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Federal Court of Australia |
Last Updated: 15 April 1998
TAXATION - SALES TAX -composite contract for developing exposed films and making prints for a global price - whether sales tax payable as on a retail sale of prints by reference to a notional wholesale selling price reflecting the developing as well as the printing or whether liability attached at the time of delivery of the negatives and prints both by reference to a charge for developing ascertained by apportioning the global price and a notional wholesale selling price of the prints. Consideration of legislative history and policy underlying the provisions of the Sales Tax Assessment Act 1992 as applicable to developing and printing contracts. Whether credit available on basis that the negatives are to be treated as input goods and the prints as output goods, the former being a "sufficient link" with the latter as required by s 52 of the Sales Tax Assessment Act 1992 . Whether a "manufacture-related activity" as defined in Item 18(5) of the Sales Tax (Exemptions and Classifications) Act 1992 - whether goods also fall within Item 18.
WORDS AND PHRASES
manufacture
goods
manufacture-related activity
Acts Interpretation Act 1901 , s 15AB
Sales Tax Assessment Act 1992 , ss 95, 16, 22, 52
Sales Tax (Exemptions and Classifications) Act 1992
Sales Tax Assessment Act (No. 1) 1930, ss 3(5), 3(6), 17A
Genex Corporation Pty Ltd v Commonwealth of Australia (1991) 30 FCR 193 - followed.
Commonwealth of Australia v Genex Corporation Pty Ltd [1992] HCA 65; (1992) 176 CLR 277 - cited.
Federal Commissioner of Taxation v Riley [1935] HCA 47; (1935) 53 CLR 69 - cited
Federal Commissioner of Taxation v Butcher [1935] HCA 46; (1935) 53 CLR 82 - considered.
Kodak (Australasia) Pty Ltd v Commonwealth of Australia (1990) 21 NSWLR 402 - cons.
Commonwealth of Pennsylvania v Perfect Photo Inc 371 A 2d 580 (1977) (Commonwealth Court of Pennsylvania) - cited.
Colorcraft Corp v Illinois Department for Revenue 482 NE 2d 1038 (1985) (Appellate Court of Illinois, 4th District) - cited.
Brayson Motors Proprietary Limited (in liq.) v Federal Commissioner of Taxation
(1983 - [1985] HCA 20; 1984) 156 CLR 651 at 657 - considered.
Pacific Film Laboratories Pty Ltd v Federal Commissioner of Taxation (1970) 121 CLR 159 - considered.
Deputy Federal Commissioner of Taxation (SA) v Ellis & Clark Limited (1934) 52 CLR
85 at 89 - cited.
Pepsico Australia Ltd v the Federal Commissioner of Taxation (1997) 147 ALR 497 at 503 - followed.
Case C80 (1953) 3 TBRD 452 at 460-461 - cited.
TANU PTY LTD v THE COMMISSIONER OF TAXATION
NG 493 of 1997
HILL J
SYDNEY
9 APRIL 1998
|
IN THE FEDERAL COURT OF AUSTRALIA | |
| NEW SOUTH WALES DISTRICT REGISTRY | NG 493 of 1997 |
|
BETWEEN: | tanu pty ltd
(trading as Photoland) ACN 009 221 345 Applicant |
|
AND: | THE commissioner of taxation
OF THE COMMONWEALTH OF AUSTRALIA Respondent
|
|
JUDGE: | HILL J |
| DATE OF ORDER: | 9 APRIL 1998 |
| WHERE MADE: | SYDNEY |
THE COURT ORDERS THAT:
1. The Court declares that, in respect of each of the contracts referred to in the statement of claim filed herein, sales tax is payable at the time of delivery of the negatives to the respective customer by reference, in the case of negatives to a charge for developing apportioned in accordance with s 95 of the Sales Tax Assessment Act 1992 and, in the case of prints, by reference to a notional wholesale selling price of those prints excluding therefrom developing charges.
2. The Court orders that the applicant shall pay the respondent's costs including costs in the High Court and reserved costs.
|
IN THE FEDERAL COURT OF AUSTRALIA | |
| NEW SOUTH WALES DISTRICT REGISTRY | NG 493 of 1997 |
|
BETWEEN: | tanu pty ltd
(trading as Photoland) ACN 009 221 345 Applicant |
|
AND: | THE commissioner of taxation
OF THE COMMONWEALTH OF AUSTRALIA Respondent |
JUDGE(S):
HILL J DATE: 9 APRIL 1998 PLACE: SYDNEY
The present application was commenced by Tanu Pty Ltd, the applicant, against the respondent, the Commissioner of Taxation in the High Court of Australia and remitted to this Court. It concerns the liability for sales tax under the Sales Tax Assessment Act 1992 ("the 1992 Assessment Act") and related legislation of the applicant in respect of two particular contracts which had been proved in evidence.
The specific detail of those contracts has been but of little relevance to the issues of principle that are involved. It suffices to say that, in each case, the applicant contracted with a customer to develop an exposed photographic film and produce prints with no apportionment of the price to each step in the process so that the customer, at the time of delivery, paid an unapportioned amount. It is not in dispute that a result of the contractual arrangements was that the customer purchased by retail the prints produced from the developed film. It is also common ground that the applicant is, for sales tax purposes, a manufacturer of goods and that, at the least, a liability to sales tax arises at the time of the retail sale to the customer.
It appears that the Commissioner proceeded to calculate the sales tax liability of the applicant in accordance with a formula contained in a sales tax bulletin which the Australian Taxation Office had published. It is unnecessary to detail the formula which involved applying an arbitrary percentage of the total tax inclusive price charged to the customer. Before the Court, however, the Commissioner did not seek to rely upon the method of calculation referred to in that bulletin which it was conceded produced no more than an approximation of the sales tax payable and the matter was debated by reference to principle rather than arbitrary formulae.
The films were then conveyed into a chemical called "stabiliser" where the "fixer" was washed out and the dye stabilised so as to reduce the tendency to fade and the films coated evenly to promote uniform drying. The developed films were then dried in a drier and came out of the developing machine and were cut off the leader. By that stage they were strips of negatives and were attached to a corresponding bag in one continuous strip.
These were then placed in the printer-processor machine and the shutter within the printing machine opened so the negative was exposed onto photographic paper within the machine. A light sensitive paper formed a latent image and was then conveyed into a developer solution which reacted with exposed silver halide crystals in the paper emulsion to form metallic silver. During this exposure, the colour developing agent was oxidised which, in turn, affected couplers in the paper's coating to form dye clouds around the metallic silver. Finally, the paper was exposed to a chemical called "bleach-fix" which stopped the action of the "developer" and converted the metallic silver back to silver halide crystals and removed the crystals from the paper. After that the paper was no longer sensitive to light and it was conveyed into a chemical called "stabiliser" to remove all traces of the "bleach-fix". The entire process of developing and printing takes around 25 minutes to complete, subject to whether the number of jobs required a delay in queuing for the machines.
Once the photographic prints were printed, the number of prints was recorded on the customer bag, the negatives were cut into smaller strips of four negatives each and placed in plastic sleeves, using a sleeving machine. Both the negatives and the prints were then placed in a wallet which was, in turn, placed in the original developing and processing bag. The number of prints was then noted on daily control forms together with a contract price. The bags were stored until customers returned to collect them when the bags were then delivered to the customers and payment was made.
1. It was submitted that the proper analysis of the transaction between the applicant and the customer was a single contract for the manufacture and sale of prints. There was no separate assessable dealing in the negatives and, in consequence, sales tax was payable pursuant to the 1992 Assessment Act (Table 1, Schedule 1, AD2a) by reference to the notional wholesale selling price. Underlying this submission was the argument that the present sales tax legislation produced the same result as that found to be the case in Genex which was decided by reference to the Sales Tax Assessment Act (No. 1) 1930 ("the 1930 Assessment Act"). An appeal to the High Court sub nom Commonwealth of Australia v Genex Corporation Pty Limited [1992] HCA 65; (1992) 176 CLR 277 was dismissed on December 8, 1992. Between the appeal in this Court and that in the High Court, the present legislation, popularly referred to as the "streamlined sales tax legislation" was passed by Parliament.
2. If the first submission was not accepted and, in consequence, there was a separate amount of sales tax payable, both in respect of the developing of the film and the printing of the prints, there was an entitlement to a credit under the provisions of CR6, in Table 1, Schedule 1 to the 1992 Assessment Act for so much of the sales tax as the applicant bore on the negatives.
For the Commissioner, it was submitted that:
1. The correct analysis of the transaction by reference to the 1992 Assessment Act, as applied to a developing and printing contract, was that sales tax was payable in respect of the developing pursuant to Table 1, Schedule 1, AD4a (and see s 22 of the 1992 Assessment Act) at the time of delivery of the negatives on a taxable value defined, in essence, to be the amount charged to the customer for developing the film. Sales tax was also payable on the retail sale of the prints under Table 1, Schedule 1, AD2a by reference to a notional wholesale selling price calculated in accordance with Note 2 to that table.
2. In order to determine the taxable value for the development of the negatives where there was an unapportioned amount for the developing of the negatives and the printing of the prints, apportionment was to be effected under s 95(2) of the 1992 Assessment Act.
3. In the alternative, the credit ground upon which the applicant, as a subsidiary submission relied, namely Schedule 1, Table 3, CR6 would have no application for the following reasons:
(i) the applicant would not have borne tax on the negative if the applicant succeeded in its first submission;
(ii) ss 52(a) and 52(c) of the 1992 Assessment Act had no application and thus the credit ground itself had no application because it was required that input goods become an integral part of output goods and this requirement was not satisfied;
(iii) s 52(b) had no application because the applicant was at all relevant times registered or because all the necessary conditions of item 18 in Schedule 1 to the Sales Tax (Exemptions and Classifications) Act 1992 were not satisfied.
It is convenient to show the mathematical results of each set of submissions to understand the reason why there is difference between the parties. For the purposes of the example, it is assumed that the retail price payable by the customer for the entire developing and printing contract is $10.00. It is also assumed that a notional wholesale value of the prints is $7.50 including costs of developing the film. If the actual cost of developing is $2.00, the cost of printing $3.00 and there is a 50% wholesale markup, the assumptions can be tabulated as follows:
|
$2.00 | Cost of developing | ||
| 3.00 | Cost of printing | ||
| 5.00 | Total Cost | ||
| 2.50 | 50% Wholesale Markup | ||
| 7.50 | Total Wholesale Price | ||
| 2.50 | 33% Retail Markup | ||
| $10.00 | Retail Price |
On the applicant's primary submission, sales tax would be calculated at the time of the retail sale of the prints on a notional wholesale value of those prints which would include the cost and wholesale markup on the negatives. Because the rate of tax is 22%, sales tax would be calculated as 22% of the $7.50 notional wholesale selling price.
On the Commissioner's preferred position, sales tax would be calculated on two components as follows:
|
1. AD4a Negatives | $2.00 | Cost of Developing | |
| 1.00
1.00 | 50% Wholesale Markup
33% Retail Markup | ||
| $4.00 | Taxable Value |
|
2. AD2a Prints | $10.00
(4.00) | Total Retail Price for developing and printing
Less AD4a Component for Negatives | |
| 6.00
(1.50) | Residual for Prints
Less Retail Markup being 33% of cost of printing plus wholesale markup of 50% | ||
|
$4.50 | Notional Wholesale Selling Price |
Note: This calculation assumes that the notional wholesale selling price is properly to be calculated as set out above, although other factors may enter the calculation.
On the Commissioner's preferred position, sales tax would be payable at the rate of 22% on the taxable value of the negatives ($4.00) plus the taxable value in respect of the prints ($4.50) ie on $8.50.
The applicant's fallback position proceeds on the assumption that sales tax is initially payable on the taxable value of $4.00 in respect of the negatives. It accepts too that tax will be payable in respect of the prints on a taxable value of $4.50. However, it assumes that a credit would then be given for the sales tax payable on the negatives, being 22% of $4.00.
Not long after the introduction of the original sales tax legislation, the High Court was required to consider some issues involving sales tax liability where photography was involved. The cases are Federal Commissioner of Taxation v Riley [1935] HCA 47; (1935) 53 CLR 69 and Federal Commissioner of Taxation v Butcher [1935] HCA 46; (1935) 53 CLR 82. Although the facts in these two cases differed, both involved substantially the question of whether the making of prints involved manufacture. In both cases it was said that it did. The former case involved a professional photographer who photographed clients and provided to them, for reward, prints. It was accepted by the parties that the transaction involved a sale of the prints, a matter which Rich, Dixon and McTiernan JJ at 78 said:
"... doubtless could not, be disputed."
(The Court held that manufacture took place.)
In the latter case, the defendant carried on the business of developing films and making prints from them. Occasionally the defendant printed from negatives supplied by customers. Again the issue was the same as that in Riley, namely, whether the defendant's business involved manufacture. There was no issue as to the correct amount of sales tax, if the issue of manufacture was resolved against the defendant. It may be gleaned from the case stated, at 83 in the report, that separate charges were not made for developing and printing.
The business of a film laboratory which developed and printed films for customers received consideration again in the High Court in Pacific Film Laboratories Pty Ltd v Federal Commissioner of Taxation [1970] HCA 36; (1970) 121 CLR 154. In that case the appellant also, from time to time, merely developed films for a customer and it was not asserted by the Commissioner that sales tax was payable in such a case. It also entered into contracts to develop and print. The case differs from the present however in that there were separate charges for each of developing and printing.
One of the issues in the case concerned whether the supply of prints involved the sale of goods within the meaning of of the then Sales Tax Assessment Act (No. 1) 1930-1966 (Cth). The Court unanimously held that it did.
Walsh J expressed the view at 174-5 that the earlier cases of Riley and Butcher supported the conclusion (although the matter was not the subject of argument) that the contract, at least for the prints, involved a sale of goods. His Honour pointed to the fact that there had been separate charges for developing and printing and continued at 175:
"These facts do not require the conclusion that what was paid to the appellant was never a price for goods sold by it but was always a charge for work done by it. If without any dissection a total amount had been fixed by the appellant and paid by the customer, in cases in which the appellant had developed exposed film and had also made prints, it might, perhaps, have been difficult to treat the customer in those transactions as having paid part of that total amount as the price of goods sold to him by the appellant. The fixing of separate charges removes any such difficulty."
It might be added to these comments that, as the sales tax legislation then stood, although there was specific legislative provision for allocating a lump sum price for the sale of goods between goods liable to differing rates of sales tax or goods liable and goods exempt, no apportionment would have been available for a lump sum consideration in part for services and in part for the sale of goods. That, no doubt, explains his Honour's comment. The provisions of ss 3(5) and 3(6) of the 1930 Assessment Act are discussed later in these reasons.
Developing and printing contracts were the subject of two cases in the 1990s with respect to the 1930 Assessment Act. The first, Kodak (Australasia) Pty Ltd v Commonwealth of Australia (1990) 21 NSWLR 402, was a decision of the New South Wales Court of Appeal. The second, Genex was a decision of a Full Court of this Court. In some of the issues dealt with there was disagreement between the New South Wales Court of Appeal and this Court. In the result, the High Court granted special leave to resolve the divergent views and ultimately accepted the analysis that had been enunciated in this Court. It is convenient therefore to refer to Genex rather than to what was said in Kodak.
In Genex, the appellant in the Federal Court developed customers' films and produced prints from them. It did this for an unallocated price. From time to time, it also developed films for customers, delivering the negatives to them. The matter came to the Full Court of this Court by way of a special case stated. Among the questions asked, was the following:
"Whether, upon the facts stated, and under the provisions of the Sales Tax Assessment Act (No. 1) and the Sales Tax Act (No. 1) as in force at the date of commencement of this action -
(i) on the delivery by the applicants to their customers of the negatives processed by the applicants for their customers; or
(ii) at some earlier time and, if so, when;
the applicants are in respect of those negatives liable to pay sales tax?"
That question was answered as follows (the answer was confirmed by the High Court on appeal):
"(i) Yes, but only where the contract between the applicants and their customers is for the developing of the film without printing.
(ii) No."
There was no issue in Genex as to whether, on the sale of the prints, sales tax was to be payable on a sale value which took account both of development and printing (if there was no separate liability for sales tax with respect to developing). Indeed, in my judgment, I noted (at 212) that this matter had not been argued and that no decided view should be expressed with respect to it. In a passage however relied upon (notwithstanding that it was clearly expressed as a not considered view) I said at 211:
"Where ... the contract between the customer and the laboratory is a contract for developing of the film and the making of prints, there is much to be said for the view that the entire process should be seen as a process of manufacturing the prints, with the negatives but an intermediate stage of that process. In such a case there will be an actual sale of the prints and the sale value of them will fall to be determined in accordance with s 18(1)(b) in the normal case of a sale by retail, as the amount for which the prints could reasonably be expected to have been sold by the manufacturer by wholesale.
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, there being no term of the contractual arrangement which would be absent or modified if the real sale were a wholesale sale ... On this basis the sale value of the prints would include an appropriate component for the process of developing."
I indicated that this seemed to coincide with the way in which developing and printing contracts had been treated by the Commissioner in Butcher (the matter had not been determined by the High Court) and in cases in the United States such as Commonwealth of Pennsylvania v Perfect Photo Inc 371 A 2d 580 (1977) (Commonwealth Court of Pennsylvania) and Colorcraft Corp v Illinois Department for Revenue 482 NE 2d 1038 (1985) (Appellate Court of Illinois, 4th District).
In Genex it was ultimately held, contrary to the submissions of the Commissioner, as already indicated, that the answer to question (f) of the special case stated, set out above, was correct. In particular, although in accordance with the legislation considered in Genex the developing of film was or involved manufacture and the negatives could be taken to be goods, there was no deemed sale of them arising under the provisions of s 17A of the then Sales Tax Assessment Act (No. 1) 1930. As then enacted, s 17A(1) read:
"Where --
(a) goods have been manufactured in Australia by a person for another person (in this subsection referred to as the `customer'); and
(b) the goods were manufactured in whole or in part out of materials supplied by the customer,
the manufacturer of the goods shall, for the purposes of this Act, be deemed to have sold the goods to the customer at the time when the goods were delivered to the customer, or were delivered under an agreement with the customer to some other person, and the customer shall, for the purposes of this Act, be deemed to be the purchaser of the goods."
The history of this section and its role in the then sales tax law is discussed in detail in Genex. Suffice it here to say that the Full Court of this Court and ultimately the High Court found s 17A inapplicable to a contract of developing and printing films because, prior to delivery, the goods were used in the printing process and thereby ceased to be goods.
An issue in the present case is whether the 1992 Assessment Act operated to change the outcome which Genex revealed as stemming from the 1930 Assessment Act.
Although the publicity which preceded the 1992 Act spoke initially of it as simplifying sales tax, that was only one of the purposes evident in the legislation as enacted. Another purpose was to deal with a number of problem areas which had been identified. It must be said, however, that there is no direct reference to Genex to be found in any extrinsic material to which reference may be had under the provisions of s 15AB of the Acts Interpretation Act 1901 .
The 1992 legislation reduced the number of acts comprising the sales tax system to seven (excluding other acts such as the Taxation Administration Act 1953 applicable to taxation matters on a more general basis). In addition there were two sets of regulations. Subsequent acts, however, have been passed to add to the number of sales tax acts.
It is fair to say that the legislation substantially adopted the legislative policy to be found in the initial legislation. That policy was described by the High Court in Brayson Motors Proprietary Limited (in liq.) v Federal Commissioner of Taxation (1983 - [1985] HCA 20; 1984) 156 CLR 651 at 657 in the following terms:
"That general policy was and is to levy tax upon all goods after they are imported into or produced in Australia and before they reach the consumer. It was not intended that the retail price of goods should be increased by the incorporation in it of more than one amount of tax or that the retail sale itself should attract tax. It was, however, intended that they should be taxed at their full wholesale value. That being so, the policy of the legislation was and is that sales tax should, in the ordinary case, be a tax upon the last wholesale sale."
The 1992 Assessment Act lists all assessable dealings that can be subject to sales tax in Table 1 of Schedule 1 to that Act: s 16(1). In the event that there is no exemption applicable by reference to the Sales Tax (Exemptions and Classifications) Act 1992 , an assessable dealing listed in that table becomes a taxable dealing. A normal taxable value is specified in the table for each dealing. In accordance with the legislative policy referred to above, the normal taxable value in the case of a wholesale sale will be "the price (excluding sales tax) for which the goods were sold".
Although the tax is a tax on wholesale sales, it is as obvious as it was with the 1930 Assessment Act that, if the tax were confined to wholesale sales, many transactions in goods would escape tax altogether. So a manufacturer, rather than sell goods by wholesale, might sell them in a retail sale. Table 1 thus treats as an assessable dealing a retail sale by a person who manufactured the goods in the course of a business (AD2a). However, in accordance with the policy underlying the legislation, the normal taxable value will be a notional wholesale selling price. This expression is, as already mentioned, defined in the second note at the end of Table 1. The definition is as follows:
" `Notional wholesale selling price' means 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."
Generally speaking, it can be said that the circumstances which constitute a taxable event (the "taxing points") made applicable in the 1992 Assessment Act are three-fold. First there is a wholesale sale, second there is, in certain circumstances, a retail sale and finally there is an application to own use (AOU). Treating goods as stock for sale by retail, one of the taxing points in the 1930 legislation, was eliminated in the 1992 Assessment Act.
Relevant for present purposes is the fact that the definition of "manufacture" in the 1992 Assessment Act continued the inclusion in the definition of processing or treating exposed photographic film so as to produce a negative or film strip (para (d) of the definition). In consequence the applicant in the present case is a person who, in the defined sense, manufactures negatives. For the reasons explained in Genex, the negatives must be treated as "goods" for the purposes of the 1992 legislation, just as they were in the 1930 legislation.
The provisions of s 17A of the 1930 Assessment Act, found inapplicable to a developing and printing contract, were rewritten. The comparable section is now s 22 of the 1992 Assessment Act. That section provides, under the heading "Delivery of Customer's Materials Goods (AD4a)", as follows:
"(1) This dealing involves assessable goods that are manufactured by a person, in the course of a business, for another person (`the customer') wholly or partly out of materials that:
(a) were supplied by the customer (or by someone else at the request of the customer); or
(b) were purchased from the manufacturer by the customer (or by someone else at the request of the customer).
(2) The dealing consists of the delivery of the goods either to the customer or to someone else at the direction of the customer or under an agreement to which the customer is a party.
(3) In this section:
`materials' includes exposed photographic film or cinematograph film that is to be processed or treated so as to produce a negative, transparency or film strip."
AD4a defines the relevant assessable dealing to be "delivery of customer's materials goods as defined by section 22".
Another change of relevance was to be found in the definition of "goods". Under the original legislation the word "goods" was defined not to include:
"(a) goods which have, either through a process of retailing or otherwise, gone into use or consumption in Australia."
The definition of goods in the 1930 Assessment Act led to the conclusion that the negatives in Genex, after they had been used for the purpose of printing, were no longer goods because they had gone into use or consumption in Australia.
The 1992 Assessment Act defines goods as follows:
" `goods' means any form of tangible personal property, but:
(a) does not include property that is sold as second-hand and is manufactured exclusively or principally from goods that:
(i) were already Australian-used goods before the manufacture began; and
(ii) in their condition as parts of the property so manufactured, retain their character as Australian-used goods; ... "
The requirement that the tangible personal property be "sold as second-hand" before it ceases to be goods under the 1992 Assessment Act brings about the conclusion that the negatives in the present case do not cease to be goods merely because they are used in the printing process because they have not been sold as second-hand. The fact that they are used in the printing process does not take them out of the definition of "goods".
The Explanatory Memorandum that was circulated with the 1992 legislation with the authority of the then Treasurer, the Hon. J S Dawkins MP, dealt with photography in chapter 21. The memorandum indicates that photography was to be incorporated into the general scheme of the new law. The memorandum does not, as earlier indicated, specifically mention Genex. The summary at part C speaks of the reason for treating exposed film and negatives as separate goods indicating that it is:
"To clarify the existing law, and to ensure that tax is collected in all cases on the manufacture of the negatives."
However, it is clear from a reading of the memorandum (see "Element 5" at 320) that it contemplates that the legislation does deal with a developing and printing contract for a single charge. It is not necessary to repeat the whole of the material in the chapter. Two extracts suffice:
"Element 5: The developer delivers the negative and the print to the customer in return for a single charge of, for example, $20.
Consequence (a): The delivery of the negative will be a delivery of customer's materials goods - which will be an assessable dealing. [AD4a and clause 22]
Consequence (b): The delivery of the print will be a sale of the print - which will also be an assessable dealing. [AD1a or AD2a]
Consequence (c): The taxable value of the negative will be the amount charged for making it up (and the value of any always exempt materials supplied by the customer). If there is no separately identified charge for making up the negative, then there should be allocated to the taxable value the amount that would be charged for the negative if the manufacture of the negative had been the only activity undertaken by the developer. The Commissioner has a discretion to make this allocation. [Table 1 and clause 95]
Consequence (d): The taxable value of the print will be its notional wholesale selling price (if it is a retail sale to the customer), or its actual selling price (if it is a wholesale sale to the customer). [Table 1]
21.5 If the print is sold by wholesale, the making up charge on the negative will be included in the wholesale price. The taxable value is simply the amount for which the goods were sold. However, if as is the more common situation, the prints are sold by retail, then 2 taxable value calculations will have to be made - the making up charge for the negative, and a notional wholesale selling price for the print. That is also the situation under the existing law where the Commissioner has come to a special arrangement with the industry allowing them to calculate their taxable value simply as a set percentage of the total retail selling price."
The reference to the existing law predated the decision of the High Court in Genex.
Relevant also to the present submissions is s 95, referred to in the memorandum and the legislative history of this section.
As and from 1940, ss 3(5) and 3(6) of the 1930 Assessment Act provided as follows:
"3(5) Where a sale and purchase, for one inclusive price, is made of goods upon the sale value of which sales tax is payable at a particular rate together with goods upon the sale value of which sales tax is payable at some other rate or is not payable, the respective amounts for which the goods are sold and purchased shall be deemed to be the amounts which, in the opinion of the Commissioner, would have been the sale prices of those goods if sold separately.
3(6) For the purposes of sub-section (5), `goods' (in so far as that word refers to goods upon the sale value of which sales tax is not payable) shall include any property on which sales tax is not payable."
Subsections 5 and 6 replaced an earlier provision of the 1930 Assessment Act, permitting apportionment of an unallocated consideration, where the goods sold were sold together with goods which were exempt. The reason for the amendment came about because, in 1940 for the first time, differential sales tax rates were fixed in the then budget.
Although s 3(5) permitted an apportionment of an unallocated consideration where there was a sale and purchase of more than one item or category of goods, it is clear that it could have had no application to apportion an unallocated price for a contract which included both services and goods. As already indicated, that no doubt is the reason for the dicta in Pacific Film, to which reference has already been made. Section 3(6) could only operate if the sale transaction referred to some property on which sales tax was not payable and not services. No doubt, if there were a sale of taxable goods together with second-hand goods upon which no sales tax was payable, or for that matter real estate not being "goods", s 3(6) would have had operation to deem what otherwise were not goods to be goods upon which no sales tax was payable.
Section 95 clearly extends beyond the terms of ss 3(5) and 3(6). It is in the following terms:
"95(1) If there is a need to know the price for which particular goods were sold, but the parties have not allocated a particular amount to those goods, the price for which those goods were sold is (for the purposes of the sales tax law) the price for which the goods could reasonably be expected to have been sold if they had been sold separately.
95(2) Similarly, if there is a need to know how much of a global amount relates to some other element of a transaction, but the parties have not allocated a particular amount to that element, the amount to be allocated to that element (for the purposes of the sales tax law) is the amount that could reasonably be expected to have been allocated to that element if that element had been the only subject matter of the transaction."
There is no particular reason why services cannot be regarded as being "an element of a transaction" which includes also the sale and purchase of goods and so becomes amenable to an allocation of consideration under s 95(2). I shall, however, defer the consideration of the meaning of s 95 until I have discussed the applicant's submission in greater detail.
It was the preferred position of the applicant that, if liability for sales tax in a developing and printing contract for one inclusive price arises, that transaction should be treated as a sale by retail of the print including in the notional wholesale selling price a component for the development of the negative. Reliance in support of this submission was placed on Genex and the comments made in Pacific Film. It is also said that, because the notional wholesale value of the print includes a component for the development of the negatives, separate taxation under AD4a based on the amount charged to the customer would result in double taxation.
I have no difficulty in accepting the proposition that the legislative policy does not favour double taxation. It is no doubt still the case, just as it was in the 1930 legislation, that it was "not intended that the retail price of goods should be increased by the incorporation in it of more than one amount of tax": Deputy Federal Commissioner of Taxation (SA) v Ellis & Clark Limited [1934] HCA 54; (1934) 52 CLR 85 at 89, and see Brayson Motors, supra, at 657-8. It must, however in fairness, be said that the Commissioner's submissions do not in fact involve any element of double taxation because they break the single transaction up into separate transactions of developing and printing, excluding the taxable value for developing from that applicable to printing. It would follow, if this is correct, that the notional wholesale selling price for the making of the prints would not include as well a component for the development of the negatives and in consequence of that no question of double taxation arises.
The more substantial difficulty for the applicant is that the submissions take no account at all of the alterations to the law effected since Genex.
To avoid the conclusion that the 1992 Assessment Act (which the Explanatory Memorandum makes clear, as I have indicated, produces a different result from Genex) does not apply to a developing and printing contract for an unapportioned price, it was necessary for the applicant to submit that the present case was not covered by s 22 and that apportionment was not possible by virtue of s 95(2).
It is obvious that s 22 was specifically designed to deal with the development of exposed film. However, it was submitted that where there was a single transaction of developing and printing, it was not accurate to describe there to be a "delivery of customer's material" within the meaning of s 22 because, for s 22 to operate, there had to be a discrete delivery rather than a delivery integral to a broader and different transaction.
With respect, there is no warrant which supports reading down s 22 in the manner suggested. The section will operate whenever there is a delivery of goods as defined in s 3. The fact that that delivery may be pursuant, as in the present case, to a contract which is both a contract for work and labour and a contract for printing of prints, does not change the conclusion that there has been a delivery of the negatives at the same time as the prints obtained therefrom were likewise delivered. In other words, there is no warrant in my view for applying s 22 only to a development contract but not applying it to a developing and printing contract.
The next submission advanced was that there could be no relevant allocation under s 95(2) as between the notional wholesale selling price applicable to the AD2a dealing and the amount charged by the developer/printer to the customer for the purposes of the AD4a dealing. It was submitted that s 95(2) only permitted apportionment of a global amount to an element of the transaction but did not arrive at, if I understood the submission correctly, an amount charged for development. It said that s 95(2) could not be used to create an "amount charged" (see AD4a) when no amount was in fact charged in the case of the single contract price. It was also said that s 95 could not be used to create an assessable dealing. In the result, it was submitted that delivery of negatives under a developing only contract would be an assessable dealing under AD4a because a charge was allocated to it but no assessable dealing would arise in respect of developing simplicitor under a contract for developing and printing for an unallocated price.
During the course of argument, I was attracted to the possibility that subs (1) and (2) of s 95 should be applied sequentially so that only if there was a need to know the price for which goods were sold would one be authorised to make an allocation under s 95(2). However, reflection and examination of the language of s 95(2) shows no particular reason why it could have operation only where s 95(1) applied first. Of course, where the transaction involved, in addition to developing the film, a wholesale sale of the prints for a global price, it would be necessary to apply s 95(1) to determine the price for which the goods were sold. Where, on the other hand, the transaction, as here, is a retail one, there is no real need to know the price for which the goods were sold because the taxable value depends upon a notional wholesale price not an actual price. In saying this, I am not to be taken as saying that actual price would necessarily be relevant in arriving at a notional wholesale selling price.
While it is true that s 95(2) in referring to "some other element of the transaction", requires the conclusion that one element of the transaction will be a sale of goods, all that is necessary to enliven s 95(2) is that there be a global amount of consideration in a transaction which involves both a sale of goods and some other element. There is no particular reason why that other element could not be, as in the present case, services by way of developing the customer's film. There being no amount allocated to developing, the amount to be allocated to developing is to be ascertained by the hypothesis that it is the only subject matter of the transaction. Once that hypothesis is activated, that is to say that developing is the only subject matter of the transaction, there will be found a relevant charge for developing. I see no reason why an allocation under s 95(2) cannot arrive at the normal taxable value under AD4a, being the amount which is charged to the customer in respect of the goods. While I accept that the language of s 95(2) is far from precise, using, as is customary in this legislation an attempt at ordinary English drafting, the legislative purpose is given effect to by treating the actual allocation arrived at by the operation of s 95(2) as if it were the amount charged for developing, the developing contract being hypothesised as the only subject of the transaction to which s 95(2) then operates.
It follows that I would reject the applicant's preferred submission that the law has remained the same since Genex on this point in favour of the Commissioner's submission that the result of the 1992 legislation is that, whether or not there is an allocation of separate considerations to the contracts of developing and printing, each of developing and printing becomes an assessable dealing with that part of the lump sum consideration applicable to developing being ascertained under s 95 if allocation be required. The result I reach accords, in my view, with the parliamentary intention and the Explanatory Memorandum to which reference may be made in the case of ambiguity, inter alia, under s 15AB of the Acts Interpretation Act 1901 .
One complaint against the system of wholesale sales tax as it existed pre-1992 was that inadequate account was taken of what is popularly known as "business inputs" thereby resulting in double taxation. I had cause to relate the history of this problem in Pepsico Australia Ltd v Federal Commissioner of Taxation (1997) 147 ALR 497 at 503. As I there said, the 1992 legislation provided an opportunity for the Government to deal more comprehensively than the earlier legislation had done with business inputs. In the same case, I explained the legislative scheme applicable in the 1992 Assessment Act, that being to seek to avoid the double taxation which taxing both business inputs and business outputs created. I need not repeat that discussion here.
As I there explained, there are three credit grounds to be found in Table 3 to Schedule 1 of the 1992 Assessment Act which are concerned with business inputs, these being CR6, CR7 and CR12. The present submission concerns only CR6. That credit ground is in the following terms:
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" | Summary of Ground | Details of ground
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Avoiding "indirect taxing" resulting from tax on inputs | Claimant is liable to tax on an assessable dealing with goods ("the output goods") and has borne tax on other goods ("the input goods") that have a sufficient link (as defined by section 52) with the output goods." |
Where that credit ground is made out, a credit is allowed for the tax borne on the input goods.
As the details of the ground make clear, it is necessary that there be a "sufficient link" defined by s 52. That section, which I discussed in detail in Pepsico, is in the following terms:
"For the purposes of credit grounds CR6, CR7 and CR12, the input goods have a sufficient link with the output goods in the following cases:
(a) the input goods, or some essential element of input goods, has become an integral part of the output goods;
(b) the input goods have been used in connection with the output goods in the carrying out of an activity that would have been covered by an exemption [R] Item if the person carrying out the activity had been registered at all relevant times;
(c) something that formed part of the input goods at the time of the tax-bearing dealing with the input goods has become an integral part of the output goods."
The relevant exemption [R] item is said to be Item 18 to be found in the First Schedule to the Sales Tax (Exemptions and Classifications) Act 1992 which item is in the following relevant terms:
"(1) Goods for use by a person (`the exemption user') mainly in carrying out one or more of the following activities:
(a) a manufacture-related activity carried out by the exemption user in the course of a business; ...
(3) This Item does not cover: ...
(4) The usual requirement that the exemption user must intend to use the exemption goods during the whole of the statutory period does not apply if all the following conditions are met in respect of the exemption goods:
(a) the exemption goods are for use by the exemption user mainly in applying a process or treatment to or in relation to goods (`the manufactured goods') that have been manufactured, or are to be manufactured; ...
(5) ... `manufacture-related activity' means:
(a) applying a process or treatment to goods that are to be used as raw materials for other goods to be manufactured by the exemption user or anyone else;
(b) applying a process or treatment to goods so that the goods, or an essential element of the goods, become an integral part of other goods that are being manufactured by the exemption user or anyone else;
(c) applying a process or treatment to goods for the purpose of bringing them into, or keeping them in, the form or condition in which they are to be marketed or used by a person:
(i) who is the manufacturer of the goods; or
(ii) ...
...
(j) processing or treating:
(i) goods/equipment that is for use by the exemption user mainly in carrying out one or more activities covered by any of paragraphs (a) to (i); or
(ii) ... "
The applicant's submission is that, in the present case, it has been liable to tax on an assessable dealing with the negatives ("the output goods") and has borne tax on the prints ("the input goods"). It is said that there is a sufficient link, as that expression is to be found in s 52, with the "output goods", thereby satisfying CR6.
When one turns to the provisions of s 52 it seems clear that neither paragraphs (a) nor (c) could have any application. Both require, as an essential element, that the exposed film become an integral part of the prints. No doubt it can be argued that the exposed film contains in a sense an image which ultimately is printed on the prints. However, in my view, this is not the correct construction of either paragraphs (a) or (c); both having regard to the evidence as to how the exposed film is developed and printed and also to a view I take that reference to essential element refers to a physical element rather than the chemical displacement which occurs in the photographic process and produces the developed film. See Case C80 (1953) 3 TBRD 452 at 460-461.
However, that still leaves s 52(b) to be considered. To fall within that paragraph, it is necessary for the applicant to show that the activity in which it engages and in which it uses the exposed film is covered by exemption item 18, that is to say that it falls within that item. As I pointed out in Pepsico, it is not a relevant question to ask whether the goods in question fall within the [R] item. Rather the question is whether the activity is covered by or falls within the item, for the section speaks of activity and not goods. In Pepsico I held that the activity there in question, that is to say the activity of making pizza, did not fall within exemption Item 18(1). I left open the question whether s 52(b) was restricted to persons who were unregistered at all relevant times and had no application to a person who at all relevant times was registered. I indicated, however, that there was much to be said for the former view that s 52 is limited to persons who were unregistered. If that view were correct, then clearly the applicant in the present case would not be entitled to the credit sought.
The first question, therefore, is whether the applicant's activity is covered by exemption Item 18. That activity can, no doubt, be described as developing and processing films supplied by customers. So the first question is whether that activity is "a manufacture-related activity" as that expression is defined in item 18(5). In my view, only one of the activities described in that definition could have application to the circumstances of the present case.
Taking each possibly relevant paragraph in turn, the first requires that the activity be the application of a process or treatment to goods which are used as raw materials for other goods. However, the "relevant goods" referred to in the description of "manufacture-related activity" must mean the goods in respect of which the credit ground is sought to be availed of. This follows too from Pepsico. It is incorrect to say that the film is used as raw material for any other goods; ie prints which are manufactured. Accordingly paragraph (a) has no application.
Paragraph (b) similarly has no application for the same reasons that s 52(a) and (c) have no application, namely that the film never becomes an integral part of the prints.
The third circumstance is to be found in paragraph (c). That paragraph treats the activity of developing as involving the application of a process to the film for the purpose of bringing it into a form which is to be used by a person who is the manufacturer of the same goods or the marketer of them. Whilst it is true that there will be a process of treatment to the prints for the purpose of permitting the prints to be marketed or used by the developer/printer, that does not seem to be a circumstance to which paragraph (c) could have application.
The only possible other circumstance is that described in paragraph (j). It may be said that the developer/printer processes or treats the negatives, being goods for use by him/her mainly in carrying out one or other of the activities covered by the various paragraphs in sub item 5 to which reference has already been made. Paragraph (b) could then have application as the developer/printer applies a process or treatment to photographic paper so that it becomes an integral part of the prints which the developer/printer manufactures. I think, therefore, that it can be argued that the activity carried on by the applicant is, for the purpose of Item 18, a "manufacture-related activity".
However, the ratio of Pepsico was that the reference in s 52 to "activity" was not satisfied merely because the activity was within the description of "manufacture-related activity". Rather, what was necessary was that the activity be a "manufacture-related activity" in connection with goods covered by the item itself. As I there pointed out at 505, it was only if s 52 was given such an interpretation that it did not produce a capricious result. I pointed out the absurdities which followed from the applicant's submission in that case. No appeal was ultimately lodged from the decision.
It therefore becomes incumbent upon me to determine not merely whether the activity of the applicant falls within the definition of "manufacture-related activity" but whether it is in respect of goods to which Item 18 would apply. So I must have regard to the requirement in Item 18 (paragraph 4) that the goods be used during the whole of the relevant "statutory period". The words "statutory period" are defined in s 5 of the 1992 Assessment Act to mean the period which commences when the goods were first applied to a person's own use in Australia. However, use of the negatives is excluded from the definition of "application to own use" in s 5 with the consequence that at no relevant time were the goods applied to "own use" and thus the statutory period never commenced. Put in another way, there is no statutory period to which Item 18(4) can apply. From this it follows that the sufficient link under s 52 has not been established.
If, as I continue to think is the better view, s 52 can operate only where a person is unregistered, then this would afford another ground for finding CR6 inapplicable. However, it is no more necessary in the present case to decide this issue than it was in Pepsico. Counsel for the applicant gave examples of what were suggested to be anomalies which would flow if this view were taken. This merely reinforces my view not to decide that which is unnecessary unless or until the occasion requires it.
It follows that I am of the view that the explanation given in the Explanatory Memorandum for the treatment of developing and printing is indeed the correct explanation and that the 1992 legislation gives effect to the parliamentary intention displayed in that memorandum.
I would accordingly declare that, in respect of each of the contracts referred to in the Statement of Claim, sales tax is payable by reference in the case of the negatives, to so much of the total contract price (calculated as if each of the developing contracts were a single contract) as relates to developing; and in the case of prints, sales tax is also payable by reference to a notional wholesale selling price of the prints excluding therefrom the developing process. The question as to the mathematical amount of the taxable value was not a matter debated before me. It will be for the Commissioner to make the necessary calculations. The applicant must pay the Commissioner's costs.
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I certify that this and the preceding twenty-three (23) pages are a true copy of the Reasons for Judgment herein of the Honourable
Justice Hill |
Associate:
Dated: 9 April 1998
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Counsel for the Applicant: | Mr D H Bloom QC with Mr S J Gageler |
| Solicitor for the Applicant: | Firmstone and Feil |
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Counsel for the Respondent: | Mr I V Gzell QC with Mr K Connor |
| Solicitor for the Respondent: | Australian Government Solicitor |
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Date of Hearing: | 1 April 1998 |
| Date of Judgment: | 9 April 1998 |
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URL: http://www.austlii.edu.au/au/cases/cth/FCA/1998/348.html