CCA BEVERAGES (SYDNEY) PTY LTD v FC of T

Judges:
Lindgren J

Court:
Federal Court

Judgment date: Judgment handed down 5 December 1995

Lindgren J

Nature of proceedings

In these proceedings, remitted by the High Court of Australia to this Court, the applicant (``CCA'') seeks relief directed to establishing the basis and extent of its liability to pay sales tax on the occasion of its sale by wholesale of soft drinks to certain retail outlets. As well, it seeks relief directed to establishing that it overpaid sales tax on the occasion when it purchased the containers from the manufacturers of them and is entitled to a credit or refund.

General background

General background facts

CCA purchased cans, ``PET'' bottles and glass bottles from the manufacturers of them for prices which included amounts of sales tax. I use the word ``containers'' to describe both (a) what CCA bought, and (b) what it later sold, filled with soft drink, to retailers, but this is not to pre-judge an issue which arises from the fact that in the form in which they were purchased the containers were in a form different from that in which, with their contents, they were sold to retailers.

The containers are cans, glass bottles and ``PET'' bottles (CCA buys containers of the last type, being a form of plastic bottle, from ACI Petalite Operations Pty Ltd). CCA requires the manufacturers of the containers, that is the sellers of them to CCA, to comply with highly developed specifications. These are directed to ensuring that the containers keep the air out and the liquid and gas in, are safe and convenient to use and are easy to stand and pack. When they are delivered to CCA, the cans comprise a can body and a can end, and the glass and PET bottles comprise a body and cap. CCA flushes the containers (of all three kinds) with carbon dioxide to eliminate air in them. The result is that the only air in a container is the small amount which is dissolved in the carbonated product. CCA labels the containers and fills them with soft drink beverages of which it is the manufacturer then ``seals'' the containers by means of hermetic sealing in the case of the cans and screw-on plastic caps in the case of the bottles. The sealing or covering device affixed to or on a container is called a ``closure''.

CCA sells the cans and bottles of soft drinks for entire prices, that is to say, prices which are not expressed to be allocated so much to the container and so much to the contents.

The case arises under the ``Streamlined Sales Tax'' legislation which commenced on 1 January 1993. As will be noted later, there was an amendment relevant to this case on 26 May 1993. CCA has sought relief in respect of certain sales by it just before 26 May (``the First Sales'') and certain sales by it just after 26 May (``the Second Sales'').

The First Sales were sales on 25 May 1993 to 7-Eleven of Canley Heights, New South Wales and to Domino's Pizza of Revesby, New South Wales. In CCA's amended statement of claim the containers included in the First Sales are called ``the First Relevant Containers''. The Second Sales were sales on 27 May 1993 to Tops Chicken of Sydney Square, Sydney Town Hall and to Domino's Pizza, Dee Why, New South Wales. In CCA's amended statement of claim, the containers included in the Second Sales are called ``the Second Relevant Containers''. In the pleading, the First Relevant Containers and the Second Relevant Containers are collectively referred to as ``the Containers''. I will use these various abbreviated forms of reference.

It was not in contest that CCA had purchased the Containers for prices which included sales tax. Although CCA had been entitled to quote its registration number on those purchases it did not do so.

All four purchasers of the cans and bottles of soft drink place the soft drinks in special purpose display refrigerators in their shops. In each case, the shop sells foodstuffs as well as the soft drinks. In each case there is no seating accommodation to facilitate the consumption of food and drink within the shops. Generally, the soft drinks are sold to customers in association with a sale of food and both are taken away from the shop for consumption elsewhere.

The First Sales and the Second Sales were for prices which included amounts which CCA calculated as amounts payable by it for sales tax. The parties are at issue as to the proper method of calculation of the sales tax payable. It is not in dispute that the rate of tax payable is 20% of the taxable value of the sales or that the taxable value is the price for which the contents were sold. But CCA submits that in accordance with the legislation this was an amount substantially less than the price on CCA's invoice to the retailers. The Commissioner, on

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the other hand, contends that the price is the invoice price or, in the alternative, an amount only a little below it.

The relief sought by CCA

The relief sought appears in para 22 of the amended statement of claim. That paragraph, as amended on the hearing, is as follows:

``22 And the applicant claims the following relief:

(a) a declaration that the taxable value of each sale of soft drinks referred to in paragraph 8 does not include a component for any of the First Relevant Containers associated therewith;

(b) a declaration that the aggregate value of the First Relevant Containers is $60.11 or such other amount as may be determined by the Court;

(c) a declaration that the taxable value of the sale of soft drinks referred to in paragraph 15 does not include a component for any of the Second Relevant Containers associated there- with;

(d) a declaration that the aggregate value of the Second Relevant Containers is $230.56 or such other amount as may be determined by the Court;

(e) a declaration that the First Relevant Containers are not covered by Item 27 Schedule 1, Sales Tax (Exemptions and Classifications) Act 1992;

(f) a declaration that the Second Relevant Containers are not covered by Item 27 Schedule 1, Sales Tax (Exemptions and Classifications) Act 1992;

(g) a declaration that Containers are covered by Item 1 Schedule 2, Sales Tax (Exemptions and Classifications) Act 1992;

(h) costs; and

(i) such further or other order as the Court thinks fit.''

Sub-paragraphs 22(a), (b) and (e) relate to the First Sales. Sub-paragraph 22(c), (d) and (f) relate to the Second Sales. Sub-paragraphs (a) and (c) are intended to establish that the taxable values of the First Sales and the Second Sales are not increased by the inclusion of a component for the First Containers and Second Containers respectively by the operation of s 35 of the Sales Tax Assessment Act, 1992 (``the Act''). Sub-paragraphs (b) and (d) assume this to be correct and are directed to a step in the ascertainment of the taxable value of those dealings. Those sub-paragraphs are intended to establish that by the operation of s 95 of the Act, the prices for which, for the Act's purposes, the Containers are to be treated as having been sold by CCA to the retailers are the amounts mentioned in them. Those amounts are substantially greater than (i) the prices for which CCA had purchased the Containers and (ii) the amounts contended for by the Commissioner (this was either nil or in the alternative the prices for which CCA had purchased the Containers).

According to CCA's case as reflected in the relief sought, the higher the prices for which the Containers are to be treated as having been sold by CCA, the less the balances representing the prices for which the contents are to be treated as having been sold. The latter represent the taxable values of the First Sales and the Second Sales. If CCA obtains the relief which it seeks in this respect, one way of describing the result is to say that part of the price for which CCA has sold to the retailers has escaped the tax net, namely, in the case of the First Sales $60.11 minus the amount for which CCA had purchased the First Relevant Containers, and in the case of the Second Sales $230.56 minus the amount for which CCA had purchased the Second Relevant Containers.

Sub-paragraphs 22(e) and (f) are directed to establishing that the First Relevant Containers and the Second Relevant Containers respectively are not covered by Exemption Item 27 in Schedule 1 to the Sales Tax (Exemptions and Classifications) Act 1992 (``the Exemptions and Classifications Act''). The Commissioner contends that the Containers fall within Exemption Item 27 and by the times of the First Sales and Second Sales were ``Australian-used goods'' and therefore not ``assessable goods''. He submits that the legislation contemplates that a manufacturer of goods to be sold in containers, such as CCA, would quote its registration number when buying the containers and that on the manufacturer's subsequent sale of the ``containers of contents'', the containers would be exempt and the whole of the sale price would be attributable to the contents and would be the taxable value of that sale. The Commissioner accepts that s 82 of the Act gave

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CCA a choice of quoting or not quoting when it purchased the Containers but says that Exemption Item 27 still applies. CCA says that it does not apply because it is expressed not to cover ``goods that are for use by the exemption user [CCA] in marketing or delivering:... take- away beverages...'' and the beverages in the Containers sold by CCA to the retailers in the present case were ``take-away beverages''.

Finally, sub-para 22(g) of the amended statement of claim is directed to establishing that both the First Containers and the Second Containers when they were purchased by CCA were subject to sales tax at a rate of only 10% of the prices paid for them, with the result that CCA is entitled to a refund since it paid sales tax calculated at the general rate of 20%. The relevant terms of Item 1 of Schedule 2 to the Exemptions and Classifications Act are noted below.

Background in more detail, outline of parties' submissions and relevant legislative provisions

General nature of sales tax and of CCA's case

The legislative policy found by Dixon J to underlie the Sales Tax Assessment Acts (Nos 1-9) of 1930-1932 in
DFC of T (SA) v Ellis & Clark Ltd (1934) 3 ATD 98 at 100; (1934) 52 CLR 85 at 89 ff and by the Full High Court in
Brayson Motors Pty Ltd (In liq) v FC of T 85 ATC 4125 at 4127; (1985) 156 CLR 651 (``Brayson's case'') at 656-657, also characterises the new ``Streamlined Sales Tax'' regime:

``That general policy was and is to levy a tax upon all goods after they are imported into or produced in Australia and before they reach the consumer. It was not intended that the retail price of goods should be increased by the incorporation in it of more than one amount of tax or that the retail sale itself should attract tax. It was, however, intended that they should be taxed at their full wholesale value. That being so, the policy of the legislation was and is that sales tax should, in the ordinary case, be a tax upon the last wholesale sale.''

(Brayson's case at ATC 4127; CLR 657)

Although the last wholesale sale is the paradigm ``taxing point'' for sales tax, the legislation also fixes upon other events as taxing points, such as ``application to own use''. Containers have posed peculiar difficulties. A container begins its commercial existence as a product which is manufactured and sold (and bought) as an entity and in its own right. Later it is ``combined'' with contents to form what is commercially a new and different product, in which the container, although physically necessary or convenient, performs a role subservient to the contents and is, at least generally, bought and sold for the sake of the contents alone and without the allocation of any part of the price to the container.

In general terms, CCA's case is that since it paid sales tax on the Containers when it bought them, sales tax was imposed on its subsequent wholesale sales in respect of the contents alone; that the amount in respect of which that tax is to be levied is a fraction of the wholesale selling price; and that the denominator of that fraction is the total cost of production of the final composite product, that is, the Containers of beverages, and that its numerator is that amount minus the cost of production of the Containers in their final form (including the cost of closures and labels).

I find it convenient to give a more detailed account of the background facts and of the relevant legislative provisions in the course of giving an outline of the parties' submissions.

Outline of CCA's submissions in chief in relation to method of calculation of sales tax on the First Sales and the Second Sales (including relevant legislative provisions)

The notions of ``assessable goods'' and ``assessable dealings'' are essential to liability. The expression ``assessable goods'' is defined in s 5 of the Act to mean ``Australian goods or imported goods'' but not to include ``Australian-used goods''. The same section defines ``Australian goods'' and ``Australian- used goods'' relevantly as follows:

```Australian goods' means goods that have been manufactured in Australia, but does not include imported goods;

`Australian-used goods' means:

(a) goods that have been applied to a person's own use in Australia (whether the goods are Australian goods or imported goods);...''

Part 3 (ss 16-50A) of the Act deals with ``LIABILITY TO TAX''. Section 16 is a pivotal provision. It is as follows:

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``16(1) Table 1 sets out all the assessable dealings that can be subject to sales tax.

16(2) If the time of an assessable dealing (as specified in column 4 of the Table) is on or after the first taxing day, and no exemption applies under Division 2 of this Part , then:

(a) the dealing is a taxable dealing;

(b) the person specified in column 3 is the person liable to the tax;

(c) the tax becomes payable at the time of the dealing, as specified in column 4;

(d) the tax is due for payment at the time that applies under Division 2 of Part 5.

16(3) To calculate the amount of the tax:

(a) determine the taxable value of the dealing under Division 3 of this Part ;

(b) deduct any exempt part of the taxable value that applies under Division 4 of this Part;

(c) multiply the result by the rate that applies under the Exemptions and Classifications Act.''

(emphasis supplied)

The exemptions which apply under Division 2 of Part 3 are discussed later. The first section in Division 3 of Part 3 is s 34 which provides that ``The general rules for calculating the taxable value are set out in Table 1''. Table 1 is divided into columns which identify various categories of ``assessable dealing'', the ``person liable'' to pay tax in respect of such a dealing, the time at which the tax becomes payable, and the ``normal taxable value'' of the dealing. I will use the abbreviation ``AD'' to refer to the assessable dealings mentioned in Table 1. Item AD1a and Item AD2a identify assessable dealings constituted by sales by a person who manufactured goods sold in the course of a business. CCA manufactured in the course of a business the beverages sold in the First Sales and the Second Sales. Item AD1a is the ``paradigm case'' referred to in Brayson's case noted earlier: a ``wholesale sale by a person who manufactured the goods in the course of any business''. The ``normal taxable value'' of such a dealing is ``the price (excluding sales tax) for which the goods were sold'', in the present case, the price (excluding sales tax) for which the beverages were sold. The rate of tax to be applied to that price is the rate applicable under the Exemptions and Classifications Act: para 16(3)(c) of the Act.

But a manufacturer might sell particular goods, only by retail. Item AD2a is a ``retail sale by a person who manufactured the goods in the course of any business'' in respect of which the seller is liable to pay sales tax calculated at the appropriate rate on ``the notional wholesale selling price''. Section 5 defines ``wholesale sale'' to mean, relevantly, ``a sale to a person who purchases for the purpose of resale'' and the same section defines ``retail sale'' to mean ``any sale that is not a wholesale sale''. Note 2 to Table 1 defines ``notional wholesale selling price'' as ``the price (excluding sales tax) for which the taxpayer could reasonably have been expected to sell the goods by wholesale under an arm's length transaction''.

Note 1 to Table 1 is as follows:

``1. Table 1 does not apply to a dealing with goods unless the goods are assessable goods immediately before the time of the dealing, and are in Australia at the time of the dealing.''

The Containers and their contents were manufactured in Australia and did not include imported goods. But CCA says that by doing things to the Containers and filling them, it applied them to its own use with these results: they became Australian-used goods and ceased to be ``assessable goods'' and Table 1 did not apply to the First Sales or the Second Sales in so far as they were sales of the Containers.

The sales by CCA of the beverages to the retailers were wholesale sales. But what of its earlier purchase of the Containers? CCA says that it purchased them not for the purpose of resale but for the purpose of filling them up with its soft drinks and in this way applying them to its own use. The expression ``application to own use'' is defined in s 5 in relation to goods, to include,

``(e) doing anything with the goods that results in the goods becoming a container for other property;''

Section 5 defines ``AOU'' to mean ``application to own use'' and ``packing AOU'' as the particular form of AOU referred to in para (e) above. I have referred earlier to what CCA did with the Containers. It was common ground that what CCA did with them resulted in their becoming containers for the beverages which CCA manufactured.

CCA's packing AOU did not fall within the terms of any of the categories of assessable

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dealing. CCA submits that it would have fallen within these terms if CCA had purchased the Containers under quote, since Item AD3c reads:

``AOU by a person who is not the manufacturer of the goods, but who obtained the goods under quote.''

In such a case the applier (CCA) must pay sales tax on:

``(a) the purchase price, if the goods were purchased under quote;

(b) in other cases, the notional wholesale selling price.''

According to the submission, if CCA had obtained the Containers under quote, since it did so by purchasing them, para (a) would have applied. CCA did not obtain the Containers under quote and paid sales tax when it purchased them (calculated as 20% of the purchase price). According to CCA's submission, for this reason it was not liable to pay tax again upon packing AOU.

What must now be considered is the selling by CCA. The evidence of Philip Rogers, the Manager of Accounting Systems employed by CCA, was that CCA paid sales tax calculated in respect of the First Sales as follows:

``(a) The cost of each component of the filled container was identified; and

(b) The cost of the filled container less the cost of the container was calculated as a percentage of the total cost of the filled container, and then that percentage was applied to the applicable sales tax rate being 20%, and the resulting percentage was applied to give an amount which was recorded on the invoice and charged to the customer and remitted to the respondent.''

Mr Rogers' evidence is that on the Second Sales CCA charged the retailers as part of the wholesale selling price, sales tax calculated on the entire selling price excluding sales tax.

CCA remitted to the Commissioner the sales tax which it charged retailers on both the First Sales and the Second Sales.

Mr Rogers gave evidence that on and from 27 May 1993, CCA resumed quoting its sales tax registration number to suppliers of containers and ceased paying sales tax as part of the price which it paid for them. But the Second Sales occurred on 27 May. The Second Relevant Containers included in those sales must have been bought earlier than that date. In any event, para 16 of the amended statement of claim pleads expressly that the Second Relevant Containers were purchased by CCA for a price that included sales tax. Paragraph 9 of the amended statement of claim in relation to the First Relevant Containers pleads to the same effect. The evidence of Mr Rogers that on and from 27 May 1993 CCA resumed quoting its sales tax registration number to suppliers of containers is irrelevant to any issue for decision.

CCA submits that Item AD1a catches the wholesale sale by CCA to retailers of the beverages. The fifth column against Item AD1a therefore makes the ``normal taxable value'' of that dealing the price (excluding sales tax) for which CCA sold the beverages.

According to CCA, s 35 of the Act is central to the issues for decision in the present case. Assume that under the former legislation a manufacturer such as CCA sold by wholesale in a way which distinguished between container and contents by appropriating the sale price as between the two elements. Assume further that a manufacturer of contents had paid sales tax on its purchase of the container. CCA submits that because it had applied the container to its own use, it ceased to be ``goods'' for the purpose of Sales Tax Assessment Act (No 1) 1930 (Cth) and sales tax fell to be assessed by reference to whatever figure the beverage manufacturer and retailer had allocated to the contents, even if the amount allocated to the container substantially exceeded the price paid for it. CCA referred to
Slades Soft Drink Pty Ltd v FC of T, unreported, FCA/Jenkinson J, 6 August 1991 (VG 299 of 1990) as an illustration of a case where the Commissioner apparently felt compelled to accept the correctness of the position as just outlined.

The opening words of sub-s 35(1) make it clear that s 35 was designed to counter this means of avoidance of tax. Section 35 provides as follows (I have shown below the form of sub-s (4) both before and after the amendment effected by Act No 18 of 1993, applicable to taxable dealings with goods taking place after 26 May 1993):

``35(1) This section deals with situations in which a container is associated with goods ( `the contents' ) that are the subject of a taxable dealing. The aim of this section is to ensure that the taxable value will include a component for the container, even though

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the parties may have allocated a separate amount to the container.

35(2) If:

(a) the taxable value of the dealing is calculated by reference to the price (excluding tax) for which the contents were sold; and

(b) the parties have allocated a separate amount to the container;

then the taxable value is increased by so much of the value of the container as is recouped by the seller in connection with the sale of the contents.

35(3) If the taxable value of the dealing is not calculated as mentioned in subsection (2), then the taxable value is increased by so much of the value of the container as could reasonably be expected to have been recouped by the taxpayer in connection with a hypothetical sale of the contents at the time of the actual taxable dealing with the contents.

35(4) [in its form prior to the substitution of sub-s (4) by Act No 18 of 1993, s 69, applicable to taxable dealings with goods taking place after 26 May 1993] This section does not apply if:

(a) the taxpayer has borne tax on the container; or

(b) the container is a shipping container covered by exemption Item 60.

35(4) [in its form as substituted by Act No 18 of 1993, s 69, applicable to taxable dealings with goods taking place after 26 May 1993] This section does not apply if the container is a shipping container covered by exemption Item 60.''

CCA submits that in respect of the First Sales, no part of s 35 applied because CCA had borne tax on the First Relevant Containers (see para 35(4)(a)). In addition, it submits that since the parties did not allocate a separate amount to the First Relevant Containers, sub-s 35(2) did not apply to increase the taxable value of the First Sales (para 35(2)(b)). CCA submits that in relation to the Second Sales, sub-s 35(2) did not apply to increase their taxable value because again the parties did not allocate a separate amount to the Second Relevant Containers (para 35(2)(b)). In support of the proposition that CCA had ``borne tax'' on the Containers, CCA refers to sub-s 11(3) of the Act which is as follows:

``A person is taken to have borne tax on goods if the person purchased the goods for a price that included tax....''

As noted earlier, CCA paid for the Containers a price that included sales tax.

CCA submits that Item AD1a makes it necessary to know the price for which the contents were sold. According to the submission, CCA and the purchasers from it did not allocate a price to the beverages themselves so that sub-s 95(1) of the Act is activated. Sub- section 95(1) of the Act is as follows:

``95(1) If there is a need to know the price for which particular goods were sold, but the parties have not allocated a particular amount to those goods, the price for which those goods were sold is (for the purposes of the sales tax law) the price for which the goods could reasonably be expected to have been sold if they had been sold separately.''

CCA contends that once it is accepted that s 35 does not apply to increase the taxable value of the First Sales and the Second Sales, sub-s 95(1) operates to deem as the price for which the contents were sold and therefore as the taxable value of the dealings, the price for which the contents would have been sold if they had been sold separately.

CCA submits that the application of sub-s 95(1) to the First Sales produces the result that the contents were sold for the aggregate invoice price (less sales tax and delivery charge) less $60.11 being the aggregate value of the First Relevant Containers. Similarly, it submits that in relation to the Second Sales the comparable amount to be deducted from the invoice prices (less sales tax and delivery charge) for the Second Relevant Containers is $230.56. The Commissioner did not submit that if the approach advocated by CCA was correct, these particular figures should not be accepted.

CCA led expert evidence from Professor R G Walker, Professor of Accounting at the University of New South Wales, in response to the following three questions:

``(a) what is the appropriate method (or methods) by which a value can be attributed to the contents of soft drink containers, in circumstances where the containers and the contents are sold together;

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(b) is it reasonable to determine the price for which the contents of soft drink containers are sold to retailers by apportioning the wholesale selling price between the containers and their contents; and (if the answer to (b) is affirmative),

(c) is it reasonable to conduct this apportionment exercise by ascertaining the costs of each of the container and contents, determining the ratio of container costs and contents costs, and determining the costs of the contents by applying that ratio to the wholesale selling price.''

It is convenient to set out Professor Walker's answer to question (a) in terms of paras 11-13 of his affidavit (as corrected by him in oral evidence):

``11. The options are to regard the wholesale price of the contents as being:

(a) equal to the direct cost of the contents;

(b) equal to the direct cost of the contents, plus a proportion of indirect costs;

(c) a proportion of the wholesale price determined by apportioning the wholesale price between contents and container in proportion to their respective direct input costs;

(d) a proportion of the wholesale value determined by apportioning the wholesale price between contents and container in proportion to their respective direct input costs plus unit indirect costs; or

(e) a proportion of the wholesale price, determined by deducting from the wholesale price the cost of the container and unit indirect costs;

(f) a proportion of the wholesale price, determined by deducting from the wholesale price the cost of the container.

12. As an aid to exposition, I will adopt the following assumptions:

• cost of container (including cost of labels and closures)$0.20

• direct cost of contents$0.16

• estimated unit indirect costs per filled container$0.04

• wholesale price$1.00

Hence the following estimates would be produced:

• Method (a) 16 cents

• Method (b) 20 cents

• Method (c) 44 cents (i.e. 16c/36c × $1.00)

• Method (d) 50 cents (i.e. 20c/40c × $1.00)

• Method (e) 76 cents (i.e. $1.00 − 24c)

• Method (f) 80 cents (i.e. $1.00 − 20c)

13. While arguments may be available to support any one of these methods, in my view it is not possible to demonstrate unequivocally the superiority of one method over another. My preference is for Method (d), for reasons outlined below.''

In response to question (b) Professor Walker expressed the opinion that it is reasonable to determine the price for which the contents of soft drink containers are sold by wholesale to retailers by apportioning the wholesale selling price between the containers and their contents, and the Professor observed that methods (c), (d), (e) and (f) above were all forms of such apportionment.

Finally, in answer to question (c), Professor Walker expressed the opinion that the method referred to in the question was a reasonable method of apportionment, and observed that methods (c) and (d) above conformed to that method. The Professor went on to say why methods (c) and (d) were reasonable and why method (d) was the one to be preferred.

Outline of CCA's submissions in chief in relation to rate of tax payable on CCA's purchase of the Containers

The second issue for decision arises under the Exemptions and Classifications Act. This relates to the rate of tax properly applicable on CCA's initial purchase of the Containers.

CCA submits that the rate of tax applicable is 10% rather than 20% because the Containers fall within Item 1 of Schedule 2 to the Exemptions and Classifications Act. That Item is relevantly as follows:

``(1) The following goods of a kind ordinarily used for household purposes:

...
(b) goods of a kind ordinarily used in connection with preparing, serving or consuming food or beverages''.

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``(d) goods of a kind ordinarily used in connection with cooking, preserving or storing food or beverages''.

(The rate applicable to Schedule 2 classes of goods was later increased to 11% but it was 10% at the times of the First Sales and the Second Sales.) In support of its submission that the Containers fall within Item 1, CCA refers to
Hygienic Lily Limited v DFC of T 87 ATC 4327; (1987) 13 FCR 396 (Gummow J) (``Hygienic Lily'') and
FC of T v Chubb Australia Ltd 95 ATC 4186; (1995) 128 ALR 489 (FCA/FC) (``Chubb'').

Outline of Commissioner's submissions in relation to method of calculation of sales tax on the First Sales and the Second Sales (including relevant legislative provisions)

The Commissioner's submissions commence with a reference to para 20.2 of the Explanatory Memorandum which accompanied the Sales Tax Assessment Bill 1992. Chapter 20 of that Explanatory Memorandum dealt with ``Containers'' and para 20.2 is as follows:

``20.2 The general approach of the new law will be to apply the same treatment to containers as applies to their contents. This is also the approach of the existing law, but its implementation is complicated and numerous exceptions have obscured its effect. The new law will be designed to `tax' containers at the same time and at the same rate (if any) as their contents. This will be achieved by the device of making containers liable to tax at the time that their contents are put in them, but exempting the dealing from tax if the contents are assessable goods. When the contents subsequently become liable to tax, the value of the container will be included in the taxable value of the contents.''

Paragraph 20.4 states that a container would be ``taken to be applied to own use'' at the time that contents are put in it or anything else is done which causes it to become a container, and that this process would be known as a ``packing AOU''. The paragraph continued by stating that a packing AOU would be an assessable dealing if it satisfied the requirements of one of the AOU assessable dealings (ADs 3a, 3b, 3c, 13a and 13c) and that such an assessable dealing would be exempted from tax if, inter alia, all the container's contents were assessable goods intended to be the subject of a later assessable dealing. The Commissioner submits that the legislation is to the effect indicated in the Explanatory Memorandum.

Division 2 of Part 3 of the Act provides for ``Exemptions''. Subdivision A provides for ``Exemptions based on exemption Items'' and Subdivision B for ``Exemptions based on quoting''. I turn to Subdivision B first. Sub- section 27(1) within Subdivision B (which comprises only ss 27 and 28) provides that a sale is not taxable if the purchaser quotes for the sale at or before the time of the sale. The Commissioner submits that the sales by the container manufacturers to CCA fall within Item AD1a (``wholesale sale by a person who manufactured the goods in the course of any business'') rather than Item AD2a, but says that I do not need to decide between these alternatives, because, for the reasons appearing below, an ``exemption applie[d] under Division 2 of [Part 3]'' (see sub-s 16(2) of the Act quoted earlier).

Section 5 defines ``quote'' to mean, relevantly, ``quote a registration number''. ``QUOTING'' is the subject of Part 7 (ss 82-91). Paragraph 82(1)(f) provides as follows:

``82(1) A registered person ( `the quoter' ) may quote a registration number for a dealing with goods if, at the time of quoting, the quoter has the intention of dealing with the goods in any of the following ways:

(a)... - (ea)...;

(f) using the goods so as to satisfy an exemption Item that is in force at the time of quoting;...''

The Commissioner accepts that under this provision, CCA had an option to quote or not to quote when it purchased the Containers from the manufacturers of them.

I turn now to Subdivision A of Division 2. Subdivision A comprises ss 24 to 26. Sections 24 and 25 are as follows:

``24 An assessable dealing is not taxable if:

(a) the goods are covered by an exemption Item that is in force at the time of the dealing; and

(b) all the requirements of that Item have been met at or before the time of the dealing.

25 A non-lease AOU is not taxable if the applier, at the time of the AOU, intends to

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deal with the goods so as to satisfy an exemption Item that is in force at the time of the AOU.''

The expression ``exemption Item'' is defined in s 5 to mean ``an Item or sub-item in Schedule 1 to the Exemptions and Classifications Act''. Exemption Item 27 in Schedule 1 to the Exemptions and Classifications Act is as follows:

``(1) Goods ( `the main container' ) for use by a person ( `the exemption user' ) as a container exclusively for contents consisting wholly of assessable goods (or of assessable goods and containers for those assessable goods).

(2) In addition, the exemption user must intend or expect that:

(a) the main container will be used as a container in relation to the contents at the time of an assessable dealing that consists of:

(i) a sale of the contents; or

(ii)...

(iii)...; and

(b) possession or control of the main container will pass to the person who is the purchaser,... for that assessable dealing.

(3) This Item does not cover goods that are for use by the exemption user in marketing or delivering:

(a)...

(b) take-away beverages or foodstuffs (whether for consumption on the premises from which they are sold or elsewhere).''

It will be recalled that in sub-paras 22(e) and (f) of the amended statement of claim, CCA seeks declarations that the First Containers and the Second Containers are not covered by Exemption Item 27.

The Commissioner submits, in terms of s 24, that at the time of CCA's purchase of the Containers, they were covered by Exemption Item 27 all the requirements of which were met at that time, and, in terms of s 25, that CCA's subsequent application to its own use of the Containers by filling them was not taxable because CCA intended to deal with the Containers so as to satisfy Exemption Item 27. According to the Commissioner's submission, even if CCA had obtained the Containers under quote so that the terms of Item AD3c were satisfied (``AOU by a person who is not the manufacturer of the goods, but who obtained the goods under quote''), ss 24 and 25 would have rendered the packing AOU non-taxable. The Commissioner submits that although s 82 gave CCA a choice whether or not to quote its registration number upon its purchase of the Containers, the legislation contemplates that it would do so in view of the fact that the Containers were covered by Exemption Item 27.

In relation to the sales by CCA, the Commissioner submits that the taxable value of the dealing included the value of the Containers the whole of which was recouped by the seller in the selling price (cf sub-s 35(3)). The Commissioner refers to paras 9.10 and 20.19 of the Explanatory Memorandum. Relevantly, these are as follows:

``9.10 The taxable values that will apply to containers are discussed below:

(i) If the assessable dealing is a wholesale sale: the container component will be so much of the value of the container as is recouped in the sale of the contents;

Note: Generally, there will be no need to add a container component to the taxable value of the contents, as the contents would usually be sold for a single price that includes a recoupment component for the container.

[Subclause 35 (2)]

(ii) If the assessable dealing is not a wholesale sale: ...

[Subclause 35(3)]''

``20.19 If an exemption has applied to the packing AOU, then there are special rules which will add to the taxable value of the contents, an amount that reflects the container component recouped in a taxable dealing with the contents. Generally, it will not be necessary to specifically add a container component to the taxable value of the contents because the contents are usually sold for a single price that includes a component for the container. However, if the sale price of the contents does not include a component for the container, then the taxable value must be increased by the amount of the container component. The

ATC 4875
amount of the container component will vary depending upon the assessable dealing with the contents:...''

The Commissioner submits that where s 35 applies to increase the taxable value of contents by the inclusion of a component for their container, the only rate of tax applicable is that applicable to the contents since the section does no more than increase the taxable value of the contents. CCA does not submit to the contrary.

The Commissioner accepts that sub-s 35(2) was thought to be necessary to meet the situation in which parties distinguish between the price being paid for a container and the price being paid for its contents, but submits that underlying this is an assumption that the normal taxable value is the entire price (excluding sales tax) for which the ``container of contents'' is sold (Item AD1a).

The Commissioner submits that if, as it does, the Act makes the quotation of a registration number optional, it is reasonable to suppose that the legislation was framed on the basis that the same ultimate tax result would flow whether the registration number was quoted or not rather than depend on how the option was exercised.

The Commissioner says that if CCA's submissions are accepted, there will be a part of the value of the Containers which will ``escape the tax net'' contrary to what must have been the legislative intention, that part being the difference between the value of the Containers in their final form and the prices which CCA had paid for them. The Commissioner submits that this result should be avoided if there is an alternative tenable construction available.

In relation to ss 35 and 95, the Commissioner makes several submissions. First, he submits that a proper construction of the invoices issued by CCA to the retailers is that the amounts of the invoices represent charges for the contents. On that basis, sales tax is to be charged on the amounts of those invoices (less sales tax and delivery charges), and CCA is entitled to a credit in respect of the tax which it earlier paid on its purchase of the Containers. The Commissioner says that the relevant credit item in Table 3 in Schedule 1 to the Act is Item CR2 the summary of which is: ``Claimant has borne tax, even though entitled to quote registration number.'' (Credits are provided for in Part 4 (ss 51-60) of the Act.)

The Commissioner submits that the Act is based on the premise that if the price for the contents already includes a recoupment component for their container, there is no occasion for any adjustment to that price, the entirety of which is the subject of a calculation of sales tax at the rate appropriate for the contents. Again, he refers to s 35 and to paras 9.10 and 20.19 of the Explanatory Memorandum quoted earlier. The invoices issued by CCA to retailers shows a single price for what was sold. The Commissioner submits that those invoices were in respect of a ``wholesale sale by a person [CCA] who manufactured the goods [the beverages] in the course of any business'' (Item AD1a). Accordingly, so goes the submission, there is no question of apportionment.

Secondly, and in the alternative, the Commissioner makes a submission based on the assumption, contrary to his primary submission, that it is necessary to apportion the wholesale price as between container and contents. On the basis of that assumption he submits that the amount attributable to the Containers is the amount which CCA had paid for them. In this regard, the Commissioner led expert evidence from John Henry Banks, chartered accountant, a director of KPMG Corporate Finance (NSW) Pty Ltd and partner of KPMG Peat Marwick in its Corporate Advisory Services Division. Mr Banks swore an affidavit dated 31 July 1995 in reply to that of Professor Walker noted earlier. In short, Mr Banks said that if it is necessary to apportion the wholesale selling price as between contents and Container, the amount to be attributed to the Container is the amount which had been paid for it. Another way of expressing the position according to Mr Banks is that the whole of the added value derived from what CCA did attached to the beverages, the Containers being merely things which are thrown away. The Commissioner also submits that it is appropriate as a matter of practicality that in the artificial division of the wholesale selling price as between a container and its contents, the container should have a value no greater than the price previously paid for it.

Thirdly, and again in the alternative, the Commissioner submits that the sale of the end product should be treated as a sale of a newly manufactured good. He refers to the definition of ``manufacture'' in s 5 as including:

ATC 4876

``(b) combining parts or ingredients so as to form an article or substance that is commercially distinct from the parts or ingredients;...''

According to this submission, the sale of the ``containers of beverages'' was an assessable dealing (AD1a), the ``manufactured goods'' in question being the ``containers of beverages''. On this basis, so the submission goes, CCA would be entitled to a credit before the First Sales and the Second Sales (Exemption Item 27; credit item CR2 (``Claimant has borne tax, even though entitled to quote registration number'')) or after the First Sales and the Second Sales (Exemption Item 27; credit item CR4 (``Avoiding double tax on the same goods'') or in the case of the Second Sales, the newly introduced credit item CR8A (``Ensuring no double tax in respect of containers'')).

Fourthly, as an alternative to the foregoing submissions, the Commissioner submits that the parties did allocate separate amounts to the Containers and so s 35 is activated. He seeks to make good this submission by the following analysis of CCA's invoices to Tops Chicken and Domino's Pizza, Dee Why. The invoice to Tops Chicken was for $66.50 including sales tax of $4.29 and delivery charge of $4.50. Since the rate of sales tax was 20%, the amount of $4.29 represented sales tax on $21.45 for the contents. According to the submission, it follows as a matter of arithmetic that after a deduction of the delivery charge of $4.50, that part of the invoice which the parties must have allocated to the subject Second Relevant Containers is $36.26.

The Commissioner applies a similar analysis to CCA's invoice addressed to Domino's, Dee Why which was for a total of $395.58 including sales tax of $28.00 and a delivery charge of $33.30. On the basis of the sales tax rate of 20%, according to the submission the parties allocated $140.00 to the contents. It also follows, according to the submission, that they allocated $194.28 to the subject Second Relevant Containers ($395.58 - [$140.00 plus $28.00 plus $33.30]).

According to the submission sub-s 35(2) is enlivened to increase the taxable value of the contents by $36.26 in the one case and $194.28 in the other, and CCA is entitled to a credit for the tax which it paid on its earlier purchase of the Second Relevant Containers as mentioned above.

It will be recalled that para (3) of Exemption Item 27 is as follows:

``(3) This Item does not cover goods that are for use by the exemption user in marketing or delivering:

(a)...

(b) take-away beverages or foodstuffs (whether for consumption on the premises from which they are sold or elsewhere).''

The Commissioner submits that the notion of ``take-away'' signifies something other than merely that something is picked up and removed. He submits that the essential notion of a take-away beverage is that the beverage must have been made on the premises as in the case of a milkshake.

Outline of Commissioner's submissions in relation to rate of tax payable on CCA's purchase of the Containers

The relevant parts of Item 1 of Schedule 2 to the Exemptions and Classifications Act were noted earlier. The Commissioner emphasises that the goods purchased by CCA comprised (in terms of sub-para 3(1) of the affidavit of CCA's expert witness Robert Graham Walker affirmed 26 July 1995);

``(a) pre-printed can bodies;

(b) can ends;

(c) glass bottles (most with but some without labels);

(d) caps for the glass bottles;

(e) PET bottles;

(f) caps for PET bottles; and

(g) labels for PET bottles and some glass bottles.''

The Commissioner submits that in order for goods to fall within Item 1, they must fall within both the opening words (``goods of a kind ordinarily used for household purposes'') and, as well, one of the lettered paragraphs (he refers to
Diethelm Manufacturing Pty Ltd v FC of T 93 ATC 4703 at 4718; (1993) 44 FCR 450 (FC) (``Diethelm'') at 469-470 (Hill J, with whom Whitlam J agreed)). The Commissioner submits that contrary to earlier authority (Hygienic Lily at ATC 4330; FCR 400) the task is not first to inquire how the goods should be categorised in terms of a class or genus and then to inquire whether that class or genus is of

ATC 4877

a kind ordinarily used for household purposes. He submits rather that one must ask whether the particular goods in question are of a kind ordinarily used for household purposes (the Commissioner refers to Diethelm, supra, at ATC 4720; FCR 472 and
OR Cormack Pty Ltd v FC of T 92 ATC 4121 (FCA/Davies J)).

In summary, the Commissioner submits that the parts which were destined to become the Containers do not fall within the opening general words of Item 1, that they do not fall within the more specific terms of para (b) or para (d), and that even if, contrary to the Commissioner's principal submission, it is proper to consider the Containers in their final form, the same is true.

Outline of CCA's submissions in reply

CCA submits that the Explanatory Memorandum should not be taken into account and refers to
Re Bolton; Ex parte Beane (1987) 162 CLR 514 at 517-518 (Mason CJ, Wilson and Dawson JJ) and
Barry R Liggins Pty Ltd v Comptroller-General of Customs (1991) 103 ALR 565 (FCA/FC) at 572-573 (Beaumont J, with whom Lockhart and Gummow JJ agreed). CCA submits that the Commissioner has not pointed to any ambiguity which, in terms of s 15AB of the Acts Interpretation Act 1901 (Cth), would entitle the Court to refer to extrinsic materials.

But if such materials are to be regarded, CCA refers to paras 9.11 and 20.21 of the Explanatory Memorandum which are relevantly as follows:

``9.11 Exceptions to the addition of a container component: A container component will not be included in the taxable value of goods if:

(i) the container has been the subject of a taxable dealing at, or before, the time when it becomes a container in relation to its contents;...

Reason: The general position is that the value of the container will form part of the taxable value of the contents. If tax has already been paid on the container as a separate assessable dealing before it becomes a container, then tax should not be paid again on the value of the container.''

``20.21 Situations where no container component will be added: A container component will not be included in the taxable value of the contents if:

(i) the container has itself been the subject of a taxable dealing at, or before, the time when it became a container in relation to the contents;

NOTE: A container will be taxed at the time of the packing AOU if not all of the contents are assessable. The contents that are assessable may at some later stage be the subject of a taxable assessable dealing. If so, then the taxable value of the assessable contents will not be increased to reflect the value of the container because the container will already have been taxed.

This may require a reduction in the taxable value of the contents to exclude the container component.''

In reply to the Commissioner's submission relating to Item 1 in Schedule 2 to the Exemptions and Classifications Act, that what CCA purchased differed from the Containers in their final form, CCA firstly relies on the Commission's admission of CCA's allegations in sub-paras 4(c) and (d) of the amended statement of claim that CCA purchased cans, PET bottles and glass bottles which were collectively referred to in the pleading as ``Containers'', and filled ``the Containers'' with soft drinks to be manufactured. Secondly, CCA refers to the following definition of ``container'' in s 5 of the Act:

``(a) packaging in which, or with which, any property ( `the contents' ) is packed or secured, in the ordinary course of a business, for the purpose of the marketing or delivery of the contents;

(b) ancillary items that are packed or secured with the contents and are intended, and reasonably necessary, to allow or facilitate the use of the contents;''

CCA submits that it is unrealistic to say that something is not a container because, for example, its lid is not sealed in place or its cap is not screwed on at the time of purchase.

CCA further submits that it does not matter whether what CCA purchased were parts for containers as distinct from containers themselves, since sub-item 1(2) in Schedule 2 to the Exemptions and Classifications Act makes ``goods marketed principally as parts,

ATC 4878

fittings or accessories for goods covered by sub-item (1)'' subject to tax at the same rate as goods of the kinds described in sub-item 1(1) itself.

On the ``rate of tax point'', CCA submits, by reference to Chubb at ATC 4195; ALR 500 (Hill J), that the distinction there drawn between office chairs and household chairs has no application in the present case because the bottles and cans are all of a size and kind ordinarily used for household purposes.

CCA replies to the Commissioner's submission that the various provisions should, if the construction is reasonably tenable, be construed in a manner which does not allow CCA to ``escape the tax net'' by submitting that this submission itself depends on a clear entitlement in CCA to a refund, yet that entitlement is not clear. CCA refers first to the ``details of ground'' of credit item CR2 which are as follows:

``Claimant has borne tax on a tax-bearing dealing for which the claimant was entitled to quote a registration number (whether or not the claimant quoted). Claimant has not sold the goods. If claimant has applied the goods to own use, the AOU would not have been taxable assuming it were an assessable dealing.''

CCA submits that it has sold ``the goods'', that is, the Containers.

CCA refers to the ``details of ground'' of credit item CR8A which are as follows:

``Claimant is the taxpayer for an assessable dealing (other than one that is not taxable because of section 29) with goods that are the contents of a container. Container is not covered by exemption Item 27(3). Claimant has borne tax on the container.''

CCA points to the infelicitous language of Item CR8A in so far as it refers to Item 27(3). Exemption Item 27(3) begins ``This Item does not cover goods that are for use by the exemption user in marketing or delivering:...''. CCA submits that the beverages in question are ``take-away beverages'' within sub-item 27(3)(b) and that the reference in sub-item 27 (3)(a) to ``ice-cream goods, or biscuit goods, that are manufactured in premises or vehicles...'' does not aid in the construction of sub-item 27(3)(b). In summary, CCA submits that it is far from clear that credit item CR8A would entitle CCA to a credit, and that even if, because of the particular facts of the case CCA would be so entitled, there would be other taxpayers who would not be.

CCA replies to the Commissioner's submission that the case is one of a ``manufacture'' by CCA of the end product (container of beverages) by submitting that the relevant part of the definition of ``manufacture'', namely ``(b) combining parts or ingredients so as to form an article or substance that is commercially distinct from the parts or ingredients'' has been authoritatively held not to apply to a case where a process of heating or other treatment is involved and is strictly limited to cases of a ``mere combination of parts or ingredients'', as by screwing together the parts of a bicycle (CCA refers to
FC of T v Jax Tyres Pty Ltd 85 ATC 4001 at 4003-4004; (1984) 5 FCR 257 (FC) at 261 (Lockhart J) and
Cohns Industries Pty Ltd v DFC of T 79 ATC 4243 (Vic/FC)). Further, CCA submits that the legislation, and, for that matter the Explanatory Memorandum, proceed upon the basis that containers begin life as separate goods and remain separate goods for sales tax purposes.

In reply to the Commissioner's submission on s 35, CCA contends that the only question about which there could be argument is whether in respect of the Second Sales the parties allocated a separate amount to the container. CCA submits that the expression ``the parties have allocated a separate amount to the container'' is not satisfied by the circumstance that it is possible, by a process of extrapolation from the figures shown on an invoice, to divine the figure for the contents on which CCA must have calculated sales tax. CCA refers to s 125 of the Act which requires a person who sells goods by wholesale at a price which includes sales tax which that person has or will become liable to pay on the goods, to specify the amount of the tax on any invoice given to the purchaser, the penalty for contravention being $2,000. CCA submits that a seller's compliance with its obligation under s 125 is far removed from an ``allocation'' by the parties.

In relation to s 95, CCA submits that the evidence of Professor Walker should be preferred to that of Mr Banks because, so it is submitted, Professor Walker addressed precisely the question posed by s 95 and Mr Banks did not. CCA refers to
Union Quarries (Footscray) Pty Ltd v FC of T (1938) 4 ATD477

ATC 4879

at 482; (1938) 59 CLR 111 at 122 (Dixon and McTiernan JJ) and submits that that case laid down a requirement that in relation to a provision such as sub-s 95(1) it is necessary to take into account all the facts known to have occurred and to omit for ascertainment nothing other than the price. CCA submits that Mr Banks did not take this approach.

Further, CCA submits that Mr Banks, by directing attention to CCA's earlier purchase of the Containers, was directing attention to a market different from that in which the Containers of beverages were sold. It submits further that if it were appropriate to attend to that market, it would be necessary to take into account the intellectual property associated with the Containers. In this respect CCA refers to
Estee Lauder Pty Ltd v FC of T 89 ATC 4299; (1989) 86 ALR 415 (FCA/Burchett J).

Reasoning

I have given a lengthy, perhaps unduly lengthy, account of the parties' submissions because this is, I understand, the first time the container provisions of the Streamlined Sales Tax legislation have arisen for judicial consideration. I will, however, decide only those issues which must be decided in order to determine whether the relief sought by CCA should be granted.

Sections 16(2)(a) and 24 of the Act and Exemption Item 27

In terms of Exemption Item 27 it was common ground

(1) that each Container constituted ``goods... for use by a person [CCA] as a container exclusively for contents consisting wholly of assessable goods'';
(2) that CCA intended or expected
- (a) that each Container would be ``used as a container in relation to the contents at the time of an assessable dealing that consist[ed] of... a sale of the contents''; and
- (b) that ``possession or control of [the Container would] pass to the person who [ was] the purchaser... for that assessable dealing''.

The only issue between the parties under Exemption Item 27 was therefore whether the exclusion expressed in para (3) operated. In that respect it is also not in dispute that the Containers were for use by CCA in marketing or delivering soft drinks. The issue in contention is whether the soft drinks which constituted the contents of the Containers satisfied the description ``take-away beverages''. In my opinion they did not.

Since writing the following paragraphs, I have had the advantage of reading the judgment of Hill J in
Pepsi Seven-Up Bottlers Perth Pty Ltd v FC of T, 95 ATC 4746. With respect, I agree with all that his Honour has said in that case on the meaning of the expression ``take- away beverages''.

Many foodstuffs and beverages are sold in containers with a view to their being consumed elsewhere than in the shop where they are sold. Most have a relatively long life to their ``use- by'' date. Others, such as those that are sold hot or are prepared freshly at the shop, are intended to be consumed relatively soon after sale. It is physically possible for all to be consumed either at the shop or away from it. Most are in fact taken away. Yet not all these are ``take- aways'' in accordance with the common understanding of that notion. Nor do foodstuffs or beverages necessarily merit the description ``take-away'' merely because they are sold at a ``take-away shop'' or are sold with other foodstuffs or beverages that are clearly ``take- aways''.

In my opinion, the expression ``take-away'' derives its meaning from its opposite: ``for consumption on the premises''. It is contemplated that foodstuffs and beverages of both kinds will be consumed relatively soon after being ordered, the only relevant distinction between them being that those in one category are for consumption on the premises and those in the other are ``for consumption away from the premises''.

The expression ``take-away'' distinguishes the foodstuffs and beverages to which it is applied from both (a) those which are to be consumed on the premises and therefore necessarily relatively soon after being ordered, and (b) those for consumption elsewhere and for which, in fact, the time between purchase and consumption is an irrelevancy. Illustrations of the latter are packaged foodstuffs or beverages which are mass produced in factories, such as containers of soft drinks.

In accordance with the above statement of my understanding of the meaning of the expression, the beverages which are the subject

ATC 4880

of the First Sales and the Second Sales were not ``take-away beverages''.

It follows that the sales of the Containers to CCA, although ``assessable dealings'', were not ``taxable dealings''. This is because, in terms of s 24 within Division 2 of Part 3 of the Act, the Containers were covered by an exemption Item that was in force at the time of the sales of them to CCA and all the requirements of that Item were met at or before the time of those sales (and see the words ``and no exemption applies under Division 2 of this Part'' in sub-s 16 (2) and the words ``and for which no exemption is available under Division 2 of Part 3'' in the definition of ``taxable dealing'' in s 5 of the Act).

The conclusion just expressed is not affected by CCA's not having quoted its registration number when it bought the Containers. An assessable dealing may be rendered not taxable by Subdivision A (``Exemptions based on exemption Items'') although it is not rendered not taxable by Subdivision B (``Exemptions based on quoting'') because the purchaser did not quote.

It follows that the declarations sought in sub- paras 22(e) and (f) of the amended statement of claim should not be made.

Application to own use - s 21 of the Act

There was a ``packing AOU'' by CCA as defined in s 5 of the Act. Item AD3c is ``AOU by a person who is not the manufacturer of the goods, but who obtained the goods under quote''. Item AD13c is relevantly similar. CCA did not obtain the Containers under quote. Accordingly, CCA's packing AOU was not an assessable dealing of either kind.

Item AD3a is ``untaxed-goods AOU as defined by section 21, by a person who is not the manufacturer of the goods''. Item AD13a is relevantly similar. Sub-section 21(2) would make the AOU by CCA an untaxed-goods AOU unless CCA had obtained the goods under quote or the goods had previously passed through a taxing point. CCA had not obtained the Containers under quote but they had previously passed through a taxing point. The reason why this had happened is to be found in the definition in sub-s 21(3) of the notion, ``passing through a taxing point'' for the purposes of s 21. Sub-section 21(3) provides, relevantly, that for the purposes of s 21, goods are taken to have passed through a taxing point only if (a) the goods have been the subject of a taxable dealing (this was not the case as I have held above) or (b) the goods have been the subject of an assessable dealing that was exempted because of s 24 (this was the case as I have held above).

Accordingly, CCA's packing AOU was not an untaxed-goods AOU and so did not fall within Item AD3a or AD13a.

Even if, contrary to this reasoning, CCA's packing AOU was an assessable dealing, s 25 of the Act would have had the effect that the assessable dealing was not a taxable dealing because the applier, CCA, at the time of the AOU, intended to deal with the Containers so as to satisfy an exemption Item, that was in force at the time of the AOU, namely exemption Item 27, with which I have dealt above.

Section 35 and AD1a

The First Sales and the Second Sales were wholesale sales of the beverages by the person who manufactured them in the course of a business. Therefore they fell within Item AD1a. The entry in the fifth column of Table 1 against AD1a gives as the ``normal taxable value'' of that dealing, ``the price (excluding sales tax) for which the [beverages] were sold''.

The Commissioner did not contend that CCA had not ``borne tax'' on the Containers within the meaning of sub-s 11(3) of the Act even though, as he contended and as I have held, they fell within Exemption Item 27. There is a good deal to support the stance taken by the parties in this respect. Sub-section 11(3) is not expressed to operate only where the purchase to which it refers was a taxable dealing. The second sentence in sub-s 11(3) lends support to the view that a person is indeed taken to have borne tax on goods if the person purchased the goods for a price that included tax even if the transaction was not a taxable dealing. That sentence suggests that in such a case it is only if and when the tax paid as part of the purchase price is actually refunded or credited to the purchaser, that the tax included in the purchase price is to be taken as not having been borne by the purchaser, and that in the meanwhile the purchaser is entitled to be treated as having borne the tax. Moreover, credit item CR8A, inserted by s 70(b) of Act No 18 of 1993 and applicable to taxable dealings taking place after 26 May 1993, supports the view taken by the parties. On this basis, by the operation of the

ATC 4881

former para 35(4)(a), the whole of s 35 was not applicable to the First Sales.

In any event, in my opinion sub-s 35(2) is not activated in relation to either the First Sales or the Second Sales because the parties did not allocate separate amounts to the First Containers or the Second Containers respectively. In this respect I accept CCA's submission and reject the Commissioner's alternative submission.

For sub-s 35(2) to be activated it is necessary that both parties have joined in the allocation of a separate part of the price to the container. No doubt this requirement may be satisfied in various ways. In particular, one party might propose an allocation and the agreement to it by the other might be implied as well as express. But there is no allocation of separate amounts of the price to the Containers by either party on the facts of the present case.

Assume acceptance of the conclusion of fact that CCA calculated the tax by reference to the figures for the contents suggested by the Commissioner. Nonetheless, the statement of the resultant figure for sales tax on the invoices was no more than a unilateral performance by CCA of the obligation imposed on it under penalty by s 125 of the Act. It cannot be inferred that CCA, much less the purchaser, was agreeing that the unstated figure by reference to which it had calculated the tax on the contents was the price for which the contents were being sold and bought.

Does sub-s 35(3) produce any effect in relation to the First Sales and the Second Sales? No. A reading of that sub-section in association with sub-ss 35(1) and (2) shows that it is intended to operate where the parties have allocated a separate amount to a container associated with contents that are the subject of a taxable dealing but the taxable value of that dealing is not ``calculated by reference to the price (excluding sales tax) for which the contents were sold''. In the present case the taxable value of the wholesale sale of the contents by the manufacturer of them is calculated by reference to the price for which the contents were sold (AD1a). Clearly, sub-s 35(3) is directed to a retail sale of the contents by the manufacturer of them, the normal taxable value of which is the notional wholesale selling price of the contents (AD2a).

Sub-section 35(3) will, however, be found to assist in the construction of s 95 to be considered next. Underlying s 35 are assumptions (a) that it is only where the parties have allocated a separate amount to a container that, generally speaking, there will be any possibility of the value of the container not having been recouped in the price for the contents, and (b) that where there has been no such allocation by the parties, the price charged is properly regarded as the price for the contents. Sub-section 35(1) makes it clear that the aim of s 35 is to ensure that the taxable value of the contents will always include a component for the container. It is difficult to think of circumstances in which the parties have not allocated a separate amount to the container and the value of the container is not both intended to be recouped and in fact recouped within the price for which the contents are sold.

The assumption is that s 35 will have work to do only where the parties have allocated a separate amount to the container, sub-s 35(2) addressing the situation in which the taxable value of the assessable dealing is calculated as the ``price (excluding tax) for which the contents were sold'' and sub-s 35(3) addressing other cases, principally those in which the taxable value of the contents is their notional wholesale selling price. In these other cases it is necessary to ``construct'' a wholesale price and then to deal with the allocation which the parties have made in the light of that notional wholesale selling price. But it is only where there has not been a recoupment of the value of the container within the actual or notional wholesale selling price of the contents that any question of adding something to the value of the contents will arise.

Although the construction of s 35 which I have outlined is to be found, in my view, within the terms of the section, it is confirmed by paras 9.10 and 20.19 of the Explanatory Memorandum quoted earlier; cf Acts Interpretation Act 1901 (Cth), para 15AB(1)(a).

Section 95

Section 95 is directed to circumstances in which, relevantly, it is necessary to know the price for which contents were sold and this is not known because that price is an unidentified part of a larger price. On the facts of the present case, in the absence of evidence that the parties intended part only of the price to be for the beverages, albeit a part unidentified in amount, the proper inference to draw from the invoices is that CCA and the retailers intended the whole

ATC 4882

of the price to be for the contents, any value of the containers being recouped as part of the price of the contents.

In terms of s 95 there are two possible ways of expressing the result of this factual conclusion. One is to say that the first condition of the operation of s 95 is not satisfied: there is no ``need to know the price'' for which the contents were sold because that expression assumes that the parties have not made that price known whereas in the present case they have done so. The other is to say that it is necessary to know that price but the second condition of the operation of s 95 is not satisfied: this requires that the parties have not allocated a particular amount to the contents and they have done so in the present case.

Clearly s 95 does not require it to be supposed that seller and buyer intend to sell and buy for a price each physical component of goods the subject of their transaction. Nor does the statement of the ``normal taxable value'' in the case of wholesale sales as ``the price (excluding sales tax) for which the goods were sold'' create a need to know a price for which each physical component was sold. Such a view could lead to absurd inquiries such as, on the facts of this case, inquiries as to the prices for which labels, paint, gas, liquid, and metal, glass and plastic were sold. It is surely less artificial and more consonant with reality to accept that ordinarily, although a manufacturer will take into account all costs of production including the cost of all physical components (including any container) in arriving at its selling price, that price is regarded by it and its buyers as being for the final product and as including ``recoupment'' of the cost of all components (including any container). The extraordinary and exceptional case is one where there is evidence that the parties did in fact allocate the price as between components.

What is ``the final product'' for this purpose? Are there two final products: container and contents? In the ordinary case, common experience and, as I have tried to explain above, s 35 of the Act, combine to suggest that in the absence of an actual allocation by the parties, for present purposes the final product is the contents, the container being a ``throw-away item''. In this respect, both the Act and the parties have treated the Containers as belonging to the same category as wrapping paper or a cardboard box.

Some support for this view is to be found in the extreme artificiality of the inquiry which s 95 would demand if it applied in the circumstances. It would be necessary to ask for what price the beverages themselves could reasonably be expected to have been sold if they had been sold separately at the same time, in the same volume, in the same market, and on the same terms and conditions. But the beverages themselves could not have been sold without containers of some kind being obtained by someone. It is noteworthy in passing that neither expert witness addressed precisely and rigorously this question posed by sub-s 95(1).

In sum, sub-s 95(1) predicates a selling of what are separate goods for sales tax purposes for a global price, but there was not in this case a selling of what are separate goods for sales tax purposes.

Credits and refunds

Part 4 (ss 51-60) of the Act is headed ``CREDITS'' and provides for the situations in which a person is entitled to a credit. Of course, CCA does not seek a credit in respect of the tax which was included in the purchase price paid by it for the Containers. I am not required for the purpose of determining CCA's entitlement to the declaratory relief sought by it in the proceedings, to determine whether it is entitled to a credit. However, both parties appeared to accept that a consideration of that question was relevant to the proper construction of the Act's provisions touching on CCA's liability for sales tax on the occasion of its sales to the retailers. As noted earlier, the Commissioner submitted that it was not a consideration against the construction of ss 35 and 95 for which he contended that CCA had paid a price which included tax on its purchase of the Containers because, he contended, CCA was entitled to a credit in respect of the tax so paid by it. CCA submitted that it was far from clear that it would be entitled to a credit.

Sub-section 51(1) of the Act provides that Table 3 in Schedule 1 to the Act sets out the situations in which a claimant is entitled to a credit under Part 4. In general terms, the Commissioner may apply a credit to which a claimant is entitled against any liability that the claimant has under any Act of which the Commissioner has the general administration, and must refund any excess to the claimant: s 55.

ATC 4883

Notwithstanding the somewhat infelicitous language of the ``details of ground'' in respect of Item CR8A referred to earlier, I think that it is clear that CCA will be covered by that Item in respect of the Second Sales. In terms of the details of that ground, it is not in dispute that CCA qualifies as ``the taxpayer for an assessable dealing... with goods that are the contents of a container'' and it is common ground that CCA ``has borne tax on the container''. The only contentious issue is that posed by the sentence ``Container is not covered by Exemption Item 27(3)''. Paragraph 3 of Exemption Item 27 excludes from Exemption Item 27 certain containers which would otherwise fall within it. The purpose of the sentence which I have quoted is to make it clear that Item CR8A does not apply to goods falling within para (3) of Exemption Item 27. I have held that the Containers were not, in terms of para (3), ``goods... for use by [CCA] in marketing or delivering:... take-away beverages''. Accordingly, in terms of the sentence quoted in the details of ground of Item CR8A, I have held that the Containers were ``not covered by Exemption Item 27(3)''. It follows that at the time of the Second Sales it became entitled to a credit for the tax previously borne by it on the Containers.

The question of CCA's entitlement to a credit upon the First Sales is not resolved by Item CR8A which, as noted earlier, applies only to taxable dealings taking place after 26 May 1993. Nonetheless, in my view the circumstances of the First Sales fall within Item CR4 (``Avoiding double tax on the same goods''). The details of that ground are relevantly as follows:

``Claimant has become liable to tax on an assessable dealing... but has borne tax on the goods before the time of [that] dealing.''

It might be argued that the assessable dealing is in respect of the contents whereas the tax was borne on different goods, the Containers. I do not think that the argument would prevail. Literally, contents and container are the subject of an assessable dealing or assessable dealings (AD1a and/or AD1b) found in the sale by CCA, and CCA bore tax on the First Containers before the time of that sale.

The declarations sought in sub-paras 22(a), (b), (c) and (d) should not be made, in the case of those in sub-paras 22(a) and (c) because the form of them would be apt to mislead.

Rate of tax payable on sale by manufacturers of the Containers to CCA

The legal principles governing the construction and application of Item 1 in Schedule 2 to the Exemptions and Classifications Act have been the subject of recent Full Court discussion in Diethelm and Chubb in which the authorities are reviewed. It would be superfluous for me to essay a restatement.

In Diethelm, Hill J (with whom Whitlam J agreed) said (at ATC 4718; FCR 469):

``... for particular goods to fall within the Item those goods must first fall within the opening words of the Item and also fall within one of the categories of goods described in the lettered paragraphs.''

French J's reasoning was to a similar effect. In Chubb, the parties accepted that this construction of the Item by the Full Court in Diethelm governed the appeal.

The word ``ordinarily'' in Item 1 has been the subject of much judicial consideration. In OR Cormack Pty Ltd v FC of T 92 ATC 4121, Davies J said (at 4124) that the adverb ``ordinarily'' had a meaning approximate to that of ``commonly'' and that the expression ``ordinarily used'' seemed to refer to a ``settled or usual use''. In Chubb the parties were apparently content to accept that the word did not mean ``predominantly'' and Hill J was prepared to accept ``the view of Davies J and that of the parties that in its context what is required to be considered is settled or ordinary use'' (at ATC 4195; ALR 501).

The cans and bottles are manufactured to a highly developed specification as described earlier with a view to keeping air outside and liquid and carbon dioxide inside, and facilitating the keeping of the contents cool. There was no evidence as to the extent to which containers of soft drink are used for household purposes as distinct from other purposes. They are, of course, used wherever soft drinks are sold, transported, stored or consumed, since containers are physically necessary to all of those activities.

It was not suggested that a distinction was to be drawn for present purposes between various kinds of soft drink containers according to whether they are used for household purposes or for other purposes. In this respect, the containers can be contrasted with the various

ATC 4884

models of chairs in Diethelm and the various kinds of safes and security cabinets in Chubb. It seems to have been accepted in the present case that although a cafeteria, hotel or entertainment venue, for example, might purchase larger quantities of cans and bottles of soft drinks than a family might do, the kinds of cans and bottles will not differ as between the two classes of buyer. No doubt a distinction might have been proposed between the larger and smaller containers of soft drinks on the basis that although both sizes are stored in domestic refrigerators for later consumption and both sizes are also consumed virtually immediately after purchase and without intervening storage, refrigerated storage of the larger kind and the associated potential for consumption over a period may suggest that proportionately more of the larger containers of soft drinks are bought for household consumption. However, as I said, nothing was made of this in the evidence or in submissions.

It was not disputed that CCA's beverages are commonly consumed domestically. It follows that the containers in which they are sold by retailers are commonly found in use in homes as the means of, at least, storage of the beverages. In my view, this shows that the Containers in the form in which CCA sold them to the retailers were ``goods of a kind ordinarily used [a] for household purposes [and] [b] in connection with... storing... beverages''. That is, in their final form the Containers fell within both the opening words of sub-Item 1(1) and para (d) of that sub-Item.

However, attention must be given to the distinction suggested by the Commissioner between the form of the Containers as purchased by CCA from the manufacturers of them, and their final form as sold by CCA to the retailers. The evidence which CCA led as to the form of the Containers at the time of its purchase and taking delivery of them from the manufacturers might have been more explicit. In their submissions, the parties did not distinguish for the purposes of the present issue between the cans and the two kinds of bottle. They were content to have the issue approached on the basis that the Containers of all three kinds (the cans, glass bottles and PET bottles) were or were not within sub-Item 1(1).

The evidence is that the Containers are flushed with carbon dioxide by CCA, and that the labelling, the hermetic sealing of the cans and the affixing of the caps onto the bottles is also carried out by CCA. Although the mere separateness of bottle and cap at the time of CCA's purchase of the bottles would not take them outside the terms of sub-Item 1(1), the separateness of can ends from can bodies is in a different category. Bottle caps can be screwed on and off by a simple manual operation which occurs daily in household situations. But the hermetic sealing of can ends to can bodies is a highly technical process calling for special equipment. This alone, in my view, prevents those Containers which were cans from falling within sub-Item 1(1) as at the time when CCA bought them.

The fact that the parties did not suggest that those Containers which were bottles should be treated differently coupled with the fact that at the time of CCA's purchase of them, the Containers of all three kinds had still to be flushed with carbon dioxide and labelled combine to lead me to the conclusion that CCA has not discharged the onus incumbent upon it of establishing that at the time of its purchase of them, the Containers which were bottles were ``goods of a kind ordinarily used [a] for household purposes [and] [b] in connection with storing beverages'' or otherwise fell within sub-Item 1(1).

These conclusions do not mean that at the time of CCA's purchase of them the Containers did not fall within the terms of the definition of ``container'' in s 5 noted earlier. They do mean that at that time they did not have the features which later brought them within the language of sub-Item 1(1).

I do not accept CCA's alternative submission which relied on sub-Item 1(2) which is as follows:

``(2) Goods marketed principally as parts, fittings or accessories for goods covered by subitem (1).''

It suffices to say that in my opinion this language is not apt to refer to a situation in which goods fitting the description in sub-Item 1(1) are not yet in existence and in which the ``parts'' sold have to be worked upon by a process of manufacture in order to become such goods (cf FC of T v Jax Tyres Pty Ltd 85 ATC 4001 at 4003-4004; (1984) 5 FCR 257 (FC) at 261 (Lockhart J)). Sub-Item 1(2) contemplates a simple procedure which might occur in a house, such as a simple manual combination or bringing together of parts, fittings or

ATC 4885

accessories. An illustration might be afforded by the affixing of the lids on cups of the kind considered in Hygienic Lily. In the absence of the other circumstances to which I have referred, the mere screwing of the bottle caps onto the bottles in the present case would have been another illustration.

For the foregoing reasons, CCA has not established that the Containers in the form in which they were sold by the manufacturers of them to CCA fell within Item 1 of Schedule 2 to the Exemptions and Classifications Act. Accordingly, the declaration sought in sub-para 22(g) of the amended statement of claim should not be made.

Conclusion

The declarations referred to in para 22 of the amended statement of claim will not be made. It may be that one or other party will wish to suggest a form of declaration which should be made in the light of the foregoing reasons. Accordingly, I will not make orders at present but will stand over the proceedings to a date for the making of orders. These will include an order that CCA pay the Commissioner's costs.

THE COURT ORDERS THAT:

1. The proceedings be stood over to 12 December 1995 at 9.30 am for the purpose of the making of orders in accordance with the reasons of Lindgren J published on 5 December 1995, including an order or orders as to costs.

2. The parties submit to the Associate to Lindgren J by 5.00 pm on 11 December 1995 agreed form of short minutes of orders or if agreement has not been reached by that time, the forms of short minutes of orders for which the parties will respectively contend on 12 December 1995.

FURTHER ORDERS:

THE COURT DECLARES THAT:

1. The taxable value of the First Sales includes the value of the First Relevant Containers associated therewith and in relation to those sales is the invoice price thereof to the retailers less sales tax and delivery charges.

2. The First Relevant Containers are within Item 27 of Schedule 1 to the Sales Tax (Exemptions and Classifications) Act 1992.

3. The First Relevant Containers are not within Item 1 of Schedule 2 to the Sales Tax (Exemptions and Classifications) Act 1992.

4. The Applicant is entitled to a credit in respect of sales tax paid on the First Relevant Containers.

5. The taxable value of the Second Sales includes the value of the Second Relevant Containers associated therewith and in relation to those sales is the invoice price thereof to the retailers less sales tax and delivery charges.

6. The Second Relevant Containers are within Item 27 of Schedule 1 to the Sales Tax (Exemptions and Classifications) Act 1992.

7. The Second Relevant Containers are not within Item 1 of Schedule 2 to the Sales Tax (Exemptions and Classifications) Act 1992.

8. The Applicant is entitled to a credit in respect of sales tax paid on the Second Relevant Containers.

SCHEDULE

In this Minute of Orders, ``the First Sales'' means the sales on 25 May, 1993 to 7-Eleven on Canley Heights, New South Wales and to Domino's Pizza of Revesby, New South Wales and ``the First Relevant Containers'' means the containers included in the First Sales; ``the Second Sales'' means the sales on 27 May, 1993 to Tops Chicken of Sydney Square, Sydney Town Hall and to Domino's Pizza, Dee Why, New South Wales and ``the Second Relevant Containers'' means the containers included in the Second Sales.

THE COURT ORDERS THAT:

9. The Applicant pay the Respondent's costs of the proceedings.

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