SMITH & NEPHEW PTY LIMITED v FC of T

Judges:
Hill J

Court:
Federal Court

Judgment date: Judgment handed down 17 December 1993

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Hill J

On 20 August 1990, Smith & Nephew (Australia) Pty Ltd (``the applicant''), applied to the Commissioner of Taxation, the respondent, for a refund of sales tax which it claimed it had overpaid in respect of sales of what are variously referred to as cotton tips or cotton buds to the Coles Myer group of companies and other customers. These sales had been included in the monthly sales tax return of the applicant during 1 July 1987 to 20 August 1990. The applicant was either the manufacturer or the wholesaler of the cotton buds in respect of which the refund was claimed. The claim for exemption was made pursuant to item 42 in the First Schedule to the Sales Tax (Exemptions and Classifications) Act 1935 (``the Act'').

By letter dated 12 November 1990 the Commissioner had advised that in his view the cotton buds were liable to sales tax at the general rate of 20 per cent. The applicant failed to object in time to the refusal to grant a refund, but subsequently applied to the Commissioner pursuant to s. 42(1) of the Sales Tax Assessment Act (No 1) 1930 to consider the objection, notwithstanding that it was out of time, and treat it as having been lodged within the prescribed period of 60 days. It would seem that the Commissioner did in fact exercise the discretion favourably to the applicant and considered the objection that was in fact lodged by the applicant with the Commissioner together with the request under s. 42(1) of that Act. However, the Commissioner disallowed the objection by letter dated 13 August 1992 and the applicant, being dissatisfied with that objection decision, appealed against it to this Court.

It was clear from the statement of facts, issues and contentions filed on behalf of the

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Commissioner that there were two issues between the parties. The first was whether the items in question were exempt from sales tax. The second was whether nevertheless the applicant was entitled to a refund of sales tax. That latter issue turns, at least in part, upon the question whether the provisions of s. 26(1A) of the Sales Tax Assessment Act (No 1) 1930 had been complied with, namely, whether the Commissioner had been, or ought to have been, satisfied that the sales tax in question had not been passed on by the applicant to another person, or, if passed on, had been refunded to that other person.

When the matter came on for hearing, the parties requested that I order the determination of four questions separately from and prior to any other questions in the proceedings. By consent I made the order requested. The questions therefore now to be decided separately from and prior to any other questions relevant to whether the applicant should be entitled to a refund are:

``(i) Whether the cotton tips the subject of these proceedings were `Surgical Appliances... viz... Absorbent cotton wool' within the meaning of those words in item 42(2) of the First Schedule to the Sales Tax (Exemptions and Classifications) Act, 1935 (`the Act').

(ii) Whether the cotton tips the subject of these proceedings were exempt from sales tax pursuant to item 42(2) of the First Schedule to the Act and section 5(1) of the Act.

(iii) Whether the cotton tips the subject of these proceedings were `Surgical Appliances (and parts therefor), viz... Surgical, medical and first aid outfits' within the meaning of those words in item 42(13) of the First Schedule to the Act.

(iv) Whether the cotton tips the subject of these proceedings were exempt from sales tax pursuant to item 42(13) of the First Schedule to the Act and section 5(1) of the Act.''

Section 5(1) of the Act operates to exempt from sales tax any item or sub-item in the first column of the First Schedule to that Act. Item 42 is in the following terms:

``Surgical appliances (and parts therefor), viz.:-

• (1) Abdominal belts
• (2) Absorbent cotton wool, gauzes and lint
• (3) Adhesive plaster and strapping
• (4) (Omitted by Act No 157 of 1979, s. 3(b))
• (5) Artificial eyes
• (6) Artificial limbs
• (7) Bandages and bandage winders
• (7A) Bath seats of a kind used by invalids or aged persons
• (7B) Colostomy, ileostomy and supra- pubic appliances; urinals made principally of rubber or other pliable material
• (8) Crutches
• (9) Elastic bandages, knee caps and stockings
• (10) Invalid chairs, invalid carrying chairs, invalid wheeled lounges and lounge chairs, invalid tricycles including motor propelled invalid wheel chairs and invalid tricycles; spinal carriages and other invalid hand carriages; wheeled beds of the kind used by invalids
• (11) Spectacles and eye-glasses (and cases and wipers therefor), but not including goggles, sunglasses, field glasses or similar optical goods
• (12) Surgical boots, braces and irons
• (13) Surgical, medical and first-aid outfits
• (14) Trusses
• (15) Umbilical belts
• (16) Uterine supports, including surgical pessaries
• (17) Wigs and hair-pieces for use by a person in respect of whom a legally qualified medical practitioner has certified that the use of a wig or hair- piece is necessitated by the loss of hair through sickness or disease (other than naturally occurring baldness) or the effects of the treatment of sickness or disease''

The goods in question

The goods the subject of these proceedings are either imported by the applicant and

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marketed by it under the registered trade name ``Dove'' or manufactured in Australia and marketed under the name ``Persona'', a trade mark apparently belonging to Coles Supermarkets (Australia) Pty Ltd. The actual product comprises a stick or stem on to which at each end is wound small tufts of absorbent cotton. The package sold by the applicant contains illustrations and instructions, making it clear that the product is for cosmetic use in applying and removing make-up, first aid in applying medication to minor injuries, and in baby-care as being suitable for cleaning a baby's nose, mouth and navel. The packaging also gives instructions how to use the product to clean ears safely. The packaging for the Persona product advises:

``Persona Cotton Tips may be used to apply and remove make-up, for baby care and first-aid application.''

The applicant manufactures as well cotton wool in two forms, firstly, a ripple pack containing a continuous length of cotton wool, marketed in 50 gram, 100 gram and 200 gram quantities and secondly, it also manufactures and sells ``cotton balls'', that is to say, small balls of cotton wool.

Evidence was given as to the process of manufacture used for the manufacture of cotton buds, the ripple pack and cotton balls. Suffice it to say that cotton wool is a misnomer. The product contains no wool. Cotton buds are 100 per cent cotton (in addition to the stem), the ripple pack is made of a mixture of 85 per cent rayon and 15 per cent cotton and the cotton balls are made of a mixture of 80 per cent rayon and 20 per cent cotton. No submission was addressed to me to the effect that the method of manufacture of any of the three products was relevant to the case.

Evidence was given by two senior members of the nursing profession as to the use of cotton buds in hospitals. In the intensive care unit of the Royal North Shore Hospital at St Leonards in Sydney, non-sterile cotton buds are used for cleaning the inside of tracheotomy tubes and cleaning the site of entry of the tracheotomy tube to prevent pressure sores and infection. In the maternity ward of the same hospital, sterile cotton buds are used for neo-natal umbilical cord care, primarily cleaning the umbilical stump. At Royal North Shore Hospital it would seem that the process of sterilising cotton buds is carried out by the hospital itself. At St Francis Xavier Cabrini Hospital in Victoria, cotton buds are purchased already sterilised from another manufacturer. At that hospital the sterile cotton buds are used for:

• (a) rolling grafts (that is, rolling the recipient graft to eradicate exudate under the graft area);
• (b) cleaning wounds;
• (c) cleaning wound surrounds;
• (d) painting wounds with ointment or lotions;
• (e) absorbing exudate from wounds;
• (f) cleaning umbilical cords; and
• (g) applying ointments to areas of broken skin.

At the same hospital non-sterile cotton buds are used for cleaning nasal passages after nasal surgery, painting mouth ulcers and cleaning ears after ear surgery.

The parties agreed, for the purpose of litigation, that the two hospitals mentioned were each 300 bed hospitals and that the cotton buds those hospitals used were, if not the applicant's product, at least substantially identical to it.

It was also agreed between the parties for the purposes of the proceedings that the goods the subject of the proceedings were sold by the applicant through two divisions. The first, the Products Division of the applicant, made sales to retailers such as grocery stores, mass merchandisers and pharmacies and the second, the Medical Division, made sales to:

• (1) medical organisations, such as hospitals and nursing homes;
• (2) medical wholesalers; and
• (3) industrial distributors.

There was also included evidence that the applicant's cotton buds were registered under the Therapeutic Goods Act 1989 (Cth). Finally, there was other evidence directed at an argument advanced by the applicant based on item 42(13). I will defer dealing with that evidence until I discuss that item.

The applicant's submissions

For the applicant it was submitted that the cotton wool buds were exempt from sales tax under item 42(2) as being ``absorbent cotton wool''. It was said that to the extent that the presence of the wooden stem detracted from this submission, that stem should be treated as being merely a ``container'' and exempt from

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sales tax by reference to item 91 of the First Schedule to the Sales Tax (Exemptions and Classifications) Act and the definition of ``container'' to be found in cl. 1(1) of that Schedule.

In the alternative it was submitted that cotton buds were exempt from sales tax as falling within item 42(13) as ``parts for first-aid outfits''.

Are cotton buds within item 42(2)?

It was submitted by senior counsel for the applicant that the heading ``Surgical appliances'' could be essentially disregarded and that the proper interpretation of the heading was that the items listed (1) to (17) inclusive were to be deemed, for the purpose of the legislation, to be surgical appliances so that it was sufficient for a taxpayer seeking to bring goods within item 42 to show that those goods fell within one or other of the listed categories (1) to (17), without it being necessary to show as well that the goods in question were surgical appliances or parts for surgical appliances.

The Commissioner, on the other hand, submitted that to fall within item 42 it was necessary that the goods not only fall within one of the numbered categories, but also that they be ``surgical appliances''. Reference was made to what was said by Gibbs J in
DFC of T v Polaroid Australia Pty Ltd 71 ATC 4249; (1972) 46 ALJR 32, in interpreting the then item 42 of the Second Schedule to the Act which referred to:

``42. Photographic materials and products not covered by item 43 in the First Schedule to this Act, namely:

• (a) unexposed photographic plates and film, including sensitized film for cinematograph cameras;
• (b) photographic sensitized paper, cards, boards, linen and other sensitized materials; and
• (c) mounts, plaques and medallions, but not including sensitized materials of a kind produced and marketed specifically for use in the reproduction of documents, drawings and plans.''

In construing this item, Gibbs J made two points. First, his Honour expressed the view (at ATC 4251; ALJR 33-34) that the word ``namely'' had its ordinary dictionary meaning of ``To wit; that is to say''. The same must clearly be said of the abbreviation ``viz''. The second point was that:

``The goods whose description follows are not mere examples of goods covered by the introductory general words but paras. (a), (b) and (c) are intended to be an exhaustive statement of the goods covered by the item.''

The same may be said of the numbered paragraphs (1) to (17) in the context of item 42 of the First Schedule.

The question whether it was necessary that the goods in question in the Polaroid case (Polaroid unexposed film) also satisfy the heading was not an issue discussed in the Polaroid case. Clearly enough a film was a photographic material, but it was insufficient for the taxpayer in that case to show that the item fell within the words ``photographic material''. It had to be shown that the item in question also fell within paras. (a), (b) or (c) of that item.

A similar problem arose more recently in
Diethelm Manufacturing Pty Ltd v FC of T 93 ATC 4703. The appellant in that case sought to argue that it sufficed, for office furniture to be exempt under item 1A of the Third Schedule to the Act, that it fell within one of a number of lettered paragraphs, without it being necessary that the goods in question were within the item heading of ``goods... of a kind ordinarily used for household purposes''. The taxpayer's submission was rejected by all members of the Full Court of this Court. They did so, however, after examining the lettered paragraphs and concluding that the context required that a successful claim to exemption required both that the heading to item 1A be satisfied as well as that the goods fell within the lettered paragraphs to that item.

Ultimately, the present case cannot be decided by reference to cases discussing the construction of other items in the Schedule. Rather, the question is one of construction of the item itself.

The expression ``surgical appliance'' is defined in the Macquarie Dictionary (Revised Edition) as meaning: ``any device designed to be worn to support a damaged or deformed part of the body''. That definition (at least if one excludes the words ``to be worn'') accords with my understanding of the ordinary use of the expression. However, it would hardly seem apt,

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for example, to encompass absorbent cotton wool, gauzes, lint, adhesive plaster and the like, although those items can be used during or after surgery. If it be a requirement that a surgical appliance be worn, then invalid chairs would not fall within the expression. There is no definition of ``surgical appliance'' in the Oxford English Dictionary, 2nd ed., although that dictionary describes ``surgical'', inter alia, as meaning:

``Pertaining to, dealing with, or employed in surgery or the surgeon's art... Of garments: worn to cure, correct, or relieve an illness or deformity.''

The latter part of the definition can likewise have no application. Invalid chairs, for example, can hardly be said to be worn.

I have formed the view that it is quite impossible to accept any ordinary meaning of the words ``surgical appliance'' so as to encompass each and every one of the items (1) to (17) listed below the heading. It is hard on any view to imagine a first-aid outfit as being a surgical appliance. Similarly, a hair piece falling within item (17), while being required by virtue of sickness or disease, could hardly be described as a surgical appliance. Gauzes, lint and bandages cannot appropriately be referred to as ``surgical appliances'' in the ordinary sense. This consideration leads me to the conclusion that the proper interpretation of item 42 requires only that the goods in question fall within one of the lettered paragraphs and that it is unnecessary for the item also to fall within the words ``surgical appliances''. However, the words ``surgical appliances'' give colour and context to the items that follow so that each must have, at the least, a medical application. For example, the word ``trusses'' could not refer to roof trusses, but must relate to trusses used to support limbs, whether or not following a surgical operation.

Upon this interpretation it becomes necessary, to determine whether the cotton buds fall within the words ``absorbent cotton wool''. The question is a short one and one more of impression than principle. It is said that absorbent cotton wool, which may be either pure cotton or mixed cotton and rayon, is got up in different ways for different purposes. It may be marketed in continuous lengths, it may be marketed as cotton wool balls or it may be marketed on a stem as cotton buds. Each of these products is, however, still ``cotton wool''. To the extent that this submission ignores the stem, it is said that the stem should be seen as insignificant to the product, or merely as being an applicator.

The present case once again shows the absurdities into which a wholesale sales tax system falls when there are large numbers of exemptions and multiple rates requiring classification and differentiation of products. The time of the Commissioner, legal and accounting advisers, not to mention that of this Court, could be better employed in ways other than resolving classification disputes with the resultant need to differentiate between arbitrary headings.

Cotton wool lengths, cotton wool balls or cotton buds are in truth but different ways of offering cotton wool for sale. While, no doubt, there are some applications for which cotton wool in a large piece would be required, or where a ball of cotton wool would be required rather than a cotton bud, there are many applications for which the three products are quite interchangeable. Cotton wool is normally used either for cleaning or for the application of some form of medical lotion. Which form that cotton wool will take will depend upon the type of application. No doubt the cotton wool bud has a convenience which other forms of cotton wool do not have because it comes complete with a stem, but that stem does not, in my view, so change the nature of the product that it becomes a different product altogether. It would, in my view, be utterly absurd if it did. It is hard to conceive what rational government policy there would be which would impose sales tax on cotton wool wound around a stem but exempt from sales tax cotton wool in a roll or ball form.

At the heart of the Commissioner's submission is that the presence of the stem causes the cotton wool to become a new and commercially distinct product from cotton wool, that product being, namely, a cotton bud. With respect, I do not agree. To use an example suggested by counsel for the applicant, an ice cream does not cease to be an ice cream merely because it comes frozen together with a stick, making it more convenient to eat. So it is said that the stem of the cotton wool bud merely makes the cotton wool more convenient to use.

I was taken to a number of cases concerned with whether a new product had been created. The context of these cases, which included
MP

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Metals Pty Ltd v FC of T (1967-1968) 117 CLR 631;
WEA Records Pty Ltd v FC of T 90 ATC 4779; (1990) 96 ALR 365; and
FC of T v Jax Tyres Pty Limited 85 ATC 4001; (1984) 5 FCR 257, was whether the particular process described in the case constituted ``manufacture'', manufacture being defined as involving the bringing into existence of a new thing. It was in this context that Windeyer J, in MP Metals at first instance, sought to explore what was meant by a new thing, a new entity. His Honour illustrated the difficulty by examples. Thus (at 639) his Honour said:

``If a piece of metal be cut into two, then clearly two new entities are created, neither of which is in size the same as the piece which as an entity has been destroyed... a shopkeeper who slices rashers from a side of bacon with a mechanical cutter. He is creating new things. They are things which have a name of their own, rashers, and are useable in a way that the piece from which they were cut was not. It may be that only by thus creating them could he find buyers for his bacon. Still he would not ordinarily be called a manufacturer, and his goods would not be called manufactured goods.''

But reference to a multitude of cases each turning on its own facts assists little in the resolution of the present case.

In my view the stem, like a reel upon which cotton is wound, is merely a vehicle to make more useful the product wound upon it. The presence of a stem (or ``applicator'') does not, in the relevant sense, bring into being a new and different product. The product retains its essential character of being cotton wool.

Counsel for the applicant further submitted that if the stem were treated as being separate from the cotton wool wound upon it, then it should be treated as being exempt as a container.

The definition of ``container'' in cl. 1(1) of Schedule 1 to the Act is as follows:

```container' means-

• (a) the inner or outer coverings in which goods are packed or secured, or are to be packed or secured, in the ordinary course of business (including inside linings and inside packing materials); or
• (b) goods ordinarily used to secure or seal, or to describe the contents of, coverings to which paragraph (a) applies, being goods forming part of the completed coverings,

and includes can keys, glass droppers and other goods that-

• (c) are accessories of coverings or goods to which paragraph (a) or (b) applies or of goods marketed in such coverings;
• (d) are attached to or form part of the inner coverings, or are contained in the outer coverings, of the goods so marketed; and
• (e) are sold with those goods for one inclusive price;''

Relevantly it is submitted that the stem, if another ``good'', must be seen as an accessory to goods marketed in coverings to which para. (a) of the definition applies and which are contained in the outer coverings and sold with the goods for one inclusive price.

It is unnecessary to consider this argument in detail, having regard to the conclusion which I have already reached. However, having regard to the wide meaning given in the same context to the word ``accessory'' in
FC of T v Kentucky Fried Chicken Pty Limited & Anor 88 ATC 4363; (1988) 12 NSWLR 643, I think the submission must be accepted. In that case, Hope JA, with whose judgment Samuels and McHugh JJA agreed, said (at ATC 4369; NSWLR 650), inter alia:

``Adopting as a basis the meaning given in the Macquarie Dictionary, an article will be an accessory if it is a subordinate part or object, added or attached for convenience or effectiveness or other such reason.

... The word thus may apply to a subsidiary article whether joined or not joined to the principal article; it must be subordinate or subsidiary to that principal article and is added or attached for reasons such as convenience or effectiveness.''

Although I distinguished what was there said in
Zendel Australia Ltd & Anor v FC of T & Anor 92 ATC 4515 by reference to the context with which I was there concerned, nothing I there said cast doubt upon the meaning of the word ``accessory'' as considered in the Kentucky Fried Chicken case. An appeal to the Full Court of this Court from my decision in Zendel was dismissed (unreported, Full Court, 25 February 1993). Accordingly if the stem is to be treated as a separate item of goods from

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the cotton wool wound around the tip, then the stem should be treated as exempt as a ``container''.

Item 42(13) - Surgical, medical and first-aid outfits

The alternative submission of the applicant was that the cotton wool buds were to be seen as parts for first-aid outfits.

Evidence was adduced concerning the contents of first-aid outfits. That evidence established that in Victoria the Directorate of School Education required a school first aid cabinet to contain ``cotton buds, for applying creams and lotions and for cleaning wounds''. Not surprisingly, no reference was made to cotton buds in regulations published under the Factories and Shops Act 1912 (NSW) on 23 March 1928, which the Commissioner tendered in evidence. Those regulations showed the need for first-aid kits to contain cotton wool. The product cotton buds is probably a somewhat more recent invention. Other evidence showed that some first aid kits included cotton buds and others did not.

In my view, however, the item has no application in the present case. The item does not purport to exempt any goods of a kind which may be contained in a first-aid kit. No doubt a first-aid kit might well contain safety pins, magnifying glasses, scissors, gloves and the like. But not every pair of scissors, not every pair of gloves, nor all safety pins or magnifying glasses will be exempt from sales tax. What is clearly contemplated is that the exemption will extend only to goods such as scissors, safety pins and the like, or for that matter cotton wool, if they are in fact at the time the taxing point is reached intended for insertion in such kits: cf
DFC of T v Stewart & Anor 84 ATC 4146; (1984) 154 CLR 385. There being no evidence that the cotton wool buds at the present time when sold to Coles Myer were intended for use in a first-aid kit (and indeed the contrary might be inferred) the exemption item has no application.

It follows, in my view, that the separate questions for decision should be answered as follows:

• (1) Yes.
• (2) Yes.
• (3) No.
• (4) No.

I would direct that the matter be placed in the list on the next tax direction day for further directions concerning the subsequent prosecution of the case.

THE COURT DIRECTS THAT:

1. The separate questions for decision be answered:

• (a) Yes.
• (b) Yes.
• (c) No.
• (d) No.

2. That the matter be listed on 11 February 1994 for further directions.