Amway of Australia Pty Ltd v Commonwealth of Australia

Federal Court of Australia|1999-03-26|Before: Foster J, Hely JJ

REASONS FOR JUDGMENT THE COURT: 1 The Appellant, Amway of Australia Pty Limited ("Amway") appeals from two judgments of a judge of the Court (Foster J). 2 In the first of the judgments appealed from his Honour dismissed an application to the Court brought in its original jurisdiction under the provisions of s 14ZZ of the Taxation Administration Act 1953 (Cth) by way of an appeal against the disallowance by the Respondent Commissioner of Taxation of an objection lodged by Amway against the Commissioner's refusal to refund to it sales tax said to have been overpaid during the period 1 June 1988 to 31 July 1992 ("the relevant period"). 3 In the second of the judgments appealed from his Honour dismissed, in an application for summary judgment, proceedings commenced in the original jurisdiction of the High Court of Australia and remitted to the Court, seeking a return of the sales tax said to have been overpaid by it as monies had and received. Irrespective of the merits of Amway's claim for refund of sales tax his Honour held, in these proceedings, that the statutory procedure for an application for refund, which if refused becomes the subject of objection and ultimate appeal, was an exclusive code which left no scope for the application of separate common law proceedings. In reaching this conclusion his Honour was bound by the decision of a full Court of this Court in Chippendale Printing Co Pty Limited v Commissioner of Taxation (1996) 62 FCR 347. 4 Amway concedes that this Court should, as a matter of comity follow Chippendale. It wishes, however, to reserve its position to challenge the correctness of Chippendale in the High Court should the matter go further. In these circumstances we would dismiss that appeal with costs. 5 Amway sells a variety of products directly to the public through a network of individuals who sell as its agents on a commission basis. It does not sell any products by wholesale, nor does it sell through its own shopping outlets. To the extent that it sells the same or equivalent merchandise as retail stores it can be said to be in competition with those stores. But of necessity, its cost structure is entirely different from such stores. It has none of the overhead costs associated with retail stores, but incurs other costs peculiar to its maintenance of a distributorship network. 6 Amway imports a large percentage of the products it sells from its parent company in the United States. The balance of products sold are purchased from manufacturers or wholesalers in Australia. It produces, annually, a catalogue largely devoted to these Australian manufactured goods which, in the evidence, are referred to as "catalogue goods". 7 Prior to amendments made to the sales tax law in 1985 Amway paid sales tax on goods which it imported in accordance with the Sales Tax Act (No 5) 1930 (Cth) by reference to a sale value being customs value, plus customs duty, plus 20%. In respect of goods which it purchased in Australia from manufacturers or wholesalers it acquired those goods in a taxable sale by reference to the amount for which the goods were sold to it, but itself paid no sales tax on them. 8 This situation changed as a result of the Sales Tax Laws Amendment Act 1985 (Cth)("the 1985 Act"). The 1985 Act included in the definition of "wholesale merchant" as one of the category of persons liable to pay sales tax, persons who sell goods under an indirect marketing arrangement, an expression defined in s 3(4A) of the Sales Tax Assessment Act (No 1) 1930. It is common ground that all Amway's sales were made under indirect marketing arrangements within that definition. In consequence, its liability to pay sales tax came to be determined by reference to a sale value determined under s 4(1) of the various applicable Sales Tax Assessment Acts. Which of such Acts was applicable depended upon whether the goods were manufactured in Australia or imported and whether the vendor was the manufacturer or importer, a purchaser from a manufacturer or importer or even further down the possible chain of distribution. The sale value was to be (relevantly) in respect of the goods Amway sold: " … the amount which would be the fair market value of those goods if sold by him by wholesale." 9 The reason for the amendments appears in the Explanatory Memorandum which accompanied the Sales Tax Laws Amendment Bill 1985 (Cth). "The sales tax law is structured on the traditional approach to the marketing of goods - a manufacturer/importer sells either directly to a retailer or to a wholesaler who generally on-sells to a retailer. The sale to the retailer (the taxable sale) is for a price that includes all of the costs incurred by, and the profit margins of, each party in the distribution chain, up to, but not including, the retailer. Indirect marketing arrangements, however, seek to eliminate the wholesaler's profit margin from the sale value of goods by technically changing the status of the wholesaler for sales tax purposes to that of a retailer. Under one arrangement - an agency arrangement - the wholesaler appoints the normal retailer as agent with the result that the wholesaler, as principal, technically becomes the retailer. Simply stated, the effect of an agency arrangement is to move back the point in the marketing chain at which the taxable sale takes place, i.e., the taxable sale is the sale to the wholesaler (now the retailer for sales tax purposes). This arrangement eliminates the wholesaler's profit margin from the sale value of the goods sold by retail, and the sales tax payable is accordingly that much lower. There is another equally artificial retail marketing arrangement that could produce essentially the same sales tax reduction. The wholesaler could acquire an interest in, or obtain permission to use (e.g., lease) a section of a traditional retailer's store from which goods might be sold direct to the public, in fact by the wholesaler, but ostensibly by the retail store operator. Again, the wholesaler technically acquires the mantle of a retailer and the wholesaler's profit margin is not subject to sales tax as it should be. In practice, indirect marketing arrangements mean that goods can be sold to the public at a considerable savings in sales tax in circumstances where, from the customer's point of view, the purchase of the goods is one at the retail level from a traditional retail store. The savings in sales tax can be reflected, wholly or in part, in a price lower than that at which a competitor's comparable goods are being sold. Those who engage in these arrangements can therefore achieve an unfair competitive advantage in the market-place to the detriment of the revenue and those taxpayers who, on principle, choose not to be a party to such arrangements. On the other hand, some businesses have for many years and for genuine commercial reasons sold their goods to the public through indirect marketing arrangements such as agency arrangements. Although sales tax reduction is not a motive for these agency sales, the revenue is affected in precisely the same manner and to the same extent. For this reason it will not be a condition precedent to application of the indirect marketing provisions that a sales tax avoidance purpose be present. Rather, where any person (not being the manufacturer of goods) sells goods by retail under an indirect marketing arrangement after the date of Royal Assent to this Bill, that person will, under the new definition of 'Wholesale Merchant' be deemed to be a wholesaler." 10 It is not suggested that Amway had, pre-1985, adopted its marketing strategy to reduce sales tax. However, it was caught up in the legislative change and became a person who was required to register for sales tax purposes and account for sales tax by reference to the amount which would be the fair market value of the goods which it sold, if it had, contrary to the fact, sold them by wholesale. 11 Shortly after the 1985 legislation became law the Commissioner issued a ruling (ST 2140) in which he conceded that it had not yet been possible to examine the circumstances applicable to each individual taxpayer to arrive at a sale value of goods sold in indirect marketing arrangements. He announced his decision on an interim basis to accept a sale value essentially of cost into store plus 20% where, as in Amway's case, goods were sold through agents to the public. 12 That ruling remained until it was replaced as from 1 June 1988 by a new ruling ST 2424. The new ruling nominated the sale value to be cost into store plus 35%. The ruling stated, inter alia: "the above sale value applies across the board to indirect marketers who sell goods by retail on an agency basis… however it is possible that in some instances because of lower industry margins a sale value of cost into store or landed costs plus 35% may be too high. If an indirect marketer considers that a lower markup is appropriate, this should be taken up with the local branch of the Taxation Office." 13 Amway took up the invitation to enter into negotiations. It claimed to be in competition with local retailers. It said (although this was more obviously true in respect of goods it purchased in Australia, rather than goods it imported) that its prices were pegged by reference to the prices charged for the same goods by its retailer competitors. It emphasised the diversity of its product range and the inappropriateness of an across the board mark-up of 35% over all its range. The submissions were initially rejected on 4 April 1989. Negotiations, however, continued and on 3 August 1992 the Commissioner wrote to Amway as follows: "After careful consideration of the matter, it has been decided that, from the date of this letter, it will be acceptable for the company to account for sales tax on the following sale values for each of the categories of goods:- a. Catalogue goods - Cost plus 5%. b. Health and Fitness goods - Cost plus 17.2%. c. Homecare goods - Cost plus 15.6%. d. Hometech goods - Cost plus 13.2%. e. Personal Care products - Cost plus 35%. The term 'cost' takes the same meaning given to it in Sales Tax Ruling 2424. In relation to imported goods 'cost' is to be equated with 'landed cost' and must include the imported price of the goods, duty, freight, insurance and handling charges. In relation to locally purchased goods 'cost' is the 'cost into store' price of the goods as detailed in paragraphs '4' and '5' of the ruling. This sale value is given on the proviso that the company reviews the sale value of its products every 12 months (the first review being no later than twelve months from the date of this letter) and adjusts the margin, if necessary, on a prospective basis. Clearly it is the responsibility of Amway to ensure that any new products marketed by the company are allocated to the correct category to ensure that the most appropriate sale value is adopted in relation to those goods. Further, if a new category of goods is ever marketed by Amway, it will be necessary for the company to approach this office to determine the appropriate sale value for that particular category of goods. Should the company fail to do this, it will be necessary for tax to be accounted for on a sale value of cost plus 35% in line with the current guidelines provided in ST 2424. Permission is given to your request to average the sale values stated above in order to alleviate administrative problems that the differing sale values would create. It will be necessary however for the company to calculate this average on the 'weighted average' method to ensure that the volume of sales for each category of goods is adequately reflected in the figure. As you are aware, the matter of the refund has not yet been determined and will be addressed pending receipt by this office of a further submission from your firm." 14 Following this letter in August 1992 an average sale value of 19.2% on all lines (except catalogue lines) was accepted as appropriate. 15 In the period, therefore, between the taking effect of ST 2424 on 1 June 1988 and the end of the month prior to August 1992 Amway paid sales tax on the basis of a sale value determined by reference to ST 2424, that is to say by reference to cost into store plus 35%. It did so under protest to the extent of the difference between this amount and cost into store plus a 20% mark-up. In due course Amway sought a refund of the amount which it had paid under protest. Separate refund provisions are to be found in the various sales tax Assessment Acts which applied to Amway. They are all in identical form. So, s 11 of the Sales Tax Assessment Act (No 6) 1930 (Cth) provides: "(1) Subject to subsection (1A), where the Commissioner finds in any case that tax has been overpaid by a person, the Commissioner shall - (a) refund the amount of any tax overpaid; or (b) apply the amount of any tax overpaid against any liability of the person to the Commonwealth, being a liability arising under, or by virtue of, an Act of which the Commissioner has the general administration, and refund any part of the amount that is not so applied. (1A) Subsection (1) does not apply in relation to any tax paid by a person unless the Commissioner is satisfied that the tax has not been passed on by the person to another person or, if passed on by the person to another person, has been refunded by the person to the other person. …" 16 The Application for refund was refused. The decision appears to have been made on the basis that Amway was not entitled to a refund because it had passed on the sales tax to its customers. Amway duly objected, that objection was disallowed and the appeal to this Court was brought in respect of the Commissioner's objection decision. The officer making the objection decision suggested that Amway had not established that it had overpaid tax. He said, however: "Whilst it is not established that any tax has been overpaid it seems reasonable to proceed on the assumption that is [sic] has." 17 He than proceeded to conclude that the objection should be disallowed on the ground that Amway had passed on the sales tax to its customers and so was disentitled to a refund. A letter, notifying Amway of the objection decision said: "Your objection has been disallowed for the following reasons: It is considered that sales tax was allowed for in determining the taxpayer's selling prices. The evidence including the price calculation sheets, pricing authorities, information from the costing department and the taxpayer's internal price review communications establishes that the taxpayer allowed for the recovery of costs including sales tax in determining the prices of the goods it sold. Additionally it is not considered that the taxpayer's contention, that tax would only be passed on if the margins pre and post the tax increase were the same, is correct in all circumstances. In any event it is not considered that the evidence confirms that the margins were in fact different."

THE ISSUES 18 As is clear from the terms of ss 11 and 11A of the No 6 Assessment Act and comparable sections, the Commissioner will be required to refund sales tax where both the tax is shown to have been overpaid and the overpaid amount has not been passed on, or if passed on to another person there has been a refund to that other person. For present purposes that part of s 11A concerned with the case where tax has been passed on but then refunded has no relevance and can be ignored. 19 There is, in an appeal to the Court, a difference between these two issues. The overpayment issue is an objective one. The taxpayer has the burden of showing that it has overpaid sales tax. Although the learned primary judge cited s 14ZZO(b)(iii) as authority for this proposition, that paragraph, subject to transitional provisions, applies only to a case where the objection decision was first notified after 1 March 1992. It is not necessary to consider here whether the transitional provisions have any application. It is not in dispute that Amway has the onus of proof. 20 The passing on issue is in a different position. Under s 11(1A) the duty of the Commissioner to refund is qualified by the conferral upon the Commissioner of a discretion, stated in terms of satisfaction. He may only refund overpaid sales tax if satisfied that the overpaid tax has not been passed on. It is not hard to see why this matter has been made the subject of a discretionary assessment. As will later be seen the concept of passing on indirect tax while simple of expression is far from easy in application. The introduction of discretion into the statutory provision concerning refunds brings about the result that when passing on falls to be considered in an appeal to this Court the Court is not entitled to consider the question whether it would be satisfied, for so to do would be for the Court to enter the arena of merits review. The Court's jurisdiction is one of judicial review. A taxpayer will only succeed if it can show that the exercise of discretion was infected with legal error. So, if the discretion was exercised erroneously and capriciously and contrary to law and fact so that it was not exercised properly or at all, the taxpayer will succeed: Avon Downs Pty Ltd v Federal Commissioner of Taxation (1949) 78 CLR 353. So too, a taxpayer will succeed if the exercise of discretion was so unreasonable that no reasonable person could have arrived at the result, for that would demonstrate that the decision maker had addressed the wrong issue, or applied a wrong principle. Equally, the taxpayer will succeed if the decision maker took into account some irrelevant consideration, or failed to take into account some relevant consideration. 21 It is desirable to enunciate at the outset the difference in the approach which the Court must take to the two issues because the learned primary judge appears to have suggested that both issues, overpayment and passing on, involved issues of discretion. One difference in the two approaches, and it may be of significance here, is that judicial review of administrative decision making is, subject to immaterial exceptions, limited to a consideration of the material which was before the decision maker. This would be the case therefore when considering the passing on issue. However, the learned primary judge suggested that this was the case with both issues. To the extent that his Honour may have disregarded, or at least paid scant heed to evidence read before him, but not before the decision maker on the issue of overpayment he may have fallen into error. It will, therefore be necessary to consider this evidence further in due course.

THE SUBMISSIONS ON BEHALF OF AMWAY 22 Amway submitted:

Overpayment 1. In deciding whether there had been an overpayment of tax it is necessary to determine the fair market value of the goods Amway in fact had sold but on the basis that Amway had sold them by wholesale. While it is necessary in arriving at this fair market value to hypothesise a wholesale sale of the actual goods sold, that being a sale by Amway, it is not correct (and is in fact nonsensical) to hypothesise as the Commissioner had, that those members of the public who actually purchased the goods from Amway were parties to the sale. Nor was there any decision which required this result. 2. Since Amway was in competition (at least as regards the catalogue goods) with the large retailers, such as David Jones, Myer and the like, the sale value should be taken to be what those firms would pay in a wholesale transaction. This would be virtually the same as the amount which Amway paid to purchase the goods. All Amway could gain was in the circumstances a mere modest wholesale mark up. Thus overpayment necessarily occurred if a mark up of 20% over cost was taken as the sale value upon which sales tax was to be paid. 3. In the alternative the Commissioner had himself calculated the appropriate sale value (albeit prospectively from the end of the period covered by Amway's refund claim) and if not estopped from resiling from the value he had adopted, that figure should be taken as at the least an admission.

On the evidence before the learned primary judge the fair market value of the goods if sold by Amway by wholesale would not have exceeded cost plus twenty percent.

The phrase "passed on" is one which is required to be given a practical meaning.

The fact that the change of basis for the calculation of the sale value expressed in the Commissioner's ruling of 1 June 1998 was not reflected in product price increases demonstrated that Amway had not passed on the additional sales tax.

The fact that purchasers entitled to purchase goods exempt from sales tax received a rebate or discount on the ordinary retail price of at least the whole of the sales tax did not result in the conclusion that all of the sales tax which it had paid to the Commissioner was passed on by Amway to consumers.

The correct test to apply in determining whether sales tax overpaid has been passed on is to ask whether the taxpayer seeking a refund of overpaid tax had secured a windfall gain.

The material before the Commissioner at the time of the decision to disallow Amway's objection was such that the Commissioner could not have been other than satisfied that sales tax had not been passed on to consumers, but in fact had been borne by Amway.

Overpayment 23 His Honour was of the view that the statutory test of fair market value of the goods if sold by Amway by wholesale required consideration of the price that would be arrived at if Amway sold to the persons it in fact sold those goods to, and in the quantities in which those sales were made, save that the transaction was to be treated as one of wholesale rather than retail sale. In reaching this conclusion his Honour relied upon the decision of the High Court in Commonwealth Quarries (Footscray) Pty Ltd v Federal Commissioner of Taxation (1938) 59 CLR 111. He rejected the submission put on behalf of Amway that the resultant figure could not exceed the price at which Amway, or competitive retailers, purchased. 24 His Honour neither accepted nor rejected a submission advanced by the Commissioner that the figure would be the price paid by the end consumer less commissions paid by Amway to distributors. His Honour said: "I find it neither necessary nor desirable to reach a conclusion as to the correct method of ascertaining the wholesale market value of the goods sold. No other basis was put forward by Amway other than the one which I have found to be erroneous. It is clear that no attempt was made to compute a hypothetical wholesale price for the goods sold on any other basis. It was conceded … that no consideration had been given to an ascertainment of a notional wholesale price other than on the erroneous basis. The statutory test is not answered by hypothesising sales by Amway to its retail competitors rather than to its own customers or, perhaps, its distributors in its retail distribution chain. As was submitted on behalf of the Commissioner, in my view correctly, the approach followed by Amway 'ignores entirely the actual retail sales made by Amway and looks instead to the sales that Amway might have made if Amway were selling different goods (apart from catalogue goods) in different quantities to different persons in a completely different market'. Moreover, the expert evidence of Professor Bewley, called on behalf of Amway, in my view also proceeds upon an incorrect interpretation of the statutory requirement, In these circumstances, it is not necessary for me to consider that evidence in these reasons."

Passing on 25 The primary judge first considered the judgments in Otto Australia Pty Ltd v Commissioner of Taxation (1990) 25 FCR 257 per Lockhart J, on appeal to the full court, (1991) 28 FCR 477 and decisions in the Administrative Appeals Tribunal to which reference will later be made. He found it neither profitable nor possible to come up with an all embracing formula. Competition in the market place had, his Honour said, a place in what was essentially a factual issue. There was, he said no logical dichotomy between "absorption" and "passing on". 26 However, his Honour said, he found no reviewable error in the reasons given by the officer who determined to disallow the objection. His Honour said: "Amway's oft repeated theme that it had lost its 'level playing field' was not, as I read the material, necessarily borne out. Amway, clearly enough, followed the prices of the other retailers. It closely researched those prices and it was astute not to exceed them. However, apart from repeated references to 'competition' there is, as I see it, no material which indicates that, prior to the sales tax increases, it was engaged in any serious struggle to match its competitor's prices. Indeed, as the evidence makes plain it was, for the most part, able to match those prices even after it had received the increased tax impost. It was able to make an acceptable profit whilst maintaining the competitive pricing. This would suggest that prior to the tax impost it would have been able to reduce its prices to the consumer if it had wished to engage in serious competition with the other retailers. So far as I can see there was no evidence placed before the Commissioner's representatives nor before the Court which would enable a comparison of the profit margins available to Amway as against the retailers with whom it asserted it was in direct competition. Clearly it has a fundamentally different cost structure." 27 Shortly after his Honour added: "In my view, neither principle nor authority requires that a finding of passing on can be made only in circumstances where profit margins pre and post the tax cost increase remain the same or where the price to the consumer is deliberately calculated to include the amount of a tax increase. I agree with the submission … that sales tax could not be passed on where the amount of the tax was 'absorbed' into its profit margins was fallacious, in that, taken to its logical conclusion, its effect would be that there could never be passing on by a taxpayer who sold goods in a competitive market. As goods are, for the most part, sold in such markets that result would be that sales tax would not ordinarily be passed on." 28 After referring to a passage in the judgment of Sheppard J in Otto to which reference will later be made his Honour said: "In the present case, there was ample indication that decisions as to whether particular merchandise would be sold at the 'competitive' price were made by, inter alia, taking into account the amount that would be payable in increased sales tax in respect of that merchandise. If an acceptable profit margin could be made despite the increase in tax, then the merchandise was put on the market. The 'competitive' price obtained for the merchandise included the amount of the tax. When a customer paid the price, it included within it the amount of the tax. I am satisfied that, in those circumstances, a relevant 'passing on' occurred. Accordingly, I am of the view that no reviewable error, in this regard, has been demonstrated in the Commissioner's decision. I should add that the evidence makes it plain that in a number of cases a reduction in price was made by Amway to customers who had a sales tax exemption. This reduction bore a direct relation to the sales tax payable on the relevant merchandise. This was, in my view, properly taken into consideration by the Commissioner as an indication that sales tax relevantly entered into Amway's pricing considerations." 29 His Honour rejected also the submission that the equity of the statute required that a passing on could occur only in circumstances where a "windfall gain" could be obtained by a taxpayer. We would say here that we agree with his Honour in respect of this matter.

Overpayment - sale value 30 The general scheme of the sales tax legislation from its inception in 1930 has been the subject of comment in various cases, including Deputy Commissioner of Taxation for the State of South Australia v Ellis & Clark Ltd (1934) 52 CLR 85, Brayson Motors Pty Ltd v Federal Commissioner of Taxation (1985) 156 CLR 651and Genex Corporation Pty Ltd v Commonwealth of Australia (1991) 30 FCR 193. It suffices to say here that the tax is, in the usual case, levied, both in respect of goods manufactured in Australia and goods imported into this country on the last wholesale sale of those goods and by reference to the amount for which the goods are sold in that last wholesale sale. Although the tax is not designed to be a tax levied on a retail sale, the policy of taxing all goods prior to their going into use and consumption in Australia would be frustrated if some retail sales were not taxed. A person might manufacture goods in Australia or import them but sell them not by wholesale but by retail. In such a case the legislation operates to impose tax at the time of the retail sale, but by reference to a sale value which, as far as possible, equates with a wholesale sale. 31 As originally enacted the normal case upon which the Act operated, a wholesale sale, produced a sale value equal to the amount for which the goods were actually sold. For present purposes it is sufficiently accurate to say that this represents the purchase price payable on the wholesale sale. This formulation continued unaltered until the ultimate repeal of the 1930 legislation and its replacement by what is referred to as the "streamlined sales tax system". However, where a manufacturer sold by retail rather than wholesale, the sale value could not be the sale price in that retail sale, for that would have been to negate the legislative scheme of taxation by reference, so far as possible, to a wholesale sale value. 32 There have, over time, been different legislative formulations of the sale value applicable to a retail sale. Prior to 1988 the appropriate formula to be adopted depended upon whether the manufacturer in fact sold goods of the same class by wholesale. If it did, then the sale value was the amount for which the goods could reasonably have been expected to have been sold by it by wholesale. If it did not, then the sale value was: "The amount for which the manufacturer could reasonably be expected to have purchased identical goods from another manufacturer if the other manufacturer had, in the ordinary course of his business, manufactured the identical goods for sale and had sold them to the first-mentioned manufacturer by wholesale." 33 This distinction disappeared with amendments made in 1988 which introduced the general rule that the sale value in all cases was to be the amount for which the goods could reasonably be expected to have been sold by the manufacturer by wholesale. 34 At the time Commonwealth Quarries was decided, the sale value to be applied to a retail sale where goods manufactured in Australia were as well sold by the manufacturer by wholesale, was to be determined by reference to "the amount for which the goods would be sold by that manufacturer if sold by wholesale." 35 The taxpayer in that case was a manufacturer who sold both by wholesale and retail. The issue was whether the sale value of goods sold by wholesale included the cost of delivery from the manufacturer's premise to the customer. The retail sales actually made by the taxpayer were on terms which included delivery to the customer. So too, were wholesale sales it made. The taxpayer's price list did not differentiate between wholesale and retail sales - all were on terms which included delivery. The High Court was unanimous that the sale value should in the circumstances include the delivery fee. Latham CJ said at 116-117: "It is possible to speculate upon the meaning of the words 'the amount for which the goods would be sold if sold by wholesale', and to raise questions as to the conditions upon which it is to be assumed that the goods which in fact were sold by retail would be sold if they were sold by wholesale. In this case it is unnecessary to explore any of these questions, because the facts are that the conditions in all respects were exactly the same in the case of sales by retail as in the case of sales by wholesale. There is no room for a contention in this case that the conditions of the actual retail sales were different in any particular from what they would have been if the sales in question had fallen within the category of sales by wholesale within the meaning of the Act." 36 In part this conclusion depended upon the fact that although it was possible to separate out delivery costs from the cost of the goods, in a wholesale sale which required delivery to the premises of the customer the price of the goods would include delivery. 37 There were other verbal formulae adopted in the No 1 Assessment Act to define sale value where other taxing points brought about a liability for sales tax. One such was the treatment of goods as stock for sale by retail. At the time Estee Lauder Pty Ltd v Commissioner of Taxation (1988) 80 ALR 314 came to be decided, the sale value, in the case of a manufacturer who did not sell goods by wholesale, of goods which that manufacturer treated as stock for sale by retail was the amount for which the manufacturer could reasonably be expected to purchase identical goods from another manufacturer if the other manufacturer had, in the ordinary course of business, manufactured the identical goods for sale and had sold them to the taxpayer by wholesale. This formulation of words required the computation of a sale value in circumstances where no sale, whether by wholesale or retail took place. So in that case it was necessary to hypothesise a sale between a hypothetical manufacturer and the taxpayer on wholesale terms. Not surprisingly, therefore, Burchett J was of the view that delivery costs were not to be included. In reaching this conclusion his Honour referred at 327 to the "barrenness of the statutory hypothesis" which the legislation required to be made as leading to the conclusion that there was to be no assumption of any particular marketing strategy. 38 By the time the taxing point relevant in Commissioner of Taxation v Pacific Dunlop Limited (Full Ct, FCA [1999] 214 unreported) arrived, the legislation had again been changed. In that case the taxpayer, a manufacturer of batteries, had treated goods it intended to sell by retail as stock for sale in that way. In the circumstances it became liable to sales tax by reference to a sale value defined in s 18(2) to be : "the amount for which those goods could reasonably be expected to be sold by the [taxpayer] by wholesale." 39 The Commissioner was dissatisfied with the amount which the taxpayer returned as the sale value and chose to act under s 18(3A) to alter the sale value in accordance with the statutory formula stated in that section, namely the amount which in his opinion was a "fair and reasonable wholesale value of the goods." In considering the application of that statutory formula the Full Court said: "If the statutory hypothesis in the former s 18(2)(b) was 'barren", that in s 18(3A) may be thought to be even more sparse. Not only is there a hypothetical vendor, but also a hypothetical purchaser. The calculation required is the determination of an amount which is a "fair and reasonable wholesale value." This expression is somewhat elliptical, because on one view it can be said that value may be an inherent characteristic of goods, whereas what is obviously involved in the present context is the resultant figure which would emerge from a wholesale transaction. The ordinary test of valuation in compensation cases, adopted for use in other revenue contexts, is that enunciated by the High Court in Spencer v the Commonwealth (1907) 5 CLR 418 namely 'What would a man desiring to buy .. have had to pay…on that day to a vendor willing to sell .. it for a fair price but not desirous to sell.' To this must be added, as a result of s 18(3A), the qualification 'in a wholesale sale'. Section 18(3A) assumes no particular terms of sale. It presumes no particular annual sales volume, it presumes no special discounts, and in particular it adopts nothing which is part of the taxpayer's actual trading pattern. This is not to say that sales of the same goods to arm's length purchasers by wholesale by the taxpayer would be irrelevant. As in all valuation cases actual arm's length sales give the best evidence of value. But, where sales made by a taxpayer are on special terms and conditions or are not arm's length, they assist not at all…" 40 The problem which indirect marketing posed for the legislation had no application to the case of manufacturers. For when a manufacturer sold by retail, the manufacturer was liable to pay sales tax with respect to the sale, and on a wholesale sale basis. It did, however, pose what the legislature saw as difficulties where the sale was made by a person who purchased from the manufacturer (or somewhere further down a chain of persons which chain commenced with a purchase from the manufacturer), which was itself the importer, or a person who purchased from the importer, or some person down a further chain of wholesale transactions commencing with a purchase from the importer. 41 It is for this reason that indirect marketing arrangements are dealt with not in the No 1 Assessment Act, but in other acts where the taxpayer is not the manufacturer. The tax avoidance which the legislature sought to correct came about because without special provision the indirect marketer purchased goods from the manufacturer, wholesaler or importer or itself imported goods in all of which cases the sale value was fixed without reference to the activities of the marketer, but generally speaking by reference to the price the marketer paid for the goods or in the case of an importer selling by retail through agents by reference to customs value, customs duty plus 20%. All costs of the marketer were thus treated as retail costs, notwithstanding that in substance there might be no difference between sales to the commission agent who on sold at a profit, and sales through but not to the commission agents where the commission agent received a commission. 42 The sale value adopted to deal with this situation was formulated to be the amount which would be the fair market value of the goods if sold by the indirect marketer by wholesale. Again the use of the concept "fair market value" is elliptical. It introduces, however, the underlying valuation concept to which reference was made in Pacific Dunlop in the context of a wholesale sale although the hypothesis required to be made is that the indirect marketer sell the goods in question by wholesale, rather than that there be both a hypothetical willing but not too willing seller and a hypothetical willing but not too willing buyer. 43 There is no particular reason why the range of hypothetical purchasers should be restricted to retail stores selling the same goods in competition with Amway, to the extent, at least of the catalogue goods, as counsel for Amway submits. Nor is there any reason why the hypothetical purchasers should be assumed to be restricted to the actual purchasers in the retail sale as counsel for the Commissioner submits. It is necessary to hypothesise that there is a wholesale sale (that is to say a sale to a person who will on sell by retail) and that the taxpayer is a party to that sale. The identity of the purchaser is unknown for the purposes of this hypothetical wholesale sale. It is then necessary to determine what price the vendor would reach in an arm's length wholesale transaction in those circumstances. No doubt it is relevant in arriving at this figure that hypothetical purchasers could purchase from the same outlets as the taxpayer did in respect of goods which it purchased in Australia. This is not a matter relevant to goods which Amway itself imported. But it is the price which Amway would realise in a hypothetical wholesale sale which is important - prices which large retailers may pay a wholesaler can be assumed to be less than a smaller retailer may be required to pay. Likewise Amway could not be hypothesised to sell by wholesale at a price lower than the price at which it purchased, or for that matter at the same price at which it did purchase. Clearly it would look for a profit, and indeed a profit which would include a reimbursement of the costs of its wholesale activity. The precise figure which would be arrived at in the hypothetical sale is a question of fact to be determined upon the evidence. This is not to suggest that the question admits of an easy answer. 44 It follows that Amway's submission that the fair market value of the goods in question must be taken as being the amount at which it purchased the goods from its own wholesalers (plus a modest markup) is not made out. The submission adopts an abstract or theoretical approach to the ascertainment of "fair market value". That approach is based more on assertion than on demonstration, and takes insufficient account of the fact that the so-called catalogue goods (in relation to which there is competition between Amway and the major retailers) account for only 15-25 per cent of total sales. It assumes, rather than establishes, that Amway could not act as a wholesaler to a large number of small retailers with characteristics similar to its network of sales agents. It is also inconsistent with the evidence of Professor Bewley, to which reference is made below. 45 In its case Amway called Professor Bewley, an econometrician from the University of New South Wales who said that the goods sold by Amway in the relevant period could be expected to have been sold by Amway by wholesale at no greater than cost plus 19.2% but generally in the range 13-17%. He arrived at this markup by reference to Australian Bureau of Statistics averages in relation to various classifications of goods of the kind which Amway distributed. Professor Bewley was cross examined. The Commissioner relied upon Mr Thirsk who advanced various criticisms of the approach adopted by Professor Bewley. Mr Thirsk was also cross examined. 46 The only reference which the trial judge made to this evidentiary contest is as follows: "Moreover, the expert evidence of Professor Bewley, called on behalf of Amway, in my view, also proceeds upon an incorrect interpretation of the statutory requirement. In these circumstances, it is not necessary for me to consider that evidence in these reasons." 47 His Honour did not identify the "incorrect interpretation" which he had in mind, and counsel for the Commissioner did not seek to sustain this finding on appeal. Counsel accepted that Professor Bewley addressed the right statutory question, but submitted that the Professor did not do so in any useful way. The submission was that Professor Bewley did not engage in any real analysis of the particular market in which Amway was engaged or of the particular products sold by it. His analysis was simply based on using industry averages for broad and somewhat ill-fitting statistical categories. 48 In this Court the appellant's main argument was grounded in the abstract or theoretical approach on which it has failed. The appellant devoted little attention to a detailed comparison of the evidence of Professor Bewley and Mr Thirsk, or of any other evidence which might bear upon that issue. As earlier indicated the trial judge did not make relevant findings of fact in relation to this evidence. 49 In this state of affairs, depending upon the view we form on the "passing on" issue, a question might arise as to whether a new trial should be ordered, or whether we should endeavour to resolve the factual issues ourselves. As we have come to a conclusion on that issue adverse to the appellant, it is not necessary to pursue the matter any further.

Passing on 50 The question of the incidence of particular types of tax is one upon which economists may differ. The generally accepted view, based on John Stuart Mill's "Principles of Political Economy" (1848) referred to by the Privy Council with approval in Atlantic Smoke Shops Ltd v Conlon (1943) AC 550 and Bank of Toronto v Lambe (1887) 12 AC 575, is that direct taxes, like income taxes fall upon the person taxed (although income tax may in a general sense be passed on to customers), whereas indirect taxes, such as taxes on the sales of goods are passed on to the consumer. The idea that the sales tax is incorporated generally in the sale price is to be found in s 70C of the No 1 Assessment Act which obliges a seller of goods in a wholesale sale to state upon the invoice delivered to the purchaser the sales tax payable. There is no requirement that a retailer do so.

51 The phrase "passed on" and comparable variations, is not a technical expression. It says no more than that the tax is borne (although not paid) by the end consumer of the goods, who purchases them in a retail transaction. The phrase has in only one case been the subject of careful consideration by this Court, that being Otto Australia Pty Ltd v Commissioner of Taxation (1990) 25 FCR 257per Lockhart J, and on appeal to the full Court (1991) 28 FCR 477. In that case the taxpayer provided a garbage removal service for a local council. It claimed exemption from sales tax with respect to its purchase of bins. It was unsuccessful in asserting its exemption. The consideration of the claim that the tax had not been passed on was thus dicta and irrelevant to the decision.

52 At 264 Lockhart J said: " 'Passed on' in the context of s 11(1A) must be given a sensible and practical meaning to cover the wide variety of circumstances which may arise in practice in sales tax legislation. It is plain from the facts of the present case that the applicant did in fact 'pass on' the sales tax to councils concerned in that, when calculating the contract price for the tender with the councils, the applicant included a component, though not shown separately in the contract documents with the councils, of sales tax paid by it on importation of the Otto carts. In other words the applicant bore the burden of the sale tax and passed it on in the price which it charged the councils for the performance of its contractual obligations." 53 On appeal his Honour's decision was affirmed. Sheppard J, with whose judgment on this point Burchett J agreed (see at 483), addressed the question of passing on with respect to the facts of that case at 480-1 as follows: "It is common ground that the appellant's charge to each council was computed or calculated by reference to its costs which included, but were not limited to, the landed costs of the bins which included both customs duty and sales tax. The submission which was put to us, which appears to have been different from the one put to the learned primary judge, was that the subsection does not apply unless there has been passed on to the purchaser an amount equal to the sales tax overpaid which can be shown to be an identifiable increase in the price of the articles in question. Only then can it be said that the amount of the tax has been passed on. I would reject this submission. Once it is conceded, as it has been, that the charge for each bin was computed by reference to costs which included sales tax, that cost was passed on. The fact that the sales tax was not passed on in an identifiable form is not in my opinion of relevance. In those circumstances, the Commissioner could not have been satisfied that the tax had not been passed on, with the consequence that s11(1) could not have any application." 54 Beaumont J found it unnecessary to consider in that case whether the sales tax had been passed on. 55 The case stands for three propositions relevant to the present question. 1. The question whether sales tax is passed on requires no separate identification of sales tax in the price. 2. Sales tax would clearly be passed on in circumstances where the evidence was that the price was calculated so as to include within it the sales tax component. 3. Where the evidence in the case falls short of (2) the finder of fact may be satisfied that the sales tax has been passed on unless satisfied that the sales tax was not in fact included in the price. Sales tax will not have been passed on where the taxpayer bears the tax personally. 56 Ultimately the question whether the sales tax has been passed on is an issue of fact. There may obviously be difficulty in resolving the issue. No doubt that is why the matter is entrusted to the Commissioner, initially, and in the event of an application, to the Tribunal. The burden of proof lies on the taxpayer. 57 In Federal Commissioner of Taxation v Bank of Western Australia Ltd (1996) 133 ALR 599 at 621 in a judgment with which Wilcox and Drummond JJ agreed, Hill J discussed the concept of "borne" albeit in a slightly different context. His Honour said, speaking of sales tax: "Sales tax is borne by the end purchaser of goods by being included in the calculation of the purchase price, although the actual liability is a liability of some earlier vendor." 58 There have been a number of decisions in the Administrative Appeals Tribunal where the question has been discussed. They all turn on their own facts. They are not necessarily all consistent and we are conscious of the inappropriateness in the present appeal of dealing with other cases which have not been argued before us. 59 In Case 45/95, 95 ATC 395 the taxpayer sold a proportion of its wine at the cellar door. The price it fixed had to pay regard to competitive prices of similar cellar sales and hostility of retailers in the event that the cellar door price was too low in comparison with retail prices. Thus the price chosen was fixed by commencing with retail prices and working backwards. Sometimes discounts were applied to make the wine competitive with other wines sold locally at the cellar door. On the facts of that case the learned member, Mr Trowse, found that the charge for wine sold was not calculated by reference to the sales tax overpaid. A matter of importance in reaching the conclusion was the decision to retain the existing price structure notwithstanding the increase in sales tax liability. He said at 400: "The fact that prices did remain the same belies any suggestion that the amounts in question were factored into selling prices. The preferable view is that the applicants decided to bear the burden themselves rather than seek relief from their customers. It seems to me to be a classic example of the producer absorbing the extra tax himself in lieu of passing it on to others." 60 This involved a conclusion of fact. It does not, however, as we will explain, necessarily follow from the mere fact that prices were not increased. 61 In Case 55/96 (1996) 96 ATC 531 a differently constituted tribunal had to consider whether sales tax had been passed on in the contract price for the construction of swimming pools. It was held that the tax had been passed on for it was a cost included in calculating the contract price. The learned Deputy President said at 538: "While it is clear that each contract was internally costed after it had been signed, and that the exact amount of sales tax for each pool was not known exactly for some time, this does not exclude the probability, as I find, that an estimate of sales tax was included in the package prices, and was a component in the calculation of the eventual purchase price. It was therefore 'passed on' to the purchasers within the principle enunciated in Case 45/95 even though it was not itemised in the contract or the precise amount may not have been known at the time the contract was signed." 62 It might be said that if the estimate was too low the sales tax was not passed on to that extent. That does not seem to have been argued. 63 In Case Y46 91 ATC 431 the taxpayer asserted that the prices for trophies which he sold by retail were determined by market forces. He said, and the evidence was accepted, that he had not added the tax to his normal selling price and had incurred losses at least in part. When the taxpayer sold to bodies exempt from sales tax a deduction was made (as indeed it was in the present case) for sales tax deducted from the invoice. The Tribunal resolved the issue of fact which arose by finding that the applicant had passed on the sales tax in dispute and that the customers not he himself bore the burden of it. The decision is explicable by reference to the documentary evidence upon which the Tribunal relied, rather than the oral assertion which, if accepted, may have led to a different conclusion. If the Tribunal took the view, as the learned primary judge thought, that absorption and passing on were different concepts there might be more difficulty with the result. 64 Amway, in the present case, placed emphasis upon the fact that at least in respect of goods purchased from wholesalers in Australia, the price it sold by retail was fixed by virtue of the fact that it sold these goods by retail in competition with department stores such as Grace Bros or David Jones. With respect, this fact, if it were a fact, and it is disputed, bears not at all upon imported goods and does not of necessity result in success for Amway. When sales tax on a particular item of goods is increased, it may well be that a taxpayer can not increase prices above retail prices at which the goods are offered by competitors. It may be open to reduce the costs of the goods from the wholesaler and thus retain the same retail margin it had formerly made, passing the increased sales tax on to the purchaser rather than absorbing the increased sales tax by reducing its margin and perhaps reducing the retail price. Why should the price paid by the consumer, in such a case, not include a component for sales tax? In the present case the evidence showed in many cases where goods were purchased from overseas, exchange variations had the effect of allowing profit margins of Amway to stay the same and, in consequence, allowing sales tax to be absorbed in the cost reduction which ordinarily could be passed on to the consumer. In some cases where the profit margin of Amway was reduced to an unsatisfactory level Amway ceased selling the goods, presumably on the basis that to pass on the sales tax in the form of higher retail prices would make the goods impossible to sell. 65 The evidence concerning refunds of sales tax to exempt purchasers does not lead to any particular conclusion. However significant the number of these sales were and the parties disagree on this, a refund of monies was given of an amount actually greater than the amount of sales tax paid. It does not follow necessarily that sales tax was included in the price of goods purchased by the consumer. 66 At the conclusion of the appeal we asked counsel for Amway to produce a short summary of the evidence which would indicate that Amway had, in setting its price after sales tax increased, borne the increased tax. Most of the material contained in that submission made reference to information which had not been put before the Commissioner. It was submitted that we should have regard to it having in mind the decision of the High Court Kolotex Hosiery (Australia) Pty Ltd v Federal Commissioner of Taxation (1975) 132 CLR 535 at 567-8. However, it is clear law that in judicial review proceedings regard can only be had to evidence that was before the decision maker at the time of the making of the original decision if that decision depending, as it did here, on the exercise of discretion, is the subject of judicial review. 67 At most, as counsel for the Commissioner submitted, the material could only be looked at if the Court decided the original decision was infected with error to determine whether the court should thereafter decide to decide the matter for itself (a limited class of case). We agree that the material can not be looked at for the purpose of discerning legal error, whatever use might thereafter be made of it. The Court should not proceed to analyse new material never before the decision maker in determining whether that decision maker made an error of law. 68 It is said to be common ground that the increase in sales tax effective as and from 1 June 1988 was not taken into account in a price review in August 1988, although it is said by the Commissioner that it was for the February 1989 review. No claim was made for a refund of sales tax for the period until February 1989. Not that that would necessarily preclude the Commissioner from examining the matter. But it seems clear that it was open on the evidence for the Commissioner to find that Amway had not satisfied the overall burden of showing that the retail price at which it sold goods by direct marketing incorporated no amount to recoup sales tax, or the converse that it had absorbed the increased sales tax in its profit margin and thereby reduced that margin. It has not been demonstrated that the Commissioner's conclusion was not open to him. For Amway to succeed it must go so far to establish an error of law. Its submissions demonstrate that it can not do so. 69 The appeal should be dismissed and the Appellant should pay the Respondents' costs of it. I certify that the preceding sixty nine (69) numbered paragraphs are a true copy of the Reasons for Judgment of the Court.

Associate: Dated: 26 March 1999 Counsel for the Applicant: R Conti QC; D McGovern

Solicitor for the Applicant: Phillips Fox

Counsel for the First and Second Respondents: A Robertson SC; S Gageler

Solicitor for the First and Second Respondents: Australian Government Solicitor

Date of Hearing: 16 February 1999

Date of Judgment: 26 March 1999

Sales Tax Laws Amendment Act 1985(Cth)

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Judgment (22 paragraphs)

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