Case X45

Members:
Purvis J

Tribunal:
Administrative Appeals Tribunal

Decision date: 23 April 1990.

Purvis J. (Presidential Member)

Generally

This is an application for review of a decision by the respondent Commissioner whereby the sales tax payable on goods manufactured by the applicant was increased.

The applicant, F.P. Pty. Ltd., the issued shares in which were, at all relevant times, held by a Mr and Mrs K, was a manufacturer of printed material. The material was sold by the company to a partnership, F.P. Sales, of which Mr and Mrs K were the sole partners. The partnership then sold the goods by wholesale

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and by retail, primarily to print brokers, to wholesale printers and to advertising agencies. The price at which the goods were sold by the company to the partnership was said by the applicant to have been based on cost of production together with a mark-up of 10%. The price at which the goods were then sold by the partnership to its customers had built into it an estimated expense ingredient said by the applicant to cover the expenses of marketing and of selling, as well as a profit percentage.

The respondent contends that the price at which the goods were sold by the company does not reflect the true sales value, which value, for the purpose of the assessment of sales tax, the subject of this appeal, has been increased by the respondent to the sale price charged by the partnership to its customers, the end users.

The applicant puts at issue the assessment in that the notice of assessment purported to raise the tax under sec. 25(2A) of the Sales Tax Assessment Act (No. 1) - ``an assessment that has been made under the provisions of sec. 25(2A)'' - whereas in fact the assessment was consequential upon an alteration of sale value made by the respondent pursuant to sec. 18(4) and should, it is said, have been raised under sec. 25(2).

The Commissioner contends that the consequences of such a statement in the notice of assessment are not such as to invalidate the assessment. It is, it is said, the assessment decision that is the subject of the reference. The respondent further contends, by way of a fall-back position, that the assessment was correctly made in accordance with sec. 25(2A).

The burden of proving that the assessment is excessive lies upon the taxpayer company. The assessment is detailed elsewhere in these reasons. It required the payment of tax in the sum of $33,491, this being the balance payable on a total sale value of $856,523 for the period 1 September 1983 to 31 August 1986. Additional tax was imposed.

The issues confronting the applicant were thus as to the sale value, as to the assessment being duly made under the correct section, and as to the imposition of penalty.

The assessment and the reference

Section 25(3) of the Sales Tax Assessment Act (No. 1) provides:

``As soon as conveniently may be after an assessment has been made, the Commissioner shall cause notice in writing of the assessment to be served on the person liable to pay the tax or further tax.''

Under date 4 December 1986, the respondent, so far as is relevant, wrote to the applicant as follows:

``Sales Tax Assessment Act (No. 1) 1930 as amended

You are hereby notified that you are liable to pay sales tax as shown hereunder in accordance with an assessment that has been made under the provisions of subsection 25(2A) of the Sales Tax Assessment Act (No. 1) 1930 as amended.

ASSESSMENT UNDER SUBSECTION 25(2A) OF SALES TAX ASSESSMENT ACT (No. 1) 1930, AS AMENDED

In respect of printed matter manufactured by you and sold or applied to your own use during the period 1 September 1983 to 31 August 1986 (both dates inclusive):
RATES OF TAX       TOTAL       AMOUNTS
                   SALE         OF TAX
                   VALUE       THEREON
                     $            $
20%              856,523.45   171,304.69
Less Tax
previously paid               137,813.69
                              ----------
Amount of Tax
now payable                    33,491.00
Additional Tax
under subsection
45(2) of
Sales Tax
Assessment Act
(No. 1) 1930                   22,290.31
                               ---------
Total Amount                   55,781.31
                               ---------
          
The total of this assessment is $55,781.31. The amount of $33,491.00 further tax should be paid forthwith, otherwise you will become liable for additional tax which, pursuant to section 29 of the Sales Tax Assessment Act (No. 1) 1930, as amended, will accrue at the rate of 20% per annum on the amount unpaid. The amount of $22,290.31 additional tax should be paid not later than 5 January 1987....''

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The total sale value of the goods upon which tax was assessed had been varied from $669,070 to $856,523, an increase of 28%.

Section 40(1) of the Sales Tax Assessment Act (No. 1) provides:

``A taxpayer who is dissatisfied with an assessment may, within 60 days after service on the taxpayer of notice of the assessment, lodge with the Commissioner an objection in writing against the assessment.''

The applicant did object ``against (though without admission as to the validity of) the above-mentioned notice of assessment of sales tax'' so issued.

The notice of objection set forth 35 purportedly independent grounds of objection. It is not necessary for the purpose of these reasons to set out such grounds, other than to say that the applicant maintained that the sale value upon which sales tax had been self-assessed was correct, that the respondent's assessment issued under the wrong statutory provisions and was of no force and effect, and that the penalties imposed were not proper and should not be payable.

The objection was disallowed and the applicant applied to have the matters at issue referred to the Tribunal for reconsideration. In the statement lodged by it pursuant to sec. 37 of the Administrative Appeals Tribunal Act, the respondent stated as its reasons for disallowing the objection, inter alia, the following:

• The assessment was correctly made in accordance with sec. 25(2A).
• The company, a registered person under the Act, manufactured goods in Australia and applied such goods to its own use, or sold such goods to unregistered persons, or to registered persons who failed to quote their certificate of registration.
• Alternatively, the Commissioner was satisfied that the taxpayer and F.P. Sales [the partnership] were not dealing with each other at arm's length in relation to the transactions.
• The Commissioner was also satisfied that the amount for which the relevant goods were sold was less than the amount for which, in the opinion of the Commissioner, the relevant goods could reasonably be expected to have been sold if the taxpayer and F.P. Sales had been dealing with each other at arm's length in relation to the transaction.
• The sale value of the goods was not less than the amount specified in the assessments, or alternatively, was greater than that value claimed by or for the taxpayer.
• Additional tax is payable under subsec. 25(2B) of Sales Tax Assessment Act (No. 1) for the period 1 September 1983 to 13 December 1984 equal to double the amount of the sales tax avoided.
• Alternatively, additional tax is payable under para. 8(1)(c) of the Sales Tax Procedure Act for the period 1 September 1983 to 13 December 1984 equal to double the amount of the sales tax avoided.
• Additional tax is payable under subsec. 45(2) of the Sales Tax Assessment Act (No. 1) for the period 14 December 1984 to 31 August 1986 equal to double the amount of the sales tax avoided.
• The Commissioner has remitted such additional tax to $22,290.31 and the circumstances do not warrant any further remission.

The evidence and the factual situation

The evidence adduced before the Tribunal was such as to establish the following factual situation.

It was in February 1980 that consequent upon what Mr K said was a decision to reorganise the structure of their business that he and his wife caused the partnership to be formed. They had, prior to that time, been carrying on business per medium solely of a proprietary limited company.

Sales tax was a matter present in his mind at the time of the restructuring and he said that he thought the structuring of the business by means of a company and a partnership would be a legitimate way of lowering the sales value of the goods to the end user by about 4%. Mr K conceded that the separating out of the business between a company and a partnership was as a consequence of the sales tax advantage having been initially ``brought up''. It was thought that the intervention of a third party, that is the partnership, could reduce the sales tax otherwise payable. Mr K also said that he

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wanted to ``branch out into areas of marketing not previously carried on by the company''. He wanted to have ``a creative design section of the business, possibly an art studio''. He said that he had found that often a design artist's firm had been asked to handle the manufacture, and if there was a physical separation of assets of the business, then he would be able to concentrate on one area and have others care for another aspect of the business. However, at the time of the reconstruction being first conceived, there was no suggestion of the artwork and craft side being divorced from the company.

By reason of the above and the surrounding circumstances referred to in evidence and elsewhere in these reasons, I am satisfied that sales tax minimisation was the prime motive behind the restructuring. The partnership took over as the ``distributor'' of printed matter, a role previously undertaken by the company.

Throughout the relevant period, the company manufactured a wide range of flat sheet printed matter, including business stationery, brochures, reports, books, pamphlets and leaflets, these to satisfy orders made through the partnership. At all times, the company sold the printed matter it manufactured exclusively to the partnership, which partnership did not supply any paper, ink or other material required for the manufacture of the printed matter. When a client sought to have printed matter prepared for it, there would be an interview with Mr K or another member of the staff, and information sought as to the requirements. An oral or written quotation was given if required. Such a quotation was generally calculated on the basis ``of estimated cost and knowledge of what the market price for the printed matter would be''. The unit costs that were integral to the calculation of a quotation were derived from work sheets prepared by Mr K. The costs and expenses contained in such work sheets were generally derived from information as to actual expenses incurred in the preceding year, together with an estimate of hours to be worked by members of the staff on particular operations and the cost thereof. All staff were employees of the company and no distinction was drawn between the company and the partnership in the determining of such costs. In the event of a quotation then being accepted, either a written or oral order was placed by the client. The partnership would then place an oral order with the company for the production of the printed matter. If artwork or film was supplied by the client, such was supplied then to the company with the order for the printed matter.

In respect of each job, a work ticket was prepared, such ticket detailing the cost of materials used on the job, together with an extension of the hours and rate per hour entailed in particular processes. The total of the stated cost of production had then added to it a 10% mark-up - thought, according to Mr K, to be appropriate to be imposed and a mark-up ``that would be approved by'' the respondent - together with a 20% sales tax, if applicable, on that resultant figure. The retail price, that is, the price that was to be charged by the partnership to the end user, was at the same time calculated and inserted on the work ticket. The company invoiced the partnership; the partnership invoiced the end user for the retail price as so stated. The clerical work entailed in the invoicing was done on behalf of the company and the partnership at the one time and by the one mechanical operation. Thus the work sheets used by the applicant were drawn up to reflect the entirety of the transaction of manufacture and sale. They contained on their face particulars referable to the whole transaction from the placing of the order to the invoicing to the end user. The manner in which the saving of sales tax was implemented varied according to whether or not the end user was registered under the sales tax legislation. The partnership was not registered.

It is to be here noted that the sale by the company to the partnership, notwithstanding the ultimate intended destination of the goods, should have attracted sales tax on the cost plus 10% figure in every case, this because it was not the partnership that had and was entitled to quote a certificate, but the purchaser from the partnership. Every sale from the company to the partnership was a sale which should have attracted sales tax. However, where the end user had a certificate and quoted it, the transaction was treated as though there had not been a taxable transaction between the applicant and the partnership and as if the partnership was not there for that purpose.

Mr K said that generally a lower price was quoted to a printer or print broker than to other customers. Sometimes the partnership bought other than from the company, this where it was

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possible to buy in at a lower cost than that of the company - it was, however, a rare occurrence.

All assets, including the business premises, manufacturing plant, motor vehicles and office furniture and equipment were owned or leased by the company. All persons engaged in the manufacture of printed matter were employed by the company. All persons engaged in the selling and distribution activities of the partnership were employed by the company. The company incurred all manufacturing expenses, expenses in relation to employees, motor vehicles, cleaning, electricity, insurance, office premises, office furniture and equipment, office supplies, postage and telephone. The partnership paid costs referable to accountancy fees, advertising and promotional material, bank charges, commissions, freight and cartage.

Throughout the relevant period, the partnership was charged by the company an amount each month intended to reimburse the company for expenses incurred on the partnership's behalf. At the end of each financial year, a calculation of the expenses said to have been incurred by the company on account of the partnership was made by Mr K in conjunction with accountants and ``a journal entry was made for any over or under recoveries''.

It might be thought that, if one looked at the financial accounts of the company, one would expect to see its profit equal to approximately 10% of gross sales if all costs and overheads known for the year had been appropriately recovered. As will be seen later in these reasons, the profit shown in the accounts was nowhere near 10% on the gross sales figure. An analysis of the financial results as set forth elsewhere in these reasons shows that the percentage of profit on cost of all sales was approximately 36%, and the average mark-up for wholesale sales approximately 39%.

The company and the partnership each operated separate bank accounts. All receipts from customers were banked into the bank account of the partnership. The partnership paid the company in relation to transactions invoiced to it as funds became available. The sales so invoiced to customers varied throughout the relevant period but were approximately 30% by way of wholesale sales, generally to print brokers and printers, and 70% by retail sales.

The prices obtained by the partnership for the end products were said by Mr K to be in line with those charged by other printing houses and ``neither particularly high nor particularly low''. They must, however, have reflected the reduction in sales tax consequent on the lower base upon which it was self-calculated.

The printing business, other than as above detailed, was conducted without distinction between the company and the partnership. Documents were brought into existence accordingly to evidence a sale by the company to the partnership and by the partnership to the end user, but even where the partnership bought goods for its own use, the same documentation was brought into existence.

I am satisfied that the ``roles'' played by the applicant and the partnership were arbitrary and devised with only one purpose, and that was to create an artificial structuring of two entities, allegedly a wholesaler and a retailer, in order to enable the imposition of sales tax on the applicant's structured sales price and not the sales price to the end user. The two capacities in which Mr K was said to have acted, the one as an employee of the company, the other as a partner in the partnership, were equally fictitious. What was said, namely that apart from manufacture, the company did not have any costs of administration, nor any costs of marketing, and that Mr K's main role was with the marketing and selling, and that while the partnership did not directly employ anyone, and did not own any plant or equipment, it obtained the facilities it needed from the applicant for a fee which it incurred on a monthly basis, subject to an adjustment at year end by reference to the final accounts, does and do not reflect the factual position as it in fact was. The service charge made by the company to the partnership whereby the whole of the cost of administration and the whole of the cost of selling were charged against the partnership was a book entry not reflecting the actual hours so engaged or expenditure so incurred and to be reimbursed.

Financial and operating results for relevant years

Sales, expenses and other relevant information as contained in the yearly accounts of the company and the partnership were as is

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set forth below. The amounts representing the sales by the company to the partnership do not include sales tax. The purchase figures shown as referable to the partnership do include sales tax. For the 1985 and 1986 financial years, being the only two complete financial years covered by the assessment, the sales tax paid was $41,150 and $51,153 respectively.

In the 1986 and 1987 years the proportion of retail sales to total sales, the remainder being wholesale sales, was 64% and 77% respectively.

As to the Company

                                   1984     1985     1986      1987
                                     $        $        $         $
  Sales (excluding sales tax)     266,139   297,555  403,593  466,264
  Gross profit                    176,639   180,179  267,315  307,188
  Direct expenses                 135,540   137,966  189,345  209,970
  Trading profit                   41,100    42,213   77,969   97,219
  Service fees "received
    from F.P. Sales"               71,000    72,000  102,400   89,000
  Total expenses                  113,141   125,088  163,033  197,372
  Net profit/loss                   2,534  (10,727)   17,336  (4,153)
As to the Partnership
  Purchases (including sales tax) 308,418   338,704  454,743  543,263
  Sales                           384,815   418,290  572,023  663,440
  Gross profit                     76,298    79,686  117,290  120,177
  Total expenses                   75,525    78,861  115,447  101,594
  Net profit/loss                     873       824    1,843   18,583

The sales made by the company to the partnership as returned for sales tax purposes, and appearing in the relevant returns, in respect of the two complete financial years were as follows:

                          Sales of                      Sales of
                         Non-taxable    Sales Exempt    Taxable
                          Material        Material      Material    Tax Paid
                              $              $             $           $
   1985 financial year      65,571         26,242       205,744      41,150
   1986 financial year     121,985         25,766       255,901      51,153

An extract of cost of sales and sales made by the applicant for June 1984, June 1985 and June 1986 showed a wholesale mark-up, that is, total wholesale sales less total cost of such sales divided by such total cost of sales, of 17.77%, and retail mark-up, that is, total retail sales less total cost of such sales divided by such total cost of sales, of 26.05%. The cost of wholesale sales figures included the 10% mark-up inserted on all work tickets and imposed by the company on all sales. Excluding this 10% mark-up, the wholesale mark-up on cost as per the work tickets was 29.54%.

An analysis of wholesale and retail sales mark-ups made by the respondent for late December 1985 through January 1986 resulted in figures for average percentage mark-ups on cost as per the company's work tickets of 39.45% and 37.97% respectively. If a figure alternative to that used by the respondent as the basis for the assessment is to be applied, and on the evidence above set forth as it relates to the actual sales prices and the mix of such sales, I am of the opinion that this should be so, it would seem preferable to make a comparison of like periods over the three years than to choose a few months in only one of the relevant years, provided, however, that no peculiar features are present in the period chosen. The month of June in the 1984, 1985 and 1986 years is chosen accordingly.

Relevant statutory provisions

The statutory provisions relevant to the issue as it relates to the sales value are contained

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in sec. 17, 18, 19 and 21 of the Sales Tax Assessment Act (No. 1). The assessment issue brings into consideration the provisions of sec. 3, 25 and 67 of the Act. The penalty provisions warrant consideration of the relevant sales tax regulations.

So far then as it is relevant to the sales value issue, the Assessment Act No. 1 provides as follows:

``17(1) [Sales tax levied on sale value] Subject to, and in accordance with, the provisions of this Act, the sales tax imposed by the Sales Tax Act (No. 1) 1930 shall be levied and paid upon the sale value of goods manufactured in Australia by a taxpayer and sold by him or treated by him as stock for sale by retail or applied to his own use.

...

18(1) [Meaning of `sale value of goods'] Subject to sub-sections (1B), (1C) and (4A), where goods (other than goods treated by a manufacturer as stock for sale by retail) have been sold by the manufacturer to an unregistered person or to a registered person who has not quoted his certificate in respect of the sale, the sale value of the goods, for the purposes of this Act, is -

(a) if the goods were sold by wholesale - the amount for which the goods were sold; or

(b) if the goods were sold by retail - the amount for which the goods could reasonably be expected to have been sold by the manufacturer by wholesale.

18(1A) [Sales not at arm's length] Where -

(a) goods that have been sold by the manufacturer after 20 September 1978 to an unregistered person or to a registered person who has not quoted his certificate in respect of the sale -

(i) were manufactured by the purchaser in whole or in part out of materials supplied by the purchaser; and

(ii) were sold by the manufacturer to the purchaser for an amount that is less than the amount for which the goods could reasonably be expected to have been sold by the manufacturer by wholesale if all the materials used in the manufacture of the goods had been purchased by the manufacturer in the ordinary course of his business from a person with whom he was dealing at arm's length; or

...

18(4) [Commissioner may alter sale value] Where -

(a) goods (in this sub-section referred to as the `relevant goods') have been sold after 20 September 1978 by the manufacturer by wholesale to an unregistered person or to a registered person who has not quoted his certificate in respect of the sale;

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

(c) the Commissioner is also satisfied -

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

(ii) that -

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

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

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

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

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

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

(i) the arm's length price; and

(ii) the alternative price.

18(4A) [Deemed `sale value'] Where the Commissioner alters the sale value of goods in pursuance of sub-section (4), the sale value so altered shall be the sale value of the goods for the purposes of this Act.

...

SECTION 19 LIABILITY FOR TAX

19 Sales tax shall be paid by the manufacturer of goods manufactured in Australia and -

(a) sold by the manufacturer to an unregistered person or to a registered person who has not quoted his certificate in respect of the sale;

(b) treated by the manufacturer as stock for sale by retail;

(c) applied by the manufacturer to his own use.

...

SECTION 21 RETURNS ETC.

21 Every manufacturer who, during any month -

(a) makes any of the sales specified in section 18, 18A or 18B; or

(b) treats any goods as stock for sale by him by retail; or

(c) applies to his own use any goods specified in sub-section 18(3),

shall within 21 days after the close of that month, furnish to the Commissioner a return of those sales, or, as the case may be, of those goods, in a form approved by the Commissioner containing such information as the form requires and such other information as required.''

The combined effect of sec. 17, 18, 19 and 21 of the Sales Tax Assessment Act (No. 1) is to impose in the first instance a self-assessing tax at the rates prescribed by the rating Act. Hence the amount upon which a tax is payable is to be determined by sec. 18(1), if relevant, or as is contended in the present case, sec. 18(4), the anti-avoidance section.

The statutory provisions relevant to the assessment issue are to be found in sec. 3, 25 and 67 of the Act. Section 3 of the Act defines ``assessment'' as meaning:

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

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

...

25(1) [Assessment] Where the Commissioner finds in any case that tax or further tax is payable by a person, the Commissioner may make an assessment in relation to the person.

25(2) [Alteration of value] Where, under sub-section 18(3A) or (4) or 18A(5) or (6), the sale value of any goods has been altered, the Commissioner shall make an assessment in relation to those goods.

25(2A) [Commissioner's discretion] Where -

(a) a person makes default in furnishing a return;

(b) the Commissioner is not satisfied with a return furnished by a person; or

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(c) the Commissioner has reason to believe or suspect that a person (although not having furnished a return) is liable to pay sales tax,

the Commissioner may determine an amount to be the amount upon which, in the opinion of the Commissioner, sales tax should be paid and may make an assessment in relation to the person.

...

25(3) [Notice in writing] As soon as conveniently may be after an assessment has been made, the Commissioner shall cause notice in writing of the assessment to be served on the person liable to pay the tax or further tax.

...

25(5) [Validity of assessment] The omission to give any such notice shall not invalidate the assessment made by the Commissioner.''

The sale value

The contention of the Commissioner

The Commissioner contended that a sale value arrived at pursuant to sec. 18(4) of the Sales Tax Assessment Act (No. 1) was warranted, generally on account of, inter alia, the following circumstances. The sole reason for the existence of the partnership and the sole purpose of the structuring of the company and the partnership was for sales tax minimisation. The transactions between the company and the partnership were clearly not at arm's length. The business was conducted by the same factual entity. The documentation of the transaction by the company and the partnership was brought into existence at the same time. Any question of creativity had not been brought out on the evidence, and the structuring, if it served any purpose, was that of divisionalisation. Further, and more specifically:

1. Whereas sales by the company were said to be at cost plus 10%, the evidence showed that the sales did not return to the company anything like the true cost plus 10%.
2. The partnership marked up the applicant's price to it by between 10% and 25%.
3. Wholesale sales to other printers were made by the partnership at a mark-up of a further 10% to 25%.
4. The mark-up from the company to the partnership and the partnership to end users was calculated on the same work ticket.
5. The partnership ``reimbursed'' the company by way of a service fee, being an arbitrary proportion of total indirect expenses incurred. This was only ``a book entry''.
6. The work tickets themselves, showing the whole of the transaction so far as the company and the partnership were concerned, including the structuring of the price to the partnership and the price to the end user, were clear evidence of a unitary function.
7. The desire to save sales tax and thus lower the price to the customer was borne out by variation to the scheme depending on whether the customer was registered or not. The partnership should itself have paid sales tax, it not having a sales tax number. The exemption was in fact applied to the customer.
8. What was claimed as wholesale sales to the partnership were at a much greater percentage than 10% as shown on the work docket. On the evidence, the wholesale mark-up varied between 17.77% and 29.54%. If one disregarded or excluded the 10%, then the percentage reached 39.45%. What were relied upon as wholesale sales in the market place occurred at a figure of cost plus approximately 30%, and not cost plus 10%. This latter shows the unreality and artificiality of the cost plus 10% figure. Thus the amount that the company was charging the partnership cannot be accepted as the arm's length price of the goods for the purposes of sec. 18(4)(c)(i).

The only conclusion to be drawn is that the transactions between the company and the partnership were not at arm's length, and the sale value should be calculated on the retail sale value under subitem 18(4)(d), that is, equating the sale value to the full selling price to end users, this being the amount for which the taxpayer could have sold the goods to an arm's length purchaser, not taking into account any unusual factors. (See
Australasian Jam Co. Pty. Ltd. v. F.C. of T. (1953) 10 A.T.D. 217 at pp. 220-221; (1953) 88 C.L.R. 23 at p. 31;
Ellesmere v. I.R. Commr (1918) 119 L.T. 568 at p. 573.)

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As to the sale value and the sales being at arm's length

Section 17 of the Sales Tax Assessment Act (No. 1) provides that sales tax be levied and paid upon the sale value of goods manufactured in Australia by a taxpayer and sold by him. Section 19 of the Act requires a manufacturer to pay sales tax and sec. 21 requires him to lodge returns. Section 18 of the Assessment Act deals with ``sale value'', and normally, if goods are sold by wholesale, the sale value is the amount for which the goods were in fact sold, or if they were sold by retail, the amount for which the goods could reasonably be expected to have been sold by the manufacturer by wholesale.

Sales tax is a tax, the liability for which does not depend upon the making by the Commissioner of an assessment. Sales tax is in effect a self-executing tax, applicable where a transaction to which it applies falls within one or other of the Sales Tax Assessment Acts. In such event, tax on that transaction will automatically become due and payable at the rate declared by the Sales Tax Act applicable to the apposite Sales Tax Assessment Act.

Section 18(4) is an anti-avoidance subsection and applies so as to allow the Commissioner to substitute for the amount for which the goods were said to have been sold, the arm's length price of those goods, that is, the amount for which they would be expected to be sold to an arm's length purchaser as part of an arm's length dealing, this where the Commissioner is satisfied, pursuant to the subsection, that the dealing was not at arm's length, and the price not an arm's length price, and on the assumption that a vendor of goods will obtain the best price available for them. (See Ellsemere v. I.R. Commr (supra).)

The applicant did not dispute that the partnership at all relevant times throughout the period was a wholesale merchant. As such, it should have been registered. If the partnership had been registered, it would then have been required to quote its sales tax number in respect of the purchase of goods which were for sale by wholesale. It was submitted on behalf of the applicant that if the partnership sold to a person who quoted his sales tax number or sales tax certificate, the partnership was entitled to a refund of the exact same amount as was charged to it by the company, or should have been charged to it by the company. This may be so, but the significance of the absence of registration and looking to whether the end user quoted a number is not as to whether the sales were or were not wholesale sales, nor as to whether a refund might be obtained but rather as to whether the absence of registration and the consequential disregard of the existence of the partnership further evidences the lack of reality in the purported division of functions. I consider this to be so. The company and the partnership did not carry on their businesses at arm's length.

It is thus the determination of what the price would have been if the transactions had been at arm's length that now presents itself. The sales tax legislation takes transactions as it finds them (see
Estee Lauder Pty. Ltd. v. F.C. of T. 88 ATC 4412 at p. 4420). The question of what is an appropriate arm's length price ought to be approached, so the applicant said, by taking the existence, operation, roles and functions of the partnership and the applicant as they were. If one was to postulate arm's length into that situation, then attention should be only directed, it was said, to the one question, that is, what is the mark-up that is appropriate for the purchaser, the partnership, in undertaking the role ``which it in reality did''.

The applicant sought to show that there was a wholesale market in printed matter because of the sales to people such as printers and print brokers. It was the applicant's submission that some 30% of the partnership sales were by wholesale. What the applicant sought to do was to show that when sales were made by wholesale, they were made at prices cheaper than when they were made by retail, and that at the very least there was an arm's length wholesale market value being the price at which the partnership sold to printers and print brokers. It was submitted that the evidence showed that such price was less than, on average, the prices it charged when it sold to people who were not printers and print brokers, and that the price charged by the partnership to the print broker is an appropriate ``other price'' to be taken into consideration in assessing what the applicant should have itself taken into account.

The respondent had, in arriving at the assessment, altered the sale value. It is open to the Tribunal, it was submitted, to conclude by

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reference to the prices for which the partnership sold by wholesale to printers and print brokers that the Commissioner's price should be discounted, either by ``working backwards from the retail price, or working up from cost and showing a mark-up on cost''. The applicant alternatively sought, as has just been mentioned, to rely upon the amount for which the goods were sold to printers or print brokers, and derive from the same what was the appropriate amount of ``sale value''. Thus, had the manufacturer, the applicant, and the purchaser, the partnership, been dealing at arm's length, the price which they chose or which they settled between them was not less than the arm's length price, or if it was, then not as much less than the arm's length price as is contended by the Commissioner.

Sales tax, in its policy and purpose, is a wholesale tax on the wholesale value of goods which is assumed by the legislation to be less than the retail price (see
Brayson Motors Pty. Ltd. v. F.C. of T. 85 ATC 4125;
D.F.C. of T. (S.A.) v. Ellis and Clarke Ltd. (1934) 52 C.L.R. 85). It was submitted that the action by the Commissioner in the subject application whereby it was said that the appropriate price should be that charged to the end user, that is the retail price, excluding only the cost of delivery to the customer, was contrary to the scheme and policy of the Acts. This submission begs the question of value. It may have substance to it but the mere stating does not relieve the applicant of the obligation and onus of proof resting on it.

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

What the Commissioner did was to identify sales by the partnership where the purchaser from the partnership quoted its certificate, or it was an exempt institution. The sales figure was calculated and the identification made from the sales tax returns prepared and lodged by the applicant. There was not any dispute as to the calculation made by the respondent in this regard, that is to say, the way in which the figure upon which the Commissioner imposed tax was arithmetically calculated.

The Tribunal does have before it material that was not available to the Commissioner, the same having been detailed earlier in these reasons. I shall not repeat it at this time other than to say that it illustrates the mix of wholesale and retail sales and the actual mark-up to the end user in contrast to the notional 10%.

It is, in my opinion, open to the Tribunal to accept on the basis of, and for the reasons earlier given, a wholesale mark-up of 17.7%. That is, all of the sales would be treated at the wholesale selling price with the stated mark-up. On this basis and on making the assumption as to comparable sales, sales tax should have been calculated and paid accordingly. I am of the opinion that this is the appropriate course to follow. Accepting then this situation, the Tribunal would apply a figure of 77.2% against the respondent's assessment. Noting a proportion of sales by wholesale to sales by retail at 1:2 - the evidence shows this to have been the approximate mix of wholesale and retail sales - and adjusting the same by the 17.7% and 26.05% mark-ups above-mentioned, the sale value amount on which the respondent calculated the duty, when compared with the price at which all of the goods could have been sold by wholesale, was excessive by 4.5%. The calculation of sales tax by the respondent in relation to the amount in dispute between the parties was excessive by 22.8%. The amount of the assessment is to be reduced accordingly.

The assessment

The applicant here sought to raise as an issue the perceived fact that the Commissioner, in performing his duty to issue a notice of assessment, described it in the notice of assessment as an assessment issued under sec. 25(2A). It was put on behalf of the applicant that because of this description and because the Commissioner's power under sec. 18(4) is to issue the assessment under the immediately preceding subsection, sec. 25(2), that the assessment itself was made without power. It was defective and without force or effect.

It was not in dispute that the Commissioner had altered the sale value by reason of his

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having been satisfied as to the prerequisites contained in sec. 18(4). The Commissioner having altered the sale value, that altered sale value, for the purposes of the Act, is to be regarded as the sale value of the goods. The Commissioner made an assessment of tax due on such sale value and then served a notice on the applicant, which advised the applicant that the Commissioner had made an assessment pursuant to the provisions of sec. 25(2A). This may have been in error but the same was not conceded by the respondent. Indeed, it was said that the assessment in the subject circumstances could have been made under sec. 25(2A) just as under sec. 18(4). Nevertheless, it was the respondent's primary submission that the assessment of tax having been made, no significance in this regard was to be attached to the wording on the notice.

The respondent further submitted that where the Commissioner has altered the sale value under sec. 18(4) in order to arrive at an arm's length price, then the sale value as so altered should be the sale value for all purposes of the Act. The action of the Commissioner in making the alternation under sec. 18(4) operates of itself, and without the need for the issue by him of any assessment, to subsitute a sale value. The liability to pay sales tax exists independently of the making of an assessment. In the light of the definition of ``assessment'', this may, in my opinion, not be so. There is, it was said, a delineation between the Commissioner's functions under the sales tax legislation and his assessing functions. Section 18(4) involves the exercise by the Commissioner of a discretion, and the Tribunal has the power under the Administrative Appeals Tribunal Act to review the exercise by the Commissioner of such discretion (see
Fletcher & Ors v. F.C. of T. 88 ATC 4834 at pp. 4845-4846).

The applicant contended that sec. 25(2A) was not apposite as the source of the power to access. Assuming the preconditions in the subsection were satisfied, then the section being an authorising provision rather than one imposing a duty, the Commissioner is required firstly to determine the amount upon which, in the opinion of the Commissioner, sales tax should be paid, and secondly, at his discretion, make an assessment in relation to the person. There was no evidence of any opinion reached for the purposes of sec. 25(2A), as to the amount upon which, in the opinion of the Commissioner, sales tax should be paid. The evidence clearly showed that the alteration of sale value was made under sec. 18(4). It was the applicant's submission that the effect of subsec. (4)(a) of sec. 18 is to preclude the need to make the opinion authorised by sec. 25(2A), being the opinion as to the amount upon which sales tax should be paid. There is no need for the Commissioner to form a further opinion, he having made an alteration of ``sale value'' in the course of making the assessment. The Commissioner is to assess under sec. 25(2), not only because it is made expressly applicable to sec. 18(4), but because the subsection actually directs him to do so with the word ``shall''. It was then not competent for the Commissioner to make an assessment under sec. 25(2A) if he was relying on sec. 18(4)(a) to alter the sale value.

The primary submission of the applicant was thus to the effect that the notice of assessment evidenced that the assessment itself had been made under a section other than the section pursuant to which it ought to have been made. According to the applicant, there was simply no mistake in the notice. The notice was a correct reflection of the assessment which had been wrongly made.

``Assessment'' is defined in sec. 3 of the Sales Tax Assessment Act (No. 1) to mean ``the ascertainment of the sale value of goods and of the sales tax payable on that sale value''. That is, the act of assessment. In this matter, I am of the opinion that the assessment was made consequent upon the Commissioner forming his opinion under sec. 18(4) and acting pursuant to sec. 25(2).

Both sec. 25(2) and 25(2A) deal with the making of an assessment, sec. 25(3) provides for the giving of notice in writing of the making of an assessment, and sec. 25(5) the omission to give such notice not invalidating the assessment. The defect then, if there be one, was not in the making of the assessment, but in the form or wording of the notice. The notice of assessment is something separate and distinct for sales tax purposes from the act of assessment.

The Commissioner did all that was required of him under the Act. He made a calculation under sec. 18(4), he made an assessment, and in giving notice, he gave notice of the making

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of the assessment. He referred to sec. 25(2A) at the top of the assessment. The assessment had not, in my opinion, been made under that section but under sec. 25(2).

In 1986, amendments were made to the sales tax legislation aimed, according to the explanatory memoranda issued by the Treasurer at the time, at bringing the appeal procedures of sales tax into line with those applicable to income tax. The above definition of ``assessment'' was inserted, and amendments made to the sections and subsections which are here being considered.

It was submitted that if the Commissioner carries out a sec. 18(4) exercise, the operation of sec. 25(2) is to impose on him an obligation to make an assessment, whereas under sec. 25(1) and 25(2A) he has a discretion. A similar situation applies in relation to sec. 166 and 167 of the Income Tax Assessment Act. In sec. 166, the words ``from the returns and other information, the Commissioner shall'' appear, whereas in sec. 167, the Commissioner ``may'' make an assessment. Section 167 particularises three instances that might fall within sec. 166. (See
George v. F.C. of T. (1952) 10 A.T.D. 65; (1952) 86 C.L.R. 183.) Sections 166 and 167 combine together to set out the Commissioner's duty with regard to the making of assessments.

However, whilst there are some similarities between sec. 167 of the Income Tax Assessment Act and sec. 25(2A) of the sales tax legislation, sec. 167 does not provide for the calculation of tax, and its operation is by means of sec. 166. That is, as I see it, the interlink as identified in George's case (supra) may not be applicable in a sales tax context. Section 167 is not an independent power because of the words ``for the purpose of the last preceding section'' appearing in it and because of the absence of the power in sec. 167 to make an assessment. Unlike sec. 167, sec. 25(2A) of the Sales Tax Assessment Act (No. 1) is not in aid of or dependent upon sec. 25(1) as merely describing with particularity a situation which might arise under sec. 25(1). Sections 25(1) and 25(2A) both stand alone. Under either, it is possible to ascertain the sale value and calculate the tax.

The applicant submitted that the respondent made an incorrect assessment, and the notice is evidence of the assessment that was so incorrectly made. I do not accept this to be so. The power to issue an assessment pursuant to a sec. 18(4) alteration is given by sec. 25(2). The notice said that the assessment was issued under sec. 25(2A). The mistake, if there is a mistake, was in the notice. It is clear that sec. 18(4) was applied by the Commissioner. The assessment issued accordingly.

The notice does not evidence that the assessment was made under a wrong section even be it that the notice itself was wrong. The notice was not, in my opinion, a correct reflection of the assessment that was made.

The wording in the written document does not carry any significance in the context of the legislation. The mere fact of the mention of a wrong subsection in the assessment does not reflect upon the making of a valid assessment. The document in evidence which recorded the decision of the officer of the respondent required the assessment to issue consequent upon the provisions of sec. 18(4). The evidence as to the transactions not being at arm's length and at proper value required a determination to be made pursuant to sec. 18(4). The Commissioner's power to make and issue the assessment that he issued was under sec. 25(2). The reference to sec. 25(2A) on the top of the notice is not conclusive or binding upon the Commissioner. The making of the assessment preceded the preparation of the notice and was not dependent upon anything contained in it. (See
Opiel v. F.C. of T. (1987) 18 A.T.R. 374 at p. 377.) The appearance of a reference to sec. 25(2A) on the notice of assessment is neither an admission that the assessment was made under that subsection, nor capable of being conclusive of that fact. In this situation, all the notice can be notice of is the making of an assessment, notwithstanding any misdescription of the section that might appear in it.

The additional tax

In my opinion, it was competent for the Commissioner to make an assessment under sec. 25(2) of the Act. The assessment that was here made was under that section and sec. 46 of the Act applies so as to render the applicant liable to pay additional tax by way of penalty equal to double the amount of the difference between the tax properly payable and the tax that would have been payable if the sale value concerned had not been altered. The Commissioner by reason of sec. 47(1) is required to make an assessment of the

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additional tax payable. Section 47(2) enables notice of the assessment to be incorporated in notice of any other assessment made in respect of the taxpayer under the sales tax legislation. Again, as with the sec. 25(2) assessment, so with the sec. 47(1) assessment. The same was made by the Commissioner. An error in the notice advising a taxpayer of its having been made does not invalidate the assessment.

Under sec. 47(3), the Commissioner is given a power to remit the whole or any part of the additional tax so payable. As I see the situation, there are not any circumstances warranting a remission other than as have been granted by the respondent. The structuring of the applicant and the partnership was deliberately so done to minimise the sales tax otherwise payable. The entities did not operate at arm's length and the sales value contrived was not consistent even with the sales figures included in the yearly accounts of the applicant. The partnership was not registered under the Act and did not have a sales tax number. This situation was ignored by the applicant. The existence of the partnership was not taken into consideration in this context.

Decision

The assessment of tax payable pursuant to sec. 25(2) of the Sales Tax Assessment Act (No. 1) is varied, the calculation of sales tax in relation to the disputed amount is excessive by 22.8% and an assessment is to issue reflecting the reduction and these reasons. The basis of the assessment of additional tax pursuant to sec. 46 and 47(1) of the Act is affirmed, the amount of sales tax on which the same is to be calculated is the amount as so reduced by 22.8%, and the assessment of additional tax is to be reduced accordingly.

Liberty to apply is reserved in relation to the implementation of this decision.

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