CASE 45/95

Members:
DJ Trowse M

Tribunal:
Administrative Appeals Tribunal

Decision date: 4 August 1995

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DJ Trowse (Member)

The issue in this reference is whether sales tax overpaid by the applicants has been ``passed on'' by them to other persons. If the amount of the overpayment has been ``passed on'' to others, then, in terms of sub-s. 26(1A) of the Sales Tax Assessment Act (No. 1) 1930 (``the Act''), the applicants will not be entitled to a refund of that excess which is an agreed amount of $22,196.55. Also it is agreed that the overpayments occurred prior to the operation of Sales Tax Assessment Act 1992 and that, having regard to the provisions of Part 3 of the Sales Tax Amendment (Transitional) Act 1992, and in particular sub-s. 9(2), the former Act has application. Furthermore, it was accepted that the applicants' claim for refund had been lodged with the respondent within a period of three years from the dates upon which the overpayments had been made and accordingly, the restriction contained in s. 12C of the Sales Tax Procedure Act 1934 is of no effect.

2. The documents lodged by the respondent pursuant to s. 37 of the Administrative Appeals Tribunal Act 1975 (T1-T23) were received into evidence, together with eight exhibits, four tendered by the applicants (Exhibits A1-A4) and the remainder by the respondent (Exhibits R1-R4). Both applicants gave evidence under oath and were represented by Mr S. Adams of Counsel. The respondent was represented by Mr G. Davies of Counsel.

3. The applicants, who are husband and wife, have since 1975 operated a winery business in one of the better known grape growing areas of South Australia. During that time they have increased wine production from 200 cases in 1975 to 12,000 cases in 1992. The bulk of this production, estimated to be in the region of eighty percent, is sold by wholesale to wholesale distributors. Wine sold in this manner is distributed from the premises of a contracted bottling company in accordance with the delivery instructions of the applicants. The remaining wine is dispatched from the bottling company to a neighbouring winery which provides storage facilities to the applicants. This stock is then moved by the pallet load to the cellar door of the applicants' winery as and when required. There it is used, to service cellar door sales which include mail order sales direct to consumers, for tasting and promotions, and to a minor extent for sales to local restaurants. As will be seen later in these reasons, the matter in dispute relates to cellar door sales and more particularly to the values placed upon them for the purpose of assessing the resultant liability for sales tax.

4. There are several varieties of wine being produced by the applicants, all of them having differing prices. Moreover, there exists within

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each category several selling prices which are dependent on the status of the customer, for example the price range for a particular product is as follows:

   Wholesale to distributor              $54 per dozen

   Wholesale to small
   retailer/local restaurants            $75 per dozen

   Cellar door sales                     $108 per dozen
      

5. The evidence given by the applicants, which I accept without hesitation, provides a clear insight as to how the various prices are established. The method applied involves the making of an assessment as to the value likely to be procured at the retail end of the market and then working backwards through each level of prior sale. Meetings were initiated with wholesale distributors and the question as to what price could be anticipated from the ultimate consumer was examined in detail. Factors considered in this process included - last year's price; market acceptance of previous vintages; and the quality and quantum of the current vintage. In this way an estimate of retail price was determined. The next step was to exclude from that determination an amount being a combination of profit margin and overheads pertaining to the retailer. That result represented the probable price as between the wholesale distributor and the retailer. A similar calculation, this time allowing for the profit margin and overheads of the wholesaler distributor, provided a guide for the price to be charged on sales occurring between the applicants and the wholesale distributors.

6. Prices charged at the cellar door were governed by all of the factors mentioned in the previous paragraph, together with the estimated retail prices now in hand, and the strength of the competition coming from the many other proximate wineries offering the same service. Overriding those issues was the need to pitch cellar door prices at a level marginally less than retail so as to keep faith with retailers, but low enough to attract customers to the cellar door. It seems that those elements were on occasions incompatible, yet the point which emerges from the evidence is that the amounts being charged during the period under review remained relatively constant. Notwithstanding the variations in vintages and the changing nature of costs associated with production, the prices charged have to a large extent remained the same. The only two increases occurring during this period reflect acknowledgements of the higher standards achieved for the products concerned.

7. Any suggestion that costs incurred, including sales tax, had played a part in their determination of price was rejected by the applicants. Such a system may have its uses in other areas of commerce but it finds no favour with these applicants. I accept their evidence as to the methodology applied in the ascertainment of price and also that the imposts emanating from the introduction of sales tax on wine in 1984 and any subsequent increases in rate were not matters taken into account by them in the fixing of their selling prices.

8. Amounts due in connection with cellar door sales are settled by either cash, cheque or credit card. No credit is available nor are invoices or statement of account prepared. A record of sales was maintained and at the end of every month a value was placed upon the wines contained in those transactions. That value was then used to determine the liability for sales tax.

9. The circumstances of the overpayment are now considered. Prior to January 1990 the applicants, in assessing their sales tax liability on cellar door sales, valued the goods sold in accordance with the prices being charged to wholesale distributors. In January 1990 one of the applicants attended a meeting conducted by officers of the respondent as part of a compliance assistance program. The purpose of the meeting was to provide assistance and information to wine producers concerning their obligations under the sales tax legislation. The situation of a producer/wholesaler also selling retail, that is the cellar door type of sale, was discussed with emphasis being placed on the value to be ascribed to such sales for purposes of the Act. Producers were referred to sub- s.18(1)(b) of the Act and to the requirement that the value is ``the amount for which the goods could reasonably be expected to have been sold by the manufacturer by wholesale''. By way of further explanation it was stated that ``this means that we have to look to a like wholesale sale (one similar in terms and conditions) to determine the `SALE VALUE'''. The instruction provided by the officer of the respondent was that, in this circumstance, the appropriate value to apply was the selling price as between producer and local restaurants and which, as a point of interest, equates with the price being charged on sales between wholesale

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distributors and retailers. Acting on that advice, the applicants, in calculating their liability for sales tax, changed from producer to wholesale distributor price to the higher producer to restaurant price. That method, which remained in place for the months December 1989 to July 1992 inclusive, caused an increase in sales tax liability, and yet on the evidence I find that this increase did not result in any corresponding lift in the prices of cellar door product. In fact those prices remained remarkably static throughout this period.

10. The facts of this matter, as they relate to overpayment, are mirrored by those existing in Case Z24,
92 ATC 240, the decision of which was handed down by the Tribunal on 18 June 1992. In that case it was held that-

• • the movement of stock from warehouse to the cellar door area must be regarded as a treatment of goods for sale by retail;
• • the taxing point was when the goods were so moved; and
• • considering the quantities of stock being transferred from warehouse to cellar door, the distributor wholesale price was the amount for which that stock could reasonably be expected to realise.

Despite some initial resistance, the respondent now concedes that the decision in Case Z24 is relevant and that sales tax has been overpaid to the extent of the amount assessed against the difference between selling prices to restaurants and the selling prices to wholesale distributors. After allowing for an adjustment to reflect liability based on stock movement from storage facility to cellar door, rather than on sales to consumers as returned by the applicants, it was agreed that the amount overpaid is a figure of $22,196.55.

11. The legislation pertinent to this issue is contained in s. 26 of the Act and is as follows:

``26(1) Subject to sub-section (1A), where the Commissioner finds in any case that tax has been overpaid by a person, the Commissioner shall-

• (a) refund the amount of any tax overpaid; or
• (b) apply the amount of any tax overpaid against any liability of the person to the Commonwealth, being a liability arising under, or by virtue of, any Act of which the Commissioner has the general administration, and refund any part of the amount that is not so applied.

26(1A) Sub-section (1) does not apply in relation to any tax paid by a person unless the Commissioner is satisfied that the tax has not been passed on by the person to another person, or, if passed on to another person, has been refunded to the other person.''

The respondent contends that the sales tax overpaid by the applicants has been passed on to other persons and on that basis is not prepared to refund any part of the $22,196.55.

12. The precise task is to ascertain in what sense the expression ``passed on'' is used in sub-s. 26(1A). In my opinion the expression is used in a non-technical manner and thus its ordinary meaning must prevail. It is my view that the term ``passed on'' is descriptive of a process whereby the person carrying a liability takes the decision to shift the burden of that liability to some other person and then gives effect to that decision. In short, it refers to the act which provides the relief that stems from the removal of that financial responsibility. The passing on may be in the form of either the handing of the respective account to the other person for his settlement or by way of reimbursement.

13. Unfortunately, the notion of passing on, in the context of this legislation, has received limited exposure. The phrase ``passed on'' was first addressed by Lockhart J sitting as a single judge of the Federal Court in the case of
Otto Australia Pty Ltd v FC of T 90 ATC 4604. His comments at 4609 are of assistance:

```Passed on' in the context of sec. 11(1A) must be given a sensible and practical meaning to cover the wide variety of circumstances which may arise in practice in sales tax legislation. It is plain from the facts of the present case that the applicant did in fact `pass on' the sales tax to councils concerned in that, when calculating the contract price for the tender with the councils, the applicant included a component, though not shown separately in the contract documents with the councils, of sales tax paid by it on importation of the Otto carts. In other words the applicant bore the burden of the sales tax and passed it on in the price which it charged the councils for the penformance of its contractual

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obligations. Had the applicant not done so and had the sales tax not been exigible then sec. 11(1) would have required the Commissioner to refund the amount of the overpaid tax.''

Section 11(1A) appears in Sales Tax Assessment Act (No. 5) 1930 and, of significance, is the fact that it is expressed in terms identical with those currently under consideration.

14. On appeal (Otto Australia Pty Ltd v FC of T 91 ATC 4305), Sheppard J, in answering the submission that the sub-section does not apply unless there has been passed on to the purchaser an amount equal to the sales tax overpaid which can be shown to be an identifiable increase in the price of the article in question, stated at 4307:

``I would reject this submission. Once it is conceded, as it has been, that the charge for each bin was computed by reference to costs which included sales tax, that cost was passed on. The fact that the sales tax was not passed on in an identifiable form is not in my opinion of relevance. In those circumstances the Commissioner could not have been satisfied that the tax had not been passed on with the consequence that sub- sec. 11(1) could not have any application.''

15. The more recent case of
Chippendale Printing Co Pty Ltd v DFC of T 95 ATC 4037 is yet another example of the futility of seeking refunds where it is conceded that the price charged to the customer included a component for sales tax. Lindgren J pointed to the mandatory nature of the provisions of the Act and, on the basis of the concession made, concluded that the obligations otherwise incumbent on the Commissioner to refund amounts of sales tax overpaid had no application because those amounts had been passed on by the taxpayer to its customers.

16. The decisions in Otto and Chippendale make it abundantly clear that sales tax has been passed on where the tax has been brought to account in the calculation of the contract price, and if it has, the fact that the amount of the tax has not been shown separately on the documents of sale is of no consequence. The evidence of the applicants is that the various costs associated with the wine produced for sale at the cellar door, together with the sales tax thereon, were not factors considered by them in the determination of selling prices. My prior acceptance of that evidence would appear to take the matter outside the procedures of calculation and computation which were central to the decisions of Otto and Chippendale. Nevertheless, the respondent contends that a reliance on the ultimate prices charged as between retailers and consumers (which included an element for sales tax) in the setting of the prices at the cellar door, brings with it a connotation that sales tax has been included as a component of those prices. On that basis it was argued that the amount of sales tax in dispute had been passed on by the applicants to the persons buying the wine at the cellar door.

17. As mentioned earlier, prices at the cellar door were determined by having regard to - likely value in the retail market; less a reduction sufficient to attract custom but not enough to antagonise retailers; and, finally, less any discounts required to combat the forces of regional competition. The question raised is whether such a system has the effect of structuring the sales tax overpaid into the prices charged at the cellar door, and, in seeking the answer to that question, it is of assistance to bear in mind that the amount in issue is the amount incorrectly paid and not the totality of sales tax assessed on these transactions. Recognising the reductions made to the retail price and accepting for the moment the proposition put by the respondent, it is arguable that only portion of the sales tax has been brought to account. If that was the situation, it seems that apportionment of some kind may be called for in order to determine the extent to which the tax has been included in the price.

18. The route suggested by the respondent appears indirect and presumptuous and in my opinion falls short of the target. Amongst other uncertainties, I fail to see how the amounts of sales tax in dispute impact upon the retail price. The tracing of a link between the component of sales tax built into the retail price and the sales tax in dispute presents its own difficulties and yet one common feature is the use of the same values, that is the selling prices charged by wholesale distributors to retailers, in calculating the overall liability for tax. What needs to be determined is whether that or any other circumstance leads to a conclusion that the additional sales tax incorrectly paid has been included as a cost in the process of working out the selling price.

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19. A reference to anticipated retail price is but one of the elements considered by the applicants. It is no more than the starting point in arriving at the prices to be charged at the cellar door. Adjustments of the kind previously described were made to ensure the reality of sales. In my view the referral to retail prices should be seen as nothing more than an initial indicator needing further adjustment. To treat such a reference as part of a system whereby a sales tax component, in this case the additional portion assessed, is included in the calculation or computation of the selling price is in my opinion an unwarranted and unrealistic expansion of the processes generally adopted when calculating or computing for the purpose of price determination. To find otherwise, is to read too much into what can only be described as a system founded on hope and estimates which bear no relationship to costs incurred. My conclusion is that the charge for wine sold at the cellar door was not calculated by reference to the sales tax overpaid.

20. A matter of paramount importance in the resolution of this dispute, and one which stands directly in the path of the submissions proposed by the respondent, is the decision of the applicants to retain their existing pricing structure notwithstanding the increase in sales tax liability. The fact that prices did remain the same belies any suggestion that the amounts in question were factored into selling prices. The preferable view is that the applicants decided to bear the burden themselves rather than seek relief from their customers. It seems to me to be a classic example of the producer absorbing the extra tax himself in lieu of passing it on to others.

21. A finding that the sales tax overpaid has not been included in the price charged and that the applicants retained that burden to themselves leads inevitably to the conclusion that the amount of $22,196.55 has not been passed on. For this reason the respondent is required to refund the agreed amount of the overpayment to the applicants.

22. It is appropriate that I briefly refer to two other submissions made on behalf of the respondent. The first relates to the accounting method adopted in the applicants' books of account whereby the amounts of sales tax paid were treated as a debit against sales rather than as a separate item of expenditure. It follows, so it was said, that such a treatment was indicative of an intention to pass the sales tax on to the client. The books of account were maintained by a firm of accountants which was engaged to compile the annual partnership and individual income tax returns. I accept the evidence that the applicants relied solely upon the expertise of the accounting firm and that they played no role in the decision to debit sales tax against the revenue account. On that basis the intention of the applicants is not demonstrated and thus the proposal suggested by the respondent is rejected.

23. The other matter proposed by the respondent appears to be based on the fact that cellar door prices exceeded those charged on sales to restaurants which were inclusive of sales tax that had been passed on to those restaurants. Against that background, it was contended that I should infer that the higher prices at the cellar door also included sales tax which had been passed on. Those facts are not in dispute and yet I fail to see how the existence of such an excess reflects upon the question under consideration. It does no more than indicate the general principle that the consumer pays a price higher than someone who buys and then on sells to that consumer.

24. For the reasons enunciated the objection decision under review is set aside and the matter is remitted to the respondent with the direction that he be satisfied that sales tax amounting to $22,196.55 has not been passed on by the applicant to another person.