FRANKLIN MINT PTY LTD v FC of T
Members:Northrop J
Tribunal:
Federal Court
Northrop J
The essential issue raised by this application is whether Franklin Mint Pty Ltd (the taxpayer) is liable to pay sales tax under the Sales Tax Act (No 10B) 1985 (the Ratings Act (No 10B)) on amounts of royalty paid in respect of goods. The long title to that Act is ``An Act to impose a tax, being a duty of customs, on the sale value of certain goods''. Section 5 imposes sales tax upon the sale value of goods in Australia ``deemed by virtue of section 6 to be sold by a taxpayer'' on or after 10 May 1985. Section 6 is set out in full:
``6(1) Where at any time-
- (a) tax is paid or payable, or might reasonably be expected to become payable, by a person upon the sale value of goods under an Act providing for the assessment of sales tax; and
- (b) an amount of royalty is paid in respect of the goods by any person,
then, for the purposes of this Act and the Assessment Act, but for no other purpose, the person referred to in paragraph (b) shall be deemed to sell the goods at that time.
(2) A person is deemed to sell goods at a particular time-
- (a) whether or not an actual sale of the goods is or has been made by that person; and
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- (b) irrespective of the time at which any such actual sale is or has been made.''
The Sales Tax Assessment Act (No 10) 1985 (the Assessment Act (No 10)) is incorporated in and is to be read as one with the Ratings Act (No 10B).
The application comes before the Court under paragraph 41(b) of the Sales Tax Assessment Act (No 1) 1930 (the Assessment Act (No 1)) pursuant to a request by the taxpayer. The Commissioner of Taxation had, by a decision, disallowed an objection of the taxpayer against an assessment to sales tax pursuant to sub-sec 10(2) of the Assessment Act (No 10) for goods sold during the period 10 May 1985 to 31 December 1986. The taxpayer and the Commissioner reached agreement with respect to a number of the objections but the present issue remains unresolved.
The taxpayer is incorporated in Victoria, but is controlled by the Franklin Mint Company, a partnership with its headquarters in Franklin Centre in the State of Pennsylvania in the United States of America. The forebears of the partnership commenced business in 1964 as the creator and marketer of commemorative medallions and coins. The business was extended and in 1985 the business was creating and marketing what are generally known as collectables including objets d'art as well as luxury and pleasure products. Its products were all created to a very high standard, were of high quality and were directed to a discerning and wealthy market. It conducted its operations worldwide in 18 countries, including Australia, through a group of organizations described as the Franklin Mint Group. The Group had manufacturing entities in three countries and procurement branches in five countries. The Franklin Mint Group comprised companies in the 18 countries, including Australia, and the taxpayer was the Group's company in Australia. The Group, including the taxpayer in Australia, conducted its merchandising in those countries through mail orders. The taxpayer commenced its operations in Australia in 1975. In Australia, sales were and are promoted by media advertising and by direct mail addressed to persons who are on a mailing list maintained by the taxpayer. The media advertising is conducted in high class magazines either by advertisements in the magazine itself or by way of a loose sheet inserted into the magazine. The loose sheets are called flyers.
Products sold by the Franklin Mint Group are manufactured by its own subsidiaries or acquired from other manufacturers in a number of countries, including Australia. The taxpayer does not manufacture products. Products obtained from persons unrelated to the Group are located and obtained by buying agents. The taxpayer imports manufactured goods from manufacturers both related and unrelated to itself and from vendors both related and unrelated to itself. The taxpayer does not import or purchase products from or through wholesalers. The Group assists manufacturers with the manufacturing of products free of charge. The costs of this service are spread between the various subsidiaries of the partnership.
In 1984, the Franklin Mint Group was conducted by the Franklin Mint Corporation. During that year, negotiations commenced for the purchase of the business of the Group from Franklin Mint Group by two other companies API Acquisition Company Inc (API) and Warner Communications Inc (Warner). In December 1984, the Franklin Mint Company partnership was formed, the partners being API and Warner. The partnership acquired the businesses and assets of the Group. Following this, a restructuring of the Group was undertaken. Under the restructuring, each subsidiary would bear its own costs. To give effect to this the subsidiaries were to be licensed to use the trade marks and get up of the Franklin Mint Group products and to pay a fee to the partnership for the use of those marks and get up. A trade mark licence agreement was entered into between the taxpayer and the partnership. The important feature of that agreement, for the purpose of this application, was that the licence fee was to be a flat fee to be paid annually irrespective of the quantity or value of products sold or the use made of the marks and get up. The annual fee was $US450,000 for each year ending 31 December, but, since the first period was less than 12 months, an amount of $US350,000 was to be paid for the period ending 31 December 1985. The annual fee was to be paid in two parts namely within 30 days after the expiration of each six months period. It was not disputed that the agreement was entered into at arm's length.
The trade mark licensing agreement is dated 18 December 1985 but came into force as of 26 March 1985 and was to remain in force
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indefinitely until terminated in conformity with the terms of the agreement. The partnership and the taxpayer were the parties to the agreement. It is recited that the partnership was the registered proprietor of the Australian Trade Marks listed in the schedule to the agreement and the owner of certain get up, that the taxpayer wished to obtain a licence to use the trade marks and get up and that the partnership had agreed to grant such a licence to the taxpayer. Under the agreement the partnership granted to the taxpayer, which accepted, ``an exclusive right and licence to use the Trade Marks and Get up'' in Australia. Provision was made for the use of additional trade marks and for general conditions of use. The agreement could be terminated on a breach of condition or upon notice.The evidence establishes, and it is not disputed, that the licence fee was paid by the taxpayer to the partnership in conformity with the trade mark licensing agreement during the period 18 December 1985 to 31 December 1986, being the period of the assessment the subject of this review. It is clear also that the amount of the licence fee paid remained the same irrespective of the quantity or value of products sold by the taxpayer in Australia. The evidence shows a wide fluctuation in the value of sales during the period 1983 to 1987 but the amount of the trade mark licence fee remained constant at the amount specified in the contract. Further the products sold were sold in connection with one or other of the trade marks referred to in the agreement or in accordance with the get up referred to therein.
In purported conformity with the provisions of the Sales Tax legislation, pursuant to s 10 of the Assessment Act (No 10) the Commissioner determined the amount of sales tax to be paid by the taxpayer in the sum of $191,389.90 and made and issued an assessment requiring payment as follows:
"Calculation of sale value for the period 18 December 1985 - 31 December 1986 inclusive.
Total Royalty payments to Franklin Mint Corporation $1,144,128.00
----------------
TAX CALCULATION SALE TAX DUE
RATE VALUE
10% $1,144,128.00 X 14.86% $170,017.00 $ 17,001.70
20% $1,144,128.00 X 66.88% $765,192.00 $153,038.40
30% $1,144,128.00 X 6.22% $ 71,166.00 $ 21,349.80
----------
$191,389.90''
----------------
The variation in the tax calculation rate depended upon the nature of the products sold by the taxpayer, different rates applying to different categories of products. The ``Total Royalty payments'' refer to the amount of the licence fee paid by the taxpayer to the partnership pursuant to the trade mark licensing fee for the period 18 December 1985 to 31 December 1986 converted into Australian currency.
In addition to the assessment for sales tax, the Commissioner required the taxpayer to pay additional tax by way of penalty under s 45 of the Assessment Act (No 1). Consideration of this matter may be deferred until later in these reasons.
As was said at the beginning of these reasons, the essential issue is whether the taxpayer is liable to pay the sales tax assessed. This depends upon the proper construction and application of the provisions contained in the Assessment Act (No 1), the Assessment Act (No 10) and the Ratings Act (No 10B).
It is necessary to refer in some detail to a number of the provisions of those Acts. The Assessment Act (No 10) and the Ratings Act (No 10B) came into operation on 10 May 1985. As was said earlier, the Assessment Act (No 10) is incorporated in the Ratings Act (No 10B). Under s 12 of the Assessment Act (No 10) a number of the provisions of the Assessment Act (No 1) apply with respect to tax and liability to tax under the other two Acts.
Sub-section 6(1) of the Ratings Act (No 10B) has been set out at the beginning of these reasons. It makes provision for deemed sales of goods. It identifies a person who is deemed to sell goods at a particular time. It provides that
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where at any time tax might reasonably be expected to become payable by a person upon the sale value of goods under an Act providing for the assessment of sales tax; and ``(b) an amount of royalty is paid in respect of the goods by any person'' then for the purpose of that Act and any Assessment Act, the person referred to in (b) ``shall be deemed to sell the goods at that time''. Sub-section 6(2) is of importance. It identifies the time of a sale even if no sale takes place.In the present case, the Commissioner claims that the amounts of licence fee paid by the taxpayer to the partnership constitutes amounts of royalty paid by the taxpayer in respect of the goods sold by it in Australia.
The Assessment Act (No 10) imposes a liability to taxation. In this Act, a reference to a ``Taxing Act'' includes a reference to the Ratings Act (No 10B). By sub-sec 3(2), in the Assessment Act (No 10) a reference to ``goods deemed to be sold'' is a reference to goods that are, by virtue of s 6 of the Ratings Act (No 10B), deemed to be sold. For the purposes of this review, the relevant parts of sections 5 and 6 of the Assessment Act (No 10) are set out:
``5(1) The sale value of goods deemed to be sold by a taxpayer is the amount that, in the opinion of the Commissioner, is the value of the amount of royalty paid by the taxpayer in respect of the goods,...''
``6 Sales tax upon the sale value of goods shall be paid by the person by whom the goods are deemed to be sold.''
In order to construe the relevant provisions of the Assessment Act (No 10) and the Ratings Act (No 10B), it is necessary to turn to s 3A of the Assessment Act (No 1). Section 3A was inserted into the Assessment Act (No 1) by Act No 47 of 1985 and came into operation on 10 May 1985, the same date as the Assessment Act (No 10) and the Ratings Act (No 10B) came into operation. Essentially s 3A contains definitions and, for the purposes of this review, sub- sections 3A(1), (3) and (5) contain the relevant provisions. The relevant parts are set out:
``3A(1) Subject to sub-section (2) (which is not relevant for present purposes), a reference in this Act to payment of a royalty, in relation to goods, is a reference to payment of an amount of royalty in respect of goods that occurs at a time when the goods are neither excluded nor exempt goods.
3A(3) For the purposes of sub-sections (1) and (2), an amount of royalty that is paid in respect of goods and another matter shall, to the extent to which it is attributable to the goods, be deemed to be paid in respect of the goods.
3A(5) A reference in this section to royalty is a reference to an amount, however described or computed, that is paid by a person (whether the payment is periodical or not) to the extent to which the amount is paid by way of royalty (or like payment) as consideration for-
- (a)...
- (c) The use of, or the right to use-
- (i) a design or trade mark;...''
The policy behind the Sales Tax legislation relating to royalties can be understood. It is to be expected that sales tax is levied and paid with respect to the sale of goods in Australia of the nature of the products sold in Australia by persons similar to the taxpayer. It is to be expected that the sale price of those goods are determined according to the cost structure of the goods to the taxpayer. If goods are imported sales tax is probably levied on the value of the goods as imported. If, thereafter, the goods are sold direct to the public, there is no intermediate wholesale value of the goods, the price of which may have been increased by the fact of royalties paid, thereby reducing the amount of sales tax to be levied. The object of the legislation is to deem the payment of the royalties to be a sale of goods liable to sales tax. This is made clear by a reference to the Explanatory Memorandum issued with respect to the legislation introduced in 1985. At pages 13 to 15 the following passage appears:
``Sales Tax Assessment Bill (No 10) 1985
Sales Tax Bill (No 10A) 1985
Sales Tax Bill (No 10B) 1985
Sales Tax Bill (No 10C) 1985
Sales Tax on Royalties
It is a general principle of sales tax to levy tax on wholesale values that reflect all costs attributable to the production, wholesale distribution and sale of goods. To this end, the sales tax law has, since its enactment in 1930, contained a provision designed to
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include in the taxable sale value of goods all `royalties' paid in connection with the manufacture, purchase, sale, etc. of those goods.Arrangements have developed, particularly in the recording industry, whereby responsibility for payment of various royalties is assumed by a company that is technically the retailer of the goods. The retailer engages a manufacturer to manufacture goods to order and the retailer sells the goods either by mail order or direct to the public, or through large retail stores under indirect marketing arrangements.
As sales tax is payable on the sales price (exclusive of royalties) of the goods by the manufacturer to the retailer, royalty costs are, under these arrangements, effectively excluded from the sales value of the goods.
Under the provisions being put in place by this Bill to counter sales tax avoidance through indirect marketing arrangements, royalties paid by a retailer who sells goods under such arrangements will be subject to tax under the present scheme of the sales tax law. However, retailers who continue to sell their goods by mail order or direct to the public, or who arrange for the royalties to be paid by an associated company, would still be able to effectively exclude the royalties from the sale value of the goods.
This Bill (together with 3 associated Taxing Bills) will therefore ensure that, in cases where the present law (as proposed to be amended by clauses 4, 5, 19, 21, 23, 39, 44, 47, 49 and 53) does not bring any royalties into the sales tax base, the person who actually pays the royalty will have a sales tax liability on the royalty payment.
A new Sales Tax Assessment Act (No 10) and 3 Taxing Acts are necessary for constitutional reasons, and will apply to royalty payments made after the date of introduction in respect of goods including those that have gone into use and consumption in Australia. This latter inclusion will ensure that the new provisions cannot be circumvented by structuring the royalty arrangements in a way that technically imposes the royalty after the retail sale has taken place. The Assessment Bill contains machinery provisions for the assessment, collection and administration of the new tax. Taxpayers affected by the new Act will be required to be registered with the Commissioner and to pay sales tax on royalty payments under the same rules that now apply to other registered sales taxpayers.''
In relation to the Sales Tax Assessment Bill (No 10) 1985 the following passage appears at p 5:
``This Bill will:
ensure, where the sales tax law does not bring a royalty in respect of goods into the sales tax base, that sales tax will be payable by the person who actually pays the royalty (proposal announced by former Treasurer on 6 January 1982); and
provide the machinery for assessment, collection and administration of the tax on royalties imposed by the three related taxing Bills.''
In relation to the Sales Tax Bill (No 10A) 1985 the following appears at p 5:
``This Bill will:
formally impose the sales tax, being a duty of customs, payable under the Sales Tax Assessment Bill (No 10) 1985 on the amount of royalty paid or payable in respect of goods; and
declare the rates of tax on such royalty to be the rates of tax applicable to the goods in respect of which the royalty is paid or payable.''
Section 5 of the Ratings Act (No 10B) imposes sales tax ``upon the sale value of goods in Australia deemed by virtue of section 6 to be sold by a taxpayer''. Sub-section 6(1) specifies two conditions which, when congruous, create a deemed sale of goods. For present purposes, the relevant parts of the sub-section are:
``6(1) Where at any time-
- (a) tax is paid or payable, or might reasonably be expected to become payable, by a person upon the sale value of goods... and
- (b) an amount of royalty is paid in respect of the goods by any person,
then,... the person referred to in paragraph (b) shall be deemed to sell the goods at that time.''
It is to be observed that the person referred to in paragraph (a) need not be the same person as referred to in paragraph (b). The person paying
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an amount of royalty in respect of the goods, being the goods referred to in paragraph (b) shall be deemed to sell the goods. The words ``at any time'' appearing at the beginning of the sub-section are to be contrasted with the words ``at that time'' appearing at the end of the sub- section. The latter use appears to suggest that the deemed sale of goods is at the time the amount of royalty is paid. The former use is not so clear. Its use seems to suggest that the first condition is of a continuing nature but the deemed sale of goods comes into existence at the time an amount of royalty is paid in respect of the goods referred to in the first condition. This construction is supported by paragraph 6(2)(b) which provides that a person is deemed to sell goods at a particular time irrespective of the time at which any actual sale is made. Similarly, paragraph 6(2)(a) makes it clear that the person deemed to make a sale need not be the person who makes the actual sale of the goods. What is important is that there must be an actual sale of goods and that there must be an amount of royalty paid in respect of the goods the subject of the actual sale.It must be remembered that the sale value of goods deemed to be sold by a person under s 6 of the Ratings Act (No 10B), is to be determined by the Commissioner in conformity with s 5 of the Assessment Act (No 10). In the present case the Commissioner has acted on the basis that the payment by the taxpayer to the partnership of the licence fee in conformity with the trade marks licensing agreement constituted an amount of royalty paid by the taxpayer in respect of the goods sold by it in Australia and so the amount of royalty so paid constituted the price of the deemed sale of goods, the sale value of the goods being determined by the Commissioner in conformity with s 5 of the Assessment Act (No 10).
Counsel for the taxpayer contended that the amounts paid by the taxpayer to the partnership were not the payments of an amount of royalty in respect of the goods it sold in the normal course of its business and thus the Ratings Act (No 10B) had no application to it. In the result, the submissions before the Court were directed to the proper meaning to be given to the word ``royalty'' appearing in s 6 of the Ratings Act (No 10B). In essence, counsel for the taxpayer contended that the word should be given its normal meaning of a payment in proportion to the quantity or value of goods sold or the occasions of use, while counsel for the Commissioner contended, in reality, that the word ``royalty'' did not mean ``royalty'' but meant the payment of any sum as consideration for the right to use a trade mark even if that payment is not a payment of an amount of royalty properly so called.
There is no definitive meaning given to the word ``royalty'' when used in the Sales Tax legislation. The word ``royalty'' in respect of goods, appears in para 6(1)(b) of the Ratings Act (No 10B) and in sub-sec 5(1) of the Assessment Act (No 10). The latter provision empowers the Commissioner to determine the value of the amount of royalty paid by a taxpayer in respect of goods by taking into account what has already been paid by way of sales tax in relation to those goods. Sub-section 3A(1) of the Assessment Act (No 1) does not ascribe a definitive meaning to the word ``royalty'' when used in the Ratings Act (No 10B) and the Assessment Act (No 10). That sub- section provides merely that a reference in those Acts to payment of a royalty, in relation to goods, is a reference to payment of an amount of royalty in respect of goods ``that occurs at a time when the goods are neither excluded goods nor exempt goods''. The goods sold by the taxpayer are neither excluded goods nor exempt goods. So, for present purposes, the reference to payment of a royalty ``is a reference to payment of an amount of royalty in respect of goods''. This, in essence, means that payment of a royalty is a reference to an amount of royalty. During the course of submissions much was said about this sub- section and reference will be made later in these reasons to those submissions. At the present stage, it is sufficient to say that the provisions of sub-sec 3A(1) contain their own problems.
Sub-section 3A(5), like sub-sec 3A(1) appears to be directed to the meaning to be given to the word ``royalty''. Again it is in the form of a reference to an amount that is paid by a person to the extent that the amount ``is paid by way of royalty (or like payment) for... the use of or the right to use... a trade mark''. It doesn't matter how the amount is described or computed or whether the payment is periodical or not. Again the word ``royalty'' is used both in the subject and the object of the description.
For present purposes, what is to be determined is the meaning to be given, in the light of the other provisos of the Sales Tax
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legislation, to the word ``royalty'' in the phrase ``the amount of royalty'' appearing in paragraph 6(1)(b) of the Ratings Act (No 10B) since that provision is a necessary component of a deemed sale of goods. Under s 5 of the Ratings Act (No 10B): ``Sales tax is imposed... upon the sale value of goods in Australia deemed by virtue of section 6 to be sold by a taxpayer.''The meaning of the word ``royalty'' has been considered in a number of authorities in relation to taxing statutes. The concept of a royalty, in its secondary sense as distinct from its primary sense of denoting one of the beneficial rights of the Crown, denotes a consideration paid for permission to exercise a beneficial privilege, usually made payable as and when the privilege is exercised and measured by the quantum of the benefit from time to time received from the exercise; see
McCauley v FC of T (1944) 7 ATD 427; (1944) 69 CLR 235 per Rich J at ATD p 431; CLR pp 243-244. His Honour said also at ATD p 431; CLR p 244:
``The question whether, in a particular case, a payment amounts to a royalty depends upon its character, and this, in turn, depends upon the nature of the contract under which it is made.''
Although Rich J dissented in the application of the law to the facts found in McCauley, his views are a useful introduction to the meaning to be given to the word ``royalty''.
In McCauley, the taxpayer, a dairy farmer, agreed to sell to a purchaser the right to cut and remove milling timber growing on part of his land ``at or for a price of royalty'' specified depending upon the amount of timber cut and removed. The question was whether the amounts received by the taxpayer under the agreement was ``any amount received as or by way of royalty'' under s 26(f) of the Income Tax Assessment Act 1936 as then in operation. At ATD p 429; CLR pp 240-241 Latham CJ discusses the meaning of the word ``royalty''. The essential features of the concept of a royalty as described in that passage is the payment of an amount determined or calculated in relation to what is received. Essentially, the amount of royalty varies in relation to the benefit received. In McCauley the Chief Justice and McTiernan J, held that the payments for the timber were received ``as or by way of royalty'' since the amount received varied according to the amount of timber cut and removed.
In
Stanton v FC of T (1955) 11 ATD 1; (1955) 92 CLR 630, a similar question came before the High Court. There, the taxpayer landowner entered into an agreement with a sawmiller for the sale of standing timber on the land, subject to a limitation as to quantity, at a lump sum price based upon the amount of timber found to be standing upon the land whether the timber was cut or removed or not. The Court, Dixon CJ, Williams, Webb, Fullagar and Kitto JJ, held the amounts received were not received ``as or by way of royalty''. The Court distinguished McCauley on the ground that there the amount received varied in regard to the amount of timber removed. In a joint judgment, at ATD p 2; CLR p 638, the Court referred to an important provision of the agreement:
``Upon the question whether the payments fill the character of a royalty there are some other provisions in the agreement that have some importance. They make it quite clear that the moneys are not calculated by reference to nor payable in respect of the timber actually cut or removed and that cutting or removal is not the occasion of the payments.''
At ATD p 3; CLR p 639, the Court said:
``It will be seen that in substance the agreement amounts to a sale of standing timber, with a limitation as to quantity, at a lump sum price based in the end upon the amount of timber found to be standing upon the land whether the timber was cut or removed or not. It will be seen too that the price was payable in quarterly instalments which became due independently of the amount of timber removed, so that the full price remained payable without regard to the extent to which the purchaser might exercise his right to cut and remove the timber.
At first sight it is not easy to see in this any of the essential characteristics of a royalty. It is said, however, that the definition of a royalty given in
McCauley v Federal Commissioner of Taxation (1944) 69 C.L.R. 235, governs the matter and requires us to hold that the quarterly payments are in the nature of royalties.''
The Court distinguished McCauley and at ATD p 4; CLR p 642 in discussing the concept of a royalty said:
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``In the case of monopolies and the like the essential idea seems to be payment for each thing produced or sold or each performance or exhibition in pursuance of the licence. In the same way in the case of things taken from the land the essential notion seems to be that the payment is made in respect of the taking of something which otherwise might be considered to belong to the owner of the land in virtue of his ownership. In other words it is inherent in the conception expressed by the word that the payments should be made in respect of the particular exercise of the right to take the substance and therefore should be calculated either in respect of the quantity or value taken on the occasions upon which the right is exercised.''
In the present case, counsel for the taxpayer relied upon these authorities. He submitted that the word ``royalty'' had a clear and unambiguous meaning and that there was no definitive meaning contained in the Assessment Act (No 1) which altered that meaning. On the facts of this case, the taxpayer was given an exclusive right and licence to use the Australian trade marks of which the partnership was the registered proprietor and in return paid by way of a fixed fee to the partnership an amount which was not calculated either in respect of the quantity or value of the goods sold on the occasions upon which the right to use the trade marks was exercised. The taxpayer was required to pay the licence fee even if it sold no goods bearing any of the trade marks.
Counsel for the Commissioner disputed this submission. They relied, essentially, upon s 3A of the Assessment Act (No 1), which, by sub-sec 12(1) of the Assessment Act (No 10) applies, mutatis mutandis, in relation to the imposition, assessment and collection of the tax chargeable under the Assessment Act (No 10) in like manner as under the Assessment Act (No 1). They contended that s 3A contained a definition of ``royalty'' which was sufficiently embracing to impose a liability to sales tax on the taxpayer by the person by whom the goods are deemed to be sold, see s 6 of the Assessment Act (No 10) and s 5 of the Ratings Act (No 10B).
There are a number of unusual features contained in s 3A. For present purposes it is to be treated as if it was contained in the Assessment Act (No 10) and as part of the Ratings Act (No 10B). Sub-section 3A(1) provides that ``a reference in this Act is a reference''. Sub-section 3A(5), however, provides that ``A reference in this section'' is a reference. Thus sub-sec 3A(5) does not have a direct application in respect of the word ``royalty'' appearing in the Assessment Act (No 10) and the Ratings Act (No 10B), but indirectly through the use of the word ``royalty'' appearing in sub-sec 3A(1) as affected by sub- sec 3A(5).
Putting this aspect to one side, counsel for the Commissioner contended that the licence fee paid by the taxpayer was a royalty payable in respect of goods. It is possible that it might have been payable in respect of other matters, for example advertising, but sub-sec 3A(3) provides that the amount does not have to be paid wholly in respect of goods. In an appropriate case, apportionment may be needed. This aspect will be referred to later in these reasons. As a result counsel submitted that the real issue before the Court was whether the amounts of $US350,000 and $US400,000, converted into $A1,144,128 and paid by the taxpayer during the period of the assessment namely, 18 December 1985 to 31 December 1986, constitutes an amount of royalty under paragraph 6(1)(b) of the Ratings Act (No 10B) having regard to the meaning to be given to the word ``royalty'' by sub-sec 3A(5). Counsel contended that this provision extended the meaning of ``royalty'' beyond its normal general meaning. In particular, counsel contended that the necessity that the amount of royalty had to be calculated ``either in respect of the quantity or value taken or the occasions upon which the right is exercised'', did not apply to a ``royalty'' under the Sales Tax legislation. They contended that the legislation ``does not pick up the common law definition of the word `royalty''', but defines it ``on the basis of an understanding of what the common law was''. Counsel pointed out that when McCauley and Stanton were decided, the Income Tax Assessment Act did not contain a definition of the word ``royalty'', hence the High Court had to consider the normal or ordinary meaning of the word. They referred also to the fact that the receipt of a payment of an amount like a royalty could be of an income nature or a capital nature and that under paragraph 26(f) it was income only if it was an amount of royalty as properly understood. A definition of royalty was inserted into the
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FC of T v Sherritt Gordon Mines Ltd 77 ATC 4365; (1977) 137 CLR 612 and
Aktiebolaget Volvo v FC of T 78 ATC 4316; (1978) 36 FLR 334, a decision of Jenkinson J in the Supreme Court of Victoria. In my opinion, none of the reasoning in either of those cases assists the submissions of counsel for the Commissioner. If anything, they support the submissions made on behalf of the taxpayer but in any event, they are based on different wording even though there are some similarities between the wording appearing in each Act.
In Australia, the owner of a registered trade mark has a property right. If that owner licenses a person to sell goods using that trade mark and to pay an amount calculated on the value or occasions on which those goods are sold, there would seem little doubt that the payments would constitute royalties in the normal sense of the word. In addition to this aspect of the meaning of royalty, the High Court in Sherritt Gordon held that the payment must relate to a right of property and that the payment for technical services provided was not a royalty.
Counsel for the Commissioner gave a detailed analysis of sub-sec 3A(5). For present purposes, that sub-section provides:
``A reference in this section to royalty is a reference to an amount, however, described or computed, that is paid by a person (whether the payment is periodical or not) to the extent to which the amount is paid by way of royalty (or like payment) as consideration for the use of, or the right to use a trade mark.''
It is to be observed that royalty is a reference to an amount paid by way of royalty as consideration for the right to use a trade mark. It doesn't matter how the amount is described or calculated, but it must be by way of royalty. Difficulties arise in applying this sub-section. Presumably the reference in sub-sec 3A(1) to royalty is a reference to what is described in sub-sec 3A(5), but sub-sec 3A(1) of itself provides that a reference in the Act to payment of a royalty, in relation to goods, is a reference to payment of an amount of royalty in respect of goods. The remaining part of sub-sec 3A(1) makes it clear that the provision has no application at a time when the goods are excluded or exempt goods. It is a reference to payment of royalty as contained in sub-sec 3A(1) that has direct application where the word royalty is used in the Assessment Act (No 10) and the Ratings Act (No 10B). What is of importance is that the Legislature has used the word ``royalty'' and in sub-sec 3A(5) has used the same word both in the subject and object of the sentence. In this context, it is important to note that what is stressed is that a royalty is a reference to an amount paid.
Counsel stressed the words ``however described or computed'' when used in relation to the word ``amount'' and submitted this had the effect of a statutory provision removing the essential ingredient of the concept of a royalty being an amount ``calculated either in respect of the quantity or value taken on the occasions upon which the right is exercised''. In other words, counsel submitted that the word ``royalty'' was used not as meaning ``royalty'' but the payment of an amount as consideration for the right to use a trade mark. This seems to ignore the other requirement that the amount be paid ``by way of royalty''. If the amount paid was not to have the essential features of a royalty, why provide that it be paid by way of royalty?
Counsel referred also to other parts of sub- sec 3A(5) and in particular paragraphs 3A(5)(d) and (f) which relate to types of considerations for which an amount is paid by way of royalty. These paragraphs refer to non-property matters which, according to Sherritt Gordon and Volvo would not support a royalty. This may be so, but a trade mark is capable of constituting a proprietary right. Paragraphs 3A(5)(d) and (f) may have extended the concept of a royalty in a particular way, but in a way which has no bearing on paragraph 3A(5)(c)(1) which relates to a trade mark. This cannot support the core submission put on behalf of the Commissioner.
It is accepted that the Legislature has power to take any word and to give it a meaning completely different to its normal meaning. But if this is done, the least that can be expected is
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that the definition be clear and unambiguous. During the course of submissions, the Court put to counsel for the Commissioner, that if the Legislature intended to give a completely different meaning to the word ``royalty'' in the Act, why did they use the word ``royalty'' at all. The response was ``because, with respect, they mucked it up''. I don't accept that response.One is reminded of the famous passage in the speech of Lord Atkin in
Liversidge v Sir John Anderson [1942] AC 206 at pp 244-245 concluding with the quotation from the book of Lewis Carroll:
``I know of only one authority which might justify the suggested method of construction: `When I use a word', Humpty Dumpty said in rather a scornful tone, `it means just what I choose it to mean, neither more nor less'. `The question', said Alice, `whether you can make words mean so many different things'. `The question is', said Humpty Dumpty, `which is to be master - that's all'.''
(``Through the Looking Glass'', c.vi.)
In sub-sec 3A(5) the concept of royalty is maintained and clarified by reference to specified types of rights of property and extended to cover matters which are not such rights of property. Otherwise, the sales tax provisions take up the concept of the payment by way of royalty and if that payment is in relation to goods, that payment is deemed to be a payment for the sale of goods. The explanatory memorandum sets out the mischief sought to be remedied but nevertheless the legislation must be construed in conformity with the words used. In its context, there is not sufficient reason to support the view that when using the word ``royalty'' in s 3A, the legislature intended to depart from the normal meaning of that word except where clearly stated, such as in paragraphs 3A(5)(d) and (f). In s 3A and in the Assessment Act (No 10) and the Ratings Act (No 10B), the word ``royalty'' connotes, at least, the essential requirements that the amount ``be calculated either in respect of the quantity or value taken or the occasions upon which the right is exercised''. The submissions put on behalf of the Commissioner are rejected.
Counsel for the Commissioner sought support from views expressed in
Cooper Brookes (Wollongong) Pty Ltd v FC of T 81 ATC 4292; (1980-1981) 147 CLR 297. Their contention was that unless their submission was accepted the definition would be meaningless, that the legislation had achieved nothing and that a Court should be slow to come to such a conclusion. Counsel quoted from Halsbury, Laws of England, 4th Ed Vol 44 paragraph 862:
``There is a strong presumption that Parliament does not make mistakes. If blunders are found in legislation, they must be corrected by the legislature, and it is not the function of the court to repair them. Thus, while terms can be introduced into a statute to give effect to its clear intention by remedying mere defects of language and to rectify obvious misprints or misnomers, or obvious mistranslations of an international convention, no provision which is not in the statute can otherwise be implied to remedy an omission, even if it is evidently unintentional.
However, if particular words of a statute are so obscure or doubtful in their meaning that they are not capable of a grammatical construction, but the intention of the legislature is plain on the construction of the statute as a whole, it is permissible, in order to give effect to the statute and avoid manifest absurdity or injustice, (1) to reject words or phrases as surplusage, if no sensible meaning can be given to them; (2) to supply omitted words or expressions; (3) to transpose, interpolate or otherwise alter words; (4) to read negative words as affirmative, or affirmative as negative, disjunctive as conjunctive, or conjunctive as disjunctive; (5) to put upon words a sense possible but not usually attributable to them; (6) to expand their literal meaning.''
Counsel submitted that applying those principles, the Court should read sub-sec 3A(5) as if the words ``by way of royalty (or like payment)'' in the opening part of the sub- section read ``a reference in this section to royalty is a reference to an amount, however described or computed, that is paid by a person (whether the payment is periodical or not) to the extent to which the amount is paid as consideration for...''. Counsel referred to a number of authorities to support this contention including
Salmon v Duscombe (1886) XI AC 627 at p 634, and
Federal Steam Navigation Co Ltd & Anor v Department of Trade and Industry [1974] 2 All ER 97 per Lord Reid at p 100:
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``Cases where it has properly been held that a word can be struck out of a deed or statute and another substituted can as far as I am aware be grouped under three heads: where without such substitution the provision is unintelligible or absurd or totally unreasonable; where it is unworkable; and where it is totally irreconcilable with the plain intention shewn by the rest of the deed or statute. I do not say that in all such cases it is proper to strike out a word and substitute another. What I do say is that I cannot discover or recall any case outside these three classes where such substitution would be permissible.''
Counsel then contended that if the words ``by way of royalty (or like payment)'' had the effect of giving to the word ``royalty'' in s 3A of the Assessment Act (No 1), the Assessment Act (No 10) and the Ratings Act (No 10B) a meaning that included the essential elements of the word in its ordinary meaning, then the inclusion of those words is totally irreconcilable with the clear intention of the Legislature which was to depart from the ordinary meaning of the word ``royalty'' by removing from it all the essential elements of the word in its ordinary meaning. In essence, what counsel was saying was that in the Sales Tax legislation, the word ``royalty'' did not mean ``royalty'' but meant any payment made as compensation for the enumerated matters. Counsel contended that this approach had been adopted by the High Court in relation to a revenue statute in Cooper Brookes (Wollongong) Pty Ltd v FC of T 81 ATC 4292; (1980-1981) 147 CLR 297 especially per Gibbs CJ at ATC pp 4294-4295; CLR pp 302-303 and at ATC pp 4295-4297, pp 304-306, per Stephen J at ATC p 4299; CLR pp 310-311, and per Mason and Wilcox JJ at ATC p 4305; CLR pp 319-320. There, the essence of the basis for the Court's judgment is illustrated by the following passage from the reasons of Stephen J at ATC p 4300; CLR p 311:
``Just as in
Curtis v Stovin [(1889) 22 QBD 513] it was possible for the Court both to recognize the nature of the draftsman's error and to identify it as error - per Lord Esher M.R. at p. 517, so here it is possible to trace the process by which sec. 80C(3) has become the anachronism which it now is.''
The Court declines to accept this submission. The essential features of an amount of royalty are well known and understood. They have been the subject of a number of authorities in Australia. The legislature has taken the word ``royalty'' as the essential feature of the new Sales Tax legislation introduced in 1985. The whole of that legislation, including s 3A of the Assessment Act (No 1), the Assessment Act (No 10) and the Ratings Act (No 10B) are based upon the word ``royalty''. To hold that, despite all this, the Court should hold that the word ``royalty'' does not mean ``royalty'' would make a mockery of the meaning of words. So to do would make the Mad Hatter's Tea Party look sane.
It remains to consider the words ``or like payment'' appearing in sub-sec 3A(5)(1). In its context, the word ``like'' means similar and in my opinion a like payment must contain the essential elements of a royalty unless expressly stated. Thus, payments made as consideration of the matters referred to in paragraphs 3A(5)(d) and (f) are payments by way of royalty since those paragraphs remove the essential features of royalty referred to in Sherritt Gordon and Volvo. Thus, by statute, those payments are like payments by way of royalty.
For these reasons, the taxpayer succeeds. The request of the taxpayer under s 41 of the Assessment Act (No 1) constitutes an appeal by the taxpayer against the decision of the Commissioner. Accordingly the appeal must be allowed with costs and the decision of the Commissioner under appeal be set aside.
Two further matters must be mentioned. The taxpayer sought a review of the penalty tax imposed. That review is now unnecessary. Secondly, during the course of the hearing of the appeal, the taxpayer sought to raise an issue of whether the total amount paid by it to the partnership was paid in respect of the sale value of goods. It was contended that part of the money was paid in respect of other matters such as advertising. The taxpayer sought to lead evidence on this issue. It became evident that difficulties arose in relation to this issue. The parties agreed that the better course to adopt was to decide the general issue of whether the taxpayer was liable to pay sales tax under the Ratings Act (No 10B) as a preliminary issue and to defer the second issue until after a decision had been given on the main issue. The Court agreed to do that. In the result this second issue does not arise.
This review raises difficult questions of law of importance. The Court had decided the issue
ATC 4074
on a preliminary, but discrete, issue. It is appropriate therefore that the Commissioner have leave to appeal, if necessary, from the orders to be made.THE COURT ORDERS THAT:
1. The appeal be allowed with costs.
2. The decision of the Respondent disallowing the objection of the Applicant be set aside and the matter be referred to the Commissioner of Taxation to be dealt with according to law.
3. The respondent have leave to appeal if necessary from the above Orders.
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