SONENCO (No. 87) PTY LTD v FC OF T
Judges:Davies J
Court:
Federal Court
Davies J
These proceedings concern the liability of the applicant to pay sales tax under the Sales Tax Assessment Act (No. 3) 1930 (Cth) (``Assessment Act (No. 3)'') and the Sales Tax Assessment Act (No. 7) 1930 (Cth) (``Assessment Act (No. 7)'') on certain motor vehicles which were distributed and marketed in Sydney, New South Wales. There are two proceedings, the first being No. G606 of 1986, which involves the period from 1 February 1981 to 31 May 1982. That proceeding was commenced in the High Court of Australia and was remitted to this Court by order of the Chief Justice on 5 December 1986. In that proceeding, the applicant is Sonenco (No. 87) Pty Ltd and the respondent is the Commissioner of Taxation. In the second proceeding, No. 257 of 1990, the periods involved are the period 1 July to 31 August 1978 and the period 1 February 1981 to 31 May 1982. In that proceeding, the Commissioner of Taxation is the applicant and Sonenco (No. 87) Pty Ltd is the respondent.
Much is common between the two proceedings but the liability of Sonenco (No. 87) Pty Ltd for the period 1 July to 31 August 1978 raises a separate issue. Accordingly, it has been ordered that the issues with respect to that period be determined separately and after the determination of the issues raised with respect to the period 1 February 1981 to 31 May 1982. The two proceedings have been heard together and the evidence given is common to both.
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Sonenco (No. 87) Pty Ltd was formerly known as McLeod Investments Pty Ltd. I shall refer to it as ``McLeod Investments''. It was one of the companies involved in a motor vehicle distributorship controlled by Mr M.W. McLeod. The retail distributor was McLeod Ford Pty Limited (``McLeod Ford'').
Before the period with which we are concerned, there were three companies involved in the distribution chain. A Ford company, which I shall describe as ``Ford Motor Co.'', manufactured vehicles in Australia or imported vehicles into Australia. The retail distributor was McLeod Ford. As a means of obtaining finance, McLeod Ford entered into a bailment plan with Citicorp Wholesale Pty Limited (``Citicorp''). McLeod Ford ordered vehicles from Ford Motor Co. and those vehicles, when delivered, were delivered to McLeod Ford. Title, however, passed from Ford Motor Co. to Citicorp and the vehicles were treated as bailed from Citicorp to McLeod Ford. Title passed from Citicorp at the time of the sale to the customer. Citicorp paid sales tax on the footing that there was a sale from it to McLeod Ford and that that sale was the last wholesale sale prior to the retail sale.
However, being advised that sales tax could be avoided if certain tax avoidance arrangements were put in place, Mr McLeod contacted Mr Ken Gordon and Mr Ron Hopkins and an organisation which I shall call ``Ron Hopkins Wholesale''. It was arranged that, for an agreed percentage of the sales tax saved, Ron Hopkins Wholesale would install a tax avoidance structure, would acquire title to each vehicle, would subsequently transfer the title to each vehicle to McLeod Ford and, on that transfer, would incur any sales tax liability under the Assessment Acts.
The first step of the tax avoidance scheme was to introduce a further two McLeod companies into the structure. They were the applicant, McLeod Investments and Trad Pty Limited (``Trad'').
On 20 February 1981, Citicorp entered into a bailment plan with McLeod Investments as the bailee. The retail distributing business continued to be carried on by McLeod Ford and the motor vehicles were delivered by Ford Motor Co. to the premises of McLeod Ford and were there displayed and sold to the customers of McLeod Ford. But the dealings with Citicorp were undertaken in the name of McLeod Investments which became the party to the bailment plan. After a vehicle was sold to a customer, McLeod Investments sent the details and its cheque for the wholesale price to Citicorp. On the documentation of each such sale, McLeod Investments quoted its certificate. Accordingly, the arrangement was that title was to pass from Ford Motor Co. to Citicorp and from Citicorp to McLeod Investments which quoted its certificate. Citicorp was no longer liable to pay sales tax.
The next part of the tax avoidance scheme was that McLeod Investments and Trad entered into an agreement to subject each vehicle to a charge. McLeod Investments was to give notice to Trad of vehicles which it intended to acquire, Trad was to lend McLeod Investments 99% of the price thereof and Trad was to have a charge over the vehicles for that sum until repaid.
Next, Ron Hopkins Wholesale was to purchase the motor vehicles from McLeod Investments subject to the 99% charge. The price of each vehicle was to be 1% of its wholesale value, that is to say, equivalent to the value which Ron Hopkins acquired. The 1% price was to be paid by Ron Hopkins to McLeod Investments.
Ron Hopkins Wholesale was then to sell each vehicle, the subject of the charge in favour of Trad, to McLeod Ford for that price, 1% of the wholesale value. Ron Hopkins Wholesale was to treat that step as the last wholesale [sale] before the sale to the consumer and was to pay sales tax as a wholesaler accordingly, the sale value being based on that price.
That was the substance of the scheme. However, the documentation giving effect to the proposed arrangement did not fulfil the requirements of those who thought that the scheme might work. Notices were not given by McLeod Investments to Trad as required by the agreement for charge. Whenever a customer agreed to purchase a vehicle, a cheque was drawn by Trad in favour of McLeod Investments for 99% of the wholesale price. But that cheque was then retained in a drawer. Ultimately, after payment had been received from the customer, there was a day on which McLeod Investments drew a cheque in favour of Citicorp and McLeod Ford drew a cheque in favour of Trad for the same amount as equalled
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the cheque from Trad to McLeod Investments. The McLeod Ford cheque and the Trad cheque were invariably passed on the same day. Trad had no assets and no credit facility. McLeod Ford was invoiced and paid.6% of the wholesale price to Ron Hopkins. The balance of.4% was included in a monthly statement which was presented by Ron Hopkins Wholesale to McLeod Ford for, inter alia, its percentage fee of the tax avoided.Mr A.H. Slater, with whom Mr S.J. McMillan appeared for McLeod Investments, conceded that no charge in favour of Trad was created for no notice was given as required by cl. 1 of the agreement for charge. I would add, moreover, that this was not a case in which equity would intervene to give effect to a charge. Title passed instantaneously through a chain from Citicorp to the customer. From the point of view of equity, Trad had no claim. Its cheque was not presented until well after the customer had obtained title to the goods and was invariably countered with a cheque in payment of Trad. Equity would not intervene in such a case to support a charge and, absent equity, there was no charge upon which Trad could rely. In fact, everybody involved understood that Citicorp was the owner of the vehicles until such time as title passed to a customer of McLeod Ford. The creation of a charge in the meantime or in the course of the instantaneous transfer of title through the chain of title was a figment of the imagination.
For its part, Ron Hopkins Wholesale was not capable of matching the quick transfer of title which was demanded by the fact that Citicorp held the title to the vehicles. There had to be an instantaneous transfer through a chain of title from Citicorp to McLeod Investments to, theoretically, Ron Hopkins Wholesale to McLeod Ford, whenever a customer obtained title to a vehicle. Ron Hopkins Wholesale organised a daily pickup of documents from McLeod Ford but Ron Hopkins Wholesale had its operational centre at Tweed Heads. Accordingly, documents had to be sent to Ron Hopkins Wholesale, first to Brisbane and from Brisbane to Tweed Heads. There they were collected in bunches until they were processed. Employees of Ron Hopkins Wholesale from time to time created documents, mainly backdated, purporting to show what had happened.
In my opinion, there was no sale from McLeod Investments to Ron Hopkins Wholesale, first because the documentation did not keep up with the transactions as they purportedly occurred after a customer had agreed to purchase a vehicle and, secondly, because the equitable charge to Trad had no basis and there was a fundamental mistake of fact which affected the arrangement between McLeod Ford and Ron Hopkins Wholesale. It was never agreed that McLeod Investments would sell the totality of the interest in the vehicles to Ron Hopkins Wholesale for 1% of their wholesale value. In the circumstance that there was no charge in favour of Trad, the dealing as proposed between McLeod Investments and Ron Hopkins Wholesale was void. Mr Ken Gordon and Mr Ron Hopkins would have been aware of what was occurring for the scheme was theirs.
Accordingly, I am of the view that, having regard to the manner of its implementation, the scheme was not successful in avoiding sales tax.
I am also of the view that the scheme was not sound in concept.
The nature of the legislation was fully examined in
DFC of T (S.A.) v. Ellis & Clark Limited (1934) 3 ATD 98; (1934) 52 C.L.R. 85, particularly by Dixon J. at A.T.D. pp. 100-101; C.L.R. pp. 89-91, and in Brayson
Motors Pty Ltd (In Liq.) v. FC of T 85 ATC 4125; (1984-1985) 156 C.L.R. 651 by Gibbs C.J., Mason, Wilson, Deane and Dawson JJ. At ATC p. 4127; C.L.R. pp. 656-657, their Honours said: -
``The 18 separate Acts which introduced sales tax to Australia in 1930 constituted the `single legislative scheme' which Dixon J. examined in his judgment in D.F.C. of T. (S.A.) v. Ellis & Clark Ltd. (1934) 52 C.L.R. 85, at pp. 89ff. They have since been much amended and have grown to 20. The amendments and increase in number have, however, evidenced no intention whatever to abandon or substantially to vary the general legislative policy which Dixon J. discerned or the means of effecting it which he explained. That general policy was and is to levy a tax upon all goods: after they are imported into or produced in Australia and before they reach the consumer. It was not intended that the retail price of goods should
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be increased by the incorporation in it of more than one amount of tax or that the retail sale itself should attract tax. It was, however, intended that they should be taxed at their full wholesale value. That being so, the policy of the legislation was and is that sales tax should, in the ordinary case, be a tax upon the last wholesale sale.''
At ATC pp. 4127-4128; C.L.R. pp. 657-658, their Honours emphasised three aspects of the underlying legislative policy: -
``The first is that sales tax was intended to be a tax upon all imported or locally manufactured goods. The second is that it should be levied upon the last wholesale sale and not upon sale by retail.... Implicit in those two aspects of the underlying legislative policy is a third which warrants express mention. It is that, in the words of Dixon J. (at p. 89), sales tax was to be `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'.''
Thus, giving effect to this policy, ss.3 and 4 of Assessment Act (No. 3) provide, inter alia: -
``3 Subject to, and in accordance with, the provisions of this Act, the sales tax imposed by the Sales Tax Act (No. 3) 1930 shall be levied and paid upon the sale value of goods manufactured in Australia and sold by a taxpayer, not being either the manufacturer of those goods or a purchaser of those goods from the manufacturer.
4(1)... for the purposes of this Act the sale value of goods shall be the amount for which those goods are sold by a registered person, or a person required to be registered, not being either the manufacturer of those goods or a purchaser of those goods from the manufacturer, to an unregistered person or to a registered person who has not quoted his certificate in respect of the purchase of those goods...''
Assessment Act (No. 7) provides likewise with respect to the sale value of goods imported into Australia.
In the application of these Acts, regard should always be had to the policy to which their Honours referred. In particular, the concepts of ``sale'', ``sold'', ``sale value'' and ``the amount for which those goods are sold'' must be given a broad meaning so as to encompass the differing means by which goods manufactured in or imported into Australia for sale reach the consumer and the differing forms in which the consideration is paid or is payable in respect of the last wholesale sale. The legislative policy requires there to be identified amongst the number of transactions which may have taken place that which reflects the concept of the last wholesale sale prior to the retail sale of the goods. It was just such a task, the identification of the sale which attracted sales tax, which was the task of the Court in the Brayson Motors case.
In my opinion, the sale of a proposed 1% beneficial interest in a vehicle for a price of 1% of the vehicle's value, even were it to occur, is not such a sale of goods as would be likely to constitute a relevant sale of the goods for the purposes of the Assessment Act (No. 3) or the Assessment Act (No. 7). The sales tax legislation is not concerned with particular interests in goods, but with the process from the manufacture or importation to the ultimate sale of goods to a consumer. And it is concerned to see that, however goods pass through that process, one or other of the Assessment Acts will apply and sales tax will be levied upon the final wholesale value of the goods.
Mr D.M.J. Bennett Q.C., with whom Dr H. Sorensen appeared for the Commissioner of Taxation, formally relied upon the doctrine of sham as enunciated in cases such as
Albion Hotel Pty Limited v. FC of T (1965) 13 A.T.D. 435; (1964-1965) 115 C.L.R. 78 and
Sharrment Pty Ltd & Ors v. Official Trustee in Bankruptcy (1988) 18 F.C.R. 449 and upon the doctrine of fiscal nullity as discussed in cases such as
W.T. Ramsay Ltd v. IRC [1982] A.C. 300 and
John v. FC of T 89 ATC 4101; (1988-1989) 166 C.L.R. 417.
However, it is not necessary for present purposes to consider those particular principles. My findings are not based upon principles of sham or fiscal nullity. I am simply of the view that, upon a proper interpretation of the sales tax legislation, McLeod Investments was liable as the company which held the title to the goods and sold the goods in the last wholesale dealing before the sale to the consumer.
ATC 4981
Avoidance schemes which seek to use the device of creating interests in the goods at some stage in the distribution chain and reuniting them at the retail level tend to affect transactions upon which the Assessment Acts do not focus attention. In the present case, it would be wrong to treat the sale to Ron Hopkins Wholesale as the relevant sale when the plan proposed that Trad would take a 99% interest in the goods by virtue of an equitable charge and that that interest would merge with or form part of the total interest in the goods with which the retail distributor dealt. Title was to pass from McLeod investments in two streams to be reunited in McLeod Ford so that McLeod Ford could sell the vehicle to its customer. Neither the purported creation of the equitable charge nor the purported sale of the remaining interest in the goods to Ron Hopkins Wholesale were relevant wholesale dealings for the purposes of the Assessment Acts, even were they effective. They were, for sales tax purposes, merely conduits by which the title passed from McLeod Investments to McLeod Ford, which was the relevant transaction for sales tax purposes.
Moreover, the price of the interest sold to Ron Hopkins Wholesale was not, for sales tax purposes, ``the amount for which those goods are sold''. The Assessment Acts use that expression as a means of establishing the sale value of the goods. The expression is therefore to be read as encompassing all elements of the consideration for the goods which are reflective of that value. If the goods are sold by a wholesaler subject to a mortgage or a charge and the purchaser undertakes, in addition to paying the stipulated purchase price, to pay the sum due under the mortgage or charge, then the amount for which the goods are sold includes the amount of that part of the consideration.
In
Queensland Independent Wholesalers Limited v. FC of T 91 ATC 4492 at p. 4497, Hill J. said: -
``In the ordinary case, the words `the amount for which the goods are sold' will be the sale price of the goods. So much was made clear in the joint judgment of Dixon and McTiernan JJ, in
Union Quarries (Footscray) Pty Ltd v FC of T; Commonwealth Quarries (Footscray) Pty Ltd v FC of T (1938) 4 ATD 477; (1938) 59 CLR 111.''
However, his Honour went on to say: -
``That the words `the amount for which the goods are sold' cannot be confined to the contract price was made plain, however, by Windeyer J in
EMI (Australia) Ltd v FC of T 71 ATC 4112; (1971) 45 ALJR 349.''
At p. 4498, his Honour said: -
``In deciding that the royalty payment was to be included in the sale value, Windeyer J said (at ATC 4118; ALJR 353):
- `The word `amount' of itself connotes a sum total to which items amount up. I hesitate to use here either of the words `consideration' or `price', because recently there has been some new academic analysis of the juristic concepts they express. It is enough to say that, as used in the Assessment Act, `the amount' for which a thing is sold means I consider the sum total of all moneys that the buyer promises, expressly or tacitly, to pay to, or for, the seller in order that he, the buyer, may get a good title to goods that he has agreed to buy.'
After referring to the passage in Commonwealth Quarries to which I have referred, his Honour continued:
- `It may be that in some agreements for sale the buyer agrees to meet some incidental charges that are not in a strict sense part of the contract price. But the judgments in the case to which I have referred support, I think, my view of the content of the word `amount'...'''
At p. 4498, his Honour stated the principle in these terms: -
``The amount for which goods are sold will be a question of fact to be determined in each case. As I have already said, it will usually be the contractual purchase price arrived at between seller and buyer. However, this will not invariably be so.''
In the present case, the scheme proposed that McLeod Investments would receive monetary consideration equivalent to the totality of the wholesale value of the motor vehicles. At the stage when McLeod Ford received an order from the customer, a cheque was drawn by Trad in favour of McLeod Investments for 99% of the wholesale price. That cheque was, at that stage, kept in a drawer. But McLeod
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Investments ultimately received the cheque and banked it. McLeod Investments also received a cheque from Ron Hopkins Wholesale for the 1% beneficial interest which Ron Hopkins Wholesale acquired or was intended to acquire. After the customer had paid for the vehicle and taken possession of it, there was a banking in which McLeod Ford paid Trad the amount necessary to discharge the purported loan of 99% of the wholesale value. The equivalent cheque from Trad to McLeod Investments was banked on the same day, leaving Trad with no significant amount in its bank account. The cheque from Ron Hopkins Wholesale to McLeod Investments for the 1% value was banked at some stage. McLeod Ford purportedly purchased Ron Hopkins Wholesale's interest for.6% and a cheque for that amount was paid. At the end of each month, there was a further accounting in which the entitlement of Ron Hopkins Wholesale's percentage fee was calculated together with other charges made by Ron Hopkins Wholesale including the remaining.4% from the 1%. At the time when Trad's cheque was paid into its bank account, McLeod Investments paid Citicorp the wholesale price of the vehicle.As these facts show, for the purpose of the Assessment Acts, the amount for which McLeod Investments sold the goods was constituted by the price which it received from Ron Hopkins Wholesale and the cheque which it received from Trad. Both Ron Hopkins Wholesale and Trad were reimbursed by McLeod Ford for the whole of the sums which they paid to McLeod Investments. Accordingly, the amount for which the goods were sold by McLeod Investments was the full wholesale price of the goods and that price was paid by McLeod Ford via the conduits of Ron Hopkins Wholesale and Trad.
I should also mention three additional issues which were discussed during the hearing.
First, Mr Bennett submitted that the Citicorp bailment plan was a sham for, so he submitted, the precise terms of the agreement were not given effect, particularly cl. 8(a) which provided for notification to Citicorp of offers to purchase received from customers. However, I would not regard the agreement as a sham. The provisions of cl. 8(b) describe in substance, though somewhat inexactly, what the parties had in mind as a matter of practice. That clause reads: -
``If the retail distributor in anticipation of the ultimate purchase of the goods by him from the Bailee obtains from a customer a sum equal to the retail purchase price or a hire-purchase offer, in respect of the goods, and delivers the goods to the customer, the title to the goods shall upon sale thereof by Wholesale to the Bailee be deemed to have passed to the Bailee immediately before but on the same day of such delivery...''
As, after the sale to a customer, a document entitled ``Dealer Settlement Sheet'', one of Citicorp's standard forms, was completed showing McLeod Investments as the dealer and setting out the details of the transaction and the amount due and as on each sheet McLeod Investments quoted its registered number, I am satisfied that the parties proceeded on the footing that there would be a sale from Citicorp to McLeod Investments and that that sale would take place at the same time as, but at the instant before, the transfer of title from McLeod Ford to the customer.
Secondly, Mr Slater submitted that, whenever title passed by the operation of s.5(1) of the Factors (Mercantile Agents) Act 1923 (NSW), there was no sale for the purposes of the Sales Tax Assessment Acts, for sale is consensual while, under the Factors (Mercantile Agents) Act, title passes by the operation of the statutory provision. McLeod Ford was, of course, a mercantile agent and had possession of motor vehicles for the purpose of sale and authority to sell the goods. But even if the terms of the bailment plan with Citicorp were different from and inconsistent with s.5(1) of the Factors (Mercantile Agents) Act, so that from time to time title did pass to the customer under the operation of s.5(1), I would not regard that fact as establishing that there was no relevant transaction of sale for sales tax purposes. The relationship between Citicorp, McLeod Investments and McLeod Ford encompassed the operation of s.5(1) of the Factors (Mercantile Agents) Act. Indeed, the bailment plan into which McLeod Investments and Citicorp entered must be read in the light of the intent and operation of that section.
Thirdly, until the events with which we are concerned, there was a practice undertaken for warranty purposes that, on the retail sale of a
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motor vehicle, title in the vehicle passed from McLeod Ford to one of the Ford companies, Ford Sales Company of Australia Limited (``Ford Sales Co.'') and from Ford Sales Co. to the customer who dealt with McLeod Ford. The evidence does not make it clear whether this arrangement continued during the period with which we are concerned. I note that the Citicorp bailment plan named the retail distributor as Ford Sales Co., so perhaps the practice continued. It makes no difference to the issues with which we are concerned. I therefore intend my references above to ``McLeod Ford'' to encompass any part which Ford Sales Co. may, for warranty purposes, have played in the distribution network.I am satisfied that the Commissioner of Taxation was correct in his view that McLeod Investments was liable to pay the sales tax assessed on the vehicles sold during the period with which we are now concerned. Counsel should within 14 days bring in short minutes setting out the precise orders which they seek.
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