DARRELL LEA CHOCOLATE SHOPS PTY LIMITED v FC of T

Judges:
Hill J

Court:
Federal Court

Judgment date: Decision handed down 21 April 1995

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Hill J

On 31 May 1991 the respondent Commissioner of Taxation served upon the applicant, Darrell Lea Chocolate Shops Pty Limited (``Darrell Lea''), four notices of assessment. The letter enclosing the notices indicated that they had been based on a review of the sales tax affairs of Darrell Lea. Each of the assessments covered the period 1 October 1987 to 31 January 1991. Darrell Lea duly objected against these assessments. The objections were disallowed on 19 October 1994 and Darrell Lea appealed to the Court against the Commissioner's decision to disallow each assessment.

The background of the sales tax dispute can be seen from statements of facts, issues and contentions filed by the parties. I would stress, however, that in the comments which follow I make no findings of fact. No evidence has been adduced before me and the applications to this Court are presently at an interlocutory stage.

It would seem that, in the relevant period, Darrell Lea purported to appoint various third parties as agents for the purpose of making sales by retail on its behalf. In total, seventy- five persons are said to have been ``full agents'', selling Darrell Lea products solely or in conjunction with another business, 154 persons are said to be ``compact agents'', selling Darrell Lea products as a small section within a larger business and seventy-eight persons are said to have been sub-agents.

The Commissioner took the view that the arrangements entered into did not give rise to a relationship of principal and agent or principal and sub-agent and the assessments which issued proceed on a different basis.

The notification of the first assessment reads as follows:

``SALES TAX ASSESSMENT ACT (NO 1) 1930 (AS AMENDED)

You are hereby notified that Darrell Lea Chocolate Shops Pty Limited is liable to pay sales tax as shown hereunder in accordance with an assessment that has been made under the provisions of sub-section 25(1), or alternatively 25(2) or in the further alternative 25(2A) of Sales Tax Assessment Act (No 1) 1930 (as amended).

SALES TAX ASSESSMENT ACT (NO 1) 1930 (AS AMENDED)

In respect of confectionery, toys and gift items manufactured by you and sold or applied to your own use, during the period 1 October 1987 to 31 January 1991 (inclusive):

                    TOTAL          AMOUNTS
      RATES         SALE           OF TAX
      OF TAX        VALUE          THEREON
                      $               $

      10%           100,172,287    9,106,571
      20%             2,102,776      350,462
                                   ---------
      Total                        9,457,033
      Less Tax Previously
      Paid                         5,823,874
                                   ---------
      Amount of Tax Now
      Payable                      3,633,159''
                                   ---------
      

The second notification is headed ``Sales Tax Assessment Act (No 2) 1930''. It notifies a liability to sales tax said to arise:

``... in accordance with an assessment that has been made under the provisions of subsection 10(1) or alternatively 10(2) or in the further alternative 10(2A) of Sales Tax Assessment Act (No 2) 1930 (as amended).''

The narration of the notice says that it is:

``In respect of confectionery, toys and gift items sold during the period 1 October 1987 to 31 January 1991 (inclusive).''

The figures for rates of tax, total sale value and amounts of tax thereon are precisely identical to those contained in the first notice to which I have referred.

The third notice purports to be made under Sales Tax Assessment Act (No 6) 1930 (As Amended). It notifies what is said to have been an assessment of sales tax:

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ATC 4303

``... in accordance with an assessment that has been made under the provisions of subsection 10(1) or alternatively 10(2) or in the further alternative 10(2A) of Sales Tax Assessment Act (No 6) 1930 (as amended).''

The narration on the notice says that it is:

``In respect of confectionery, toys and gift items imported by the company and sold or applied to own use, during the period 1 October 1987 to 31 January 1991 (inclusive).''

The rates of tax, total sale value and amounts of tax are precisely identical to those in the other two assessments.

The final notice is headed ``Sales Tax Assessment Act (No 7) 1930''. It purports to notify an assessment:

``... made under the provisions of subsection 10(1), or alternatively 10(2) or in the further alternative 10(2A) of Sales Tax Assessment Act (No 7) 1930 (as amended).''

The narration on the document says that it is:

``In respect of confectionery, toys and gift items sold during the period 1 October 1987 to 31 January 1991 (inclusive).''

Again, the figures for rates of tax, total sale value and amounts of tax thereon are identical to those in the other three notices.

An accompanying letter reads as follows:

``Enclosed are four notices of assessment based on the recent review of the company's sales tax affairs. The assessments are primarily based on the conclusion reached during that review that the company has sold goods to agents who in turn sell by retail to the public or by wholesale to sub-agents. The working papers which support the calculations for the assessments will be made available to the company or its representatives for inspection as soon as possible. Copies of the assessments have been forwarded to the company's solicitors with a covering letter concerning further matters relevant to sales tax. A copy of that letter is enclosed for your information.

While four notices of assessment have been issued, I wish to point out that the total amount of the company's liability based on the matters considered so far is $36,433,159. This single amount should be paid as set out in each notice of assessment.''

In the objections lodged by it, Darrell Lea put in issue the validity of the assessments relying, inter alia, upon the issue of the four assessments, each for the same amount, and less clearly upon the fact that the assessments are each said to be made pursuant to the provisions of alternative sections.

Perusal of the statement of facts, issues and contentions filed by each party indicates that, in addition to the question of the validity of the assessment there arises the question of the sales tax consequences of the purported agency appointments giving rise to a substantive liability for sales tax; an issue whether the Commissioner is precluded from issuing the assessments by virtue of a reliance by Darrell Lea on what is said to have been a ruling issued by the Commissioner; as well as the issues whether the prerequisites for assessments, under all or any of the sections pursuant to which the assessments were said to have been made had been complied with. There is intertwined with these questions the issue of what sale value was to be attributed to goods sold by Darrell Lea, treated by Darrell Lea as stock for sale by retail, or applied by it to its own use.

An extensive request for particulars was made on behalf of Darrell Lea and some answers given. On 31 March 1995 I ordered certain limited particulars be provided. These were requested in a letter of 6 April 1995 which presently remains unanswered. There is a dispute between the parties as to whether the particulars requested complied with my order. That is a dispute not yet resolved.

In the meantime, Darrell Lea moved the Court for an order that there be tried as preliminary questions the issue of the validity of the assessments. The questions sought to be asked are stated in the following form, so far as the first notice of assessment is concerned as follows:

``Whether the document annexed and marked `A' constituted notice in writing of an assessment validly made pursuant to the provisions of the Sales Tax Assessment Act (No 1) 1930.''

Similar questions are asked in respect of the remaining three notices.

Order 29 r 2 of the Federal Court Rules enables the Court to make orders for the decision of any question separately from any other question. There will, of course, be cases

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where the fragmentation of issues will frustrate the policy behind the rule, which can be assumed to be to minimise the expense to the parties and the time required for Court hearings, particularly in a case where a determination of the preliminary issue will either determine the controversy between the parties or substantially narrow the field of that controversy: cf
The Wik Peoples v State of Queensland (26 May 1994, unreported per Drummond J).

The experience in tax cases, particularly where questions of validity of an assessment are involved, indicates that neither time nor expense may ultimately be saved. The case of
FJ Bloemen Pty Limited v FC of T 81 ATC 4280; (1981) 147 CLR 360, although not a case involving the determination of a separate issue, provides a salutary example. The events in question concerned the year of income ended 30 June 1968. An original assessment was issued on 28 May 1971. It was disallowed in 1973 and the taxpayer requested it be referred to a Board of Review. An amended assessment was issued on 4 September 1974 and also objected to and appealed against in the Supreme Court of New South Wales. The taxpayer sought declarations in the Supreme Court as to the validity of the assessment. It took until 5 June 1981 for the validity of the assessment to be determined. In the meantime the proceedings in the Supreme Court, under the then Part V of the Income Tax Assessment Act (1936), were stood over. It was not until 22 August 1986 that the question of substantive liability was determined.

The Commissioner opposes the making of an order under the rule. He submits that it would be more convenient for all issues to be heard together. Darrell Lea, on the other hand, submits that a determination in its favour of the validity of the assessment would bring an end wholly to the proceedings. It says that the agents in question are resident in six States and that for it to prepare the case of Darrell Lea would involve statements being taken virtually from all agents. Even if a limited number of agents were chosen as representative, there would still be very significant costs and expenses in a hearing on the substantive liability of Darrell Lea when the question of validity would be relatively short and involve virtually no evidence.

Certainly as the issues currently present themselves a disposal of the separate question, if decided in favour of Darrell Lea, would involve one day of hearing only whereas disposal of the substantive liability issue would or could conceivably occupy considerable Court time.

Having regard, however, to the dangers of fragmentation and delay, particularly where questions of validity are concerned, I would only be disposed to deal with the issue of validity as a separate issue if I took the view that the issue of validity was indeed one which raised a genuinely arguable issue.

As can be seen from my judgment in
Vale Press Pty Ltd v FC of T 94 ATC 4587, the appeal provisions relevant to sales tax are substantially similar to those applicable to assessments of income tax.

The High Court in
DFC of T v Richard Walter Pty Ltd 95 ATC 4067 has recently and authoritatively considered the provisions of the Income Tax Assessment Act 1936, and particularly s 177 of that Act, in the context of the determination of validity of an assessment. The case again arose outside the ordinary appeal procedures, although it is clear from the previous judgment of the High Court in Bloemen's case that similar problems arise for a taxpayer seeking to challenge the validity of an assessment of income tax in proceedings originally under Part V and now under the provisions of Part IVC of the Taxation Administration Act (1953).

Richard Walter decided that the consequence of production of a notice of assessment of income tax is to place beyond review the question of validity of an assessment, except where it could be shown either that there was a purported assessment made in bad faith or where it appears that the Commissioner has not made an assessment definitive of the tax liability of the taxpayer (see at 4082 per Brennan J). There may be differences in emphasis in the various judgments and it is not necessary to analyse them now in detail. In Richard Walter the taxpayer sought to rely upon the fact that the Commissioner had made determinations under s 177F of the Income Tax Assessment Act 1936, both in respect of the taxpayer and in respect of another company. In the result he had included the same amount of income in the assessable income of each of the taxpayers. That fact of its own did not require the conclusion that the assessments were invalid. The policy of the legislation is that the

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taxpayer is given a full opportunity of contesting the liability to tax in proceedings under Part IVC: cf
McAndrew v FC of T (1956) 11 ATD 131 at 133; (1956) 98 CLR 263 at 270. The Court did not have to consider the situation where the Commissioner had issued assessments on alternative bases to the same taxpayer in respect of the same income, but in circumstances where the Commissioner had indicated that only one liability would be sought to be enforced. That, in the context of sales tax, is the issue which Darrell Lea seeks now to litigate.

Each of the Sales Tax Assessment Acts referred to in the assessments contained a power to assess. An assessment had thus to be made pursuant the relevant Assessment Act; there was no general power of assessing sales tax. Each Assessment Act was discrete. Liability to sales tax was not dependent upon assessment. It arose independently of that assessment. There was no direct equivalent to s 175 of the Income Tax Assessment Act but s 67 of the Sales Tax Assessment Act (No 1) 1930, which section was at relevant times incorporated into the other Assessment Acts, was in substantially identical terms to s 177 of the Income Tax Assessment Act. Section 67 provided:

``The mere production of-

• (a) a notice of an assessment... is conclusive evidence-
• ...
• (c) of the due making of the assessment...:
• (d) in the case of a notice of an assessment - except in proceedings under Part IVC of the Taxation Administration Act 1953 on a review or an appeal relating to the assessment, that the amounts and all of the particulars of the assessment are correct.''

It would seem reasonably clear that the same transaction could not give rise to a liability for sales tax under different Taxation Acts (except perhaps in a most unusual case). Indeed, the generally accepted view is that once the taxing point has been reached under one Act, so as to make that Act apply, the legislation is spent. Whether that view is correct need not be considered here. The No 1 Assessment Act was the Act applicable in the circumstance where the dealing in the goods was a dealing by a manufacturer of goods which that taxpayer has manufactured. The dealing which gives rise to a liability under the No 2 Assessment Act is a dealing not by the manufacturer but by some other person. Similarly, the goods the subject of the same transaction could not both be manufactured in Australia or imported into Australia. Thus assessments in respect of the same transaction made under either the No 1 or the No 2 Acts would be mutually inconsistent with assessments under the Nos 6 or 7 Acts.

I have said enough to indicate that the present is a case which seeks to explore an area not directly covered in the Richard Walter case. Likewise it may be possible to argue that the legislative scheme is so different that comments made in the Richard Walter case are not necessarily applicable in the present context. Put another way, there is clearly an arguable issue between the parties not being one of which it could be said that it is frivolous or has no chance of success. Further, the issue is an important one. Were it successful the result would bring to an end the present controversy although, no doubt, it would give rise to the issue of a further assessment or further assessments in due course.

In the circumstances it seems to me that it is an appropriate exercise of discretion to order the separate trial of questions going to validity. Some evidence will need be taken to ensure that the separate questions do in fact arise. It may well be that it would be appropriate, and in the interests of the parties after this has happened, that the separate question be treated as a case stated for the Full Court. I express no view on the matter as this has not been the subject of argument. It is not a course that I would necessarily encourage but it is one that the parties might take into consideration. I would accordingly propose to make orders as sought by the applicant. Before so doing, however, I would give the Commissioner an opportunity to consider whether the questions as worded are appropriate to raise the real issues between the parties going to the question of validity. I would order that the costs of the applicant's motion be treated as costs in the determination of the separate questions.