, it is accepted in Amway's case that these increases were not ignored. They were referred to in correspondence between Amway and the parent company in America which, apparently, exercised a general supervisory role over pricing, whilst allowing considerable autonomy to the Australian company. It is quite clear that the tax increase was taken into account as a relevant cost along with other costs. It seems that on some occasions the increase was effectively negatived by cost reducing factors such as favourable exchange rates. In my view, the evidence is clear, and would have been clear to the Commissioner that the increase in sales tax was taken into account by Amway in determining whether lines of merchandise to which it applied could be sold at a profit. If an acceptable profit margin existed, notwithstanding that there was a decrease in relation to the previous margin, the product would be made available to the distributors. If no such acceptable margin existed, the distribution of the product was discontinued in favour of some product where an acceptable margin would exist. The evidence demonstrated that this happened. As indicated a bias occurred in favour of low taxed items, such as clothing, in the relevant period.
In these circumstances, I consider that what was said by Sheppard J in the Full Court in Otto is very much in point. His Honour rejected the submission that s 11(1A) did not apply ``unless there has been passed on to the purchaser an amount equal to the sales tax overpaid which can be shown to be an identifiable increase in the price of the articles in question''. His Honour continued that where ``the charge for each bin was computed by reference to costs which included sales tax, that cost was passed on''. In the present case, there was ample indication that decisions as to whether particular merchandise would be sold at the ``competitive'' price were made by, inter alia, taking into account the amount that would be payable in increased sales tax in respect of that merchandise. If an acceptable profit margin could be made despite the increase in tax, then the merchandise was put on the market. The ``competitive'' price obtained for the merchandise included the amount of the tax. When a customer paid the price, it included within it the amount of the tax. I am satisfied that, in those circumstances, a relevant ``passing on'' occurred. Accordingly, I am of the view that no reviewable error, in this regard, has been demonstrated in the Commissioner's decision.
I should add that the evidence makes it plain that in a number of cases a reduction in price was made by Amway to customers who had a sales tax exemption. This reduction bore a direct relation to the sales tax payable on the relevant merchandise. This was, in my view, properly taken into consideration by the Commissioner as an indication that sales tax relevantly entered into Amway's pricing considerations.
There remains for consideration only Amway's submission that the ``equity of the statute'' requires that passing on can occur only in circumstances where a ``windfall gain'' could be obtained by the taxpayer. The concept is discussed in the joint judgment of Deane and Gummow JJ in
Nelson & Anor v Nelson & Ors (1995) 184 CLR 538 at 552-554. The passage, in my view, offers no support for Amway's proposition. Chippendale is authority for the proposition that the refund provisions are a code in the construction of which the concept of the ``equity of the statute'' can play no significant part. It is clear that sales tax ``has a natural tendency to be passed on to purchasers'' (
Capital Duplicators Pty Ltd v Australian Capital Territory [No 2] 93 ATC 5053; (1993)178 CLR 561
ATC 5090
at 568). I accept the Commissioner's submission that ``[t]here is every reason to think that Parliament intended the refund provisions to operate so as to compensate only a taxpayer who has been unable to transfer that economic burden and who as a consequence has suffered actual loss as a result of overpayment''. There is nothing, in my view, in the present case, which would take it into the exceptional class of case exemplified by the ``Cellar Door Case''.Conclusion
As a result of the foregoing reasons, I am satisfied that the applicant has not demonstrated any appealable error in the Commissioner's decision. Consequently both applications will be dismissed with costs.
THE COURT ORDERS THAT IN PROCEEDINGS NG 436 of 1995:
1. The application be dismissed.
2. The applicant pay the respondents' costs.
THE COURT ORDERS THAT IN PROCEEDINGS NG 436 of 1996:
1. The application be dismissed.
2. The applicant pay the respondent's costs.
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