Bennett Honda Pty. Limited v. Deputy Federal Commissioner of Taxation.

Judges:
Morling J

Court:
Federal Court

Judgment date: Judgment handed down 21 December 1984.

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Morling J.

This is the hearing of an objection to the competency of an application made by Bennett Honda Pty. Limited (Bennett Honda) for an order of review of a decision made by the respondent that certain commercial arrangements made between Bennett Honda and Borg Warner Acceptance Corporation (Australia) Limited (Borg Warner) are such as bring into operation the provisions of sec. 4(2) of the Sales Tax Assessment Act (No.7) 1930, as amended (the Sales Tax Assessment Act).

The respondent contends that the decision which is the subject of Bennett Honda's application is one which comes within para. (e) of Sch. 1 of the Administrative Decisions (Judicial Review) Act 1977 (the Judicial Review Act). If the decision is one of a kind falling within that paragraph this Court has no jurisdiction to review it - see sec. 3(1) of the Act which provides, inter alia, that the words ``decision to which this Act applies'' means a decision of an administrative character made under an enactment, other than a decision included in any of the classes of decisions set out in Sch. 1 to the Act.

One of the classes of decisions that are excluded from the Judicial Review Act is described in the following terms in para. (e) of Sch. 1:

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``(e) decisions making, or forming part of the process of making, or leading up to the making of, assessments or calculations of tax or duty, or decisions disallowing objections to assessments or calculations of tax or duty, or decisions amending, or refusing to amend, assessments or calculations of tax or duty, under any of the following Acts:

• ...
• Sales Tax Assessment Act (No. 7) 1930
• ...''

The background to the application appears from correspondence which has passed between the respondent and Borg Warner. It seems to be common ground between the parties that in so far as sales tax is payable, it will be payable by Borg Warner. However, the applicant claims to be aggrieved by the decision because it purchases motor cycles from Borg Warner and consequently any increase in sales tax payable by Borg Warner as a result of any assessment being raised consequent on the decision sought to be reviewed will result in Bennett Honda paying a higher price for motor cycles purchased from Borg Warner. I think it is a question whether the applicant is aggrieved by the decision it seeks to have reviewed. But for the purposes of disposing of the present application I shall assume that it is aggrieved by the decision and that it is a competent applicant for an order of review under the Judicial Review Act.

Borg Warner provides Bennett Honda with a form of wholesale financing known as floor plan financing in order to facilitate the distribution by Bennett Honda of Japanese motor cycles. This form of wholesale financing operates in the following fashion. Bennett Honda (Wholesale) Pty. Limited imports motor cycles into Australia and thereafter sells them to Borg Warner. In turn, Borg Warner bails the goods to Bennett Honda under a bailment agreement. Bennett Honda in turn sub-bails the machines to dealers for sale to the public. Immediately prior to the time at which a retail sale takes place, a sale takes place between Borg Warner and Bennett Honda at the price at which Borg Warner acquired the goods, plus sales tax. In consequence, the title in the motor cycles passes to Bennett Honda. The dealer then sells to the retail purchaser as an agent of Bennett Honda. The dealer, or sub-bailee, then repays the amount owed by Bennett Honda to Borg Warner at Bennett Honda's direction.

Floor plan financing is a major part of Borg Warner's business, and it enters into similar arrangements with many other importers and distributors of motor cycles in Australia. There is no common shareholding between Borg Warner and Bennett Honda, or Bennett Honda (Wholesale) Pty. Limited. The Borg Warner and Bennett Honda companies claim that they deal at arm's length and that there is no connection between them, other than that which arises from the agreements to which I have referred. However the price at which the goods are sold by Borg Warner to Bennett Honda is not acceptable to the respondent.

The decision that the applicant seeks to have reviewed under the Judicial Review Act is described in the application as ``the decision of the respondent made on or before and as evidenced in a letter dated 3 October 1984 addressed to Borg Warner Acceptance Corporation (Australia) Limited (`Borg Warner') that the commercial arrangements between the applicant and Borg Warner and the circumstances surrounding those arrangements are such as would bring into operation sec. 4(2) of the Sales Tax Assessment Act (No. 7) 1930''.

The letter of 3 October 1984 from the respondent to Borg Warner, in which the decision sought to be reviewed appears, is in the following terms:

``Section 4(2) of the Sales Tax Assessment Act (No. 7) provides that where imported goods are sold by a person other than the importer and the vendor and purchaser are not dealing with each other at arm's length in relation to the transaction, the Commissioner is empowered to alter the sales value of the relevant goods.

In consideration of the above provisions the sale value of motor cycles purchased by your company from importers and covered by bailment agreements with retailers associated with those importers and by sub-bailment agreements with their agents has been reviewed. The review has shown that the sale value currently adopted by your company is not satisfactory.

With effect from 8 October 1984 the sale value of motor cycles covered by the arrangements mentioned above should be an amount equal to Landed into Store Cost of

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the motor cycles plus 15% of that amount, except in circumstances where the motor cycles are sold by the importer to your company at a price exceeding Landed into Store Cost plus 15% when the sale value will be the actual selling price.

You are advised that Landed into Store Cost includes all charges incurred in bringing the motor cycles into store or warehouse such as purchase price, insurance and freight, wharfage, customs duty, storage on wharf, delivery to store, sorting and/or stacking and any other related charges.

It is our understanding that you purchase motor cycles from Kawasaki Motors Pty. Limited, Norm Fraser Importers Pty. Limited, Bennett Honda Pty. Limited and LNC Distribution Pty. Limited for subsequent sale under bailment/sub-bailment agreements. These suppliers have been advised of this increased sale value.

It is also mentioned that other goods apart from motor cycles are subject to similar trading arrangements and the sale value of these goods is presently being reviewed. When the review has been completed you will be advised of the decision.''

This letter was preceded by a long course of dealing between Borg Warner and the respondent. For many years prior to October 1984 Borg Warner had submitted to the Australian Taxation Office returns for sales tax purposes. There had been correspondence between the respondent and Borg Warner over the years. As early as 13 September 1973 Borg Warner's accountants had forwarded to the respondent the draft of a sub-bailment agreement and sought the respondent's views on it. The respondent advised Borg Warner that the agreement was ``acceptable insofar as it bears on sales tax''.

On 2 October 1980 Borg Warner wrote to the respondent seeking to achieve clarification of its sales tax responsibilities in relation to sub-bailment transactions. The respondent took a considerable time to consider this letter, and did not reply until 17 May 1984. On that date, he wrote a letter to Borg Warner which read, in part, as follows:

``Where goods, which have been the subject of conventional bailment/sub-bailment arrangements, are sold to retailer bailees/sub-bailees the taxable sale value would normally be the price charged by the bailor/finance company to that retailer. However, the sales tax legislation also contains provisions for a sale value to be altered where the goods in question have been sold for less than an arm's length price. Thus any concern that this office has in relation to the goods dealt with by sub-bailment arrangements is not with the arrangements as such but centres on whether goods dealt with under those arrangements, when they reach a taxing point, are being taxed on a sale value that is provided for in the sales tax law.

A number of bailment arrangements have recently been examined, in particular some involving wholesalers and retailers selling goods through unrelated finance companies. These arrangements usually involve a wholesaler importing goods free of tax and selling them at cost or virtual cost to the unrelated finance company. The finance company in turn sells the goods at the same price to the wholesaler's related retail company. In this situation, as explained earlier, the goods in question reach their taxing point when they are sold by wholesale by the finance company and it is that company upon which the sales tax law imposes a liability for sales tax. In cases where the value upon which tax is paid is less than that prescribed in the law it is the finance company that is liable, under the sales tax law, for the payment of any further tax.

The question of whether a sale value or landed cost or virtual landed cost is a sale value provided for in this law has been considered and the conclusion that has now been reached is that such a sale value does not meet the requirements of the law.

As a consequence of this, and because this incorrect sale value is not always adopted, each bailment arrangement needs to be considered on its own facts. The Deputy Commissioner of Taxation in Sydney has therefore been asked to institute enquiries into this aspect so that the question of the alteration of the sale value of particular previously sub-bailed goods can be determined. Officers from the Deputy Commissioner's Office will be in touch with you shortly in this regard.''

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On 29 June 1984 the respondent wrote to Borg Warner advising of a review which he had undertaken concerning bailment arrangements. The letter stated, in part:

``It has been noted that in some instances, imported goods have been sold by wholesale, by the importer, to an unrelated wholesale finance company at landed cost or virtual landed cost.

This office does not accept a sale value of landed cost or virtual landed cost as being in accordance with the sale values provided for in the sales tax legislation.

Based on a review of the pricing structure of your company you are advised that a sale value which is acceptable to this office should be no less than the landed cost of motor cycles plus 25% of that amount.

Landed cost is to be calculated by reference to the value for duty, duty (sic.), freight, insurance, wharfage and any other costs incurred in importing the motor cycles to Australia.

This sale value is effective from 2 July 1984 and cancels any sale value which may have been agreed to by this office.''

The respondent contends that it appears from the above correspondence that the decision the applicant wishes to have reviewed is a decision forming part of the process of making or leading up to the making of an assessment of sales tax and is therefore a decision of the kind referred to in para. (e) of Sch. 1. According to the respondent, if Borg Warner is dissatisfied with the decision it should exercise the rights given to it under the provisions of Pt. VII of the Sales Tax Assessment Act (No. 1) 1930 as made applicable by sec. 12 of the Sales Tax Assessment Act (No. 7). Provision is made in Pt. VII for, inter alia, objections to sales tax assessments and to the reference to a Board of Review of an objection disallowed by the Commissioner.

It was submitted on behalf of the applicant that the decision was in the nature of an income tax ruling such as might be given by the respondent in answer to a request for his opinion on a question of liability to income tax. It was also argued that the decision was no more than a statement that the respondent proposed to take a certain course of action in the future. It was not a decision, so it was argued, from which an assessment or calculation of duty inevitably followed and it was therefore not a decision which had the necessary causal connection with an assessment or calculation of duty, and hence was not within para. (e).

Before considering these submissions it is necessary to refer to the relevant sales tax legislation. The Sales Tax Assessment Act provides, in effect, for a system of self-assessment of tax by the taxpayer, with an overriding right in the respondent to assess the taxpayer to further tax in the circumstances referred to in the Act. Section 3 provides that sales tax imposed by the Act shall be levied and paid upon the sale value of goods imported into Australia and sold by a taxpayer not being the importer of the goods. Section 4(1) provides that for the purposes of the Act the sale value of goods which are sold on or after 1 August 1930 shall be the amount for which those goods are sold by a registered person, not being the importer of the goods, to a registered person. By sec. 4(2) where the Commissioner is satisfied of the matters referred to in the subsection, he is required to alter the sale value of the relevant goods. Where the Commissioner alters the sale value of the goods pursuant to sec. 4(2), the sale value so altered is to be the sale value of the goods for the purposes of the Act (sec. 4(3)).

Section 5 provides that where goods imported into Australia are sold by a person other than the importer of the goods (being a registered person) to an unregistered person sales tax shall be paid by the vendor of the goods. By sec. 7, every person who during any month makes any of the sales specified in the section shall, within 21 days after the close of that month, furnish to the Commissioner a return of those sales in the prescribed form. The Commissioner may require any person to furnish him with an additional return within a specified time - vide sec. 8. Every person liable to pay tax under sec. 5 upon the sale value of any goods sold by him during any month shall, within 21 days after the close of that month, pay sales tax upon that sale value (sec. 9). Where the Commissioner finds in any case that tax or further tax is payable by any person, he may assess the sale value upon which tax should be or should have been paid and calculate the tax or further tax which is payable - sec. 10. Where, under subsec. (1)

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or (2) of sec. 4 the sale value of any goods has been altered, the Commissioner is required to calculate the further tax (if any) payable in consequence of that alteration - sec. 10(2).

I turn now to consider the nature of the decision that the applicant seeks to have reviewed. The letter of 3 October 1984 must be read in the light of the correspondence that preceded it and against the background of the Act. The letter conveys the respondent's decision that assessments of sales tax on goods sold by Borg Warner are to be calculated on the basis referred to in the letter. The letter is tantamount to a direction to the taxpayer that the sales tax payable by it pursuant to sec. 9 must be paid upon the sale value of the goods as determined by the respondent and specified in the letter.

I do not think that the decision can fairly be described as being merely a statement by the respondent of the attitude he proposes to take to future assessments of tax. It may be that in the correspondence which preceded the letter of 4 October statements were made conveying decisions not falling within para. (e) of Sch. 1. But by the time the letter of 4 October 1984 was written the stage had been reached where the respondent was dealing specifically with Borg Warner's liability to tax and the manner in which its tax liability was to be calculated. The letter was not merely a statement of the attitude the respondent intended to adopt in dealing with future assessments of tax. It is true that the statement in the letter that ``with effect from 8 October 1984 the sale value of motor cycles covered by the arrangements mentioned above should be an amount equal to Landed into Store Cost...'' might, on one interpretation of it, be taken as referring only to future events. But the words ``should be'' in this sentence do not refer only to prospective situations which may arise. In my opinion, what is conveyed by the words ``should be'' is that the respondent has decided that tax payable by Borg Warner on current and future sales will be calculated on values determined in accordance with the formula referred to in the letter. The letter must be read in the context of the respondent's right under the Act to assess the taxpayer to further tax if he thinks the taxpayer's ``self-assessment'' is incorrect.

A decision as to the value of goods is an essential part of the process of making an assessment or calculation of tax. The decision as to the value of goods is a decision which leads up to, and is a necessary prerequisite of, the calculation of duty payable. This being so, I think there is no escape from the conclusion that the decision is a decision making, or forming part of the processes of making, or leading up to the making of, an assessment or calculation of tax or duty. It is thus a decision within para. (e) of Sch. 1 and hence is not reviewable under the Judicial Review Act.

The cases which have been decided on the meaning of para. (e) of Sch. 1 support the conclusion which I have reached. In
Tooheys Ltd. v. Minister for Business and Consumer Affairs (1981) 36 A.L.R. 64, Ellicott J., after referring to the statement by Kitto J. in
Batagol v. F.C. of T. (1963) 109 C.L.R. 243 at p. 252, that ``... the definition of `assessment' means, in my opinion, the completion of the process by which the provisions of the Act relating to liability to tax are given concrete application in a particular case with the consequence that a specified amount of money will become due and payable as the proper tax in that case'', said at p. 77:

``In my opinion it is to this process that para. (e) is directed. Under each of the Acts mentioned it is necessary to assess or calculate what is the liability of the subject in a particular case. In arriving at that assessment or calculation decisions may have to be made about matters which lead to the making of it or which are part of the process of making it....

The calculation of customs duty, in a particular case, involves identifying the applicable rate of duty and the value of the goods.''

As I have attempted to show, the calculation of sales tax in the present case involves, inter alia, identifying the value of the goods and the decision which the applicant seeks to have reviewed is a decision as to the value of the goods subject to tax. It is thus a decision involved in the calculation of the tax.

Ellicott J. also said in Toohey's case that the words ``leading up to making'' are intended to point to decisions which have to be made, or, in the circumstances, it is appropriate to make, before the actual process of assessment or calculation can begin. A decision as to the value of goods subject to tax is a decision

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which has to be made before the actual process of calculation can begin.

Toohey's case was affirmed on appeal (42 A.L.R. 260). It was also referred to with approval by Smithers J. in
Intervest Corporation Pty. Limited v. F.C. of T. and D.F.C. of T. 84 ATC 4744.

In
D.F.C. of T. v. Clarke & Kann 84 ATC 4273 at p. 4276, the Full Court of the Federal Court said:

``Because para. (e) plainly intends to exclude from review some decisions which are made prior to assessment, it must be taken to refer not only to assessments which have been made but to those which will be made.

...

It is inappropriate to attempt to define the boundary between those decisions which are and those which are not `decisions leading up to' the making of an assessment. However, a decision does not lead to the making of an assessment merely because it precedes the making of an assessment or because its purpose is to enable or facilitate the making of any assessment which may be made. A decision is not a decision leading up to the making of an assessment unless the making of an assessment has followed or will follow from the decision.''

Having regard to the course of dealing disclosed in the correspondence and the terms of the decision which is sought to be reviewed I think there is not only a sufficient, but also a close relationship between the decision and the making of an assessment or assessments of sales tax.

For these reasons I am of the opinion that the decision sought to be reviewed is not one which is reviewable under the Judicial Review Act and that therefore the objection to competency should be upheld. The application must therefore be dismissed with costs.

THE COURT ORDERS AS FOLLOWS:

1. Objection to competency upheld.

2. Application dismissed.

3. Applicant to pay respondent's costs.