OPTUS MOBILE PTY LTD v FC of T

Judges:
Lee J
Emmett J
Gyles J

Court:
Full Federal Court

MEDIA NEUTRAL CITATION: [1999] FCA 1403

Judgment date: 14 October 1999

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Lee, Emmett and Gyles JJ

The appellant, Optus Mobile Pty Limited (``Optus''), applied under section 39B of the Judiciary Act 1903 for declarations concerning the taxable value for the purposes of the Sales Tax Assessment Act 1992 (``the Act'') of certain ``assessable dealings'' within the meaning of that expression under the Act. A judge of the Court dismissed the application with costs [reported at 99 ATC 4492]. From that decision, Optus has appealed to the Full Court. The respondent to the appeal, and to the original application, is the Commissioner of Taxation (``the Commissioner'').

2. For present purposes, the only relevant assessable dealing was the sale by Optus of a Nokia 3810 mobile telephone handset (``Nokia 3810'') such sale effected on its behalf by a franchisee, trading under the name ``Optus World Pymble'', on 7 November 1997. The purchaser was Fields Glass Pty Ltd (``Fields''). The price attributed to the sale of the Nokia 3810 by Optus and Fields was $199. Optus sought, relevantly, a declaration that:

``The taxable value of that assessable dealing is the sale price of $199 or some lesser amount.''

The Commissioner contends that the taxable value of the relevant assessable dealing is $538.30.

Factual background

3. Optus has, at all relevant times, carried on business as the provider of a mobile telephone network. It also engages in the selling of mobile telephone handsets. Optus has never manufactured mobile telephone handsets. It acquires the handsets that it sells from the local branches of subsidiaries of overseas manufacturers and, occasionally, by direct import from overseas manufacturers. The primary judge found that it is likely that the Nokia 3810 in question was manufactured overseas and purchased by Optus from a local supplier.

4. Optus sells mobile telephone handsets through a variety of distributors, including a network of franchisees operating under the name ``Optus World''. Approximately 19% of sales of handsets by Optus are wholesale sales to distributors. There was nothing before the primary judge to indicate that those sales involve anything other than a simple sale and delivery of the handsets for subsequent retail sale to customers by the distributor. It is common ground that the price received by Optus for such sales is $538.30.

5. Optus sells the balance of its mobile telephone handsets by means of ``bundled sale contracts''. A bundled sale contract is one under which a customer purchases a handset for a price below the suggested retail price. Under such a contract, the customer accepts an obligation to connect to the seller's mobile telephone network and to remain as a subscriber for a stipulated minimum period, paying a monthly access fee together with charges for calls. An activation fee is payable upon connection. The customer also agrees to pay a cancellation fee if the customer terminates the arrangement within a specified period, usually 18 months.

6. Optus offers to its customers a choice of ``plans'' to regulate its arrangements with its customers. The monthly access fee, the charge for calls, the price payable for the handset and the cancellation fee vary according to the plan selected by the customer. The activation fee is constant for all plans. Generally, the greater the commitment undertaken by a customer for monthly access charges and calls, the lower the price payable for the handset. Further, the lower

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the price fixed for the handset, the greater was the cancellation fee. The following table summarises the evidence concerning the variations according to the Optus plan selected:

+-----------------------------------------------------------+
|                                          |   Nokia 3810   |
|                                          |     (1997)     |
|-----------------------------------------------------------|
| Cost to Applicant                        |           $405 |
| Unbundled Wholesale Price                |        $538.30 |
|-----------------------------------------------------------|
| Suggested Retail Price (unbundled)       |           $769 |
|-----------------------------------------------------------|
| ``Yes'' plan 30:                         |                |
|  minimum total outlay                    |           $904 |
|  retail price                            | $299           |
|  cancellation fee                        | $250           |
|                                          | ----           |
|  aggregate of price and cancellation fee |           $549 |
|-----------------------------------------------------------|
| ``Yes'' plan 60:                         |                |
|  minimum total outlay                    |          $1344 |
|  retail price                            | $199           |
|  cancellation fee                        | $350           |
|------------------------------------------| ----           |
|  aggregate of price and cancellation fee |           $549 |
|-----------------------------------------------------------|
| ``Yes'' plan 90:                         |                |
|  minimum total outlay                    |          $1784 |
|  retail price                            | $99            |
|  cancellation fee                        | $450           |
|                                          | ----           |
|  aggregate of price and cancellation fee | $549           |
+-----------------------------------------------------------+
      

7. The sale of the Nokia 3810 to Fields was under a bundled sale contract. Fields selected the ``Yes 60'' plan. Accordingly, the price for the Nokia 3810 was $199. Under the ``Yes 30'' plan, the purchase price would have been $299. For the ``Yes 90'' plan, the purchase price would have been $99. The sale to Fields occurred when an agent of Fields signed a printed document at the retail premises of Optus World Pymble. The document was an application by Fields to purchase a Nokia 3810 from Optus for the price of $199 on the condition that Fields would pay to Optus:

• • an activation fee;
• • a monthly access fee;
• • an additional charge if Fields terminated the agreement within 18 months.
• • a charge for phone calls in excess of an agreed amount of free ``air time''.

8. The Nokia 3810 was not the only handset that could be the subject of a bundled sale contract. The following table illustrates the pricing of selected handsets under various plans offered by Optus:

+------------------------------------------------------------------+
|       Phone      | Normal | ``Yes'' 30 | ``Yes'' 60 | ``Yes'' 90 |
|                  |   SRP  |            |            |            |
|------------------------------------------------------------------|
| Motorola D628    |  $475  |     $99    |      $0    |      $0    |
|------------------------------------------------------------------|
| NEC Fido         |  $513  |     $99    |     $29    |      $0    |
|------------------------------------------------------------------|
| Nokia 1610       |  $545  |    $139    |     $49    |      $0    |
|------------------------------------------------------------------|
| Ericsson GA628   |  $565  |    $159    |     $69    |      $0    |
|------------------------------------------------------------------|
| Panasonic G500   |  $699  |    $249    |    $159    |     $69    |
|------------------------------------------------------------------|
| Nokia 3810       |  $769  |    $299    |    $199    |     $99    |
|------------------------------------------------------------------|
| Nokia 8110/8110i |  $939  |    $419    |    $329    |    $239    |
|------------------------------------------------------------------|
| Ericsson GH688   |  $955  |    $429    |    $349    |    $249    |
+------------------------------------------------------------------+
      

9. The second column headed ``Normal SRP'' is the suggested retail price to be paid for the handset in question without commitment to any plan. For example, the suggested retail price for a Nokia 3810 was $769. If a customer wanted access to the mobile telephone network of Optus without any commitment, the customer would be able to pay the activation fee of $65 and buy a Nokia 3810 for $769 and then simply pay for calls made in addition to a monthly access fee.

10. A significant fact that appears from the table is that, in some cases, a customer may, in consideration for a commitment to a particular plan, be given a handset without cost. The significance of that will appear below.

Statutory framework

11. For reasons that are not presently relevant, the sale of the Nokia 3810 to Optus was not taxable under the Act. However, the sale of the mobile telephone handset by Optus directly to Fields, through Optus World Pymble acting as an agent for Optus, was taxable. The sale was an ``indirect marketing sale'' as provided in section 20 of the Act. Section 20 is in the following terms:

``20 A sale of assessable goods is an indirect marketing sale if it is a retail sale made by a person ( `the marketer' ) who is not the manufacturer of the goods and the sale is made:

• (a) under an arrangement that provides for the sale of the goods to be made by a person who is acting for the marketer but is not an employee of the marketer; or
• (b) from premises that:
  • (i) are used, mainly for making retail sales of goods, by a person or persons other than the marketer; and
  • (ii) are held out to be premises of, or premises used by, the other person or persons.''

12. An indirect marketing sale is an assessable dealing under Item AD2d in Table 1 in Schedule 1 of the Act. That provision relevantly provides as follows:

+----------------------------------------------------------------------------+
| [1] No. | [2] Assessable dealing | [3] Person | [4] Time   | [5] Normal    |
|         |                        | liable     | of dealing | taxable value |
|----------------------------------------------------------------------------|
| AD2d    | indirect marketing     | seller     | time of    | the notional  |
|         | sale as defined by     |            | sale       | wholesale     |
|         | section 20             |            |            | selling price |
+----------------------------------------------------------------------------+
      

Thus, Optus was liable to pay sales tax in respect of the ``indirect marketing sale'' of the Nokia 3810 to Fields on the ``notional wholesale selling price''. That term is defined in Note 2 to Table 1 in Schedule 1 of the Act as follows:

``The price (excluding sales tax) for which the taxpayer could reasonably have been expected to sell the goods by wholesale under an arm's length transaction.''

The Commissioner contends that in the present case that price was $538.30, while Optus contends that the notional wholesale selling price was $199 or some lesser sum.

Reasoning

13. Clearly the notional wholesale selling price is not the price for which a taxpayer actually sells goods by retail. The question is:

``What is the price for which the taxpayer could reasonably have been expected to sell the goods by wholesale under an arm's length transaction?''

The question so posed contemplates a hypothetical transaction, being a wholesale sale of the goods in question by the taxpayer under an arm's length transaction. It is the expectations of the taxpayer in question that must be considered and, accordingly, it is necessary to endeavour to ascertain, at least on a hypothetical basis, the price for which the particular taxpayer itself could reasonably have been expected to sell the goods in question under an arm's length wholesale sale.

14. The price payable under an arm's length transaction suggests the notion of a market price. That assumes the existence of a willing but not too anxious buyer and a willing but not

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too anxious seller - see
Spencer v Commonwealth (1907) 5 CLR 418. In a situation where there is no clear ascertainable market price, value is normally determined by reference to comparable transactions. That will normally be the best evidence of the price at which a willing but not too anxious seller will sell to a willing but not too anxious buyer.

15. The Act requires a determination of a hypothetical wholesale value, regardless of whether the taxpayer has sold the goods by retail, or sells goods of the same class by wholesale. A particular taxpayer may never sell goods of the relevant category by wholesale. In such a case, it may be possible to raise questions as to the conditions upon which it should be assumed that goods, which in fact were sold by retail, would be sold if they were sold by wholesale. However, in a case where the conditions in all respects were exactly the same in the case of sales by retail as in the case of sales by wholesale, it is not necessary to explore such questions -
Commonwealth Quarries (Footscray) Pty Ltd v FC of T (1938) 59 CLR 111 at 116.

16. Further, in a contract under which, for a single lump sum of money, a party undertakes to do various things, including the transfer of property and goods, the entire money consideration or contract price cannot be regarded as the amount for which the goods are sold. In such a case, the amount for which the goods are sold could not be ascertained from the transaction except by allocating part of the consideration to the other acts or things to be done by the seller - Commonwealth Quarries at 121.

17. Optus contended that the taxable value of the handset should be the price that would have been charged at a wholesale level for the particular transaction in question, including all the terms and conditions forming part of that transaction. In
Genex Corporation Pty Ltd & Ors v The Commonwealth of Australia & Anor 91 ATC 4564; (1991) 30 FCR 193, Hill J, with whom Beaumont and Burchett JJ agreed, said, at ATC 4579; FCR 211:

``In carrying out the hypothesis of a wholesale sale postulated by s 18(1)(b) the Commissioner may assume the hypothetical sale is made on the same terms and conditions as the actual retail sale is made, except in respect of price...''

However, pre-1992 cases, such as Genex, were concerned with the provisions of the Sales Tax Assessment Act (No. 1) 1930. The formulation of the test required by that Act has undergone various changes.

18. There were two methods for ascertaining the relevant wholesale price for the purposes of sales tax. Under the first method, tax was to be levied upon an amount referable to the actual wholesale price where the taxpayer in fact sold the goods by wholesale. The second method involved reconstructing a wholesale transaction by examining the particular retail transaction in question. It was not a matter of election for the taxpayer to decide which method to apply in calculating the relevant wholesale price. It was only if the first method was unavailable (in that the taxpayer did not, in fact, sell the goods by wholesale) that the second method became necessary.

19. Where a taxpayer sells goods by wholesale as well as retail, it would be relatively easy to derive an amount for which the goods could reasonably be expected to be sold by wholesale by the taxpayer in the particular case -
Estée Lauder Pty Limited v FC of T 88 ATC 4412 at 4418; (1987-1988) 80 ALR 314 at 321. The requirement for reconstruction arises only in circumstances where there was no actual yardstick provided by a real wholesale sale by the taxpayer of the same goods.

20. Under the current Act, the relevant measure of tax payable is specified in Item AD2d of Table 1 of Schedule 1 of the Act to be ``the notional wholesale selling price''. If, as Optus appears to contend, the second method for calculating the wholesale price is applicable to all cases under the new legislation, the current Act represents a significant change from the previous position.

21. The definition of ``notional wholesale selling price'' in Note 2 to Table 1 in Schedule 1 of the Act, however, indicates that no such change was intended:

``The price ... for which the taxpayer could reasonably have been expected to sell the goods by wholesale under an arm's length transaction.''

[emphasis added]

That definition makes clear that what is meant by ``notional wholesale selling price'' is not an amount derived from an exercise that involves incorporating all the terms and conditions of the

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retail transaction in question in every case, such that a particular item of merchandise may have several possible ``prices'' depending on the terms and conditions of the particular retail sale.

22. The corollary of the contention advanced on behalf of Optus, that the notional wholesale selling price of a handset under a bundled sale contract is the price allocated under the contract to the handset is that the notional wholesale selling price of precisely the same model would vary according to the particular plan chosen by a customer. More significantly, in the case of some plans, the notional wholesale selling price would be nil. That would be absurd.

23. Rather, the best evidence of the price that would reasonably be expected at the wholesale level is the price that was actually obtained by the taxpayer in a wholesale arm's length transaction. That is the best comparable transaction and, accordingly, the best evidence of value. It is only necessary to engage in a hypothetical reconstruction of the wholesale sale from the particular circumstances of the retail sale in question in cases where there is no such external yardstick of that wholesale price.

24. If it were necessary to determine a notional wholesale price in relation to the particular taxable transaction in question, it would be necessary to determine the price that would have been charged for the handset by Optus had it supplied the handset to, say, Optus World Pymble, with the same conditions as were attached to the contract with Fields. Even if there were no question as to the allocation of the total consideration for the handset and other acts and things to be done by Optus, the sum of $199 could scarcely be adopted as the wholesale price. The declaration sought by Optus is that the notional wholesale price is $199 or some lesser sum . However, no attempt has been made by Optus to demonstrate what that lesser sum should be. No basis has been advanced for indicating what would be an appropriate wholesale price in relation to a handset sold by retail for $199. One explanation for such an omission is that, for the reasons indicated above, the sum of $199 does not represent a true retail price. It is an arbitrary and artificial price produced in the circumstances described above.

25. If the sum of $538.30 is not the notional wholesale price in relation to the transaction with Fields, there is simply no evidence as to what that price should be. The correlation between price and cancellation fee might suggest that the true retail price for the handset was $549. A notional wholesale price might be derived from that figure. However, there would need to be some evidence to indicate how much mark up would be normal in relation to the supply of such a handset. One possibility might be to examine the relationship between the suggested retail price and the normal wholesale price and derive a notional wholesale price for the transaction in question by reference to that relationship. On that basis, since the actual wholesale price of $538 was 70% of the suggested retail price of $769, the notional wholesale price would be $384, which is 70% of $549. However, those matters have not been canvassed in argument.

26. Fields committed itself to an obligation to pay:

• • $199, being the price for the Nokia 3810;
• • $1,344, being the minimum total outlay, including access and connection fee plus a maximum of $630 worth of air time;
• • $350, being the cancellation fee, contingent upon the contract being cancelled.

Thus, in return for the commitment to pay $1,543, Optus undertook an obligation to provide Fields with a handset and access to its mobile telephone network, together with a maximum of $630 worth of air time, in effect paid for in advance.

27. Clearly, the price for the Nokia 3810 was not $1,543. If there were no evidence of the wholesale price normally charged by Optus for the Nokia 3810 and there had been no apportionment of the sum of $1,543 between the handset and the other acts or things to be done by Optus, it would have been necessary for part of the consideration payable to Optus to be allocated to the other acts or things to be done by Optus - Commonwealth Quarries at 121. The other acts and things to be done by Optus were to provide Fields with a handset and access to its mobile telephone network, together with a maximum of $630 worth of air time. There was no evidence of the value of those other acts and things.

28. There was no suggestion that the arrangements between Optus and its customers are made otherwise than at arm's length. Thus, in the present case, the whole of the consideration promised by Fields, being:

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ATC 5076

• • purchase price;
• • connection fee;
• • access fee;
• • contingent liability for cancellation fee;

is given in return for the consideration promised by Optus, being:

• • ownership of the Nokia 3018;
• • access to the network;
• • period of pre-paid air time.

29. However, so far as Fields was concerned, there was nothing to suggest that the allocation of the parts of the consideration passing from it to specific parts of the consideration passing from Optus, was of any significance. If Fields had wished to acquire a Nokia 3810, without the commitment to the payment of a connection fee and access fee, the suggested retail price that it would have had to pay was $769. There was no evidence that a Nokia 3810 would have been made available to Fields for anything less than the suggested retail price, in the absence of the other commitments that Fields undertook Thus, the allocation of the sum of $199 to the purchase price signifies that Optus must have obtained some other benefit from the transaction. Those factors indicate that the allocation of the parts of the consideration was not made at arm's length.

30. A possible explanation for the variation in the prices payable for the same model of handset under different plans is that, as an inducement to customers to undertake a commitment to a minimum outlay, and the revenue thereby generated for Optus, Optus reduces the price for the handset. However, because of the possibility that a customer may terminate the arrangements before Optus has derived sufficient revenue to justify the reduction in the price of the handset, the cancellation fee is payable to compensate Optus. The compensation is, in effect, for the loss that Optus would otherwise suffer on the sale of a handset at the reduced price.

31. Optus contended that there was no evidence of such subsidisation of the cost of the handsets from the revenue derived by Optus. Optus said that it would have been open to the Commissioner to cross-examine witnesses, who gave evidence on behalf of Optus, to elicit specific facts relevant to subsidisation but that the Commissioner chose not to do so. It was said that it is not open to the Commissioner to seek to have inferences drawn as to matters that could have been the subject of such cross- examination.

32. Optus contended that, in the light of evidence as to the keen competition in the relevant market, no inference should be drawn that the revenue to be derived by Optus from continuation of a contract for the minimum period of 18 months, would be equal to the cancellation fee. It was said that the inducement of the cheaper handset can be explained by the desire on the part of Optus to obtain increased market share. That is to say, Optus was prepared to make a sacrifice in the price of its handsets in order to derive a greater market share.

33. Optus adduced no evidence as to the revenue derived from the provision of the telephone network to its customers. There is a perfect negative correlation between the price charged by Optus for a Nokia 3810 and the cancellation fee. As the former reduces, the latter increases. The sum of the two is always $549. That gives rise to an inference that the cancellation fee is a measure of the benefit that Optus expects to receive as a result of a customer continuing with a contract for 18 months. Optus must be taken to have derived some benefit by reason of the commitment of its customer. The inference to be drawn is that Optus expects that, once a person has become a customer, that person will remain a customer during, and after the expiration of, the minimum period of 18 months. There is, of course, no commitment on the customer to remain after the expiration of the period, but that appears to be the benefit Optus expects to derive from the concession that it makes to its customer.

34. In the present case, there is simply no need to undertake the hypothetical exercise suggested by Optus. Optus in fact sells mobile telephone handsets by wholesale. Specifically, it sells Nokia 3810 by wholesale. The price at which Optus would have sold the Nokia 3810 handset to a retailer under an ``unbundled'' transaction was $538.30. There was no suggestion before the primary judge that the sales to retailers from which that price was derived were otherwise than at arm's length. Nor was there any suggestion before the primary judge that the terms of such sales were inappropriate to a sale of the handsets by wholesale under an arm's length transaction.

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Accordingly, there is no need to work backwards from the retail transaction.

35. On the evidence before the primary judge, the price for which Optus could reasonably have been expected to sell the Nokia 3810 by wholesale, under an arm's length transaction, was $538.30. That is the conclusion reached by the primary judge. Accordingly, the appeal should be dismissed with costs.

THE COURT ORDERS THAT:

1. The appeal be dismissed with costs.