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Hygienic Lily Limited v. Deputy Federal Commissioner of Taxation.

Judges:
Gummow J

Court:
Federal Court of Australia

Judgment date: Judgment handed down 6 April 1987.

Gummow J.

These proceedings were commenced in the High Court of Australia in March 1986. Jurisdiction, no doubt, was attracted by sec. 75(iii) of the Constitution. An order of the High Court was made under sec. 44 of the Judiciary Act 1903 that the matter be remitted to this Court and that the action proceed here as if the steps already taken in the High Court had been taken in this Court.

The applicant in the course of its business manufactures and sells by wholesale cups of various capacities and sizes, together with lids for those cups. The cups are manufactured from paper coated with wax. Three sizes and capacities are in issue here, the cups being identified as the 425, 485 and 655 millilitre cups. After they have been manufactured by the applicant, the cups are printed by the applicant with various designs some of which are particular to requirements of customers, being trade marks or designs employed by those customers in their respective businesses. The applicant sells the cups and lids in circumstances such that it is liable to pay sales tax. In the year ended 30 June 1985 the applicant paid a total of some $469,000 in sales tax in respect of these cups and lids.

A dispute has arisen between the parties as to the rate at which such sales tax is exigible and this the applicant seeks to have resolved by having declarations made in these proceedings. The respondent offers no objection as to the appropriateness of declaratory relief in these circumstances. It is agreed that the law is to be applied in its present condition, including any amendments since the proceedings were instituted.

Evidence was tendered as to the course of trade in the cups and lids I have described, by reference to the activities of one particular customer of the applicant. McDonald's System Pty. Ltd. ("McDonald's") is incorporated in New South Wales and owns 185 McDonald's restaurants throughout Australia. McDonald's itself operates some of these restaurants but the majority are operated by franchisees of McDonald's. The three sizes of cup in evidence in these proceedings are classified as "regular", "medium" and "large" drink cups. Many millions of them are used each year in the operations of McDonald's restaurants. There is some evidence of use of the cups in connection with gratuitous promotional activities, but plainly the overwhelming use to which they are put at these restaurants is to contain beverages sold there to customers. The cups are received by customers filled with the beverage ordered and with the lids fitted by hand. Approximately 55% of what was called the "total business" of McDonald's restaurants is in the sale of food and drink to customers who do not consume their purchases on the premises and who take them elsewhere to do so.

Some of the McDonald's restaurants have not only a counter-service but also a drive-in facility whereby customers may order and takeaway food and drink without leaving their cars. At these McDonald's restaurants approximately 40% of business is conducted at the take-away counters. It is not disputed that of these "take-away" customers a number take the food and drink home and consume them there.

Section 17 of the Sales Tax Assessment Act (No. 1) 1930 ("the Assessment Act") provides that the sales tax imposed by the Sales Tax Act (No. 1) 1930 ("the Tax Act") shall be levied and paid upon the sale value of goods manufactured in Australia by a taxpayer and sold by him or treated by him as stock for sale by retail or applied to his own use. The respondent contends that the rate at which sales tax is exigible in respect of the applicant is 20% of the sale value both as to cups and lids, relying upon sec. 6B of the Sales Tax (Exemptions and Classifications) Act 1935 ("the Classifications Act") and sec. 4(d) of the Tax Act. The applicant contends the applicable rate is 10%, relying upon sec. 6B of the Classifications Act and sec. 4(b) of the Tax Act. Section 4(b) applies the rate of 10% to goods covered by the Third Schedule to "the Classifications Act" and the dispute essentially is whether the cups fall within Item 1, para. (c) of the Third Schedule. It is not disputed that if the cups fall within Item 1, the lids are accessories within Item 2 of the Third Schedule and so likewise attract tax at the rate of 10%. Section 3(1) of the Assessment Act contains a definition of "goods" which is rendered applicable to the Classifications Act by sec. 3(1) of that latter Act. The definition applies unless the contrary intention appears. So far as material, it provides:

ATC 4329

"`Goods' includes commodities, but does not include -

  • (a) goods which have, either through a process of retailing or otherwise, gone into use or consumption in Australia..."

Item 1 of the Third Schedule is in the following terms:

"1. Goods (not being goods covered by an item in the Second Schedule, goods of a kind used exclusively or principally in sport or games or goods designed for use exclusively or principally in, or in connection with, swimming pools or spa baths) of a kind ordinarily used for household purposes, namely: -

  • (a) furniture, but not including pictures, picture frames, statuary, sculptures, plaques, medallions, medals, inlays, mosaics, tapestries, cameos or representations of mottoes, proverbs or verses;
  • (b) crockery and articles of a material other than earthenware used for purposes similar to the purposes for which crockery is used;
  • (ba) jardinieres and vases;
  • (c) glassware and articles that are made of a material other than glass and are used for purposes similar to the purposes for which glassware is used;
  • (d) cutlery and cutlery sharpeners;
  • (e) refrigerators, ice chests and other appliances used for the cooling or freezing of food;
  • (f) washing machines, wringers and other appliances used for or in connexion with laundering;
  • (g) vacuum cleaners, carpet sweepers, floor polishers and other appliances for use for cleaning purposes;
  • (ga) space heaters, radiators and other appliances for use for room heating;
  • (h) grillers, stoves, ranges, ovens, cookers, toasters, mixing machines, immersion heaters, hot water jugs and kettles, percolators and other appliances for use for culinary purposes;
  • (ha) electric fans;
  • (hb) air conditioners of a kind used exclusively, or primarily and principally, for air cooling;
  • (i) kitchen utensils and hardware;
  • (j) brooms, mops, dusters, brushes, buckets, dippers and basins;
  • (ja) incinerators, compost bins, garbage cans and stands and holders for garbage sacks;
  • (jb) fire grates and fireplaces;
  • (k) fruit bottling outfits and fruit preserving bottles and jars;
  • (l) floor coverings and bath and door mats;
  • (m) blinds;
  • (n) mattresses, pillows, other bedding and cushions;
  • (o) sewing machines, knitting machines, carding equipment, spinning wheels and weaving looms;
  • (p) appliances and fittings used for or in connection with electric, gas or other lighting; candles and tapers."

That brings me to the immediate issues in the present case. First, it was accepted by both parties that "glassware" means items or merchandise made of glass. Secondly, it was agreed that the paper cups in issue here are "articles that are made of a material other than glass and are used for purposes similar to the purposes for which glassware is used". Both parties also accepted that, at least in the circumstances of this case, the possession by an article of that attribute or quality bringing it within para. (c) of Item 1, would not necessarily qualify it for inclusion in Item 1. Thus, the applicant indicated it would not, for example, contend that a glass retort or test-tube used in laboratories qualified under Item 1 para. (c).

Both parties thus would allow some impact of the introductory words in Item 1 upon para. (c) and some consequent refinement in the otherwise general meaning of the terms of para. (c). However, they differ as to the proper construction of those introductory phrases and thus as to the nature and extent of their impact upon para. (c).

The respondent does not contend that the size of the cups is of any relevance to this case.

ATC 4330

Rather, he submits that the cups in question are, on the evidence, manufactured by the applicant solely or substantially for the purpose of use in McDonald's restaurants to fill them in response to orders placed by customers. When in this way, one looks to the purpose of manufacture the conclusion is, it is submitted, that the cups are not "of a kind ordinarily used for household purposes" and so fall outside Item 1. The applicant, on the other hand, submits that the customers of McDonald's restaurants put the cups to such use or uses as to bring the cups within the description "goods of a kind ordinarily used for household purposes" and so within Item 1, and further, in any event, these are paper cups, such cups are ordinarily used for household purposes and that is sufficient. The applicant also submits that to use paper cups to drink beverages is to use them for a household purpose, even if the activity is not performed in or near a house.

A perusal of Item 1 discloses:

  • (a) the expression "goods of a kind" appears twice in the introductory matter, and within that matter "ordinary" use is apparently selected as something distinct from use "exclusively or principally" for a particular activity;
  • (b) the paragraphs which follow this introductory matter identify various items by their application and do so by such terms as "used for" or "for use for"; and the expressions "of a kind", "ordinarily" and "exclusively or principally" are not employed.

This indicates, in my view, that goods are "ordinarily used for household purposes" within Item 1 even though they are not exclusively or principally so used: cf.
Nomad Industries of Aust. Pty. Ltd. & Anor v. F.C. of T. 86 ATC 4036 at p. 4042. Further, the setting in which the phrase "goods of a kind" appears suggests it is directed not to the use for which the particular goods in question were designed or manufactured, nor to the purpose to which it is intended those particular goods shall be put, but rather to the nature, quality and adaptation of goods in the class or genus in question. Thus, goods are "of a kind ordinarily used for household purposes" if they are to be recognised as members of a class or genus which commonly or regularly (albeit not necessarily exclusively or principally) is used for household purposes: cf.
Customs and Excise Commrs v. Mechanical Services (Trailer Engineers) Ltd. (1979) 1 W.L.R. 305 at pp. 312-313, 315, 316-317.

It may be observed that the expression "of a kind" is found elsewhere in the Third Schedule, for example in Item 2, Item 8 and Item 14. A precursor of Item 14 has been the subject of a High Court decision, which I discuss later in these reasons.

Item 1 may be compared with and contrasted to Item 81(1)(c). This exempts "goods for use... and not for sale, by... a public benevolent institution". Unlike Item 1, it directs attention not to goods identified by the purposes for which goods of that kind are ordinarily used, but, more immediately, to the goods in question themselves, and to the identity or character of a particular user. Even so, in
D.F.C. of T. v. Stewart & Anor 84 ATC 4146; (1984) 154 C.L.R. 385, the High Court held certain machines to satisfy the description in Item 81(1)(c) notwithstanding that their inherent character was not that of goods designed for use by a public benevolent institution, and notwithstanding that they were not exclusively used by the particular public benevolent institutions to which they were supplied. The interpretation of Item 81 which led to this conclusion is consistent with, albeit not compelling, the approach which I have taken to Item 1 in the Third Schedule.

In my view, the cups involved in this case, are of a kind ordinarily used for household purposes because they are members of a class or genus (paper cups) which commonly or regularly (albeit not necessarily exclusively or principally) is used for household purposes (viz. the carrying of beverages and the consumption thereof). In my view, a purpose may be a household purpose even if not exclusively or principally pursued in situ a dwelling.

In any event, even if one looks to the provenance of the particular goods and to the purpose for which they were manufactured, that does not, in my view, take them outside the genus of goods ordinarily used for household purposes. The cups have printed upon them "McDonald's" and many stylised representations of the letter "M"; it readily may be conceded that these goods are manufactured to fill orders placed upon the

ATC 4331

applicant to supply McDonald's restaurants for use in filling with beverages sold to customers. However, in my view, that does not deprive them of the character of goods of a kind ordinarily used for household purposes. Item 1 does not predicate the criteria for classification upon so single faceted a method of characterisation.

Not surprisingly, decided cases are not of decisive importance in the present dispute. However, as both parties sought support from decided cases upon comparable or analogous provisions, I should turn to these cases. They contain some treatment of the term "household purposes" and also of the relationship between the general words of introduction to Item 1 and the paragraphs that are attached by the term "namely". This latter aspect is of limited importance in the present case because as I have said, both parties agreed that goods that fall within para. (c) are not necessarily within Item 1. Counsel for the plaintiff submitted that the decision of the High Court in
F.C. of T. v. Newbound & Co. Pty. Ltd. (1952) 10 A.T.D. 59, contained authoritative guidance upon the issues of construction involved in the present case which was favourable to his client. Counsel for the defendant denied this was so.

The issue in that case was whether a utensil or fitting called a "washfountain" fell within an exemption in the Classifications Act. The legislation has since been altered and no such exemption presently exists. However, Item 14 of the Third Schedule (i.e. the same Schedule as that in which appears the Item 1 in issue in this case) is couched in substantially identical language to the old Item 90D involved in Newbound's case.

Item 90D was in the following terms:

"90D. Household fittings and sanitary ware (and parts therefor, including chains, plugs and washers) of a kind installed in houses or other buildings so as to become fixtures therein, namely: -

  • (1) Baths, bath and shower screens, pedestal lavatory basins, wall and bowl basins, sinks, sink tops, draining boards, combination sinks and drainers, wash troughs and stands or pedestals therefor;
  • (2) Toilet pans and seats and covers therefor; appliances for sterilizing or disinfecting toilet seats; sanitary cisterns and water storage tanks for use in sewerage systems;
  • (3) Septic tanks and filter tanks and distributing chambers of a kind used in septic tank installations; and
  • (4) Chemical sanitary units and tanks, pumps and barrels of a kind used in chemical sanitary systems."

The taxpayer contended that the "washfountain" in question was a "pedestal lavatory basin" within the meaning of para. (1) of Item 90D and so exempt. The "washfountain" was adapted for use by a number of persons at the same time. The High Court (Williams, Webb, Fullagar JJ.; Dixon C.J., McTiernan J., dissenting) held in favour of the taxpayer. But the reasoning employed by the members of the Court displays a greater variety than the bare result would suggest. I turn first to the members of the majority. Fullagar J. (with whom Williams J. agreed) was of the view that (a) clearly the object in question was a "pedestal lavatory basin", (b) prima facie it was wrong to read the generic description in the opening words of Item 90D "Household fittings... of a kind installed in houses or other buildings so as to become fixtures..." as limiting the specific description "pedestal lavatory basins" which was introduced by the word "namely" and as thereby denying an exemption, (c) in any event, all difficulty disappeared in adjusting the generic to the specific if the phrase "household fittings" was read as "meaning fittings which serve a household or domestic purpose (such as the washing of hands or clothes)". This was because when workers in a factory gathered around the "washfountain" to wash their hands they were using it, in his Honour's view, for a household or domestic purpose and thus the generic and specific elements in Item 90D were satisfied. The applicant in the present case sought to draw support from this treatment of "household fittings" for its submission that "household purposes" in Item 1 may identify an activity not necessarily or exclusively performed in or about a house and that the goods in question (the paper cups) were of a kind ordinarily used for domestic purposes. As I have indicated, I have accepted that submission.

The other member of the majority, Webb J., approached the question rather differently. His

ATC 4332

Honour held that (a) the "washfountain" was a "pedestal lavatory basin", (b) whilst it was designed for use in factories and hospitals and whilst purpose of manufacture was "a material consideration", the "washfountain" was adapted also for use in large households and the circumstance that an article was rarely used as a household fitting did not prevent it from being one, (c) accordingly the "washfountain" was a "household fitting", (d) further, the submission (evidently accepted by Fullagar J.) that the "washfountain" was a "household fitting" because its exclusive purpose (the washing of hands) was of an essentially domestic purpose, seemed to be sound.

Of the minority, McTiernan J. held that even if the "washfountain" was a "pedestal lavatory basin" it could not qualify for exemption unless it was (as it was not in his Honour's view) a household fitting or sanitary ware. That leaves the judgment of Dixon C.J. In contrast, for example, to Fullagar and Williams JJ., the Chief Justice held that the washfountain was not "clearly" within any description in the list introduced by the word "namely". If an item were clearly within the list then the general words "household fittings" ought not to be used to restrict the primary meaning of the specific words in the list. But that was not the present case. A term like "pedestal lavatory basin" was possibly capable of various applications and the introductory expression "household fittings" gave a definite application. "On the whole" this reasoning led the Chief Justice to reject the view that the washfountains in question were within the exemption.

The judgments certainly illustrate the subtleties in meaning and in combinations of meaning that can be found in collocations of ordinary terms. Whilst there is no authoritative guidance for the resolution of the present question of construction of Item 1, it is to be observed, as the applicant submitted, that the term "household" was, at least by the majority, not read as limited to activities solely pursued in a domestic setting.

I was referred also to the decision of Olney J. in
F.C. of T. v. Sherwood Overseas Pty. Ltd. 85 ATC 4267. This was a decision upon Item 1 of the Third Schedule. The result was to allow to the taxpayer the classification sought for a swimming pool cleaning device known as the "Kreepy Krauly". The Court accepted the submission that these devices were "Goods... of a kind ordinarily used for household purposes, namely:... (g) vacuum cleaners, carpet sweepers, floor polishers and other appliances for use for cleaning purposes". Olney J. held that the general words appearing at the head of the first Item of the Third Schedule qualify each of the groups of goods described in the numbered subparagraphs. This meant, for example, that in so far as para. (a) referred to furniture it was to furniture of a kind ordinarily used for household purposes and not to office furniture. The Court apparently was not referred to Newbound's case, supra. In his Honour's judgment the "Kreepy Krauly" was a "cleaning appliance" (para. (g)), ordinarily used for household purposes. Olney J. said he had not understood the Commissioner to have advocated that an article can only be regarded as ordinarily used for household purposes if its ordinary use "is within the four walls of a dwelling house".

In
Kentucky Fried Chicken Pty. Limited v. F.C. of T. & Ors 86 ATC 4701, Yeldham J. held, inter alia, that "paper serviettes" were within the classification in Item 8(1)(b) of the Third Schedule in favour of "Household drapery and soft furnishings, namely... table napkins". His Honour adopted what Olney J. had said as to the adjective "household" as used to describe articles, viz. articles ordinarily used in or about a dwelling house for household purposes. In my view in the same way that these goods did not cease to be of that character by their use in connection with supply of goods and services to customers at Kentucky Fried Chicken "outlets", the cups in the present case are goods of a kind ordinarily used for household purposes.

Whilst I have not reached the conclusions I earlier expressed by reliance upon these decisions, they do serve to support the approach to construction of Item 1 that I have taken.

It follows that the applicant has succeeded in making out its case for the applicability of the Item 1 classification. The respondent should pay the applicant's costs. The Exhibits (other than Exhibits "B", "C" and "D") may be returned. I will hear the parties as to the form of declaratory relief. In view of the agreement of the parties as to the treatment of the lids for the cups no declaration is necessary or

ATC 4333

appropriate. The declarations I would propose to make are as follows:
  • (1) Declare that the cups which are Exhibits "B", "C" and "D" in these proceedings are each, within the meanings of Item 1 in the Third Schedule to the Sales Tax (Exemptions and Classifications) Act 1935, (i) articles that are made of a material other than glass and are used for purposes for which glassware is used and (ii) goods of a kind ordinarily used for household purposes.
  • (2) Declare that the rate of sales tax imposed by the Sales Tax Act (No. 1) 1930 upon each of the cups being Exhibits "B", "C" and "D" in these proceedings is 10%.

THE COURT ORDERS THAT:

1. The respondent pay the applicant's costs.

2. The Exhibits, other than Exhibits "B", "C" and "D", be returned.


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