CASE Z24

Members:
BJ McMahon DP

Tribunal:
Administrative Appeals Tribunal

Decision date: 18 June 1992

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BJ McMahon (Deputy President)

This is an application to review a decision of the respondent to disallow an objection against a Sales Tax assessment dated 27 February 1990 in respect of goods manufactured in Australia and sold in Australia during the period 1 July 1988 to 30 November 1989. The goods in question were bottles of premium wine sold by retail at the premises of the applicant vigneron. In order to decide whether the assessment was excessive, it is necessary to settle two aspects of the transactions during the assessment period. The first is to establish the taxing point. The second is to establish the value of the goods for sales tax purposes.

2. The respondent contends that the taxing point was at the time of the actual sales and that consequently the provisions of s 18(1)(b) of the Sales Tax Assessment Act (No 1) 1930 govern the method by which the value of the goods is to be fixed. The applicant contends that the taxing point was at the stage where the applicant treated the goods as stock for sale by retail and that accordingly the value is to be fixed by reference to the provisions of s 18(2).

3. Section 18(1) is in the following terms-

``18(1) 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.''

4. Prior to 23 August 1988, s 18(1)(b) was in the following terms-

``(b) if the goods were sold by retail-

• (i) if the goods are of a class which the manufacturer himself sells by wholesale - the amount for which the goods could reasonably be expected to have been sold by the manufacturer by wholesale; or
• (ii) in any other case - the amount for which the manufacturer could reasonably be expected to have purchased identical goods from another manufacturer if the other manufacturer had, in the ordinary course of his business, manufactured the identical goods for sale and had sold them to the first-mentioned manufacturer by wholesale.''

5. For practical purposes, there is no real difference between the 2 texts which were operative during the assessment period. The 1988 amendment was brought in presumably as a result of the decision of the Federal Court in
Estee Lauder Pty Limited v FC of T 88 ATC 4412. However it is to be noted that the prior legislation referred to ``goods... of a class'' whereas the current legislation refers to ``the goods''.

6. The relevant part of s 18(2) currently reads as follows-

``18(2) For the purposes of this Act the sale value of goods treated by the manufacturer of the goods as stock for sale by retail shall be the amount for which those goods could

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reasonably be expected to be sold by the manufacturer by wholesale:

...''

7. Prior to 23 August 1988 it was in these terms-

``(a) if the goods so treated by the manufacturer are of a class which the manufacturer himself sells by wholesale - the amount for which those goods could reasonably be expected to be sold by the manufacturer by wholesale; or

...''

8. There appears to be no relevant difference between the 2 texts of s 18(2) that could affect the outcome of the present application in different ways for different parts of the period under review.

9. The applicant owns and operates vineyards in the Hunter Valley district upon which are erected 3 buildings. One of these houses the applicant's wine making and bottling plant. The second building is used as the general warehouse and distribution facility. Approximately 100 metres from this building is the third building which contains an office and laboratory area, a tea room facility, some storage space and the cellar door sales area. The enterprise was described by one deponent as a ``boutique winery''.

10. The bulk of the applicant's cases of wine, each containing 12 bottles, are stored in the warehouse. The storage area behind the tasting counter (otherwise known as the cellar door sales area) can hold approximately 220 cases. The area immediately adjacent to the tasting counter can hold a further 50 cases. In order to provide stock for sale to visitors at the cellar door sales area, and in order to provide bottles for tasting, pallet loads consisting of between 50 and 72 cases are brought by a forklift truck from the warehouse to the retail storage area on a regular basis. The applicant sells a substantial volume of its wine from its cellar door sales area. The area is open to the public at specified times and visitors may taste the wine that is available for tasting at a particular time. While the vast majority of the sales made at the cellar door are direct to consumers, some sales are also made to local restaurants from the cellar door. Most of the sales made at the cellar door are in one or two case lots. By law, the maximum amount of an individual sale at the cellar door may not exceed 5 cases.

11. In the period in question, the applicant sold 13,469 cases. Of these 10,170.5 cases, or 75.5%, were sold to distributors. Retail sales at the cellar door accounted for 2,804 cases, or 20.8% of total sales. Sales to local restaurants and/or local retailers amounted to 259.5 cases, or 1.9% of total sales, while export sales accounted for the balance, namely, 235 cases or 1.8% of the total. As the stock in the cellar tasting area remained constant, it follows that during the assessment period some 2,800 cases were moved by forklift truck from the warehouse to the retail storage area in lots of between 50 and 72 cases at a time.

12. By law, retail sales must be made in the defined sale area. If these cases were not moved from the warehouse to the retail storage area, it would be necessary for employees to go to the warehouse on each occasion that a sale was made and to bring the case back to the buyer at the counter.

13. All bottles brought to the retail storage area are intended either for retail sale or for tasting. Some bottles that have damaged labels are particularly set aside for tasting. The general manager of the applicant estimated that during the assessment period 150 cases were used for tasting. A record is kept of the wine appropriated for tasting purposes in accordance with the applicant's obligations under the Act. No written record is kept of the cases moved from the warehouse to the retail storage area.

14. Stock for the applicant's other sales is drawn from the warehouse. These include sales made to distributors, a few mail order retail sales and sales to local restaurants where the restaurant proprietor does not come to the cellar door to make his purchase. Sales to consumers and local restaurants would fall within the 1-5 case range, while sales to distributors could be from one case to more than 100 cases. Evidence was given by the applicant's accountant, who examined all the relevant invoices, that restaurant sales were principally to 3 restaurants in the area which between them accounted for approximately 84 per cent of sales made to local re-sellers. Evidence was also given that the retail price mark-up by restaurants was usually 100 to 150 per cent of the price paid by the restaurant to the applicant. This corresponded with some 75 to 100 per cent above the cellar door price. Evidence was also given, which I accept, that there was no commercial scope for further volumes of sales

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to local restaurants because of pricing and trading conditions.

15. The applicant does not have written agreements with its 4 distributors in New South Wales, Victoria, South Australia and Tasmania. It does, however, sell at an agreed price to the New South Wales distributor and at the same price to the South Australian distributor. That price is approximately 75 per cent of the local restaurant price. The price charged to the Victorian and Tasmanian distributors is some 2 to 3 per cent lower again. No price list is published, although one is used for internal purposes.

16. The New South Wales distributor purchased 8,306.5 cases during the assessment period, or 61.7 per cent of the applicant's sales during that time. The Victorian distributor purchased another 10.3 per cent of the company's sales. Sales to South Australia and Tasmania were quite small. There are no contractual conditions with any of the distributors apart from price arrangements. There are no conditions, for example, relating to exclusivity of territory, obligations to promote the wine, a restriction on distributing competitive products, or arrangements as to minimum quantities to be supplied. The respondent mistakenly assumed the existence of such conditions in its letter of 29 December 1988. I am satisfied there were no conditions of the nature referred to in that letter.

17. Affidavits of 2 rival wine makers in the district were tendered in evidence and were objected to by the respondent on the grounds of relevancy. As the legislation requires a consideration of a hypothetical sale of the actual goods of the applicant, and as the affidavits dealt principally with the way in which the 2 other wine making companies referred to are treated for sales tax purposes, I find that their evidence is not directly relevant to the issues before me. However, I have derived some assistance from them in confirming the applicant's evidence as to the general trading conditions in the Hunter Valley area and in particular on the question of the commercial practicality of substantially increasing sales of the applicant's wine to local restaurants.

18. I will deal firstly with the question of fixing the taxing point. Resolution of this question will not only fix the time at which the goods should be valued. It will identify ``the goods'' if s 18(1) is to apply or ``those goods'' if s 18(2) is to apply. The Commissioner contends that it is at the point of sale, that ``the goods'' are bottles sold to consumers, that the sales are therefore of lots of less than 5 cases, that the only comparable sales of these quantities are to local restaurants and that therefore the local restaurant price is the appropriate wholesale value. The applicant contends that the taxing point should be when the forklift truck loads are brought from the warehouse to the retail storage area, that ``those goods'' are quantities of 50 to 72 cases, and that the wholesale value should be determined at that point by reference to those quantities.

19. The s 18(2) test to be applied was set out in
FC of T v York Motors Pty Ltd (1946) 8 ATD 169; (1946) 73 CLR 459. The best known statement of the position appears in the judgment of Latham CJ at ATD 176; CLR 477-

``The Act distinguishes between actual sale of goods and treatment as stock for sale by retail. Such `treatment' is something which is short of actual sale. It is a `treatment' of stock as stock to be sold by retail at some time thereafter; that is, the stock in some way enters the class of being regarded as stock for retail sale. If it is so regarded, then it is immaterial that in fact it may be sold wholesale or may be used by the manufacturer himself. The `treatment' creates a liability to pay tax and the manufacturer becomes bound to include the stock in his monthly return under s. 21 and to pay tax accordingly.

Treatment as stock for sale by retail, if distinguishable from actual sale, must include any proved decision to regard the stock as stock for retail sale, that is, any decision to allocate or assign the stock to the category of goods intended to be sold by retail. Until sale, the goods remain in the possession or control of the owner. Treatment as stock for sale by retail does not involve any change in possession or control. It means that the stock is regarded in a particular way, namely as available for disposal by retail sale; that is, the treatment of stock to which the Act refers is a mental determination which, however, must be proved to exist if the question of whether or not it did exist is called in question.

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It is difficult to see what more could be done in the way of treating goods such as motor cars as stock for sale by retail. It is not suggested that some physical separation is required, as by putting the goods in a separate room or on particular shelves, although evidence that that was done might, in a particular case, show that such treatment had occurred, as, for example, if a manufacturer who had a factory and a shop moved goods from his factory to his shop, unpacked them and put them upon shelves in his shop, where he sold them by retail.''

20. Counsel for the respondent submitted that there was not the necessary ``mental determination'' in the mere movement of stock for 2 reasons. Firstly, he said that it was unclear at the time the stock was moved to the retail storage area, whether individual bottles would be used for retail sale or for tasting purposes. Secondly, he pointed to the absence of any written record of stock movement that was relied upon in York Motors. In my view, this submission must fail. It matters not if the goods are appropriated for and supplied for tasting purposes after the necessary ``mental determination'' has been made. To offer wine for tasting is to appropriate the goods to the use of the manufacturer. Starke J at ATD 178; CLR 480 and 481 said-

```A manufacturer,' said the learned judge from whom this appeal is brought `treats his manufactured stock for sale by retail when he reaches a definite decision not to sell it wholesale to another retailer but to sell it himself by retail, and he does some final and unconditional acts which,... indicates that he has ceased to be a wholesaler and has become a retailer in regard thereto.' Doubtless a taxpayer who so decides and acts treats his goods as stock for sale by retail but I should not think that his act must be final and unconditional, so that he can never change his method of dealing with such goods or sell them wholesale or apply them to his own use. It is enough if he decides to sell his stock by retail and evidences in some manner his decision. It may be evidenced in many ways, e.g., his method of conducting business, advertisements, entries in his books of account and so forth. But it is not necessary that he should notify the Commissioner of Taxation, though perhaps not inadvisable, nor is it necessary that he should never change his method of dealing with the stock.''

21. More to the point was the observation of Dixon J at ATD 180; CLR 484-

``Finality of decision is, I think, something foreign to the conception upon which s. 17 of the [Sales Tax] Assessment Act and s. 3 of the [Sales] Tax Act proceed in imposing sales tax on goods treated as stock for sale by retail. The legislation is looking to an act on the part of the taxpayer which when done will expose him to a liability to tax in respect of the goods. There is no fiscal reason why, if the tax so incurred is paid, the goods should ultimately be dealt with by retail. It is open to the taxpayer to do what he likes with his goods. What he does afterwards with the goods will not affect his liability for tax once he has incurred it by treating them as retail stock.''

22. In my view, the movement of the stock from the warehouse to the retail storage area must be regarded as an unequivocal treatment of the goods as stock for sale by retail. It is in the nature of a ``final and unconditional act''. There is no evidence that any of the cases were, at any time, moved back to the warehouse. It is not necessary that a written record be kept of the movement. The objective fact of movement indicates a clear resolution on the part of the applicant to appropriate stock for retail or tasting purposes. The fact that an employee would otherwise need to visit the warehouse each time a sale is made and to bring stock back to the retail area seems to me not to the point.

23. ``Those goods'' referred to in sub-section 18(2) must therefore be the subject of the enquiry - what is the amount for which they could reasonably be expected to be sold by the applicant by wholesale. ``Those goods'' at the taxing point consisted of between 50 and 72 cases of the applicant's wine. There is no actual sale at the taxing point. One must therefore hypothesise both a sale and the nature of the sale in applying the terms of sub-section 18(2). In predicating a hypothetical wholesale sale of the goods transferred to retail stock, it is appropriate to hypothesise a wholesale sale in the quantities in which the goods are treated as stock for sale by retail. The observations of Dixon and McTiernan JJ in
Union Quarries (Footscray) Pty Ltd v FC of T (1938) 4 ATD 477 at 482;

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(1938) 59 CLR 111 at 122 are apposite-

``The words which we have described as constituting the chief or leading provision declaring the standard of sale value deal with the general case of a manufacturer selling by wholesale. They are followed in the sub-section where they occur, viz., s. 18(1) of the Sales Tax Assessment Act (No. 1), 1930-1935, by a paragraph dealing with the special case of a manufacturer selling by retail. If in such a case the goods are of a class which he usually sells by wholesale, the sale value is to be the amount for which the goods would be sold by the manufacturer if sold by wholesale. This description of sale value is, doubtless, susceptible of a meaning consistent with the taxpayer's contention. But its interpretation must be affected by the leading provision and we think its language is equally capable of a meaning inconsistent with the taxpayer's contention. In the context we should interpret the paragraph as requiring that a sale by wholesale should be supposed with the same terms and conditions as the actual retail sale made, except in respect of price and any other term or condition which would be absent or modified in a sale by wholesale.''

24. Starke J makes the same point at ATD 480; CLR 119-

``The case of the retail sales of the taxpayer is dealt with in s. 18(1)(b) and the sale value is the amount for which the goods would be sold by the manufacturer if sold by wholesale. Or in other words the subsection takes the particular sale and substitutes for the amount for which the goods were sold by retail the amount for which they would have been sold wholesale upon the same terms and conditions.''

In the present circumstances I must take the hypothetical sale at the taxing point and then apply the test postulated by His Honour. This means that I must ask what amount could be obtained if 50 to 72 cases of wine of a particular label from a boutique winery selling normally for a high price (according to a deponent) were sold at that time - the taxing point - by wholesale.

25. The evidence is that cases in this quantity are not sold to local restaurants. The Commissioner has adopted the local restaurant price as the benchmark wholesale price. In my view, it is an inappropriate approach. It is necessary to give a meaning to the word ``reasonably'' in sub-section 18(2). If all the evidence points to the fact that sales to local restaurants are in small quantities, that there is no scope for increased sales of the applicant's products in that market and that the quantities would be more appropriately sold to distributors, it follows that it would not be reasonable to expect the amount for which these quantities of the applicant's wine (``those goods'') could be sold by wholesale, would be the amount payable by local restaurants. Rather it would be the amount payable by the distributor. The benchmark suggested by the applicant is the higher of the distributor price levels.

26. Counsel for the respondent submitted that I should reject this approach because a sale to a distributor is not the last wholesale transaction and because I should not have regard to commercial practicalities, but rather to the objective amount that could be obtained if the restaurants were receptive to the idea of purchasing such quantities. He referred to a passage in the judgment of Gummow J in
Vale Press Pty Ltd v FC of T 91 ATC 4763 at 4768-

``There is a further point. The applicant also submitted that the effect of para. 18(1)(b) of the Assessment Act is to make the incidence of the tax dependent upon the formation of an opinion by the Commissioner of the reasonableness of the result. I accept the submissions by the Commissioner that the criterion now found in para. 18(1)(b) of reasonable expectation in the particular case is objective rather than subjective, that it is expressed in terms which are not ambiguous, and that it is undesirable to paraphrase them or to use other words; cf.
FC of T v McCabe 90 ATC 4968 at 4971-4972. As was pointed out in Truhold Benefit, supra at ATC 4302; CLR 686, a submission that the incidence of a tax cannot be made dependent upon the formation by the Commissioner, guided and controlled by the policy and purpose of the enactment, of an opinion of the reasonableness of the result is not open in the light of the decision in
Giris Pty Ltd v FC of T 69 ATC 4015; (1968-1969) 119 CLR 365. In any event, it follows from the construction which I have

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accepted of para. 18(1)(b), that the incidence of the tax is not made dependent upon the formation of such an opinion by the Commissioner.''

27. As to the first point, it seems to me that a proper construction of the sub-section requires one to adopt an approach of reasonableness in fixing the hypothetical wholesale price. If this approach leads to a price which would be paid by a wholesaler to a manufacturer, rather than by a retailer to a manufacturer, then that is a result that arises from the circumstances of the case. As to the second objection, it seems to me that His Honour's observations are concerned principally with the constitutionality of the sub- section. I do not read his observations as a broad assertion that the Commissioner should not be guided and controlled by the policy and purpose of an enactment or that where the criterion of reasonableness is imported into a statute, that he can ignore the reasonableness of the result for which he contends.

28. The respondent relied also upon observations made in Case D53
(1953) 4 TBRD 289 at 297. That case dealt with a situation (as in this case) where there were different levels of wholesale prices. The Chairman, Mr RR Gibson, observed-

``Some payers of sales tax (e.g., the taxpayer company) appear to be imbued with the religious belief that the sale value of goods sold by retail by a person who is a wholesaler is necessarily the lowest price at which he sells similar goods by wholesale to one or more of his customers. That belief has probably been induced by the Commissioner's liberal interpretation of the Act and (if that is so) by a misunderstanding of that interpretation. There is certainly nothing in the Act to justify that belief. Every case to which the proviso to s. 4(1) applies is a particular sale by retail by the taxpayer of particular goods and, by the presently applicable part of the proviso (the first part, ending with the word `wholesale' where it first occurs), the sale value of the goods so sold is the amount which would be the fair market value of those goods (i.e., the particular goods sold by retail) if sold by the taxpayer by wholesale. I should think in practice the taxpayer and the Commissioner would necessarily seek to find the criterion of the sale value among the prices at which the taxpayer was contemporaneously selling similar goods by wholesale in the ordinary course of his business, but where such prices vary according to quantities sold and to other circumstances, the wholesale price selected as the sale value will not be the sale value clearly contemplated by the legislature unless it is the wholesale price of goods in a transaction which bears a close relation to the circumstances of the retail sale. It appears to me that the best criterion (if it is available) of the sale value contemplated by the legislature would be the price at which the taxpayer is contemporaneously selling, in the ordinary course of his business, goods of the same quantity or quantities and of the same kind or kinds as those which were the subject of the actual retail sale.''

29. I do not think the respondent can derive much support from this passage. Once it is realised that the goods in question are not those sold at the cellar door, comparisons with sales to restaurants collapse. A hypothetical sale of 50 to 72 cases of expensive premium wine does not bear a close relation to the circumstances of a sale of the same wine to a local restaurant. It bears a close relation to the circumstances of a sale by the applicant to its distributors. In fact it is the commonest type of sale made by the applicant. Seventy-five per cent of its sales are accounted for by sales to distributors.

30. There is nothing special in the relationship between the applicant and its distributors that might be said to affect price. There is no written agreement containing any restrictive conditions. The special feature relied upon by counsel for the respondent was the price of 75% of the restaurant price, which was the agreed price to be paid by the distributor. One cannot regard this as special when it is a feature in the calculation of the price in 75% of the applicant's sales. The arrangements with the distributor cannot be compared with the arrangements discussed by Mr AC Leslie in the same case at 301-

``It will be seen that the agreement does more than fix a selling price. It records the terms of the bargain made between the parties and this bargain depends upon a series of mutual obligations. Some of these obligations fall upon the principal, and it may be their effect would be to appreciate the sale price of the goods while other obligations fall upon the distributors, and it may be that these tend to lessen the price at

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which the purchaser would be prepared to buy. It is clear, however, that the sale price has not been arrived at with regard to market value only. It has been arrived at in the light of market value and the value of the rights and liabilities of the parties under the agreement. The agreement is not an ordinary agreement for sale - it gives both parties special rights, and these rights must be of some value to the respective parties or there would be no need for the agreement. In my opinion, the price fixed under this agreement cannot be regarded as `the fair market value of the goods if sold by wholesale.' On the contrary, it is a special price based, no doubt, on the market price, but influenced by the special terms under which the goods are sold.''

The price paid by the New South Wales distributor is, in my view, the normal wholesale price for this particular wine in these particular quantities. There is nothing in the arrangements between the applicant and the distributor which could result in price distortion.

31. The present circumstances may also be distinguished from Case K108
(1959) 10 TBRD 573. In that case, a manufacturer of aerated waters sold both wholesale and retail, the latter sales being at the factory. Preferential wholesale rates were charged to one re-seller in another centre, who purchased some lines of aerated waters only. The manufacturer calculated the sale value of the retail sales of both aerated waters and cordials by reference to these preferential wholesale rates. The Commissioner determined the value by basing it on the wholesale rates charged generally and his approach was upheld by the Board of Review. In fact all the retail sales concerned appear to have been made in the coastal town where the goods were manufactured and the value adopted by the Commissioner was the actual wholesale selling prices charged in that town. Clearly that was a comparable basis and was consistent with the approach laid down in Union Quarries. In the present circumstances, the context is not between rival wholesalers or rival wholesale prices, but between sale situations that are not comparable, either historically or commercially.

32. It is not necessary in this case to adopt the submission made by counsel for the applicant that one should take a broad brush or robust approach to business realities in determining liability for sales tax. In my view, a simple application of the sub-section to the facts as I have found them, leads inevitably to the conclusion that sales by wholesale of the volume of the applicant's wine considered at the taxing point, were only ever made at the distributor wholesale price and that therefore this must be the amount for which those goods could reasonably be expected to be sold by the applicant by wholesale. There is no evidence that quantities to be considered at the taxing point have ever been sold to local restaurants. To hypothesise the opposite is not reasonable. It would be necessary to adopt this unreasonable hypothesis if one were to hold that the restaurant price was the reasonable wholesale price.

33. The objection decision under review is therefore set aside and the matter is remitted to the respondent with the direction that the sale value of the goods during the assessment period was the amount agreed to be paid to the applicant by its New South Wales distributor.