P & N BEVERAGES AUSTRALIA PTY LTD v FC of T
Judges:Gzell J
Court:
New South Wales Supreme Court
MEDIA NEUTRAL CITATION:
[2007] NSWSC 338
Gzell J
1. P & N Beverages Australia Pty Ltd manufactures a range of carbonated fruit drinks under the "Fuze" label. It does so by reconstituting with water a previously manufactured fruit concentrate. It claims that the drinks are GST-free under A New Tax System (Goods and Services Tax) Act 1999 (Cth). The Commissioner of Taxation has ruled that supplies of the fruit drinks are taxable supplies. P & N seeks declarations that the supplies of the fruit drinks are GST-free.
The legislation
2. A New Tax System (Goods and Services Tax) Act 1999 (Cth), s 9-30(1)(a) provides, amongst other things, that a supply is GST-free if it is GST-free under Division 38. Section 38-2 in Div 38 provides that a supply of food is GST free. Section 38-4(c) provides that beverages for human consumption are food. There is a definition of the term "beverage" in s 38-4(2) that is irrelevant for present purposes. There is no dispute that the fruit drinks are beverages for human consumption.
3. But there exceptions. A New Tax System (Goods and Services Tax) Act 1999 (Cth), s 38-3(1)(d) provides, relevantly for present purposes, that a supply of a beverage, other than a beverage of a kind specified in the third column of the table in cl 1 of Sch 2, is not GST-free. In order to succeed, therefore, P & N must establish that its fruit drinks are of a kind specified in the relevant column of that table. Clause 1 is: "Beverages that are GST-free". Item 11 is in the following terms:
"non-alcoholic carbonated beverages, if they consist wholly of juices of fruits or vegetables."
The second column of the table is headed "Category". The category relevant to item 11 is: "Fruit and vegetable juices."
4. The issue is whether or not the fruit drinks supplied by P & N consist wholly of juices of fruits.
Statutory construction
5. It is not in dispute that a purposive approach must be taken to the construction of A New Tax System (Goods and Services Tax) Act 1999 (Cth). In
CIC Insurance Ltd v Bankstown Football Club Ltd (1995-1997) 187 CLR 384 at 408, the High Court said that the modern approach to statutory interpretation insists that the context be considered in the first instance, not merely at some later stage when ambiguity
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might be thought to arise and context is understood in its widest sense.6. In
Saga Holidays Ltd v Commissioner of Taxation 2006 ATC 4001; (2005) 149 FCR 41 at [29], Conti J took the view that a contextual consideration, in construing A New Tax System (Goods and Services Tax) Act 1999 (Cth), was that GST is traditionally a tax on businessmen, to be assessed and paid by businessmen and to be administered and interpreted in accordance with the understanding of businessmen. His Honour accepted a submission by the Commissioner that because GST is payable on a wide variety of business transactions constituting taxable supplies, the legislation is necessarily expressed in general terms to facilitate its application to that wide variety of transactions. Hence the legislation should not be construed in a narrow and technical way but, rather, should be construed in a broad and practical way. On appeal,
Saga Holidays Ltd v Commissioner of Taxation 2006 ATC 4841; [2006] FCAFC 191, Stone J expressed a similar view at [29], as did Young J at [70].
7. In
Woolworths Ltd v Federal Commissioner of Taxation 99 ATC 4187 at [11], Hely J referred to authorities for the proposition that a somewhat robust approach should be taken in construing concessional items in sales tax legislation. The court should not give exemption and classification items a narrow or rigid meaning. They must be understood in a flexible and elastic sense.
8. To similar effect are the reasons of Heerey J in
Telstra Corporation Ltd v Commissioner of Taxation 96 ATC 4805; (1996) 68 FCR 566 at 569. The classifications of goods attracting exemptions or beneficial rates should be liberally construed unless the text or context requires a narrow construction.
9. In
Totalizator Agency Board v Federal Commissioner of Taxation 96 ATC 4782; (1996) 69 FCR 311 at 322-323, Hill J, with whom the other members of the Full Court agreed, drew a distinction between exemption items in favour of persons or bodies named in the legislation and exemption items where it was clear that the purpose of the government was to stimulate particular activity. Only the latter attracted a liberal interpretation. His Honour took the view that there was no general principle of construction that required a benevolent interpretation of exemption items and they should be given their ordinary meaning save where it was clear that the legislative purpose was to afford encouragement to a particular industry or activity. His Honour noted that in
Diethelm Manufacturing Pty Ltd v Commissioner of Taxation 93 ATC 4703; (1993) 44 FCR 450 at 457, French J had limited his proposition that exemption items should not be given a narrow application to those that existed for the purpose of encouraging, rewarding, or protecting some class of activity.
10. Since A New Tax System (Goods and Services Tax) Act 1999 (Cth) is directed to persons who supply goods and services in the course of commerce, many exemption items employ technical terms that are framed by reference to trade usage, as Hill J observed in
Pepsi Seven-Up Bottlers Perth Pty Ltd v Federal Commissioner of Taxation 95 ATC 4746; (1995) 62 FCR 289 at 295. An interpretation of such terms as they are understood in the relevant trade is to be preferred, as was observed by the High Court in
Collector of Customs v Agfa-Gevaert Ltd (1995-1996) 186 CLR 389 at 398.
11. In
Herbert Adams Pty Ltd v Federal Commissioner of Taxation (1932) 47 CLR 222 at 227, Dixon J said that a provision of the sales tax legislation with which he was concerned was expressed in a manner that amounted to a recognition, if not an adoption, of a trade meaning. That recognition was expected because the tax was levied upon persons who sell commodities in the common course of distribution and a revenue law directed to commerce usually employs the descriptions and adopts the meanings in use among those who exercise the trade concerned.
12. In construing a statute, the court should strive to avoid a capricious or irrational result and seek to give each provision a field of operation, it being improbable that the framers of legislation could have intended to insert a provision that had virtually no practical effect. The court should look to see whether any other meaning produces a more reasonable result, as Gummow J observed in
Minister of State for Resources v Dover Fisheries Pty Ltd (1993) 43 FCR 565 at 574.
13.
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With respect to the category descriptions in the second column of the table in cl 1 of Sch 2 of A New Tax System (Goods and Services Tax) Act 1999 (Cth), s 182-15 provides that the column is not operative. In interpreting an item in the table, the second column can only be considered for a purpose for which an explanatory section may be considered under s 182-10(2). Section 182-10(2)(d) provides that in interpreting an operative provision, an explanatory section may only be considered in determining the meaning of the provision if the ordinary meaning conveyed by its text, taking into account its context in the Act and the purpose or object underlying the provision, leads to a result that is manifestly absurd or is unreasonable.Legislative history
14. Item 11 in the table in cl 1 of Sch 2 of A New Tax System (Goods and Services Tax) Act 1999 (Cth), had its origin in item 36(3) in the schedule to the Sales Tax Exemptions Act 1935 (Cth). It exempted from sales tax: "essences (being substantially juices of Australian fruits) from which non-alcoholic beverages are made."
15. In 1946, the legislation had become the Sales Tax (Exemptions and Classifications) Act 1935 (Cth) and item 36(3) became: "essences, concentrates and cordials, consisting wholly or principally of juices of Australian fruits, for the making of non-alcoholic beverages; non-alcoholic beverages consisting wholly of Australian fruits". The legislation was in that form when the High Court considered it in
Federal Commissioner of Taxation v F H Faulding & Co Ltd (1950) 83 CLR 594. At 596, Latham CJ indicated that the cordials in question consisted of water, sugar and fruit juice with generally some preservative. But the percentage of Australian fruit juice by volume or by weight was less than 50% and, according to any quantitative standard, the cordials did not consist principally of fruit juices of Australian fruits.
16. P & N accepts that in order to establish that its fruit drinks consist "wholly of juices of fruits", it must establish that they consist of 100% of juices of fruits.
17. Immediately before the commencement of A New Tax System (Goods and Services Tax) Act 1999 (Cth), the item comparable with item 11 was item 13(4) of the second schedule to the Sales Tax (Exemptions and Classifications) Act 1935 (Cth). It subjected to 10% sales tax: "non-alcoholic carbonated beverages, if they consist wholly of juices of fruits or vegetables."
18. The further supplementary explanatory memorandum accompanying the introduction of A New Tax System (Goods and Services Tax) Act 1999 (Cth), made a statement with respect to the then current exemptions under the sales tax legislation. Clause 1.3 stated:
"The amendments will ensure that basic food for human consumption is GST-free. In addition, they will ensure that the current WST exemptions for food are, in general, maintained."
In cl 1.5 it was stated that the wholesale sales tax exempted food marketed for human consumption with the exception of confectionary, biscuits, savoury snacks, ice cream goods, flavoured milk, fruit and vegetable juice, cordials and certain beverages. Clause 1.6 stated that on 1 July 2000, the GST would replace the WST and in the absence of proposed amendments, all food would be subject to GST. The statement in cl 1.3 was not accurate. Item 13 taxed carbonated fruit drinks consisting wholly of juices of fruits at the concessional rate of 10%. Item 11 in the table to cl 1 of Sch 2 of A New Tax System (Goods and Services Tax) Act 1999 (Cth), exempts such drinks from goods and services tax.
Foods Standards Code
19. The Food Act 2003, s 21 requires persons to comply with requirements imposed upon them by the Foods Standards Code. Penalties are imposed for non-compliance. The Foods Standards Code means the Australia New Zealand Food Standards Code defined in the Food Standards Australia New Zealand Act 1991 (Cth). Under that legislation the Australia New Zealand Food Standards Code was defined to mean the code published under the name "Food Standards Code" in the Gazette on 27 August 1987.
20. The Food Standards Code, standard 2.6.1, with respect to fruit juice and vegetable juice, defined fruit juice or vegetable juice as the liquid portion, with or without pulp, obtained from fruit or vegetables respectively and in the case of citrus fruit, other than lime,
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the endocarp only of the fruit and included products that had been concentrated and later reconstituted with water to a concentration consistent with that of the undiluted juice from which it had been made. The standard provided that fruit juice might have added to it no more than 40g/kg of sugars, salt, and herbs and spices. Standard 1.3.1, with respect to food additives, provided that specified non-fruit based additives in specified maximum amounts could be added to fruit juices. Standard 1.3.2, with respect to vitamins and minerals, provided that non-fruit based specified vitamins and minerals in specified maximum quantities could be added to fruit juice. Standard 1.3.3, with respect to processing aids, provided that specified processing aids in specified maximum amounts could be added to food generally and in some cases to specified foods.21. In was common ground that the fruit drinks supplied by P & N met the Foods Standards Code requirements.
22. It was also common ground that P & N fruit drinks contained non-fruit based additives, vitamins and minerals or used processing aids within the limits permitted by the Foods Standards Code. The evidence was that the fruit drinks contained 98% to 99% fruit juice and 1% to 2% additives and processing aids not directly derived from fruit.
Trade meaning
23. P & N accepts that since it is claiming the benefit of an exemption from the imposition of a tax, the burden of proving the facts necessary to fall within the exemption item lies on it (Diethelm at 457).
24. It was common ground that the phrase "juices of fruits" does not have a trade meaning. It was described in submissions on behalf of P & N as an unusual formulation, an odd phrase and not a phrase commonly employed in ordinary discourse. It was submitted that the phrase was synonymous with "fruit juice" and that term had a trade meaning as defined in the Food Standards Code.
25. P & N relied upon Agfa-Gevaert in substituting a trade meaning of "fruit juice" for "juices of fruits" that has no trade meaning. In that case the phrase "silver dye bleach reversal process" in a tariff concession had no trade meaning but the words "silver dye bleach process" did. The tribunal hearing the customs duty appeal construed the composite phrase by reference to the trade meaning of the lesser phrase and the ordinary meaning of the word "reversal". The High Court held that the tribunal's approach involved no error of law.
26. It was submitted that, by parity of reasoning, in the composite phrase "wholly of juices of fruits", the word "wholly" should be given its ordinary meaning and the words "juices of fruits" should be given the trade meaning for "fruit juice."
27. Agfa-Gevaert is quite different from the instant circumstances. The composite phrase was not one that had an obvious ordinary meaning. Nor did the lesser phrase. In those circumstances, the lesser phase aided the proper interpretation of the composite one. Here, the words that comprise the composite phrase are words of common parlance, even if they are oddly arranged, and there is not the same need to call in aid a trade meaning.
28. It was submitted that the description of the category for item 11 in the table to cl 1 of Sch 2 of A New Tax System (Goods and Services Tax) Act 1999 (Cth), supported the contention that "juices of fruits" and "fruit juice" were interchangeable phrases and it was appropriate that parliament should have adopted the Food Standards Code and its trade meaning of "fruit juice". It was submitted that item 11 was an exemption item, the purpose of which was to encourage the fruit juice industry and the item should be interpreted in a robust and beneficial manner. It was submitted that the second column description of the category could be taken into account because the literal interpretation adopted by the Commissioner would create an absurdity. First, because the addition of carbon dioxide as a non-fruit based additive caused any fruit drink not to answer the description of a beverage that consisted wholly of juices of fruits with the consequence that the item could have no operation. Secondly, because it would create a dichotomy between products manufactured from reconstituted juice and products that were not reconstituted, because of the need to replace elements lost in the concentration process. And it would create the absurd result that it could never apply to carbonated products because of the expert evidence that carbonated fruit drinks were produced to be kept on the shelf and not
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refrigerated and it was necessary to add preservatives and other additives to stabilise them for an extended shelf life.29. I reject the submission that no beverage can answer the description in item 11 in the table to cl 1 of Sch 2 of A New Tax System (Goods and Services Tax) Act 1999 (Cth) because the addition of carbon dioxide during the carbonation process means the beverage is no longer wholly of juices of fruits. The item presupposes that there is a carbonated beverage. That requires the addition of carbon dioxide. The purpose of the item is to limit the exemption to beverages that, but for carbonation, consist wholly of juices of fruits.
30. Nor is it to the point, in my view, that there are no manufacturers in the fruit drink industry who produce a carbonated fruit drink without non-fruit based additives. Since carbonated fruit drinks are, at present, produced with the intention that they not be refrigerated but be kept on a shelf, additives are used to stabilise and extend the shelf life of the product. There was no evidence that a carbonated fruit drink without additives could not be refrigerated and no evidence that the industry was incapable of producing a carbonated fruit drink without additives to be sold in the short term.
31. And even if that is not possible, and item 11 in the table to cl 1 in Sch 2 of A New Tax System (Goods and Services Tax) Act 1999 (Cth) lacks operation, that is a matter for parliament to cure. If there is no trade meaning of "juices of fruits" that allows for additives, there is no justification for departing from the ordinary meaning of the phrase.
32. There is a lot to be said for the submission of the Commissioner that when the compromise was made for a qualified exemption for food to ensure the passage of the legislation, as Sundberg J points out
Cascade Brewery Co Pty Ltd v Commissioner of Taxation 2006 ATC 4339; (2006) 153 FCR 11 at [40], the legislature seems to have drawn the line between exempt and non-exempt food supplies in favour of food that is fresh, natural or unprocessed. For example, the beverages that are not included in the table to cl 1 of Sch 2 of A New Tax System (Goods and Services Tax) Act 1999 (Cth) and are therefore not GST-free, include soft drinks and cordials, flavoured milk (item 2) and flavoured soy milk and rice milk (item 4). The only carbonated beverages that are GST-free are those satisfying item 11, and water (item 14), is GST-free only if it is non-carbonated and without any other additives. If that was the policy, it founds a further argument against an interpretation that would bring within the category of food supplies that are exempt, a product that included non-fruit based additives.
33. For the Commissioner it was submitted that the composite phrase "wholly of juices of fruits" was used in its ordinary meaning because there was no trade meaning for it. The phrase had its origin in "juices of Australian fruits" in 1935 well before the gazettal of the Food Standards Code in 1987. It was unreal to say that the code preceded A New Tax System (Goods and Services Tax) Act 1999 (Cth) when the origin of item 11 in the table in cl 1 of Sch 2 preceded the code.
34. I agree with that submission. Furthermore, the extrinsic materials do not suggest that parliament adopted a trade meaning in the Foods Standards Code. If it had, one would have expected it to have departed from the unusual phase "juices of fruits". The extrinsic material makes it clear, in my view, that parliament intended to bring within the scope of the amendments to A New Tax System (Goods and Services Tax) Act 1999 (Cth) the exemptions or concessions in relation to food products under the existing sales tax legislation. Hence the adoption of the phraseology in item 11.
35. Parliament was invoking its past legislation rather than adopting a trade meaning of other words in an industry code that the past legislation preceded. The harking back to a phrase used in the sales tax legislation in 1935 leads to the irresistible conclusion that parliament was carrying forward some of the exemptions and concessions with respect to food in the sales tax legislation and not attributing to the phrase any trade meaning of a different term in the Foods Standards Code. There was no logical reason for parliament, in introducing a new tax, to adopt a code intended to ensure that the public was protected from poorly prepared food. The two objects are clearly distinct. If Parliament had intended to adopt the code, one would have expected a collocation such as: "non-alcoholic carbonated
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beverages produced wholly in accordance with the Foods Standards Code."36. That means, in my view, that item 11 must be construed according to its ordinary meaning. As a Full Court of the Federal Court observed in
Zeroz Pty Ltd v Deputy Commissioner of Taxation 97 ATC 4277 at 4284, if there is no trade usage then, a fortiori, the expression must be used in its ordinary English sense. The ordinary meaning of "wholly of juices of fruits" is 100% fruit juice.
37. The concession by P & N that the word "wholly" meant 100% was a proper one. Items 10 and 12 in the table to cl 1 in Sch 2 of A New Tax System (Goods and Services Tax) Act 1999 (Cth) are, respectively, concentrates for making non-alcoholic beverages if the concentrates consist of at least 90% by volume of juices of fruits, and non-alcoholic non-carbonated beverages if they consist of at least 90% by volume of juices of fruits or vegetables. In that context, "wholly" must, in my view, mean 100%.
38. P & N submitted that if there was no trade meaning of "juices of fruits" and the ordinary meaning of that phrase was to be adopted, it should be determined by reference to those engaged in buying and selling goods upon whom decisions involving the application of A New Tax System (Goods and Services Tax) Act 1999 (Cth) fall. Since fruit drinks made from concentrated fruit juice that is reconstituted are commonly produced and sold without differentiation from fresh juice, it was submitted that the term "juices of fruits" in its ordinary meaning was wide enough to encompass such reconstituted juices and if a product might legally be marketed and sold as a fruit juice and was available as such on the supermarket shelf it would be regarded by the ordinary person as juices of fruits.
39. I reject that submission. It gives no weight to the word "wholly" in the composite phrase and it ignores the fact that non-alcoholic non-carbonated beverages are GST-free under item 12 in the table to cl 1 in Sch 2 of A New Tax System (Goods and Services Tax) Act 1999 (Cth) if they consist of at least 90% by volume of juices of fruits. It is only the non-alcoholic carbonated beverages that must consist wholly of juices of fruits. If the owner of a supermarket was confined to selling fruit drinks that consisted wholly of juices of fruits he would, in my view, interpret that phrase to exclude fruit drinks containing non-fruit based additives.
40. Furthermore, the argument seeks to attribute to the ordinary meaning of "wholly of juices of fruits" a trade meaning in the absence of any trade usage.
41. It follows from my finding that any trade meaning derived from the Food Standards Code is not attracted by the legislation and my rejection of the argument that the ordinary meaning of the phrase "wholly of juices of fruits" encompasses fruit drinks with non-fruit based additives, that P & N must fail. Having accepted that to qualify for exemption, the fruit drinks of P & N must consist of 100% of juices of fruits, the introduction of even 1% of non-fruit based additives means that the exemption is not attracted. No de minimus argument was raised on behalf of P & N.
Conclusion
42. In my judgment, P & N has failed to establish an entitlement to any of the declarations sought by it to the effect that its "Fuze" range of fruit drinks are GST-free.
43. There will be judgment for the Commissioner on the statement of claim. P & N is to pay the Commissioner's costs.
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