COPPERART PTY LTD v FC of T

Judges:
Hill J

Court:
Federal Court

Judgment date: Judgment handed down 17 September 1993

Hill J

Before the Court are two appeals brought by Copperart Pty Ltd (``the applicant'') against decisions of the Administrative Appeals Tribunal (``the Tribunal'') constituted by Dr Gerber, a deputy president, and a senior member, Dr Grbich. A third member of the Tribunal, Mr Burns, had retired before the Tribunal handed down its reasons for decision and the Tribunal was reconstituted, pursuant, so it is said, to s. 21A of the Administrative

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Appeals Tribunal Act 1975, as a Tribunal of two members to hear the case.

The appeals concern what the Commissioner of Taxation (``the Commissioner'') asserts to be one assessment and the applicant asserts to be two assessments, made by the respondent Commissioner, of sales tax payable by the applicant over a period which extends from 1 April 1982 to 30 November 1986, in respect of copper and brass goods imported by the applicant into Australia and sold by it. A liability for sales tax arises upon the applicant by force of the Sales Tax Assessment Act (No 6) 1930 (``the Act'').

An appeal to this Court from the Tribunal is an appeal ``on'' and therefore limited to, a question of law: s. 44(1) of the Administrative Appeals Tribunal Act 1975. It follows from this that this Court is not at liberty to find for itself the relevant facts from which the question of law might emerge. That task is entrusted to the Tribunal and the Tribunal alone.

At the heart of the criticism made by senior counsel for the applicant of the Tribunal's reasons is the failure of the Tribunal to find the facts from which the ultimate questions of law for decision by this Court might emerge. The reasons consist of a long recitation of the evidence given by the three witnesses called for the applicant, followed by conclusions of fact which can only proceed on the basis that the Tribunal has rejected some, at least, of the evidence which it has recited. The reasons fail, also, to comment on the credit of the witnesses, although it must be assumed, as some at least of their evidence can not have been accepted, that the Tribunal did not accept the credit of the witnesses.

The failure of the Tribunal to make findings of material facts constitutes a breach of s. 43(2B) of the Administrative Appeals Tribunal Act 1975 and an error of law, justifying the setting aside of the Tribunal's decision and the remission of the matter to the Tribunal for reconsideration:
East Finchley Pty Ltd v FC of T 89 ATC 5280;
Stasos v Tax Agents' Board of NSW 90 ATC 4950;
FC of T v Studdert 91 ATC 5006. The obligation under s. 43(2B) is not satisfied by a statement of the Tribunal's conclusion of fact. The parties are entitled to know what evidence the Tribunal accepted and what evidence it took into account. Likewise, the parties are entitled to know what evidence the Tribunal rejected. Without this knowledge the parties will have but an incomplete idea of the Tribunal's process of reasoning and a lessened respect for the Tribunal's decision- making process.

Apart from the fact that the failure of the Tribunal to make findings of fact constitutes an error of law entitling the applicant to succeed in its appeal, the failure to make those findings makes it difficult for me to set out what the relevant facts are upon which the appeal itself turns. The only way I am able to do this is to assume that evidence recited in the reasons not contradicted by the ultimate conclusions reached by the Tribunal, has been accepted. This is a somewhat unsatisfactory course and I hesitate to embark upon it. However, it seems to me the only way in which I can indicate the issues in the appeal as a prelude to giving my reasons why the appeal must be allowed.

The applicant imported, at the relevant times, copper and brass ware into Australia. It had a wholly owned subsidiary, Laddeton Nominees Pty Ltd (``Laddeton''), which, at relevant times, purchased goods from the applicant and sold them at retail outlets.

In August 1982 the applicant entered into a franchise agreement with Danbury Pty Ltd (``Danbury''), an unrelated company. At that time the applicant's advertising in newspapers and magazines included reference, at the foot of each advertisement, to the four retail outlets conducted by Laddeton and to that conducted by Danbury. Danbury carried on business in Geelong but the applicant did not advertise there. In the result there was an agreement between Danbury and the applicant that Danbury would undertake any local advertising and would pay $50 per week towards the applicant's advertising costs, to be reviewed from time to time. Danbury paid a flat advertising levy of $216.67 per month until March 1983 and an additional amount in December 1982. Subsequently there were other stores opened and in respect of at least some of these stores there were franchise agreements. Each of the stores contributed to advertising in some way. Some stores paid flat monthly amounts, others paid a contribution equal to 7% of monthly turnover.

In around January or February 1983 some of the franchisees apparently became discontented, feeling it was unfair that they should be paying a contribution to advertising costs on a flat basis, while others were paying a levy based on

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turnover. In the result a meeting was held, on 1 March 1983 at the Dorset Gardens Hotel, at which representatives of seven stores attended. This meeting is referred to in the reasons of the Tribunal and hereafter in these reasons as ``the first Dorset meeting''.

At the first Dorset meeting an agreement was entered into between the applicant and all of the seven companies who were probably franchisees, that all franchisees should pay an advertising contribution equal to 7% of monthly turnover. The applicant was to arrange for delivery of catalogues of its goods to householders in the vicinity of stores and agreed to conduct all advertising, including advertising in the locality where retail stores existed. A new price list was introduced at around the same time.

The applicant's price structure was founded upon a wholesale list price and a discount. Prior to the first Dorset meeting a discount of 15% had been given off the list prices. After the first Dorset meeting a discount of 20% was given off the list prices. After the first Dorset meeting with its agreement that franchisees would pay an advertising contribution, the list prices charged by the applicant to the franchisees increased, but as the discount also increased it would seem that generally the actual prices paid by franchisees to the applicant remained constant.

Before the first Dorset meeting, only two of the franchisees had paid an advertising levy calculated as 7% of turnover. The remaining franchisees had paid a flat monthly fee for advertising. The consequence to the franchisees of the arrangement entered into at the first Dorset meeting was that for two of the franchisees the amount paid for advertising, by way of levy, increased, for two of the franchisees the levy remained the same, for one of the franchisees, although the basis of the levy changed, the quantum of it remained more or less the same, and in respect of the remaining franchisees the amount they paid in dollar terms for the levy was in fact reduced.

All but three franchisees (including franchisees who did not attend the first Dorset meeting) agreed to pay the 7% advertising levy. Those that did not ultimately elected to terminate their franchise agreements during the year 1983. There was also some evidence before the Tribunal that two non-franchisees purchased goods from the applicant by wholesale at list price less 20%, these being Kaemph & Co and M Hart. These non- franchisees paid no advertising levy.

The advertising campaigns of the applicant were what are often described as point of sale advertising, that is to say, while advertising the goods sold by the applicant, the advertising was directed at revealing the location where the goods could be purchased. The advertising levies paid by franchisees were paid into a special bank account to which the applicant contributed 2% of its turnover and to which Laddeton contributed 7% of its turnover. This fund was not always sufficient to provide all of the cost of advertising and it was necessary for the applicant, from time to time, to pay the difference between amounts in the fund and the actual cost of advertising.

Franchise agreements entered into between the date of the first Dorset meeting and a second meeting also held at the Dorset Gardens Hotel in October 1983 (``the second Dorset meeting''), required the payment of a ``promotional fee'' of 7% of budgeted turnover. In the schedule to one of the agreements to which my attention was drawn, ``Promotional Assistance Covered by Promotional Fee'' was explained as follows:

``(a) Regular advertisements in colour in nationally circulated magazines such as New Idea TV Week or other similar magazines plus advertising on television in local and interstate newspapers from time to time. Each month, one of the franchisees will be invited to sit on the advertising committee in planning the advertising schedule for the next period.

(b) Promotional fees will be deposited into a separate account together with a contribution by the franchisor of 2% of its turnover as a fund to be wholly expended in advertising through the various media. The fund may be audited at any time by a suitably qualified auditor at the request of the majority of franchisees.

(c) Services of a fully qualified merchandiser available for verbal advice on merchandising techniques and practice and for on site consultations by appointment at cost of travel and accommodation and franchisees undertake to act in accordance with written recommendations.

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(d) Point of sale material including colour leaflets for local distribution from time to time, posters, caring for copper and brass leaflets, gift vouchers, etc.

(e) Other promotion material available at nominal charge, e.g. printed carry bags, price tags, pricing guns, sale tickets, etc.''

The applicant appointed more franchisees after the first Dorset meeting. Each of these was required to pay the advertising levy of 7% of monthly turnover.

Prior to the first Dorset meeting, Laddeton had obtained a special discount of 15% in respect of all of its purchases. After the first Dorset meeting, Laddeton commenced to pay the 7% advertising contribution but continued to be able to purchase its stock at an additional discount of 15% off the price paid by the other franchisees.

When franchisees terminated the franchises, the applicant would sometimes buy back stock at the invoice price for the goods. It did not refund any part of the advertising or the franchise fee, but did not require the franchisee to pay any further advertising fee.

Prior to the second Dorset meeting, one of the franchisees had experimented with a strategy of marking ``Copper Art'' goods for sale at the recommended retail price but selling them at a ``sale price'' equivalent to 50% of that price. A similar experiment was conducted by Laddeton at one of its stores with good results. At the second Dorset meeting Mr van Roest, the person who controlled the applicant and referred to somewhat colourfully by the Tribunal as the ``eminence grise'' behind both the applicant and Laddeton, stated he wanted to implement the half price strategy in all stores. This discussion coincided with the introduction of a levy said to be designed to develop a consistent physical image in stores, to develop uniform marketing strategies and better training of staff and store supervision. Franchisees were required to pay 4% of turnover for this strategy.

The outcome of the second Dorset meeting was thus the introduction of a 4% fee, in addition to the 7% advertising fee, and a marketing strategy which involved the applicant increasing its wholesale list price but applying to that list price a 35% discount. The recommended retail price was increased, although the actual half price retail price was in fact lower than previous retail prices albeit not 50% of the previous net selling price. According to the Tribunal the resulting effect was an overall slightly lower wholesale price when the discount was taken into account.

The 4% of turnover had been calculated by an executive of the applicant as representing the applicant's realistic costs, on an annual basis, of providing the additional services promised.

After the second Dorset meeting there occurred a meeting with New South Wales franchisees at which the same strategy was discussed. All but one of the New South Wales franchisees agreed to adopt the new strategy. The dissident ultimately agreed to sign an agreement which was altered to some extent.

Laddeton continued to obtain a greater discount than other franchisees. The evidence of Mr van Roest was that sales to Laddeton, if taken as a whole rather than on a store by store basis, amounted in 1982-83 to 20.6% of the total sales of the applicant, in 1984 31.5% of the total sales of the applicant and in 1985 27.1% of the total sales of the applicant. By contrast the largest independent franchisee accounted for only 1.5% of the applicant's sales. The justification made by Mr van Roest on behalf of the applicant for the additional discount to Laddeton was said to be substantial economies of scale in dealing between the companies. Laddeton was required to take items by the box load and could not order individual goods, as an ordinary franchisee could nor could it return damaged goods. There was also said to be a cost advantage in invoicing Laddeton centrally as compared to the individual invoicing to separate stores involved with other franchisees.

Laddeton had no staff of its own other than those involved in the shops. The administration of Laddeton was carried out by the applicant. There were no written agreements between the two companies and it was conceded by Mr van Roest that although there were two separate entities, the management of both of them was conducted by the same staff and the same directors.

It may be said here that evidence was adduced before the Tribunal, but not commented on in its reasons, from an accountant, Mr Spencer of Deloitte Ross Tohmatsu, whose expertise was apparently not challenged, who expressed the view that having regard to the economies of scale in making sales of large quantities to Laddeton, the

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additional 15% discount receivable by that company was commercially realistic and reasonable. I will return to this evidence later.

The Commissioner saw fit to make an assessment, or assessments, the ultimate effect of which was to require the applicant to pay additional sales tax to that paid in respect of the period in question with its normal monthly returns. These returns had been based upon s. 4(1) of the Act, that is to say, upon a sale value calculated by reference to the amount for which the goods in question had been sold.

Before referring to the assessment or assessments made by the Commissioner, it is necessary to refer to the statutory provisions which the Commissioner purported to exercise. These are to be found in ss. 4(2) and (3) and ss. 4A(1), (4), (5) and (6) of the Act as follows:

``4(2) Where-

(a) goods (in this sub-section referred to as the `relevant goods') imported into Australia by a registered person, or by a person required to be registered, have been sold after 20 September 1978 by the importer of the goods to an unregistered person or to a registered person who has not quoted his certificate in respect of the purchase of the goods;

(b) the Commissioner is satisfied that, having regard to any connection between the importer and the purchaser of the relevant goods or to any other relevant circumstances (including circumstances arising out of any agreement entered into between the importer and the purchaser, or out of any other agreement, that was related, directly or indirectly, to the sale of the goods), the importer and the purchaser were not dealing with each other at arm's length in relation to the transaction; and

(c) the Commissioner is also satisfied-

(i) that the amount for which the relevant goods were sold is less than the amount (in this sub-section referred to as the `arm's length price') for which, in the opinion of the Commissioner, the relevant goods could reasonably be expected to have been sold if the importer and the purchaser had been dealing with each other at arm's length in relation to the transaction; or

(ii) that-

(A) the purchaser could have purchased identical goods from another importer by wholesale and obtained delivery of the identical goods at or about the time when the purchaser obtained delivery of the relevant goods; and

(B) the amount for which the relevant goods were sold is less than the amount (in this sub- section referred to as the `alternative price') for which, in the opinion of the Commissioner, the identical goods could reasonably be expected to have been sold to the purchaser,

the Commissioner shall alter the sale value of the relevant goods to the amount ascertained in accordance with the following paragraphs:

(d) if the Commissioner is satisfied as to the matter mentioned in sub-paragraph (i) of paragraph (c) but not as to the matters mentioned in sub-paragraph (ii) of that paragraph - an amount equal to the arm's length price;

(e) if the Commissioner is satisfied as to the matters mentioned in sub-paragraph (ii) of paragraph (c) but not as to the matter mentioned in sub-paragraph (i) of that paragraph - an amount equal to the alternative price;

(f) if the Commissioner is satisfied as to the matter mentioned in sub-paragraph (i) of paragraph (c) and also as to the matters mentioned in sub-paragraph (ii) of that paragraph - an amount equal to the lesser of-

(i) the arm's length price; and

(ii) the alternative price.

4(3) Where the Commissioner alters the sale value of goods in pursuance of sub-section (2), the sale value so altered shall be the sale value of the goods for the purposes of this Act.

...

4A(1) Where-

(a) goods (in this sub-section referred to as the `relevant goods') imported into Australia by a registered person, or by a

ATC 4785
person required to be registered, have been sold by the importer of the goods to an unregistered person or to a registered person who has not quoted his certificate in respect of the purchase of the goods;

(b) under an agreement entered into for the purpose, or for purposes that included the purpose, of securing that the amount of the sale value of the relevant goods would be less than the amount that could reasonably be expected to be the amount of the sale value of the relevant goods if the agreement had not been entered into, valuable consideration (in this section referred to as the `relevant consideration') has been given, directly or indirectly, by the purchaser, or by another person, to the importer or another person for, or in connection with, any of, or any 2 or more of, the following acts:

(i) the grant of a right or option to purchase goods;

(ii) the exercise, in whole or in part, of a right or option to purchase goods;

(iii) the surrender or other termination, in whole or in part, of a right or option to purchase goods;

(iv) allowing a right or option to purchase goods to lapse in whole or in part;

(v) the assignment, in whole or in part, of a right or option to purchase goods;

(vi) the provision of, or procuring the provision of, services in connection with the relevant goods; and

(c) the relevant goods were sold-

(i) in a case where the relevant consideration has been so given, in whole or in part, for, or in connection with any of, or any 2 or more of, any acts referred to in sub-paragraphs (i) to (v) (inclusive) of paragraph (b) - after 20 September 1978; or

(ii) if sub-paragraph (i) does not apply but the relevant consideration has been given for, or in connection with, any acts referred to in sub-paragraph (vi) of paragraph (b) - after 16 November 1978,

the sale value of the relevant goods shall, for the purposes of this Act, be determined in accordance with the provisions of this section and not in accordance with the provisions of sub- section (1) or (2) of section 4.

...

4A(4) Subject to sub-section (5), for the purposes of this Act, the sale value of goods the sale value of which is required to be determined in accordance with the provisions of this section is-

(a) if the relevant goods are of a class which the importer himself sells by wholesale - the amount for which the goods could reasonably be expected to have been sold by the importer by wholesale if no agreement of a kind referred to in paragraph (b) of sub- section (1) had been entered into in relation to the sale of the goods; or

(b) in any other case - the amount for which the importer could reasonably be expected to have purchased identical goods from another importer if the other importer had, in the ordinary course of his business, imported the identical goods for sale and had sold them to the first-mentioned importer by wholesale and no agreement of a kind referred to in paragraph (b) of sub-section (1) had been entered into in relation to the sale of the identical goods.

4A(5) Where-

(a) the sale value of the relevant goods is required to be determined, for the purposes of this Act, in accordance with the provisions of this section;

(b) the Commissioner is satisfied that, having regard to any connection between the importer and the purchaser of the relevant goods or to any other relevant circumstances (including circumstances arising out of any agreement entered into between the importer and the purchaser, or out of any other agreement, that is related, directly or indirectly, to the sale of the relevant goods), the importer and the purchaser were not dealing with each other at arm's length in relation to the transaction; and

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(c) the Commissioner is also satisfied-

(i) that the amount for which the relevant goods were sold is less than the amount (in this section referred to as the `arm's length price') for which, in the opinion of the Commissioner, the relevant goods could reasonably be expected to have been sold if the importer and the purchaser had been dealing with each other at arm's length in relation to the transaction and no agreement of a kind referred to in paragraph (b) of sub-section (1) had been entered into in relation to the sale of the relevant goods; or

(ii) that-

(A) the purchaser could have purchased identical goods from another importer and obtained delivery of the identical goods at or about the time when the purchaser obtained delivery of the relevant goods; and

(B) the amount for which the relevant goods were sold is less than the amount (in this section referred to as the `alternative price') for which, in the opinion of the Commissioner, the identical goods could reasonably be expected to have been sold to the purchaser if no agreement of a kind referred to in paragraph (b) of sub-section (1) had been entered into in relation to the sale of the identical goods,

the Commissioner shall alter the sale value of the relevant goods to the amount ascertained in accordance with sub-section (6) and the sale value so altered shall be the sale value of the relevant goods for the purposes of this Act.

4A(6) The amount ascertained in relation to the relevant goods for the purposes of sub- section (5) is-

(a) if the Commissioner is satisfied as to the matter mentioned in sub-paragraph (i) of paragraph (c) of sub-section (5) but not as to the matters mentioned in sub- paragraph (ii) of that paragraph - an amount equal to the arm's length price;

(b) if the Commissioner is satisfied as to the matters mentioned in sub-paragraph (ii) of paragraph (c) of sub-section (5) but not as to the matter mentioned in sub- paragraph (i) of that paragraph - an amount equal to the alternative price; or

(c) if the Commissioner is satisfied as to the matter mentioned in sub-paragraph (i) of paragraph (c) of sub-section (5) and also to the matters mentioned in sub- paragraph (ii) of that paragraph - an amount equal to the lesser of-

(i) the arm's length price; and

(ii) the alternative price.''

On 9 November 1987 the Commissioner forwarded to the applicant a letter accompanied by three pieces of paper. The letter, so far as is relevant, provided as follows:

``Reference is made to the letter from this office dated 14 October 1987 and you are advised that in accordance with the powers vested in the Commissioner of Taxation by sections 4(2) and 4(A) [sic] of the Sales Tax Assessment Act (No 6) 1930 as amended, the sale values of copper and brass goods imported and sold by you by wholesale have been altered. The further and additional tax arising from the alterations is contained in the attached Notices of Alteration and reflect an aggregate amount due of $736,138.49 further tax and $201,164.90 additional tax.

The Notice of Alteration, which has issued pursuant to Section 4(2) raises a further tax liability of $69,579.67 from an alteration to the sale value of goods sold to your related retail entity Laddeton Nominees Pty Ltd during the period 1 April 1982 to 2 August 1985 (both dates inclusive). The increase in sale value resulted from an adjustment to equate the sale value on goods sold to Laddeton Nominees Pty Ltd to the sale value of identical goods sold (net of discount) to non-related franchise holders.

The Notice of Alteration issued pursuant to s. 4(A) [sic] raises a further tax liability of $666,558.82 and additional tax (section 46 STAA No 1 Principle Act) [sic] - sec. 12(1)(d) STAAA (No 6) 1930 as amended of $201,164.90. Total amount payable under this notice is $867,723.72. The increase in sale value under this notice accounts for the valuable consideration by way of promotion, royalty/franchise service fees paid by Laddeton Nominees Pty Ltd and non-related franchise holders under franchise

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agreements entered into during the period 1 April 1982 to 30 November 1986 (both dates inclusive).''

The first piece of paper accompanying that letter was a document purporting to be a Notice of Alteration under s. 4(2) of the Act. It showed, at the various relevant sales tax rates, the sale values included in the applicant's sales tax returns lodged monthly and altered sale values determined under s. 4(2) of the Act, covering the period 1 April 1982 to 2 August 1985. The end result was to arrive at additional sale value figures upon which further sales tax was said to be payable. The document concluded with the words ``Total amount due under this assessment $69,579.67''.

The second document which accompanied the letter was headed ``Notice of Alteration under Section 4A of Sales Tax Assessment Act (No. 6) 1930 as amended''. This document covered the period 1 April 1982 to 30 November 1986 and detailed the sale values included by the taxpayer in ordinary monthly returns and the increased sale values calculated under s. 4A of the Act. It arrived at additional taxable sale values and further tax payable on these additional taxable sale values. The document concluded that a further amount of sales tax of $666,558.82 was owing, together with additional tax under s. 46 of the No. 1 Assessment Act of an amount of $201,164.90. The document concluded with the remark ``Total amount due under this assessment $867,723.72''. A final page contained the following remarks:

``The aggregate amount due under these Notices of Alteration is $937,303.39. The amount of $736,138.49 further tax should be paid forthwith, otherwise you will be liable for additional tax...''

The applicant regarded the letter as notifying two separate assessments and accordingly objected in separate notices of objection to each. These objections having been disallowed, the applicant requested the Commissioner to forward them to the Administrative Appeals Tribunal for review.

In its reasons the Tribunal identified six issues. It said:

``There are, first, threshold procedural questions about the validity of the assessments in this case. Second, whether the anti-avoidance tests in the two relevant provisions, i.e. ss. 4(2) and 4A, were applied to the relevant transactions by the Commissioner and, if so, whether they could properly apply. Third, there are the key questions whether the Commissioner properly adjusted the sale price to the franchisees by including an element to reflect the advertising and franchise fees. Fourth, whether the specific prices charged by T to L could be sustained, i.e. whether these sales prices were justified in all the circumstances. Fifth, having regard to the identity of function and personnel between T and L and the lack of documentation, could the discount on normal sales prices be supported? And finally, has the applicant discharged the onus of showing that the Commissioner's sale values are wrong?''

The first question of which the Tribunal spoke concerned the question whether there had been two assessments issued in relation to the same transaction and if so the effect of ss. 4A(1) and 4(2).

Prima facie the wording of these sections suggests that if an alteration has been made to sale value under s. 4(2), that altered sale value becomes the sale value for the purposes of the Act: s. 4(3). Similarly, s. 4A makes it clear that if that section is used there may not be a ``sale value'' under s. 4(2). This apparent difficulty was resolved by the Tribunal in the following passage:

``There is one major problem with Mr de Wijn's submission before we even get to the point of evaluating Mr Shaw's argument, and that is that, both at the end of s. 4A(1) and at the commencement of s. 4(1), the general provisions of s. 4(1) are made subject to the mini-anti-avoidance provisions of s. 4A. Where there is one of these offending schemes, ie `an agreement entered into for the purpose... of securing that... sale value of the relevant goods would be less than' the normal sale value, all else is excluded. Similarly, in relation to Mr Shaw's argument, s. 4A(4) is explicitly made subject to the arm's length test in s. 4A(5). In this sense any overlap in the provisions is `self-cleansing' and the formation of the opinion by the Commissioner under s. 4A makes this into the paramount assessment: cf Case X45.''

The second procedural matter to which the Tribunal referred was the operation of s. 12B of

ATC 4788

the Sales Tax Procedure Act 1934 (Cth) (``the Procedure Act''). It was submitted for the applicant, before the Tribunal as before me, that s. 12B required the Commissioner, where the three year period referred to in it arose, to remit tax payable unless the Commissioner had, in accordance with s. 12B(1)(c), required payment of the tax prior to the expiration of the relevant period. Section 12B provides relevantly:

``(1) Where tax (not being tax paid prior to the commencement of this section) in respect of any transaction, act or operation, effected or done in relation to any goods has not been paid at the expiration of a period of three years from-

(a) where the tax is payable in respect of the importation of those goods - the date of the entry of those goods for home consumption; or

(b) in any other case - the close of the month in which the transaction, act or operation was effected or done,

the Commissioner may remit that tax unless he-

(c) has required payment of the tax prior to the expiration of that period;...

...

(3) For the purposes of this section the Commissioner shall be deemed to have required payment of tax if he, or an officer acting on his behalf, has served upon any person a notice in writing specifying that an amount of tax is payable by that person in respect of-

(a) the transaction, act or operation specified in sub-section (1) of this section; or

(b) any transactions, acts or operations which include the transaction, act or operation specified in that sub-section.

(4) For the purposes of this section `tax' includes any further tax payable under any Sales Tax Assessment Act and any additional tax for which the person is liable under this Act or any Sales Tax Assessment Act.''

The Tribunal answered the submission made as follows:

``In our view, the section gives the Commissioner a discretionary power whether to remit taxes payable, and that the letter of 19 April 1985, although not specifying the actual amount of tax payable, put the applicant on notice that the Commissioner had concluded that further tax was payable in respect of both the promotional and franchise service fees and the sales to L.''

The Tribunal's reasons leave one in some doubt whether the Tribunal refused the submission concerning s. 12B on the basis that because that section was discretionary the Tribunal had exercised a discretion adversely to the taxpayer, or because s. 12B had no application because the letter of 19 April 1985 did not conform with s. 12B(1)(c) of the Procedure Act.

The Tribunal was of the view that on the facts of the case both s. 4(2) and s. 4A applied. Dealing with s. 4A, the Tribunal noted a concession from junior counsel for the applicant. There is a dispute between the parties as to what concession was in fact made. At some stages the Tribunal appears to have taken the concession as merely being that the applicant and Laddeton were not at arm's length. That was not much of a concession, given that Laddeton was a wholly owned subsidiary of the applicant. In another part of their reasons, however, the Tribunal appear to have regarded the concession as having been somewhat wider, namely, as being a concession that in respect of the terms of trading between them, Laddeton and the applicant were not acting at arm's length. Given that there appears to have been no evidence of any negotiation between the parties, even the wider concession would not seem to have made much difference to the outcome of the case. It suffices here to say that a perusal of the transcript shows that the concession as made was somewhat ambiguous. It was open for the Tribunal to treat it as a concession on the issue whether the two companies were dealing with each other at arm's length in respect of the transactions they entered into, although I accept that junior counsel did not intend such a concession to be made. However, there is hardly a matter of law in that question.

The Tribunal expressed the view that the applicant and franchisees were not dealing at arm's length in relation to the relevant transactions because:

``... there was the franchise agreement and the payment of the advertising and franchise

ATC 4789
fee or royalty, and because of the way the franchise agreement was structured. We have concluded that it was structured in that way to decrease the sale value of the goods. Therefore the provisions of s. 4A(1) and s. 4A(5) were prima facie satisfied.''

Precisely what the Tribunal meant by its reference to the way the franchise agreement was structured is not quite clear.

At the end of the day the Tribunal concluded that the sales values fixed by the Commissioner were ``appropriate''. It reached this conclusion largely on the basis that the question before it was whether, on the evidence, it had been proved that there was some other price preferable to the price the Commissioner adopted. Onus of proof and in particular s. 42E(b) of the Sales Tax Assessment Act (No 1) 1930 (``the No 1 Assessment Act'') played a significant part in the conclusions reached by the Tribunal. Indeed the Tribunal appeared to treat the question before it as being whether the taxpayer had discharged the onus of showing that the sale value adopted by the Commissioner for the purposes of the assessments was excessive, rather than as dealing with that question in the context that the Tribunal, for the purposes of the review before it, stood in the shoes of the Commissioner and was empowered to exercise its own discretions. Reference was made, in the course of the reasons, to Case X45,
90 ATC 364, a decision of Purvis J sitting as the presidential member of the Tribunal which appeared to support the Tribunal's approach.

The above summary of the Tribunal's reasons is of necessity inadequate. It is, however, fair to say that there is often little discernible reasoning. Instead there is a statement of the submissions put by either party without it always being made clear which submissions were accepted.

I propose to approach the issues before me in a somewhat unconventional way. I propose to analyse the issues of law, as they arose before the Tribunal, and then to consider what questions of fact are necessary to decide these issues. In so doing the difficulties in the Tribunal's reasons will become apparent.

1. The preliminary issue - the relationship between s. 4(2) and s. 4A

As has already been seen, where the Commissioner makes an alteration of the sale value of goods pursuant to s. 4(2), that sale value as altered becomes ``the sale value of the goods for the purposes of this Act'': s. 4(3). Similarly, if the Commissioner acts under s. 4A(5) to alter the sale value of relevant goods, the sale value so altered becomes ``the sale value of the goods for the purposes of this Act''.

The mutual exclusivity of these sections leads to the conclusion that the application by the Commissioner of either section brings about the result that no further amendment of sale value can be made.

That submission was accepted in part by the Commissioner before me. It was submitted that the Commissioner in fact acted under s. 4A because the facts present satisfied s. 4A and the Commissioner formed the satisfactions required by s. 4A(5). In consequence the sale value altered under s. 4A(5) operated to preclude any further alteration of sale value under s. 4(2).

It was the primary submission of the Commissioner that in the present circumstances there was only one assessment comprising the letter accompanied by the pieces of paper which, on their face, appeared to be assessments. This one assessment, the Commissioner said, was made under s. 4A(5) and so the problems raised by the applicant fell away.

Section 3(1) of the Sales Tax Assessment Act (No 1) 1930 defines ``assessment'' for the purposes, inter alia, of the Act as meaning:

``(a) the ascertainment of the sale value of goods and of the sales tax payable on that sale value; or

(b) the ascertainment of additional tax payable under Part VIII.''

Each of the documents which accompanied the letter ascertained a particular sale value and calculated the sales tax payable with respect to that particular sale value. It is difficult to see why each then should be treated as having been subsumed into the one assessment.

It may be accepted, as was submitted by the Commissioner, that the High Court in
DFC of T v Hankin (1959) 11 ATD 503 at 506-507; (1958-1959) 100 CLR 567 at 576 per Dixon CJ, Fullagar, Kitto and Windeyer JJ, at 580 per McTiernan J, made it clear that a letter accompanying a notice of assessment may be read together with the notice of assessment as constituting one assessment. But there is

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nothing in Hankin which suggests that the existence of one letter worded as the letter of 9 November 1987 was, could operate to make what otherwise would be two assessments, one.

There seems little doubt that if a taxpayer can show that an assessment is made without power, that taxpayer will have shown that the assessment is excessive and thus satisfied the burden of proof imposed upon it: cf
McAndrew v FC of T (1956) 11 ATD 131; (1956) 98 CLR 263. The assessment should not be treated by the Tribunal as a nullity and indeed s. 67(1) of the No. 1 Assessment Act applicable, inter alia, to the Act makes the production of a notice of assessment conclusive evidence of the due making of the assessment and in a review that the amounts and all of the particulars of the assessment are correct.

The Commissioner's alternative submission was that if there were two assessments here, that made under s. 4A(5) was the principal assessment and once made precluded the assessment under s. 4(2). To the extent to which the two assessments concerned the same goods, that part of the assessment made under s. 4(2) which dealt with goods already the subject of the s. 4A assessment would be invalid. If I were of the view that this was the case, it was submitted I should send the matter back to the Tribunal to determine the matter of quantum.

There is no finding as to which assessment was made by the Commissioner first. That matter is as much a matter of fact as whether the applicant and Laddeton were dealing with each other at arm's length in relation to the transactions between them. On one view of the matter, if the first assessment, as a matter of temporality, was an assessment under s. 4A, then that assessment was validly made, but no further assessment could be made under s. 4(2). Conversely, if the first assessment made was that under s. 4(2) then no assessment could be made under s. 4A(5).

In my view the Tribunal must find as a fact which assessment was made first. In the absence of any evidence being called from the Commissioner, it can perhaps be assumed that the order of assessment was in accordance with the order suggested by the letter of 9 November 1987, that is to say, an assessment first made under s. 4(2) and thereafter made under s. 4A. If the Tribunal reaches this conclusion then the assessment purporting to be made under s. 4A will be shown to be excessive, so far as that assessment relates to the same items as are dealt with under the assessment under s. 4(2). As the assessment under s. 4A covers sales made not only to Laddeton but also to other franchisees, it is clear that the second assessment covers a wider scope than the first. It also covers a slightly longer period of time, that is to say, from 2 August 1985 to 30 November 1986.

The Tribunal would then proceed to consider the assessment for the period 1 April 1982 to 2 August 1985 covering sales made by the applicant to Laddeton. Since, for the purposes of the review of that assessment, the Tribunal has all the powers and discretions of the Commissioner and may do again, subject to the notice of objection, what the Commissioner has done, it would be open to the Tribunal to consider the goods sold in that period under s. 4A(5), if the Tribunal were of the view that all of the elements of that sub-section were satisfied. If it ultimately applied s. 4A(5) and arrived at different sale values, those sale values would then replace the sale values determined by the Commissioner. The sales tax payable would accordingly be able to be calculated.

The second assessment would be relevant only in respect of goods sold not by the applicant to Laddeton but by the applicant to other franchisees, in the period 1 April 1982 to 30 November 1986. Here again, the Tribunal should consider, in place of the Commissioner, whether the assessment should be made under s. 4A(5) or s. 4(2). Whatever view ultimately the Tribunal took, it could replace the sale values selected by the Commissioner and the sales tax due could again then be calculated.

In this way the Tribunal could approach the sales tax liability covered by each of the two assessments and thereby resolve all of the issues between the parties. This is not what the Tribunal in fact did and its failure to deal with the assessments without regard to the provisions of ss. 4A(5) and 4(3) constituted an error of law justifying of itself the appeal being allowed.

2. The operation of s. 12B of the Procedure Act

It will have been observed that s. 12B uses the word ``may''. It does not use the word ``shall''. Prima facie when the word ``may'' is used it confers a discretion. If a discretion were conferred by s. 12B, then it would be open for the Tribunal to consider how that discretion should be exercised. It would exercise the discretion itself without being influenced by the manner in which the discretion was in fact

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exercised by the Commissioner, if indeed it had been exercised.

There are, however, cases where the word ``may'' will be held to mean ``shall'': cf
Finance Facilities Pty Ltd v FC of T 71 ATC 4082; (1971) 127 CLR 106. The relevant principles are set out in the judgment of the High Court in
Ward v Williams (1955) 92 CLR 496 at 505-506:

``... it is necessary to bear steadily in mind that it is the real intention of the legislature that must be ascertained and that in ascertaining it you begin with the prima facie presumption that permissive or facultative expressions operate according to their ordinary natural meaning. `The authorities clearly indicate that it lies on those who assert that the word "may" has a compulsory meaning to show, as a matter of construction of the Act, taken as a whole, that the word was intended to have such a meaning' - per Cussen J.:
Re Gleeson (1907) V.L.R. 368, at p. 373. `The meaning of such words is the same, whether there is or is not a duty or obligation to use the power which they confer. They are potential, and never (in themselves) significant of any obligation. The question whether a Judge, or a public officer, to whom a power is given by such words, is bound to use it upon any particular occasion, or in any particular manner, must be solved aliunde, and, in general, it is to be solved from the context, from the particular provisions, or from the general scope and objects, of the enactment conferring the power' - per Lord Selborne:
Julius v. Bishop of Oxford (1880) L.R. 5 A.C. 214, at p. 235. One situation in which the conclusion is justified that a duty to exercise the power or authority falls upon the officer on whom it is conferred is described by Lord Cairns in his speech in the same case. His Lordship spoke of certain cases and said of them `[they] appear to decide nothing more than this: that where a power is deposited with a public officer for the purpose of being used for the benefit of persons who are specifically pointed out, and with regard to whom a definition is supplied by the Legislature of the conditions upon which they are entitled to call for its exercise, that power ought to be exercised, and the Court will require it to be exercised'.''

Finance Facilities concerned the proper construction of s. 46(3) of the Income Tax Assessment Act 1936 as it then stood. That sub- section directed the Commissioner to three separate matters referred to in sub-secs. (a), (b) and (c) of s. 46(3). If the Commissioner was satisfied in respect of one of the alternatives, it was provided that the Commissioner may allow a rebate. One of those alternatives was whether ``having regard to all circumstances'', it would be reasonable to allow the further rebate. This third alternative no doubt assisted the argument that the word ``may'', as appearing in s. 46(3), did not signify a discretion.

The question is one of construction. There is not present in s. 12B reference to reasonableness as one of the matters to be taken into account. On the other hand, the section is concerned with conferring an advantage upon a taxpayer and in such circumstances it is easier to construe the word ``may'' as merely facultative rather than as discretionary.

Regard should be had also to the policy behind the introduction of s. 12B into the Procedure Act (a policy now clearly stated in s. 76 of the Sales Tax Assessment Act 1992 which replaced s. 12B).

Despite the Commissioner's submission to the contrary, I do not find great assistance from s. 14(2) of the Procedure Act which provides:

``Nothing in this Act shall, except where otherwise expressly provided, take away the remedies, or alter the liabilities, provided for in any Sales Tax Assessment Act.''

There is a real question whether the word ``liability'', used in s. 14(2), refers to an obligation to pay tax. But in any event, s. 12B is quite express in the way it operates.

Section 12B was introduced into the Procedure Act by cl. 60 of the Sales Tax Amendment Act 1936. The then treasurer, Mr Casey, said in the course of his second reading speech:

``Clause 60 provides for the curtailment of retrospective taxation, and the bill contains the following provision for that purpose:

(a) a three years' time limit on retrospective taxation...

(b) no retrospective taxation where taxpayers act in accordance with departmental rulings and advices...

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The three years' time limit will not apply where the Commissioner is satisfied that tax has been avoided by fraud or evasion...

The general effect of the provision is that sales taxpayers will not be called upon to pay tax more than three years after the close of the month in which a taxable transaction took place, unless they receive a specific notice from the Department to pay tax on those sales, etc, within that period. The present law requires the Taxation Department to seek to collect back taxation for a period reaching back to the coming into force of the sales tax law, if it finds the taxpayer has not complied with the full requirements of the law during that period. This may cause serious hardship to taxpayers who, through inadvertence, have not appreciated the incidence of the sales tax law on their business, and who, when required to pay the additional tax, are not in a position to recoup themselves by passing it on to their customers. For that reason, the government takes the view that a time limit upon the retrospective application of an indirect tax such as sales tax is justifiable. As a necessary compliment of this proposal, the bill also provides for a three years' time limit upon the making of refunds to taxpayers.''

(Parliamentary Debates, House of Representatives, p. 2128).

It is interesting to observe that the limitation upon the making of refunds to taxpayers, which appears in s. 12C, is completely mandatory and allows no discretion to the Commissioner.

Clearly enough, s. 12B contains some ambiguity. That ambiguity may be resolved when regard is had to the legislative purpose as enunciated in the Treasurer's second reading speech. These reinforce to me the conclusion that Parliament intended s. 12B to be mandatory and to operate as a release of a taxpayer once the three years had elapsed, unless the circumstances are such as to come within the exclusions to the section. It is to these to which I must now turn.

The Commissioner had, on 19 April 1985, that is to say within the relevant three year period, sent a letter to the applicant. In that letter the Commissioner had requested a supplementary return for the period 1 April 1982 to 28 February 1985 and the payment of tax thereon in respect of:

``(a) promotional fees and franchise service fees charged to franchisees and omitted from the taxable sale value of the goods; and

(b) the difference between the price charged to Laddeton Nominees Pty Ltd for goods sold and the arms-length price of those goods having regard to prices charged to independent franchisees, including the promotional fees and franchise service fees.''

The earlier part of the letter stated relevantly:

``With regard to arms-length wholesale sales to franchisees, tax is payable on the amount for which the goods are sold. In this connection, a promotional fee and a franchise service fee, both of which relate to the sale of specific goods and which are components of the price that the franchisee is required to pay for those goods, form part of the taxable sale value on which sales tax is payable.

In relation to non-arms length wholesale sales to Laddeton Nominees Pty Ltd, tax is also payable on the price for which the goods are sold, subject to the formation of an opinion by the Commissioner that such amount is lower than the arms-length price, ie the price for which similar goods are sold in similar circumstances to an arm's-length customer (eg a franchisee).''

It is submitted for the Commissioner that that letter constitutes, for the purposes of s. 12B of the Procedure Act, a requirement of payment of the tax. The letter was written prior to the expiration of the three year period. The applicant submits, however, that the letter does not satisfy that description for two reasons. First it is submitted that the letter does not nominate a figure as an amount of tax payable in respect of the particular transactions. Secondly, it is submitted that to comply with s. 12B the notice must nominate the relevant assessment act under which sales tax was payable. Thirdly it was said that because sales tax arising out of an alteration of sale value under either s. 4(2) or s. 4A of the Act only became payable once there is an alteration of sale value, the notice could not relate to the tax the subject of the present assessments.

In my view each of these submissions is misconceived. The word ``amount'' appearing

ATC 4793

in s. 12B(3) is perhaps ambiguous. It can refer to a money figure or it may be taken to refer merely to the fact that there is sales tax payable in some amount not yet quantified. Of the two alternatives I prefer the latter. To require the Commissioner to stipulate the precise figure of sales tax payable when that information may well be known only to the taxpayer and not disclosed to the Commissioner by the taxpayer, imposes in my view an unreasonable burden upon the Commissioner. It is also inconsistent with the explanatory memorandum to which I have already referred.

The second submission may be disposed of more quickly. There is nothing in s. 12B(3) which requires the Commissioner in the notice to indicate the Assessment Act under which the sales tax is payable. It is true that the tax in question may be tax under any of the various sales tax assessments acts (see s. 12B(4)), but that of itself does not seem to me to require the particular sales tax act to be nominated.

Finally, I do not think the reference to ``tax payable'' requires that the notice under s. 12B(3) can only be given where tax arises without assessment under, for example, s. 4(1) of the Act, but not to a case where tax becomes payable as a result of the alteration of a sale value. The words ``tax payable'' in s. 12B(3) have the same meaning as they do in s. 12B(1), that is to say, they refer to tax ultimately payable even though not yet payable, so long as that tax relates to a transaction, act or operation effected or done in the three year period.

It follows, in my view, that the letter of the Commissioner dated 19 April 1985 sufficed as a notice under s. 12B(3) with the consequence that, although s. 12B(1) is not discretionary, the section had no operation because the Commissioner had required payment of the tax prior to the expiration of the three year period. It follows in this respect that there was no error of law on the part of the Tribunal.

The relevance of onus of proof.

Section 42E of the No 1 Assessment Act provides relevantly:

``In proceedings under this Part on a review before the Tribunal...

...

(b) the burden of proving that an assessment is excessive... lies on the objector.''

This section, incorporated into the No. 6 Act by reference (s. 12), echoes the corresponding provisions of the former s. 190(b) of the Income Tax Assessment Act 1936 now to be found in s. 14ZZK and s. 14ZZO of the Taxation Administration 1953 (Cth).

It may be said, no doubt tritely, that s. 190(b) means what it says. That is to say, the taxpayer must show, on the balance of probabilities, that the assessment is excessive. If he or she fails so to do the assessment will be confirmed. Cases such as
McCormack v FC of T 79 ATC 4111; (1978-1979) 143 CLR 284; and
MacMine Pty Ltd v FC of T 79 ATC 4133; (1979) 53 ALJR 362, explain what is meant by sections such as s. 190(b) where a factual issue arises between the parties. If that issue is whether a taxpayer has purchased property for the purpose of resale at a profit the taxpayer must show, by evidence, that the assessment is incorrect and will do so by adducing evidence as to his purposes to show that at the time of acquisition he did not have a purpose of resale at a profit.

If the assessment be a default assessment of income tax under s. 167 of the Income Tax Assessment Act, s. 190(b) will have the consequence of ensuring that the issue (before the Court, at any rate), will be whether the taxpayer has shown that the assessment is excessive and the extent to which the assessment is excessive. So it is incumbent upon a taxpayer to show in such a case not only that the assessment is wrong but the extent to which it is wrong. That is to say, the taxpayer must show his actual taxable income:
FC of T v Dalco 90 ATC 4088; (1989-1990) 168 CLR 614.

Where the dispute between the Commissioner and the taxpayer concerns the exercise of a discretion, there are, as is well acknowledged, significant differences in the approach of the Court and the approach of the Tribunal. If a taxpayer chooses to appeal to the Court directly where a matter of discretion is involved, the taxpayer must show that that discretion has miscarried because the Commissioner has taken into account some irrelevant matter or failed to take into account some relevant matter, or there is some error of law in the manner in which that discretion has been exercised:
Avon Downs Pty Ltd v FC of T (1949) 78 CLR 353. In the Tribunal, however, the matter will proceed differently. This is because of s. 43(1) of the Administrative

ATC 4794
Appeals Tribunal Act 1975 which provides, so far as is presently relevant:

``For the purpose of reviewing a decision, the Tribunal may exercise all the powers and discretions that are conferred by any relevant enactment on the person who made the decision...''

There may be a question, unnecessary to resolve here, as to whether the word ``may'' in s. 43(1) is facultative or discretionary. This is not a matter upon which any argument was raised and I do not propose to deal with it. Section 43(1) is in similar terms to the provisions of the former s. 193 of the Income Tax Assessment Act repealed coextensively with the abolition of appeals to the Taxation Boards of Review and the substitution therefore of appeals to the Administrative Appeals Tribunal. Section 193(1) provided:

``For the purposes of reviewing such decisions, the Board shall, subject to this section, have all the powers and functions of the Commissioner in making assessments, determinations and decisions under this Act...''

Kitto J, in
Mobil Oil Australia Pty Ltd v FC of T (1963) 13 ATD 135 at 145-146; (1962-1963) 113 CLR 475 at 502, adopted the language of the Privy Council in
Shell Company of Australia Ltd v FC of T (1930) 1 ATD 113 at 125; (1930) 44 CLR 530 at 545, when his Honour said that the Taxation Board of Review was ``in the same position as the Commissioner himself''. It was, as his Honour said, quoting
Jolly v FC of T (1935) 3 ATD 162 at 167; (1935) 53 CLR 206 at 214 per Rich and Dixon JJ: ``only another executive body in an administrative hierarchy.''

The context in which Kitto J spoke was an assessment made under the provisions of s. 136 of the Income Tax Assessment Act, a section which was dependent upon the exercise by the Commissioner of a discretion. Speaking of the role of the Board of Review in a review of such an assessment, his Honour said (at ATD 145-146; CLR 502-503):

``The function of the Board under that section, like the function of the Commissioner, is not to ascertain and give effect administratively to a liability existing under the Act, but, where the Board forms a certain opinion as to a matter affecting the taxpayer's liability under the ordinary provisions of the Act, to select an amount (of the total receipts of the business) which it considers normal or reasonable... to become the taxpayer's taxable income for the purposes of assessment, and by so doing to cause a special tax liability to arise by force of the section. It must give a decision as to whether s. 136 shall operate to subject the taxpayer to the special tax liability for which it provides, and if so what the amount of the liability shall be. If the decision involves a question of law it will be subject to appeal to this Court; but even where an appeal lies to this Court - and it is then an appeal on fact as well as law - the Court will not substitute its own discretionary judgment for those of the Commissioner or of the Board... The Board's function, therefore, is to decide whether to create a liability.''

Of course the law has since changed so that an appeal from the Tribunal is not, once a matter of law arises, an appeal both on fact as well as law. But subject to that matter, what is there said by his Honour is apposite to an assessment made pursuant either to ss. 4(2) or 4A(5) of the Act.

In
FC of T v Brian Hatch Timber Co (Sales) Pty Ltd 72 ATC 4001 at 4012; (1971-1972) 128 CLR 28 at 59, Owen J, contrasting the powers of the Court with those of the Board of Review, said:

``The taxpayer could, of course, have appealed to the Board of Review. Had he done so it would have been for the Board to decide whether on the material placed before it, it was satisfied that the taxpayer was entitled to the deduction claimed. The taxpayer, however, did not take that course nor does it appear to have taken any steps to ascertain what material was before the Commissioner in making his assessment...''

Where an issue arises under either s. 4(2) or s. 4A(5) before the Tribunal, it is for the Tribunal to decide on the material placed before it whether it is satisfied of the matters relevant to the exercise of its discretion. There is not a two-pronged process, as the submissions of the Commissioner suggested.

It was submitted for the Commissioner that the consequence of the onus being upon the taxpayer to show the assessment was excessive, was that the taxpayer was required to persuade the Tribunal to a degree of satisfaction

ATC 4795

warranting the exercise of its powers before the Tribunal would step in and in fact exercise them. The submission was put in a number of ways. For example, it was said that the taxpayer must show that the evidence is such that the Tribunal should adopt a different view to that adopted by the Commissioner and if the taxpayer fails to adduce sufficient evidence to persuade the Tribunal to depart from the Commissioner's decision, then the taxpayer loses and the Tribunal presumably then does not need to exercise any discretions at all. With respect, that is not the way I believe s. 43E operates in the present context.

At all times it is true the onus of proof will lie upon the taxpayer to show the excessiveness of the assessment. But in conducting a review of the Commissioner's assessment, the Tribunal is required to put itself in the same position as the Commissioner and to determine whether or not the Tribunal has reached the necessary satisfaction. Whether it does will no doubt depend upon the facts adduced in evidence. To the extent to which the exercise of discretion may operate in favour of the taxpayer, the failure to prove facts that might be relevant to the exercise of that discretion will result in the taxpayer losing. No doubt if the Tribunal, in exercising its discretion, does not reach the relevant satisfaction, in a matter at least where the exercise of the relevant discretion will favour the taxpayer, the taxpayer will also lose. The discretions exercisable under s. 4(2) or s. 4A(5) are somewhat different. They are in essence discretions adverse to the taxpayer, not discretions favourable to him. The state of satisfaction to which each section refers is a condition precedent to the alteration of sale value and ultimate increase in a taxpayer's liability. The Tribunal must consider all the facts before it and, if it reaches the relevant state of satisfaction, will itself determine to alter the sale value, that is to say, the taxpayer will lose and the Commissioner will succeed. It is not for the taxpayer first to show some error by the Commissioner in the exercise of the discretion before the Tribunal commences itself to exercise that discretion afresh.

The Tribunal appears to have taken a quite different view. In so doing it fortified itself by referring to the decision of Purvis J in Case X45 (supra). That case concerned the application of s. 18(4) of the No. 1 Assessment Act, equivalent to s. 4(2) of the Act. In the course of his reasons, his Honour said (at 375):

``The applicant is required to demonstrate that the Commissioner's exercise of discretion was vitiated by some error, or that there was not before the Commissioner material which is now before the Tribunal, and which would inexorably have led the Commissioner to a different result. Unless the Tribunal finds that either on the material before the Commissioner or the material before the Tribunal, the Commissioner's decision was wrong, it should affirm the sale value and the assessment.''

With great respect to his Honour, I do not agree with the passage cited. It ignores the role of the Tribunal as an administrative organ and equates the task of the Tribunal to that of the Court. The adoption of the same view by the Tribunal in the present case was similarly in error and operated to vitiate the Tribunal's decision. It is interesting to note that Purvis J in Case X45 appears himself in any event to have proceeded to exercise the discretion conferred initially upon the Commissioner.

The operation of s. 4A

Section 4A touches two different kinds of arrangements. The first, which clearly enough satisfies the description of a sales tax avoidance scheme, concerns options granted over the goods ultimately to be the subject of sale. An example of the type of arrangement can be seen from the decision of the full court in
FC of T v Kelly Ford Pty Ltd & Ors 84 ATC 4205; (1984) 52 ALR 535, a gift duty case which arose out of a typical sales tax avoidance scheme involving options. The second concerns arrangements for services in connection with the goods.

While sales tax is a tax on the sale of goods rather than a tax on the provision of services, in the absence of either general or specific anti- avoidance provisions, sales tax might be reduced by the reduction of the wholesale sale price of the goods and the charging of some fee for the provision of services the cost of which is ordinarily included in the cost of the goods. It was early made clear by the decision of the full High Court in
Commonwealth Quarries (Footscray) Pty Ltd v FC of T (1938) 59 CLR 111, that if goods were sold on a cost and freight basis the ordinary sale value, being the amount for which the goods are sold, would include the cost of the freight. Likewise if the goods were sold ex-factory the sale value would

ATC 4796

not include the cost of freight even if there were a separate arrangement to cover the cost of freight. What might be done with freight might also, absent an anti-avoidance provision, be done with other services, at least where these services are provided in respect of matters occurring after title passes to the purchaser. This is subject to a caveat appearing in the joint judgment of Dixon and McTiernan JJ in Commonwealth Quarries (at 121) that there may be some services which are so essential to the sale that they could not be distinguished from the sale as a separate and independent service.

The explanatory memorandum which accompanied the various sales tax assessment amendment bills of 1978, including that which inserted s. 4A, makes clear the mischief which s. 4A (and equivalent sections) was designed to combat. At 5-6 the memorandum makes the following general comment under the heading ``Service Charges'':

``These amendments are designed to counter tax avoidance schemes involving agreements under which the vendor sells goods at a price below their true wholesale value under an arrangement whereby another person (usually an associated company) receives an additional amount from the purchaser which is ostensibly for the provision of services in connection with the goods. The total of the two amounts represents the normal wholesale price of the goods. Amounts paid for services are not subject to tax and, under the particular arrangements, this amount is inflated while the price charge for the goods on which tax is payable is reduced accordingly.

The amendments will mean that where agreements of this type are entered into for the purpose of avoiding tax by reducing the sale value of goods, the sale value will be the fair and reasonable wholesale selling price of the goods.''

Later in the memorandum (at 24-5) appears the following:

``Arrangements at which the amendments are directed assume a variety of forms. A common element is that goods are sold for amounts substantially below their true wholesale selling price with a reduction in the selling price being made up by a separate charge. The person liable to pay sales tax on the transaction claims that the separate charge is not subject to sales tax and that the sale value of the goods for sales tax purposes is the substantially reduced price for which the goods are sold. The goods would not, of course, have been sold for anything like the reduced price were it not for the collateral arrangement under which the separate charge is paid. The total of the two amounts represents the normal wholesale price of the goods.

These separate charges are usually of two kinds. Either there is a charge in connection with the granting, exercise or assignment of an option to purchase the goods, or a charge for services in connection with the goods that is out of all proportion to the value of the services to be rendered.''

The prerequisites for s. 4A to apply are all objective and none of them raise a question of discretion. Discretion arises only once s. 4A(1) has directed that the sale value is to be determined in accordance with s. 4A, rather than in accordance with ss. 4(1) or (2).

For s. 4A to operate there needs to be the following elements:

(1) An agreement or arrangement.
(2) The necessary purpose.
(3) Valuable consideration given.
(4) That valuable consideration given in connection with the provision of or procuring the provision of services in connection with the relevant goods.

The word ``agreement'' is defined in s. 4A(9) in wide and, by 1993, quite familiar terms. It encompasses arrangements or understandings which may be formal or informal, express or implied, or indeed not intended to be enforceable. It cannot have been in doubt before the Tribunal that there were present in the dealings between the applicant and Laddeton, and the applicant and the franchisees, agreements as defined. It is incumbent upon the Tribunal to identify the agreement.

The agreement found has to be one entered into for the relevant purpose, that is to say, that either the purpose of entering into the agreement or one of the purposes of entering into the agreement must be to secure that the amount of the sale value of the relevant goods would be less than the amount that could reasonably be expected to have been the amount of that sale value if the agreement had

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not been entered into. There can be little doubt but that the purpose referred to in s. 4A(1)(b) is a subjective purpose. The paragraph does not talk in terms of the purpose of the arrangement itself, cf the provisions of s. 260 of the Income Tax Assessment Act 1936.

In all cases where a question arises whether s. 4A applies, it will be necessary to identify with precision the arrangement and in respect of that arrangement to make a finding as to purpose. The Tribunal did not expressly state what the arrangement was that it considered fell within s. 4A but it is, I think, implicit in the Tribunal's reasons that it took the view that the relevant agreements were the agreements for the provision of advertising services in the case of the arrangements entered into after the first Dorset meeting and the agreements for the provision of advertising and other services after the second Dorset meeting (collectively referred to as the ``service agreements'').

Assuming this to be correct, the next question to be determined was whether a purpose of entering these agreements held by any of the parties to the agreements (see s. 4A(7)) was what may be conveniently described as reduction of sale value. There is no doubt that the Tribunal found that such a purpose existed. There is no real discussion of the matter so far as the arrangements existed between the applicant and Laddeton. So far as the arrangements existed between the applicant and other franchisees, the Tribunal's reasons are to be found in the following passages:

``119. The key question, then, is whether the objective facts are sufficient to support the inference that there was an agreement or, at least within the widened definition of that term, an informal understanding, express or implied, between the parties that the sale value of the goods was to be less than they might reasonably expected [sic] to be within the terms of s. 4A(1)(b) because of the franchising agreements and imposition of the advertising levy.

120. Viewed against the whole of the background as it evolved in evidence, we are satisfied that the franchise fee and the advertising fee cannot be treated in isolation and, whilst the evidence is not as clear as one might wish, there are sufficient features in this case, such as the 5% extra discount to franchise stores when the franchise fee was introduced, the extra discount to stores paying the advertising levy, and the timing with changes in the wholesale price or discounts, to satisfy us that `the amount for which the relevant goods were sold is less than the amount... for which... the relevant goods could be expected to have been sold'.''

Counsel for the applicant submitted, in addition to the submission that there were no findings of fact to support the ultimate conclusion of fact, that the Tribunal's findings were not open on the evidence.

Evidence had been given by Mr van Roest, as the representative of the applicant, and Mr de Stefano, as representing one of the franchisees, in which they both denied having the necessary purpose. Each, as well, deposed to the fact that no discussions had taken place concerning sales tax at all. The tenor of their evidence was that the arrangements reached, at the first and second Dorset meetings, addressed commercial problems.

Clearly the Tribunal must have rejected either or both of these witnesses in reaching its ultimate conclusion. The Tribunal does not state which of the parties to the arrangements had the necessary purpose, a matter which, one would think, would be an essential or at least ``material'' factual finding. Further, it is hard to see how the existence of the franchising agreements or the imposition of the advertising levy of themselves justify the conclusion that there had to be the necessary purpose.

Paragraph 120 of the reasons was criticised essentially on two grounds. First it was said that the introduction of the advertising fee, after the first Dorset meeting, did not in fact cause sale values generally to be reduced. As I have already mentioned, while an extra discount was given to franchise stores at the time the advertising fee was introduced, that was in connection with a marketing policy which actually increased list prices by at least the same margin. Paragraph 120 appears not to have taken this matter into account. Nor does it appear that the Tribunal took much notice of the fact that other arm's length purchasers, such as the Hart family and Kaemph & Co, obtained the same discounts as franchisees who paid the advertising levy. There is little discussion as to why these transactions were ignored. Such discussion as there is appears at para. 116 of the reasons where the Tribunal said:

ATC 4798

``We have concluded that, although there were some exceptions to the arrangements, for example in respect of the advertising levy in the case of the Claremont store, and the ability of the Hart family and Kaemph & Co to purchase goods at the same price paid by the franchisees, as a general rule, discounts were only granted if the levies were paid. It is also significant that when each of the levies was introduced, discounts offered to franchisees were increased. However, later in 1986, when T commenced to pay tax on the importation of the goods and sold tax-paid stock to franchisees, the discounts offered were reduced from 36% to 23%.''

No doubt it was open to the Tribunal to reject the Hart and Kaemph sales as special cases or aberrations. The Tribunal was clearly correct when it indicated that if the general rule was that discounts were only granted if levies were paid, the conclusion was open that as a result of the service agreements the amount of the sale value of the relevant goods was less than it would have been if the service agreements had not been entered into.

The next element for the operation of s. 4A is the necessity for there to be valuable consideration. A passage in the Tribunal's reasons dealing with the relationship between the applicant and Laddeton suggests valuable consideration was unnecessary. At para. 113 the Tribunal said:

``We therefore reject Mr de Wijn's submission that for an agreement to be caught by s. 4A(1), it is necessary to have valuable consideration provided for in one of the series of ways listed under paragraph (b).''

Apart from the criticism that there appears to be no reasoning process supporting the word ``therefore'', the proposition put by the Tribunal is clearly inconsistent with the language of the section itself. However, I do not think that it could be said that that inconsistency affected the decision as, on any view of the matter, there was valuable consideration given in the dealings between the applicant and Laddeton. That valuable consideration was the amount paid by way of advertising levy or other service fee. The valuable consideration was clearly paid in connection with the provision of services in connection with the relevant goods.

Once the prerequisites of s. 4A(1) are satisfied, it becomes necessary for the Commissioner, or where the matter is in the Tribunal, for the Tribunal, to determine the appropriate sale value. That determination will depend upon whether the matter is one falling within s. 4A(4) or s. 4A(5). As the provisions of s. 4A(4) are subject to s. 4A(5), it is necessary to commence with s. 4A(5). It is here that issues of discretion arise.

The provisions of s. 4A(5) mirror the comparable provisions of s. 4(2). Both find their origin in the provisions of s. 31C of the Income Tax Assessment Act 1936 which pre- dated the amendments to the sales tax legislation by a year. Curiously, the legislative policy behind s. 31C on the one hand, and the provisions of s. 4A(2) or s. 4A(5) on the other, are quite different. The purpose of s. 31C is to ensure that the purchase price of trading stock, which is a deduction for income tax purposes, is not increased in non-arm's length transactions. The purpose of the corresponding sales tax provisions is to ensure that the price payable in non-arm's length transactions is not reduced.

Be that as it may, the first matter of discretion arises under s. 4A(5)(b). That sub- section requires the Commissioner to be satisfied that the importer and purchaser were not dealing with each other at arm's length in relation to the transaction, having regard to the matters set out in the sub-section. The relationship between the parties (``connection'') will no doubt be a matter relevant to the Tribunal reaching the required satisfaction. However, it must be said that in a particular fact situation related parties may deal with each other at arm's length in relation to a transaction and unrelated parties may deal with each not at arm's length in relation to a particular transaction. In
The Trustee for the estate of the late AW Furse No 5 Will Trust v FC of T 91 ATC 4007 at 4014-4015, I discussed a similar provision in s. 102AG(3) of the Income Tax Assessment Act. I said:

``The first of the two issues is not to be decided solely by asking whether the parties to the relevant agreement were at arm's length to each other. The emphasis in the subsection is rather upon whether those parties, in relation to the agreement, dealt with each other at arm's length. The fact that the parties are themselves not at arm's length does not mean that they may not, in

ATC 4799
respect of a particular dealing, deal with each other at arm's length. This is not to say that the relationship between the parties is irrelevant to the issue to be determined under the subsection.''

In that case I expressed the view that what was required was a determination whether, in respect of a particular dealing, the parties were dealing with each other as arm's length parties would normally do, so that the outcome of their dealing was a matter of real bargaining.

While, as I have already indicated, it was open to the Tribunal to find that the applicant and Laddeton were not dealing with each at arm's length in relation to the relevant transactions, it is well nigh impossible to see why that conclusion was reached on the evidence before the Tribunal, so far as concerned the dealings between the applicant and its franchisees. On the face of it, there was a real bargaining between these parties. None of the matters referred to by the Tribunal in its reasons seem clearly to bear upon the issue. The reference to the franchise agreement, the payment of fees and the way the franchise agreement was structured, are somewhat cryptic as a process of reasoning. No doubt cases may be imagined where there will be a finding of fact that parties were not dealing with each other at arm's length in relation to a transaction where some element of bargaining was present. For example, a case may be imagined where imported goods are sold at landed cost to a financier on quotation of certificate where there is bargaining between the financier and the importer as to appropriate holding charges, but where the actual price paid between the parties is a matter of no significance provided the financier receives its holding charge. Such a case would, in my view, fall easily within s. 4A. But the present would not appear to be such a case.

The second discretion to be exercised by the Tribunal in place of the Commissioner arises under s. 4A(5)(c). For the Commissioner, or in his place the Tribunal, to be satisfied that the amount for which the relevant goods were sold was less than an arm's length price, it is obviously necessary for the Commissioner to determine what an arm's length price is. This flows also out of s. 4A(6) where the amount ultimately fixed as the sale value in a case to which s. 4A(5)(c) applies, will be that arm's length price.

In the present case the Tribunal made no finding of that arm's length price. It may perhaps be assumed that the Tribunal concluded that the arm's length price was effectively the list price, less discount, less the advertising levy of 7%, less the additional 4% levy imposed after the second Dorset meeting. It no doubt is correct to treat a discount off the wholesale selling price as relevant in the calculation of the amount for which the goods are sold. So much was decided by the full court of this Court in
Queensland Independent Wholesalers Limited v FC of T 91 ATC 4492. The factual circumstance which makes the Tribunal's decision somewhat difficult in the present case is that before the arrangements had been entered into, a lower price had generally prevailed for the goods than was the case once the arrangements were entered into. That is to say that prima facie the arm's length price should not merely have been calculated by just taking the advertising levy away from what otherwise would be the purchase price.

It would have been open to the Tribunal, if it had investigated the earlier arrangements under which some advertising levy was paid, to have categorised those arrangements also as having fallen within s. 4A, with the consequence that the arm's length price would have been found prior to the entry into of those arrangements but subject to matters such as inflation. That, however, is not the course upon which the Tribunal embarked.

In considering the arm's length price for the transactions between the applicant and Laddeton, the Tribunal took no account of the evidence of Mr Spencer, to which I have already referred. The mere fact that goods were ordered on a store by store basis logically did not disturb the effect of that evidence. If the Tribunal was of the view that it did, then at least it should have given the expert witness the chance of commenting upon that result. But neither counsel for the Commissioner nor the Tribunal suggested to Mr Spencer that his conclusions as to reasonable prices and volume discounts applied only where the volume purchaser had one store and not where the volume purchaser had a number of stores which ordered on a store by store basis.

Although the matter was not fully argued before me, there is I think much to be said for the view that s. 4A(5)(c)(i), where it uses the words ``no agreement of a kind referred to in

ATC 4800

paragraph (b) of sub-section (1) had been entered into'' does not necessarily require the hypothesis that no service agreement was entered into at all. It is possible, and indeed so much was conceded by counsel for the Commissioner, that the words ``of a kind'' require the hypothesis that in determining the arm's length price, that determination is to be made having regard to the circumstances of the transactions between the vendor and purchaser, which could include the service arrangement, provided, however, that the arrangement is not one entered into for the necessary sale value reduction purpose. In other words, the arm's length price would be the price at which it would be expected that the goods would be sold if no tax-avoidance had been involved. So construed, the outcome of the section would accord with the explanatory memorandum.

By way of example, let it be assumed that there was a sale of goods ex-factory with an agreement for delivery of those goods to the purchaser. Let it further be assumed that the delivery agreement had been entered into for the necessary sales tax reduction purpose and at an inflated fee. The hypothesis upon which the arm's length price would be determined would continue to assume a sale ex-factory with an arrangement for delivery, save that the ordinary commercial rates would apply to the arrangement for delivery and this would leave a proper arm's length price for the sale of the goods. Likewise, a case may be assumed where there is a sale of goods ex-factory and an agreement for delivery but the agreement for delivery is at an ordinary commercial rate, albeit that one of the parties had the necessary sale value reduction purpose. Section 4A would continue to apply but the sale value reached would not need alteration because if there had been no sale value reduction purpose the same figures would have been arrived at in an arm's length negotiation, both for the sale of the goods and for their delivery.

I would make another comment on the construction of s. 4A(5). As presently advised, I am of the view that the Commissioner, or the Tribunal in its place, is required to consider not merely s. 4A(5)(c)(i) but also s. 4A(5)(c)(ii). I say this because the sale value ultimately to be calculated, where both ss. 4A(5)(c)(i) and (ii) apply, is the lesser of the two amounts. Unless the Commissioner (or the Tribunal in its place) considers both matters, he will not know which of the two amounts will be the lesser.

The position of the franchisees

In my view there was no evidence from which it could be concluded that the franchisees were dealing with the applicant other than at arm's length in relation to the relevant transactions. Hence s. 4A(5) could have had no application. That means that if the preconditions for the operation of s. 4A were satisfied, the sale value would need to be determined under s. 4A(4). The Tribunal failed to consider this and when the matter is returned to the Tribunal for further consideration, it will be necessary for the Tribunal, if it concludes that s. 4A(1) applies but that the applicant and the franchisees were dealing with each at arm's length in relation to the transaction, to apply s. 4A(4).

Lest I be thought to have accepted all the applicant's submissions as to s. 4A, I would make two comments. First, the fact that an advertising levy was all spent, or the fact that the applicant was required itself to contribute to that levy and top up the levy when insufficient, does not mean that there can have been no relevant sale value reduction purpose. Nor does it say anything about the arm's length price. Further, although the advertising was point of sale advertising, it of necessity also advertised the goods of the applicant. Retail advertising, if successful, operates to increase the demand for wholesale sales as a consequence of an increase in the demand for retail sales. The same may be said of the services said to be provided for the 4% franchise fee. A finding that these services were actually provided in connection with the goods, and that the applicant actually expended funds in at least the amount paid by the franchisees in providing the services, does not of itself negate the finding of a sale value reduction purpose.

It follows, in my view, that the matter should be remitted to a Tribunal differently constituted for reconsideration, with or without the taking of further evidence as the Tribunal may direct.

THE COURT ORDERS THAT:

1. Applications allowed.

2. Matters remitted to the Tribunal (to be heard by a Tribunal differently constituted) for decision in accordance with law, with or

ATC 4801

without the hearing of fresh evidence at the discretion of the Tribunal.

3. Respondent to pay applicant's costs of the applications to this Court.

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