JMB Beverages Pty Ltd v Commissioner of Taxation - [2009] FCA 668 - FCA 2009 case summary — Zoe

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JMB Beverages Pty Ltd v Commissioner of Taxation

[2009] FCA 668

Federal Court of Australia|2009-06-22|Before: Edmonds J

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Court

Federal Court of Australia

Decision date

2009-06-22

Before

Edmonds J

Source

Original judgment source is linked above.

Judgment (24 paragraphs)

[1]

INTRODUCTION 1 This is an appeal under Part IVC of the Taxation Administration Act 1953 (Cth) ('the Administration Act') against an objection decision by the respondent ('the Commissioner') disallowing the objection of the applicant to a notice of assessment of its GST 'net amount' (see s 17‑5(1) of A New Tax System (Goods and Services Tax) Act 1999 (Cth) ('the GST Act')), for the period 1 October 2006 to 31 December 2006 issued pursuant to ss 105-5(1) and 105‑10 of Sch 1 to the Administration Act. 2 The issue before the Court is whether products manufactured and sold by the applicant are exempt from goods and services tax ('GST') because they are beverages of a kind that fall within Items 11 or 12 of the table ('the Table') in cl 1 of Sch 2 to the GST Act, respectively non-alcoholic carbonated beverages consisting wholly of juices of fruits or vegetables or, non-alcoholic non-carbonated beverages consisting of at least 90% by volume of juices of fruits or vegetables.

[2]

FACTUAL CONTEXT 3 The primary facts are not in dispute; the recitation of them below is largely taken from the applicant's written outline of submissions. 4 The applicant manufactures and sells by way of wholesale four varieties of alcohol-removed wine products marketed under the 'Edenvale' brand name ('Edenvale products'). Three of the varieties, namely Edenvale Chardonnay, Edenvale Shiraz and Edenvale Rose are non-carbonated. The fourth variety, Edenvale Sparkling Cuvee, is, as the name suggests, carbonated. 5 The Edenvale products are sold primarily to retailers such as Coles, Woolworths and the like.

[3]

Production of Edenvale Products 6 In about August 2006 the applicant entered into an agreement with Austvin Pty Ltd ('Austvin') for that company to produce the Edenvale products. The production process is carried out at Austvin's Loxton Winery ('Loxton Winery') which is located at Loxton in South Australia. 7 The Edenvale products are produced by the blending or combination of four base components, all of which are derived from grape juice. The grape varieties used in the production of the Edenvale products included Chardonnay, Shiraz, Cabernet Sauvignon and Colombard. 8 The manufacture of the Edenvale products involves a three stage process, namely: (1) Preparation of the base wine; (2) a de-alcoholisation process; and (3) a reconstitution (or blending) process. 9 The base wine is produced by Austvin from grapes processed at the Loxton Winery (described as 'crush') and grape juice that is purchased from outside sources (described as 'bulk'). Crush and bulk are mixed together to produce a base juice. 10 The base juice is then used by Austvin to prepare a wine ('base wine') for use in the de-alcoholisation process. The base wine is prepared using standard wine making practices. Yeast is added to the base juice to cause fermentation which results in the production of ethanol alcohol and esters that characterise wine and provide flavour, aroma and 'mouth feel'. 11 For red wines, the fermentation occurs when yeast is added to the base juice from which neither seeds nor skin have been removed or to which seeds and skin have been added. 12 Some of the additives used are themselves of grape origin, including grape skin extract and wine recovered from a previous packaged wine. Other additives include processing aids and ingredients that are of a non-grape origin such as oak plank, chip and shave. Oak is used to impart flavouring and is later physically removed or filtered from the base wine. Still other additives, such as yeast and finings, are substantially removed at a later stage in the wine production process. 13 A relatively small amount of rain water is added to the base wine during the reconstitution process for some of the Edenvale products. 14 After the base wines have been produced, Austvin uses a Flavourtech Spinning Cone Column ('SCC') to reduce the alcohol content of the base wines for the specific Edenvale products to below 0.5% alcohol v/v. The SSC is a distillation or stripping column whereby the base wine is heated under low pressure vacuum conditions to boiling point, generating steam to remove volatile compounds and ethanol alcohol. No materials are added to the base wine whilst it is in the SCC. 15 The base wine is passed through the SCC twice. The first pass removes volatile esters from the base wine. These volatile esters include grape-derived volatile compounds, fermentation esters and oak lactone. The volatile esters are contained in a 60% v/v ethanol solution and constitute approximately 1% of the total volume of the base wine that has passed through the SCC. 16 The second pass through the SCC removes almost all the remaining ethanol alcohol from the base wine. What remains after the second pass is the de-alcoholised base wine having less than 0.1% ethanol v/v and which includes non-volatile compounds and acids that are described as 'fermentation derived compounds'. 17 The base wines have been reduced or concentrated to approximately 86% to 88% of their previous volume by the de-alcoholisation process and need to be reconstituted during the next phase of the process which involves the blending of grape juice concentrates and distillates ('low sugar juice'). This involves the addition of: (1) Approximately 50% of the volatile esters produced during the first run which increases the amount of alcohol in the product from below 0.1% v/v to below 0.3% v/v; (2) a quantity of grape juice concentrate; and (3) a quantity of low sugar juice. 18 The grape juice concentrates are produced by crushing fresh grapes (Chardonnay for the 2008 Neutral Premium Concentrate and predominantly Petit Verdot for 2008 Red Premium Concentrate), where the crushed juice (and bulk juice for the 2008 Neutral Premium Concentrate) is passed through a spinning cone distillation system to remove the distillate and to concentrate the sugars and grape-derived acids by approximately 3.5 times. 19 The low sugar juice (2008 Chardonnay low sugar juice and 2008 Shiraz low sugar juice) is produced in very large quantities by passing grape juice through the spinning cone distillation system and collecting the distillate. That distillate has traces of grape-derived aroma compounds and negligible levels of alcohol. 20 The blending is done in a tasting room at the Loxton Winery and the objective is to produce the best quality beverage but with substantially reduced levels of alcohol and sweetness. At this point the product is referred to as de-alcoholised wine. 21 The de-alcoholised wine products have the following percentage of alcohol: Edenvale Chardonnay 0.29% v/v Edenvale Shiraz 0.26% v/v Edenvale Rose 0.22% v/v Edenvale Sparkling Cuvee 0.27% v/v 22 The de-alcoholised wine is transported in bulk from the Loxton Winery to a bottling plant owned and operated by G. Patritti & Co Pty Ltd. All the Edenvale products are tested upon arrival at the bottling plant. Small amounts of sulphur dioxide may be added at the bottling plant in order to ensure that the Edenvale products are within specifications. 23 The de-alcoholised Edenvale Chardonnay, Edenvale Shiraz and Edenvale Rose are filtered before being bottled with screw caps. The bottled products are then pasteurised at the lowest possible heat. 24 The Edenvale Sparkling Cuvee is filtered, stored in pressurised tanks and jet infused with carbon dioxide before being bottled under pressure with corks and wire caps. The bottled products are also pasteurised at the lowest possible heat. 25 In accordance with the Food Standards Code (see [56] below) applying to non-alcoholic beverages, the Edenvale products are labelled as 'Alcohol removed' and as containing not more than 0.5% alcohol by volume.

[16]

LEGISLATIVE HISTORY AND EARLIER JUDICIAL CONSIDERATION 46 Items 11 and 12 of the Table had their origin in Item 36(3) in the Schedule to the Sales Tax Exemptions Act 1935 (Cth) which was subsequently renamed the Sales Tax (Exemptions and Classifications) Act 1935 (Cth) ('the E & C Act'). Item 36(3) exempted from sales tax: 'Essences (being substantially juices of Australian fruits) from which non-alcoholic beverages are made'. 47 In Federal Commissioner of Taxation v F H Faulding & Co Limited (1950) 83 CLR 594, the High Court of Australia had occasion to consider Item 36(3) of, what was then, the First Schedule to the E & C Act, when it was in the following terms: 'Essences, concentrates and cordials, consisting wholly or principally of juices of Australian fruits, for the making of non-alcoholic beverages; non-alcoholic beverages consisting wholly of Australian fruits'. It is important to an appreciation of what was said in the Full High Court and its relevance to this case, that the framework of the issues which came up to the Full Court be understood. It was not disputed that the liquids sold were cordials nor that they were cordials for the making of non-alcoholic beverages or that they contained substantial quantities of juices of Australian fruits. They did not consist wholly of such juices. The only controversy was as to whether they consisted principally of juices of Australian fruits. In the present case, there is a real issue as to whether the beverage supplied consists of 'juices of fruits'. 48 At first instance, Rich J held that the words 'consisting … principally of juices of Australian fruits' referred to the characteristic feature of the cordial - to what his Honour described as the element giving it its name and nature, its essential properties. 49 On appeal to the Full Court, Latham CJ said (at 596 - 597): The difficulty which this view meets is found in the words "consisting of". The reference is not to the principal characteristic of the cordial considered as a cordial, but to the content of the cordial. In the phrase "consisting wholly or principally of juice of Australian fruits" the word "wholly" necessarily requires the application of a quantitative standard. The word "principally" must, in my opinion, be similarly construed. Words might have been used which would have given the exemption to any fruit juice cordial in which the whole or larger part of the fruit juice used was juice of Australian fruits. So also an exemption might have been given to all cordials in which any flavouring of Australian fruit juice was contained. Possibly some such provision would represent the result which Parliament intended to achieve. But the court cannot speculate upon such a matter. It must construe the words actually used. The word "consisting" refers to the physical components of the cordial, and the questions to be asked in determining whether the exemption is applicable are (1) Does this cordial consist wholly of juices of Australian fruits? In the present case the answer to this question must be--No: (2) Does it consist principally of juices of Australian fruits? The answer to this question must also, in my opinion, be--No, because the words "consisting principally of" must be read as referring to quantity expressed in terms of either volume or weight of the substance of the cordial and cannot be read as referring to that constituent of the cordial, whatever its proportionate quantity, which gives to the cordial its distinctive flavour as a cordial. 50 Item 36(3), specifically Item 36(3)(d)(ii), was the subject of further consideration by the Supreme Court of New South Wales in Deputy Commissioner of Taxation v Pepsi-Cola Metropolitan Bottling Co Inc (1967) 10 FLR 101, when it was in the following terms: Fruit juice products, namely:- (a) Concentrates for the making of non-alcoholic beverages, being concentrates which consist of not less than 25% by volume of juices of Australian fruits; (b) Cordials for the making of non-alcoholic beverages, and preparations for use in the flavouring of foods, being cordials or preparations which consist of not less than 25% by volume of - (i) juices of Australian fruits (ii) a mixture of concentrates and juices of Australian fruits and water, being a mixture of a strength not less than the natural strength of the juices; (iii) juices of Australian fruits and a mixture of concentrates of juices of Australian fruits and water, being a mixture of a strength not less than the natural strength of the juices; (c) Non-alcoholic beverages consisting wholly of juices of Australian fruits or vegetables (including herbage) (d) Non-alcoholic carbonated beverages containing not less than 5% by volume of : (i) juices of Australian fruits (ii) a mixture of concentrates of juices of Australian fruits and water, being a mixture of a strength not less than the natural strength of the juices; (iii) juices of Australian fruits and a mixture of concentrates of juices of Australian fruits and water, being a mixture of a strength not less than the natural strength of the juices;' (Emphasis added). 51 Paragraph (d) was added to Item 36(3) by Act No. 71 of 1957. Significantly, it uses the word 'containing', not the words 'consisting' or 'consist of' as in paras (a), (b) and (c). After referring to what was said by Latham CJ in Faulding in the extract reproduced at [49] above, Macfarlan J said (at 106): If, indeed, as the High Court in Faulding's case appears to have thought, the use of the word "consisting" means "constituents actually existing at the time of tax and physically identifiable by reference to the qualities prescribed for exemption" the word "containing" might be thought to have been intended to have a different meaning. Were it not so, then one might reasonably have expected that the word "consisting" would have been used again. This, indeed, was an argument submitted on behalf of the defendant, while learned counsel for the plaintiff distinctly accepted that his argument on this point meant that there existed an identity of meaning for the words "contain" and "consist". 52 After referring to various dictionary definitions of the word 'containing' to which he was taken by counsel for both parties, his Honour said (at 107 - 109): The word "containing" qualifies the words "non-alcoholic carbonated beverage". In other words, the mixture which is afterwards described in par. (ii) must be contained in the non-alcoholic carbonated beverage and in the present case, the beverage being carbonated when it is in the bottle for sale by retail, the contents of that bottle must then contain the "mixture". It is therefore necessary to inquire what is contained in the bottle at that time. … In my opinion all the circumstances lead to the conclusion that, subject to certain matters I will mention in a moment, Parliament is only concerned to insure that an Australian fruit juice in the prescribed quantity shall have been used in the carbonated beverage. In my opinion, the meaning of the word "contain" must be understood in this way. 53 I have referred at some length to the Pepsi-Cola case because of the reliance placed on it by counsel for the applicant for his submission, or the first alternative of it, that the Edenvale products consist of the requisite measures by volume of the juices of fruits at the point of supply notwithstanding the anterior fermentation and de-alcoholisation processes. For reasons I will come to, reliance on the Pepsi-Cola case for that submission, in my view, is flawed. 54 Immediately before the commencement of the GST Act, Item 11 of the Table found expression in Item 13(4) of the Second Schedule to the E & C Act 1992 : 'non-alcoholic carbonated beverages, if they consist wholly of juices of fruits or vegetables', and Item 12 of the Table found expression in Item 13(3) of the Second Schedule to the E & C Act, although the bar for the volume requirement of juices of fruits or vegetables was set much lower: 'non-alcoholic non-carbonated beverages, if they consist of at least 25% by volume of juices of fruits or vegetables'. In both cases they were subject to 10% sales tax rather than being, as under the GST Act, tax free. 55 Item 11, but not Item 12, of the Table came up for judicial consideration in P & N Beverages Australia Pty Ltd v Commissioner of Taxation (2007) 210 FLR 202. The plaintiff taxpayer (P & N) manufactured carbonated fruit drinks by reconstituting a fruit concentrate with water and non-fruit based additives. It sought declarations that supplies of the fruit drinks were exempt from GST in reliance on Item 11 of the Table. The Supreme Court of New South Wales (Gzell J) dismissed the claim for relief and in doing so rejected a number of submissions concerning the phrase 'juices of fruits', at least three of which were repeated by the applicant in the present case. 56 His Honour observed at [24] that it was common ground that the phrase 'juices of fruits' does not have a trade meaning. At [36] he referred to what was said by a Full Court of this Court in Zeroz Pty Ltd v Deputy Commissioner of Taxation (1997) 35 ATR 349 at 357, 'if there is no trade usage then a fortiori the expression must be used in its ordinary English sense'. But P & N in that case, like the applicant in this case, made a number of submissions which, at the risk of doing the applicant a disservice, went something like this: (1) While the phrase 'juices of fruits' does not have a trade meaning, the phrase is synonymous with 'fruit juice' and that term had a trade meaning as defined in the Food Standards Code. (The Food Standards Code is a reference to the Australia New Zealand Food Standards Code as defined in the Food Standards Australia New Zealand Act 1991 (Cth). The Food Standards Code, standard 2.6.1, with respect to fruit juice and vegetable juice, defined fruit juice or vegetable juice as the liquid portion, with or without pulp, obtained from fruit or vegetables respectively and in the case of citrus fruit, other than lime, the endocarp only of the fruit and included products that had been concentrated and later reconstituted with water to a concentration consistent with that of the undiluted juice from which it had been made. At [21] and [22], his Honour observed that it was common ground that the fruit drinks supplied by P & N met the Food Standards Code requirements. It was also common ground that P & N fruit drinks contained non-fruit based additives, vitamins and minerals or used processing aids within the limits permitted by the Food Standards Code. The evidence was that the fruit drinks contained 98% - 99% fruit juice and 1% - 2% additives and processing aids not directly derived from fruit.) (2) In substituting a trade meaning of 'fruit juice' for 'juices of fruits' that has no trade meaning, reliance was placed on Collector of Customs v Agfa-Gevaert Ltd (1996) 186 CLR 389 where the phrase 'silver dye bleach reversal process' in a tariff concession had no trade meaning but the words 'silver dye bleach process' did. The High Court held that the Tribunal's construction of the composite phrase by reference to the trade meaning of the lesser phrase and the ordinary meaning of the word 'reversal', involved no error of law. The submission, by parity of reasoning, was that in the Item 11 composite phrase 'wholly of juices of fruits', the word 'wholly' should be given its ordinary meaning and the words 'juices of fruits' (in both Items 11 and 12) should be given the trade meaning for 'fruit juice'. (3) That having adopted the Foods Standards Code prior to the introduction of the GST Act, its concepts were well known to the Parliament and that it may be taken to have had regard to them in respect of a law dealing with the exemption of food. 57 His Honour rejected each of these submissions, as well as a number of others more specifically directed to Item 11 of the Table. 58 As to the reliance on Agfa-Gevaert in substituting a trade meaning of 'fruit juice' for 'juices of fruits', his Honour said at [27]: Agfa-Gevaert is quite different from the instant circumstances. The composite phrase was not one that had an obvious ordinary meaning. Nor did the lesser phrase. In those circumstances, the lesser [phrase] aided the proper interpretation of the composite one. Here, the words that comprise the composite phrase are words of common parlance, even if they are oddly arranged, and there is not the same need to call in aid a trade meaning. 59 As to the submission that Parliament may be taken to have adopted the Food Standards Code and its trade meaning of 'fruit juice' in respect of a law dealing with the exemption of food, his Honour said at [34] - [35]: [34] … Furthermore, the extrinsic materials do not suggest that parliament adopted a trade meaning in the Foods Standards Code. If it had, one would have expected it to have departed from the unusual [phrase] "juices of fruits". The extrinsic material makes it clear, in my view, that parliament intended to bring within the scope of the amendments to the GST Act the exemptions or concessions in relation to food products under the existing sales tax legislation. Hence the adoption of the phraseology in Item 11. [35] Parliament was invoking its past legislation rather than adopting a trade meaning of other words in an industry code that the past legislation preceded. The harking back to a phrase used in the sales tax legislation in 1935 leads to the irresistible conclusion that parliament was carrying forward some of the exemptions and concessions with respect to food in the sales tax legislation and not attributing to the phrase any trade meaning of a different term in the Foods Standards Code. There was no logical reason for parliament, in introducing a new tax, to adopt a code intended to ensure that the public was protected from poorly prepared food. The 2 objects are clearly distinct. If parliament had intended to adopt the code, one would have expected a collocation such as: "non-alcoholic carbonated beverages produced wholly in accordance with the Foods Standards Code".

[17]

Relevant Principles of Statutory Construction 60 Recently, in Commissioner of Taxation v Bargwanna [2009] FCA 620 (12 June, 2009), in the course of considering whether a fund was applied for the purposes for which it was established within s 50-60 of the Income Tax Assessment Act 1997 (Cth), I said (at [28]): It can be accepted that where Parliament has enacted legislation to encourage a particular activity, for example, legislation which gives particular concessions to the mining or petroleum industries, the legislation must be construed so as to promote Parliament's purpose and not so as to detract from that purpose: Totalizator Agency Board v Commissioner of Taxation (1996) 69 FCR 311 at 323A per Hill J, with whom Tamberlin J and Sundberg J agreed. Thus an exemption which exists for the purpose of encouraging, rewarding or protecting some class of activity is to be given a liberal rather than a narrow construction and application: see Commissioner of Taxation v Reynolds Australia Alumina Ltd (1987) 18 FCR 29 at 35 per Beaumont J and at 46 - 47 per Burchett J; Diethelm Manufacturing Pty Ltd v Commissioner of Taxation (1993) 44 FCR 450 at 457 per French J. But in the case of a provision which confers an exemption upon a particular kind of body or fund which meets certain requirements, Parliament's purpose is not promoted by construing the provision in a manner favourable to the body or fund referred to in it: see TAB at 323C per Hill J. Indeed, there is much to be said for the view that the privileged status of exemption from income tax on the income of a fund which aspires to that status demands strict adherence to the requirements that must be met before that status is conferred … 61 In Network Ten Pty Ltd v TCN Channel Nine Pty Ltd (2004) 218 CLR 273 at [11] the High Court affirmed the observations made by McHugh J in Newcastle City Council v GIO General Ltd (1997) 191 CLR 85 at 42 that: [A] court is permitted to have regard to the words used by the legislature in their legal and historical context and, in appropriate cases, to give them a meaning that will give effect to any purpose of the legislation that can be deduced from that context. 62 It is the same with the GST Act. As Hill J (with whom Stone and Allsop JJ agreed) said in H P Mercantile Pty Ltd v Commissioner of Taxation (2005) 143 FCR 553 at [44]: It is clear, both having regard to the modern principles of interpretation as enunciated by the High Court in cases such as CIC Insurance Limited v Bankstown Football Club Ltd (1997) 187 CLR 384 and s 15AA of the Acts Interpretation Act 1901 (Cth) that the Court will prefer an interpretation of a statute which would give effect to the legislative purpose, as opposed to one that would not. This requires the Court to identify that purpose, both by reference to the language of the statute itself and also any extrinsic material which the Court is authorised to take into account. 63 There is nothing in the language of the GST Act; nothing in the statutory context, by which I include Div 38, in particular Subdiv 38-A, and Schs 1 and 2 to the GST Act; and nothing in the extrinsic materials to suggest that Items 11 and 12 of the Table owe their existence to a legislative purpose of encouraging the fruit growing industry, thereby warranting a liberal rather than a narrow construction and application of the two items to promote Parliament's purpose. 64 But there is every indication in those same sources of a legislative purpose to exempt from GST, 'basic food for human consumption' and, in addition, to '… ensure that the current WST exemptions for food are, in general, maintained': see the Further Supplementary Explanatory Memorandum (Senate) to the A New Tax System (Goods and Services Tax) Bill 1998, cl 1.3. 65 The notion of 'basic' food pertains to food that is fundamental to sustenance, or rudimentary, having few or no attributes, beyond the ordinary or essential elements necessary to achieve that purpose: see the definition of 'basic' in the Oxford English Dictionary: 'Providing or having few or no amenities, accessories, functions, etc., beyond the ordinary or essential; of or designating the lowest standard acceptable or available; rudimentary.' On one level, the idea of basic food inevitably devolves into a merit category (see Cooper GS and Vann RJ, "Implementing the Goods and Services Tax" (1999) 21 Sydney Law Review 337 at 349) in that, caught up in that notion is the presumption that it is likely to encompass food which is fresh, natural or unprocessed: see the Further Supplementary Explanatory Memorandum (Senate) to the A New Tax System (Goods and Services Tax) Bill 1998 at cl 1.2, that '… supplies of fresh fruit and vegetables by a primary producer will be GST-free.' This is evident from Sch 1 as to the 'Food that is not GST-free', and Sch 2 as to the 'Beverages that are GST-free'. For example, items such as certain prepared foods, snack foods, confectionary, ice cream and biscuits are not GST-free. As to beverages neither soft drinks, (including flavoured mineral waters) nor cordials, are GST-free. 66 The fact that carbonated water is not GST-free (but natural water is (see Item 14 in Sch 2)) usefully illustrates the notion of what is basic in a beverage, and when the addition of other attributes will render it non GST-free. When introducing the amendments in the Senate, the Assistant Treasurer noted that 'cordials, soft drinks and flavoured milk will be taxable': Commonwealth of Australia, Senate, Hansard, Thursday 24 June 1999, p 6264. Coffee and tea, however, were considered sufficiently basic by the legislature to qualify: see Items 2 (flavoured milk) and 5 (coffee and tea) in Sch 2. 67 Consistent with the policy that basic fare should be GST-free is the policy perspective that its consumption should not rise to the level of entertainment. Hence all food and drink for consumption on premises where it is supplied (i.e. restaurants, eat-in facilities, etc) will not be GST-free. There is also a policy predisposition against 'hot food' which is not prepared in the home - the consequence being that standard takeaway food is liable for GST, for example, hamburgers, chips, BBQ chickens, pies, pizzas, as well as takeaways in plastic food containers. 68 As the express purpose of the amendments identified in the Explanatory Memorandum was to ensure that only 'basic food for human consumption' was GST-free, it is also unlikely, the Commissioner submitted, that it was intended to encompass beverages where the essential character of the original 'natural' nature of the product has been altered due to it having undergone a process. 69 Such a legislative purpose is also discernable both from the circumstances in which the amendments arose, and the context in which Items 11 and 12 appear in the Table. This was recognised by Gzell J in P & N at [32]: There is a lot to be said for the submission of the Commissioner that when the compromise was made for a qualified exemption for food to ensure the passage of legislation, as Sundberg J points out Cascade Brewery Co Pty Ltd v Commissioner of Taxation (2006) 153 FCR 11 at [40], the legislature seems to have drawn the line between exempt and non-exempt food supplies in favour of food that is fresh, natural or unprocessed. For example, the beverages that are not included in the table to cl 1 of Sch 2 of the GST Act and are therefore not GST-free, include soft drinks and cordials, flavoured milk (Item 2) and flavoured soy milk and rice milk (Item 4). The only carbonated beverages that are GST-free are those satisfying Item 11, and water (Item 14), is GST-free only if it is non-carbonated and without any other additives.

[19]

The phrase 'juices of fruits' 70 It is common ground that the phrase 'juices of fruits' does not have a trade meaning. The applicant submitted, through the line of reasoning rejected in P & N (see [55] and [58] above), that 'juices of fruits' is 'fruit juice' as defined in the Food Standards Code, which defines 'fruit juice' to include products that have been concentrated and later reconstituted with water to a concentration consistent with that of the undiluted juice from which it was made. The Commissioner did not accept that 'juices of fruits' is synonymous with 'fruit juice', the first step in the applicant's line of reasoning. Insofar as the applicant called in aid the second column of the Table, the Commissioner submitted that this was not permissible: s 182-15 of the GST Act. According to the Commissioner, there is no ambiguity, obscurity or manifestly absurd or unreasonable result flowing from the ordinary meaning of the text, taking into account its context and the purpose or object underlying it, which would mandate such recourse: see subs 182-10(2). 71 The Commissioner submitted that the phrase 'juices of fruits', not having a trade meaning, is to be interpreted according to its ordinary English meaning. In this regard 'juice' is relevantly defined to mean: The Oxford English Dictionary: 1.a. The watery or liquid part of vegetables or fruits, which can be expressed or extracted; commonly containing the characteristic flavour and other properties. Macquarie Dictionary: 1. the liquid part of plant or animal substance ... 2. any extracted liquid, especially from a fruit 72 According to the Commissioner, the ordinary meaning of 'juices', in the context of the GST Act, suggests that 'juices of fruits' is the liquid extracted from those fruits. The extraction process entails that the juice originally formed 'part' of the fruit and, therefore, the juice is extracted from the fruit through some mechanical process such as pressing or crushing. 73 The applicant in support of its argument referred to the sales tax exemption, when it was initially introduced, limiting the exemption to juice from Australian-sourced fruit. This meant that when the requirement that fruit be of a particular provenance was brought to an end the reference to the country of origin was removed from the item, leaving the 'uncommon' phrase 'juices of fruits'. The Commissioner's response was that there is nothing 'uncommon' about the phrase if the exemption was limited to juices extracted from fruit. According to the Commissioner, the expression 'fruit juice' is clearly an expression of broader scope and would have been used by the drafter (both at the time that there was the requirement for a particular country of origin and after) if a concept beyond juices extracted from fruit had been intended. 74 The Commissioner observed that the GST legislation when introduced also explicitly sought to ensure that the 'current WST exemptions for food [were], in general, maintained' (see [64] above) and adopted the same terminology. The specific discussion of the treatment of beverages stated that 'the only beverages and ingredients that will be GST-free are those beverages and ingredients specifically listed' in cl 1 of Sch 2, which included 'fruit and vegetable juices if they consist of at least 90% by volume of juices of fruits or vegetables': Further Supplementary Explanatory Memorandum (Senate) to the A New Tax System (Goods and Services Tax) Bill 1998, paras 1.54 and 1.55. 75 The Commissioner submitted that the legislative background to the food amendments and the apparently deliberate adoption of drafting previously used in the sales tax legislation is indicative of continuity in the use and meaning of 'juice' between the 'old' sales tax regime and the GST Act. 76 The Commissioner further submitted that it is self-evident from the GST Act that there was an intention to narrow the scope of those fruit or vegetable juice products that would receive GST-free treatment compared to those products that were subject to the concessional WST rate of 10% immediately prior to the introduction of the GST. For example, under Item 13 in Sch 2 to the E & C Act the respective percentages for concentrates, and non-alcoholic non-carbonated beverages moved from 25% to 90% by volume of juices of fruits. This change in percentages was to restrict the availability of the exemption and supports the view that the meaning of 'juices of fruits' should not be seen to have expanded on the introduction of the GST. 77 Reference was made to Cascade Brewery Company Pty Ltd v Commissioner of Taxation 153 FCR 11 where Sundberg J said at [40]: The reason for the qualified exemption of food from GST is well-known, and was common ground. It was the political compromise reached in order that the GST scheme might become law. The distinction drawn in Totalizator between an exemption directed at a particular person or body and one that encourages a particular activity is applicable here. It is true, as Cascade says, that item 13 is not directed at a particular person or body. But nor is it concerned to encourage any particular activity. It is not intended to encourage the production of beverages or ingredients of any kind. It was the result of a political deal that gave partial exemption to food. In the case of the beverage component of food, the result was that the beverage or an ingredient therefore would be exempt if it was of a kind marketed principally as food for infants or invalids. In accordance with Totalizator, there is no occasion to approach the meaning of 'infant' or 'invalids' in any manner other than by according the words their ordinary meaning. 78 According to the Commissioner, the applicant is not correct in submitting that the expressions 'juices of fruits' is an anachronism resulting from the history of the sales tax legislation and that the meaning intended to be conveyed by the draftsman by the use of that expression was the same as 'fruit juice'. It follows, the Commissioner argued, that 'juices of fruits' and 'fruit juice' are not synonymous and any purported trade meaning as to 'fruit juice' in the beverage industry (being the definition in the Foods Standard Code) has no relevance to the interpretation of the expression 'juices of fruits'. 79 In any event, the Commissioner submitted, the definition of 'fruit juice' in the Food Standards Code could not have had significance in construing the expression 'juices of fruits' in circumstances where that expression was used in taxing legislation many years before the Food Standards Code was introduced. The expression 'juices of Australian fruits' had been a term used in the wholesale sales tax since the 1930s and 1940s. 80 In this regard, in Zeroz, reference had been made by the taxpayer to the Food Standards Code (as it then existed) for the purpose of ascertaining the trade meaning of a term in the sales tax legislation. A Full Court of this Court said at 354 and 359 - 360: One might wonder at the relevance in interpreting a statutory provision first incorporated in legislation effective from 20 September 1985 (when Item 23 of the 1935 Act was introduced by Act No 145 of 1985) of a standard not published until 1987 and on the evidence still the subject of consideration and alteration until that date. [p 354] … It is hard to accept that a public document still in the process of formulation and not yet published at the time the word "yoghurt" was introduced into the sales tax law should be seen as the source of a definition of the expression "yoghurt" in statute passed years earlier. [p 359 - 360] 81 Similarly in the current proceedings the Food Standards Code could have no relevance for the same reason. As Gzell J said in P & N at [33]: ... The phrase had its origin in 'juices of Australian fruits' in 1935 well before the gazettal of the Foods Standards Code in 1987. It was unreal to say that the code preceded the GST Act when the origin of Item 11 in the table in cl 1 of Sch 2 preceded the code. 82 I agree with the Commissioner's submissions. In my view, they compel the conclusion that the phrase 'juices of fruits' in Items 11 and 12 of the Table is to have its ordinary English meaning of being confined to juices extracted from fruits and does not extend to 'fruit juice' in the wider embrace of that term in trade parlance, assisted or unassisted by the definition in the Food Standards Code.

[20]

The phrase 'consist of' 83 The carbonated Edenvale product will only qualify for GST-free status under Item 11 of the Table if it 'consist[s] wholly of juices of fruits' at the supply point and the non-carbonated Edenvale products will only qualify for GST-free status under Item 12 of the Table 'if they consist of at least 90% by volume of juices of fruits' at the supply point (emphasis added). 84 The applicant submitted that the test for Items 11 and 12 is a quantitative test referring to the physical components that go to make up the goods and, accordingly, in the case of the Edenvale non-carbonated products, each of those products consists of more than 90% by volume of juices of fruits. This is on the basis that more than 90% of the volume of the beverages was originally derived from the juices of fruits albeit that, when the production process took place and the components were mixed, only the grape juice concentrate and low sugar juice constituted juices of fruits. 85 The applicant relies on the decisions in Faulding and Pepsi-Cola in support of its position. 86 The Commissioner's position is that in order for Items 11 and 12 to be satisfied, the beverage must be constituted by the mixing (through some mechanical process) of the juices of fruits with the other part of a beverage so as to produce the final beverage. The juices of fruits in the final beverage must constitute at least 90% of the volume of the beverage (in the case of Item 11, 100%), and be separately discernible as juices of fruits prior to the mixing (or carbonisation in the case of Item 11). 87 The word 'consist' is defined in the Shorter Oxford Dictionary as follows: 1. a Exist or reside in; be located or inherent in ... b Be constituted or composed of (actions, qualities etc; arch, material things); having its essential features in. 2. Exist together as compatible facts; ... 4. Be made up or composed of. 88 In other words, the Items contemplate that the beverage will consist either wholly or of at least 90% by volume to which the remainder (or, nothing in the case of Item 11) will be added. 89 In the current context the major component of the final beverage is the de-alcoholised 'base wine'. Although the wine making process commences with the juices of fruits, once the fermentation process commences (where the sugars are converted to alcohol) the nature of the component changes. The juices of fruits become wine and the later processes undertaken to remove the alcohol and restore its flavour never result in the product being returned to its original state. 90 When the final beverage is being made by the mixing of the addition of grape juice concentrates, the low sugar juice and the de-alcoholised base wine it is not possible to say that something has been added to a beverage that consisted either wholly or of least 90% by volume of juices of grapes. It may be possible to say that the de-alcoholised base wine originated or was derived from juices of grapes, but the only components of the end product that consist (either wholly or of at least 90% volume) of juices of grapes are the grape juice concentrates and low sugar juice. The combination of the grape juice concentrates and low sugar juice only ever constitutes 15% or less by volume of the end product. 91 There exists further support for the conclusion that to satisfy the exemption juices of fruits in a beverage must exist at the time of supply and be physically identifiable. This is found in the words 'by volume' in Items 10 and 12. 'By volume' is a quantitative test that can only be satisfied by a measurement of the prescribed ingredient (juices of fruits) by reference to the final product, rather than the ingredient that may have been 'contained' in, or made up, the beverage during the course of the manufacturing process. 92 The decision in Faulding is entirely consistent with the Commissioner's position. In Faulding, the majority (which included Latham CJ) concluded, in the context of Item 36(3), that the word 'consisting' refers to a quantitative test in terms of the constituents actually existing at the time of supply and physically identifiable by reference to the qualities prescribed for exemption. Latham CJ said (at 597): [T]he words 'consisting principally of' must be read as referring to quantity expressed in terms of either volume or weight of the substance of the cordial and cannot be read as referring to that constituent of its cordial, whatever its proportionate quantity, which gives to the cordial its distinctive flavour as a cordial. 93 So too must the de-alcoholised wine under consideration consist of at least 90% (or wholly, for the carbonated Edenvale product) of 'juices of fruits' and not merely be derived from those products while retaining some of their character. 94 The decision in Pepsi-Cola does not create any tension with such a conclusion because the item in question in that case used the word 'containing', not 'consisting', a distinction apparent to Macfarlan J in the extract from his judgment (at 106) reproduced at [51] above and the reason why, in that case, his Honour concluded that in using the word 'containing', rather than 'consisting', 'Parliament [was] only concerned to ensure that an Australian fruit juice in the prescribed quantity shall have been used in the carbonated beverage' (at 109). 95 An additional impediment for the applicant in the case of the carbonated Edenvale product is that Item 11 of the Table requires that it must consist 'wholly' of juices of fruit and even in the applicant's case, it admitted that the product only consists of 97.3% by volume of juices of fruit. However, the applicant argues that the additional volume largely consists of rainwater added to the beverage as part of the reconstitution process and, accordingly, the rainwater should properly be regarded as part of the grape juice. Once an adjustment is made for the rainwater (and taken into account as being part of the juices of fruits, but see [96] below), the product consists of 99.1% by volume of juices of fruits. It is then suggested by the applicant that the de minimis rule should apply to the remainder. 96 Subject to the de minimis rule applying, which was not argued in P & N, Gzell J stated that 'wholly' meant 100%: At [36] - [37]: [I]n my view … Item 11 must be construed according to its ordinary meaning. … The concession by P & N that the word 'wholly' meant 100% was a proper one. Items 10 and 12 in the table to cl 1 in Sch 2 of the GST Act are, respectively, concentrates for making non-alcoholic beverages if the concentrates consist of at least 90% by volume of juices of fruit, and non-alcoholic non-carbonated beverages if they consist of at least 90% by volume of juices of fruit or vegetables. In that context, 'wholly' must, in my view, mean 100%. And later at [41]: It follows from my finding that any trade meaning derived from the Foods Standards Code is not attracted by the legislation and my rejection of the argument that the ordinary meaning of the phrase 'wholly of juices of fruits' encompasses fruit drinks with non-fruit based additives, that P & N must fail. Having accepted that to qualify for exemption, the fruit drinks of P & N must consist of 100% of juices of fruits, the introduction of even 1 % of non-fruit based additives means that the exemption is not attracted. No de minimis argument was raised on behalf of P & N. 97 The de minimis rule does not arise for consideration in the current context unless the rainwater that is added to the beverage is regarded as being part of the 'juices of fruit'. Dr Brooke-Taylor in his further report (annexed to his affidavit sworn on 2 April 2009) describes the product to which the 'reconstitution' (by way of the addition of rainwater) is made as follows (at para (3)): [W]here a fruit juice product which contained ethanol was concentrated by a process of evaporation that removed the ethanol and the concentrate was later reconstituted with water to a concentration consistent with that of undiluted juice product, the resulting product would be fruit juice within the scope of the definition in Standard 2.6.1. (Emphasis added.) The reference to 'fruit juice product' in the above extract is not a reference to either the fruit juice concentrate or low sugar juice, but to the de-alcoholised base wine. The adding of rainwater to the de-alcoholised base wine would not constitute the reconstitution of juices of fruit as the de-alcoholised base wine at that point in the process (even if it was 'concentrated') does not constitute juices of fruit. 98 In any event, the de minimis rule has no scope to operate in circumstances where the clear intent of the legislature was that the product consist of 100% of the juices of fruit. This is made clear by the fact that in the case of Items 10 and 12 of the Table the requirement imposed by the legislature for the volume of juices of fruit was 'at least 90%' which had the effect of allowing the beverage to include non fruit based additives without the loss of the exemption. 99 For these reasons, I would conclude that the carbonated Edenvale product does not 'consist wholly of juices of fruits' at the point of supply and that the non-carbonated Edenvale products do not 'consists of at least 90% by volume of juices of fruits' at the point of supply. This would be enough to dismiss the application but in deference to the submissions that were made by both parties on the second issue - whether the Edenvale products were non-alcoholic beverages for the purposes of Items 11 and 12 of the Table - I will address that issue.

[21]

Second Issue: Whether the Edenvale products are non-alcoholic beverages for the purposes of Items 11 and 12 of the Table 100 The Commissioner's original position taken in the documents filed under O 52B r 5 of the Federal Court Rules was that a 'non-alcoholic … beverage' is one that contains no alcohol. Indeed, he maintained in his submissions that the ordinary meaning of 'non-alcoholic' in the context of the Table is a beverage that contains no alcohol. There was no elaboration of this submission and I have reservations as to whether it is a sound one. 101 In any event, the Commissioner accepted that the adoption of such a strict approach would mean that certain beverages that were intended to be exempt would be subject to tax. This is particularly so in respect of some fruit juices as, in the course of the production of some fruit juices, some natural fermentation may occur which may have the effect of excluding the juices from being exempt. 102 He submitted that in such circumstances a construction of the legislation that promotes the purpose of the GST Act is to be preferred to one which would not promote the purpose; see s 15AA of the Acts Interpretation Act 1901 (Cth); CIC Insurances Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384. He submitted that confining non-alcoholic beverages to those beverages which do not acquire their alcohol content through human intervention (i.e., by using yeast to cause or accelerate fermentation), and contain an amount of alcohol by volume which is considered insignificant, best promotes the legislative purpose of the GST Act in respect of food namely, that GST-free status is confined to 'basic' food. 103 As the alcoholic content of the applicant's Edenvale products arises through human intervention those products are not, according to the Commissioner, non-alcoholic even though the level of that content may be low after the de-alcoholisation process has taken place. 104 By reference to the same principle of construction, the applicant contended that a non-alcoholic beverage meant a beverage other than an alcoholic beverage; this gives meaning and operation to Items 11 and 12 and is therefore to be preferred. 105 Reference was also made to the canon of statutory construction that terms used in statutes that are in pari materia should be given the same meaning unless there is a clear indication to the contrary: Attorney-General v Prince Ernest Augustus of Hanover [1957] AC 436 at 461 per Viscount Simonds; The Wik Peoples v The State of Queensland (1996) 187 CLR 1 at 171 per Gummow J. 106 Various benchmarks were referred to in regulatory legislation in Australia and overseas. Liquor licensing and control statutes in various States of Australia - where 'liquor' means either a beverage that contains more than 0.5% alcohol by volume or a beverage that contains more than 1.15% alcohol by volume. 107 Reference was also made to the distinction between alcoholic beverages and non-alcoholic beverages previously drawn under the E & C Act where a benchmark of 1.15% by volume of alcohol was adopted. 108 The applicant submitted that the Customs Tariff Act 1995 (Cth) is legislation that is in pari materia to the GST Act. Under Sch 3 'Classification of goods and general and special rates of duty' of the Customs Tariff Act 1995 there is a distinction between, inter alia, preparations of fruit juices (Chapter 20) and beverages (Chapter 22). Note 5 to Chapter 20 provides that: For the purposes of 2009, "juices, unfermented and not containing added spirit" means juices of an alcoholic strength by volume (see Note 2 to Chapter 22) not exceeding 0.5% vol. 109 Note 3 to Chapter 22 similarly provides that: For the purposes of 2202, "non-alcoholic beverages" means beverages of an alcoholic strength by volume not exceeding 0.5% vol. 110 To which might be added A New Tax System (Wine Equalisation Tax) Act 1999 (Cth) ('the WET Act') which introduced a wine tax on assessable dealings and importations of wine made on or after 1 July 2000 to ensure that, following the introduction of GST at a rate of only 10%, the price of wine remained stable. The definition of wine in s 31-1 lists a number of products but does not include beverages that do not contain more than 1.15% by volume of ethyl alcohol. 111 The Commissioner submitted that his approach to the task of statutory construction is to be preferred. He submitted that it is more consistent with the terms of the legislation and does not involve the nomination of a definite, but quite arbitrary figure, in the application of the item in circumstances where the legislature could have readily nominated a figure but declined to do so. He further submitted that the situation where negligible amounts of alcohol occur as a result of natural fermentation fall quite easily into the category of exempt products when the legislative purpose is seen in that light. 112 I have come to the conclusion, not without some hesitation, that the Commissioner's approach is to be preferred because it better promotes the legislative purpose of the GST Act in relation to food , namely, that the exemption or GST-free status is a qualified one where, as Sundberg J pointed out in Cascade Brewery, the legislature seems to have drawn the line between exempt and non-exempt food supplies in favour of food that is fresh, natural or unprocessed. The fact that one can readily point to some specific exclusions to this line in the GST Act does not reduce or mitigate against its force as an overall observation or conclusion. 113 For these reasons, I am of the view that the Edenvale products are not non-alcoholic beverages. While their respective alcohol content by volume is low, it owes its existence to an infused process of fermentation rather than a naturally occurring one. 114 The application must be dismissed. 115 Neither party sought an order as to costs. Accordingly, I will not make any such order. I certify that the preceding one hundred and fifteen (115) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Edmonds.

JMB Beverages Pty Ltd v Commissioner of Taxation

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Judgment (24 paragraphs)

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