Lansell House Pty Ltd v Commissioner of Taxation

AND: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

JUDGES: BENNETT, EDMONDS AND NICHOLAS JJ DATE: 31 January 2011 PLACE: SYDNEY (BY VIDEO LINK TO MELBOURNE)

REASONS FOR JUDGMENT THE COURT: 1 The appellants previously sold or currently sell in Australia a product known as "Mini Ciabatte" (which we may also refer to as the product). The respondent (the Commissioner) determined that the product, described on its packaging as "Italian flat bread" and imported from Italy, was subject to GST. On appeal, the issue before the primary judge was whether the product falls within item 32 of clause 1 of Schedule 1 of A New Tax System (Goods and Services Tax) Act 1999 (Cth) (the GST Act); that is, relevantly, whether the product was 'food that is, or consists principally of, biscuits, cookies, crackers, pretzels, cones or wafers'. The primary judge found that the product is a cracker and therefore not GST-free under s 38-3 of the GST Act. 2 The issues as identified by the appellants are whether the primary judge erred: a) in finding that Mini Ciabatte is a cracker; and b) in exercising his discretion to refuse the appellants' application for leave to file an additional affidavit during the trial.

RELEVANT LEGISLATION 3 Under s 7-1 of the GST Act, GST is a tax payable on taxable supplies. A supply is a taxable supply if it meets the conditions described in s 9-5 (that is, the supply is: made for consideration; in the course of an enterprise; connected with Australia; and by a registered supplier). There is no dispute between the parties that the relevant conditions for a taxable supply are satisfied. However, pursuant to s 9-5 a supply is not a taxable supply to the extent that it is GST-free. 4 Section 9-30(1) of the GST Act relevantly provides that: A supply is GST-free if: (a) it is GST-free under Division 38 or under a provision of another Act… 5 Section 38-2 of the GST Act provides that: A supply of food is GST-free. Section 38-3 of the GST Act relevantly provides that: (1) A supply is not GSTfree under section 382 if it is a supply of: ... (c) food of a kind specified in the third column of the table in clause 1 of Schedule 1, or food that is a combination of one or more foods at least one of which is food of such a kind; ... (3) The items in the table in clause 1 of Schedule 1 or 2 are to be interpreted subject to the other clauses of Schedule 1 or 2, as the case requires. Section 38-4(1)(a) of the GST Act relevantly provides that: Food means any of these, or any combination of any of these: (a) food for human consumption (whether or not requiring processing or treatment)… Schedule 1 of the GST Act relevantly provides that: 1 Food that is not GSTfree * Food specified in the third column of the table is not GSTfree. ... Food that is not GSTfree Item Category Food 32 Biscuit goods * food that is, or consists principally of, biscuits, cookies, crackers, pretzels, cones or wafers

The PRIMARY JUDGE's finding that Mini Ciabatte is a cracker 6 As stated by the primary judge and not in dispute in this appeal, the onus is on the appellants to establish that Mini Ciabatte is not a cracker. 7 As relevant to the issues in the appeal, the primary judge observed at [12] that a product can be characterised in more than one way. For example, it may be able to be characterised as a cracker and also as a bread, but this is irrelevant for the purposes of the GST Act, as a product can have only one "classification". 8 Section 38-3(c) of the GST Act speaks of food 'of a kind specified in the third column'. The primary judge considered the words "of a kind" at [19]. His Honour considered the relevant question to be what the words add to "specified" and observed that if the intention had been simply to identify the items in the table in the Schedule, Parliament would have used the words "food specified". The question his Honour posed was: what does "of a kind" add? 9 The primary judge noted that in Customs and Excise Commissioner v Ferrero UK [1997] STC 881, an analogous case where an item exempted from value added tax in the United Kingdom was 'confectionery, not including cakes or biscuits', the Court of Appeal took the approach that the words in the statute must be given their ordinary meaning. The Court of Appeal held that what is relevant is the view of the ordinary reasonable man in the street as to whether or not the product falls within the relevant category, in that case biscuits. The Court of Appeal then considered some of the characteristics of biscuits. The product there in issue had some of those characteristics but also had characteristics not normally associated with biscuits. The Court of Appeal classified the product as biscuits. In Commissioners for Her Majesty's Revenue and Customs v Procter & Gamble UK [2009] STC 1990, Toulson LJ clarified the approach in Ferrero as saying that it is for the Tribunal to decide what the reasonable view is on the basis of all the facts known to the Tribunal. The primary judge agreed with that formulation of the Ferrero test and said at [17]: I do not think the intrusion of the reasonable man assists the classification exercise. If the reasonable man is to be "informed" as the Court has been informed, there simply seems no place for him. 10 The primary judge referred to Zeroz Pty Ltd v Deputy Commissioner of Taxation (1997) 35 ATR 349 at 357, in which the Full Court, in determining whether a particular product was "frozen yoghurt" for the purposes of sales tax, said that it first needed to be considered whether or not there was a trade usage of the phrase. If there was no such trade usage, 'the expression must be used in its ordinary English sense'. 11 After consideration of the evidence of the witnesses, the primary judge said at [46] that the words in item 32 'identify household food items with which the ordinary consumer, including their vendors, are familiar. There is no indication that they are used in a specialised or trade sense that differs from the ordinary usage of the words'. That is, his Honour concluded that the words in item 32 are ordinary English words in common usage. Having considered the evidence, including the expert witnesses' identification of the similarities and differences between the various products and having been informed as to the ingredients and manufacturing processes, his Honour said at [65] that he was able to form his own view as to the significances of the similarities or differences between biscuits, crackers and bread. 12 It is apparent that the case proceeded before the primary judge on the basis of various indicia for the purposes of a comparison between Mini Ciabatte and crackers, that being the class in item 32 on which the Commissioner fastened. In comparing the ingredients, as taken from the evidence, the differences lay in the relevant percentage of water (40-55% for a cracker and 35% for Mini Ciabatte) and yeast (0-1.25% for a cracker and 1.5% for Mini Ciabatte). Otherwise, the ingredients of Mini Ciabatte fell within the ranges of the ingredients for crackers. 13 However, the primary judge said at [73] that the ratios for the water and yeast content of crackers were described by Dr Quail, who gave evidence for the appellants, as "typical ranges" and that Dr Quail accepted that there may be exceptions that fall outside those ranges. Further, Mr Abbatangelo, the sole director of each of the appellants, described the percentages of the ingredients of Mini Ciabatte as rough estimates. Thus his Honour attached little significance to the fact that two components were outside the range of those ingredients in crackers. 14 For the purposes of this appeal the appellants also rely upon the consequence of the fact that Mini Ciabatte contains yeast. The primary judge at [81] accepted that a feature of all crackers containing yeast (of which there was evidence) is that they are made with a lamination process. As a distinguishing feature, Mini Ciabatte contains yeast and is not subject to a lamination process. 15 His Honour also considered the product's: origin; use; in store display; marketing; tax treatment in Italy; moisture content; cell structure; presence of a developed gluten network; sugar content; protein content; appearance; and shelf life. His Honour did not consider the classification of similar products to be relevant in deciding whether Mini Ciabatte was an item 32 product. 16 The primary judge said at [108] that classification decisions for GST tax purposes are often prescribed as questions of fact and degree, a matter of impression and a combination of fact-finding and evaluative judgment. His Honour referred to what was said by Jacob LJ in Procter & Gamble at [19]: It was not incumbent on the Tribunal in making its multifactorial assessment not only to identify each and every aspect of similarity and dissimilarity (as this Tribunal so meticulously did) but to go on and spell out item by item how each was weighed as if it were using a real scientist's balance. In the end it was a matter of overall impression. 17 At [109], his Honour said, in summary, that: the ingredients of Mini Ciabatte are substantially the same as those of a cracker; the ratio of ingredients in Mini Ciabatte and crackers are substantially the same; the manufacturing processes are largely the same for Mini Ciabatte and crackers; both Mini Ciabatte and crackers can be produced using yeast and can include fermentation stages; the percentage of sugar as an ingredient of Mini Ciabatte is within the range specified for crackers; to the extent that the Italian origin of Mini Ciabatte is relevant, the evidence points towards the product being a cracker; Mini Ciabatte and crackers are put to the same use; Mini Ciabatte and crackers are displayed in supermarkets as comparable products; while the appellants market Mini Ciabatte as Italian flat bread, the supermarkets treat it and sell it either as a cracker or in the company of crackers and biscuits; the moisture content of dry flat bread such as Mini Ciabatte is quite low and similar to crackers; Mini Ciabatte has an elongated cell structure similar to that of a cracker; both Mini Ciabatte and crackers have a gluten network; the percentage of protein of Mini Ciabatte is within the range specified for crackers; Mini Ciabatte's appearance (size, weight, docking, saltiness and thinness) is like that of a cracker; Mini Ciabatte snaps or cracks like a cracker; and Mini Ciabatte's long shelf life points to it falling into the biscuit/cracker category. 18 The distinction emphasised in the appeal and before the primary judge is the fact that the water and yeast content of Mini Ciabatte is outside of the range of those for crackers. His Honour dealt with that on the basis that the percentages in the standard manufacturing process for Mini Ciabatte were said in the evidence to have been rough estimates. The other emphasised difference is the absence of lamination in the manufacturing process of the product, which contains yeast, but the inclusion of such a process in the manufacturing process of crackers containing yeast. His Honour acknowledged that difference and took it into account in the context of the consideration of the characteristics of Mini Ciabatte and crackers. 19 The primary judge was not persuaded that the Commissioner's classification of Mini Ciabatte as an item 32 product was wrong and concluded that the product is a cracker. His Honour did not, therefore, rely on the effect of the phrase "food of a kind" in finding that the product fell within item 32.

The appellants' submissions 20 In summary, and as submitted in the appeal, the appellants say: It is not sufficient for Mini Ciabatte or the attributes of Mini Ciabatte to be substantially the same or largely the same as those of a cracker - they must be identical to a cracker or to the attributes of a cracker as the case may be. 21 The appellants submit that a finding based on an overall impression does not permit the primary judge as the finder of fact to disregard indicia which are not otherwise satisfied. An overall impression is not, the appellants contend, a mechanism for curing the absence or the inadequacies of indicia under consideration in the classification process. The appellants submit that the difference in the yeast and water content of crackers, not only as an absolute difference but also as a percentage difference in composition, poses, in effect, a threshold question that, together with the absence of lamination, needs to be evaluated before the overall impression can be considered. With food, the appellant says, the composition and manufacturing processes define the differences between products. The appellants assert that yeast and lamination are the defining differences between crackers and bread. 22 Other than that assertion, the appellants were unable to explain why these criteria or indicia are threshold indicia or why the facts that the level of yeast of Mini Ciabatte is somewhat higher than that of a cracker and that there is no lamination process deprives Mini Ciabatte of classification as a cracker.

CONSIDERATION 23 "Cracker" is not a defined term in the GST Act. It is defined in the Shorter Oxford Dictionary (5th ed, Oxford University Press, 2002), relevantly, as 'a thin dry biscuit' and in the Macquarie Dictionary (rev 3rd ed, Macquarie, 2003) as 'a thin, crisp biscuit'. The Commissioner submits, and we accept, that what is and what is not a cracker is not a 'bright line' defined by the percentage of its ingredients. This is in contrast to, for example, a consideration of yoghurt, the subject in Zeroz, which is defined as having an upper pH level of 4.5. In Zeroz the trade meaning for yoghurt was, as the Full Court observed at 359, narrower than the ordinary English meaning because it excluded from the definition of yoghurt all products having a pH in excess of 4.5. Even in that case their Honours said: It can hardly be accepted that a product on the border line of pH 4.5 might change its character from "yoghurt" to something else not being "yoghurt", if in the manufacturing process the pH level was found to be slightly in excess of 4.5, say 4.51. 24 Where the question to be answered as to the characterisation or classification of a product is one of fact and degree, as it was for biscuits in Ferrero, Lord Wolf MR said that it is a 'perfectly satisfactory statement of the approach' to be taken to consider different characteristics of the product and, if the product has the characteristics of two categories, to place it in a category in which it has sufficient characteristics to qualify (at 885). As Jacob LJ said in Procter & Gamble at [14], this sort of question, being a matter of classification, 'is not one calling for or justifying over-elaborate, almost mind-numbing, legal analysis. It is a short practical question calling for a short practical answer'. In a case where scientific analysis does not form part of the characterisation of the product, its classification is not a scientific question. 25 Dr Quail, whose evidence on the ingredients and manufacturing process of Mini Ciabatte was accepted by the primary judge, said in his report that the ingredient table included in the report, in which he compared the ratio of ingredients for bread, biscuits, crackers, pretzels and wafers, represented typical ranges. He acknowledged that there may be exceptions that fall outside of these ranges. The information was, he said, based on generally available recipes. The appellants' case was not argued before the primary judge on the basis of key threshold ingredients or indicia by which crackers are defined. As his Honour's reasons demonstrate, various criteria were put forward by the parties and it was not put to the primary judge that these other indicia were subsidiary or minor, or that yeast and lamination represented threshold defining criteria. 26 The appellants do not criticise the formation of an overall impression on the part of the primary judge to determine whether or not Mini Ciabatte is a cracker but submit that this could only be done after considering what the appellants submit were the threshold issues. They submit that the overall impression cannot replace threshold inadequacies of the ingredients and manufacturing process. That submission is based upon an acceptance that the yeast, water and lamination factors are indeed threshold requirements for crackers. The evidence does not support this submission and the appellants have failed to establish that such threshold requirements exist. 27 The primary judge accepted that all crackers containing yeast (of which there was evidence) are made with a lamination process and that this feature distinguishes Mini Ciabatte from crackers. However, that is only one of the characteristics that his Honour took into account in determining whether Mini Ciabatte is properly classified as a cracker within the generally understood meaning of that word. 28 The appellants' main criticism of the overall impression formed by the primary judge is his Honour's reference to the fact that Mini Ciabatte is displayed in supermarkets together with crackers. The appellants emphasise that Mini Ciabatte is also displayed in supermarkets with products that are GST-free, such as lavash, bagel crisps and mini toasts. Also, Mini Ciabatte is sold not only in supermarkets in the company of crackers and biscuits but also in the delicatessen section of some supermarkets. 29 We do not see that this affects his Honour's reasoning or his Honour's statement at [109] that supermarkets display Mini Ciabatte together with crackers as comparable products and sell them either as a cracker or in the company of crackers or biscuits. That was correct. Finding that the choice of display is a more powerful and independent indicator than the name that the appellants attach to the product was a matter for the primary judge and has not been shown to be in error. In any event, the appellants accept that a supplier cannot, by a label, govern the classification of a product for the purposes of the GST Act. The primary judge did not, as submitted by the appellants, find that the location of the display governed the classification of a product; this simply formed one of the factors taken into account by his Honour. The fact that other products that are GST-free are also displayed in proximity with Mini Ciabatte does not, in our view, derogate from the force of the primary judge's reasons. 30 The appellants further submit that the primary judge erred in taking into account that Mini Ciabatte is 'substantially the same' or 'largely the same' in its attributes as a cracker. We do not accept that submission. First, as explained above, there is no bright line test for what is or is not a cracker. Secondly, although the primary judge did not need to consider whether or not Mini Ciabatte is "goods of a kind" specified in Schedule 1 as a cracker, this answers many of the appellants' submissions. The phrase "of a kind" has been defined by the Oxford English Dictionary (online edition, Oxford University Press, 2010) as 'of the same sort, not a typical or perfect specimen of the class'. The word "kind" is appropriately used to denote a genus, class or description (Commonwealth of Australia v Spaul (1987) 74 ALR 513 at 516 per Davies, Lockhart and Neaves JJ). The use of the words "of a kind" in s 38-3(1)(c) of the GST Act adds further generality to the description of the items described in Schedule 1: Air International Pty Ltd v Chief Executive Officer of Customs (2002) 121 FCR 149 per Hill J. Thus, a new product that does not possess all of the same characteristics of known crackers may nevertheless be within the relevant item. For example, in the present case, included within item 32 are products that do and do not contain yeast and products that might be produced by different manufacturing processes. The question is whether the resulting product comes within the genus, class or description of a cracker. 31 The appellants submit that the word "specified" in the phrase "of a kind specified" signifies precision and denotes the degree to which a product must have the characteristics of the item in Schedule 1. In this case, the appellants say, it means that Mini Ciabatte's ingredients must fall within the range of the ingredients for a cracker as in Dr Quail's report and must, if yeast is used, utilise the lamination process. 32 In Gantry v Parker and Parsley Petroleum Australia Pty Ltd (1994) 123 ALR 29 at 43, a passage relied upon by the appellants, Burchett J observed that "specify" is a word which signifies precision. However, his Honour added that the word must yield to its context. In the present case, in the expression "of a kind specified" in the Schedule the word "specified" does not serve to limit the description of what may constitute a cracker. The word in that context simply means 'mentioned or named specifically or definitely' (Macquarie Dictionary). 33 The appellants' submission is that Mini Ciabatte is not a cracker because it is not laminated and contains yeast. Even if that submission were to be accepted, we are satisfied that it is "of a kind" of the cracker genus. This takes account of the other characteristics of the product as set out by the primary judge at [109] and the general understanding of a cracker as a thin, crisp, dry, hard biscuit. That description applies to Mini Ciabatte. That is, Mini Ciabatte is of a kind specified in item 32 of clause 1 of Schedule 1 of the GST Act. We are not satisfied that it is not of such a kind.

The primary judge's decision to reject the appellants' application to file an affidavit during the hearing 34 The second issue in the appeal concerns his Honour's decision, in the exercise of his discretion, to reject an application by the appellants to file a further affidavit from a Mr Muntoni during the course of the proceedings. The asserted need to do so arose out of the cross-examination of the appellants' witness, Mr Abbatangelo. Mr Abbatangelo had sworn an affidavit in the proceedings in which he stated that he was 'intimately familiar with the ingredients and manufacturing process of the Mini Ciabatte'. Mr Abbatangelo was not the author of the documents setting out the manufacturing process. He translated the production process for Mini Ciabatte from Italian into English. That translation was provided to the experts of the parties and formed the basis for their reports and evidence. Mr Abbatangelo was cross-examined and said, inter alia, that the percentages in the manufacturing process were rough estimates. This was a matter taken into account by the primary judge in concluding that the ratio of ingredients in Mini Ciabatte, compared to the ingredients for crackers set out by Dr Quail in his report, was substantially the same. 35 The appellants submit that the primary judge should not have relied upon that evidence as Mr Abbatangelo was not the author of the written statements of the manufacturing process and was not qualified to comment on its accuracy. We reject that contention. Mr Abbatangelo held himself out as being able to speak on the statement of the manufacturing process and had given evidence that he was familiar with that process. The appellants rely on the fact that it only emerged in the cross-examination of Mr Abbatangelo that he was not the author of the written statement. As Mr Abbatangelo was the appellants' witness, it is surprising that it seems to be asserted that the appellants were unaware of this fact. 36 The appellants sought the leave of the primary judge to file and rely on a further affidavit of Mr Muntoni, the author of the written statement of the manufacturing process. The appellants point out that the Commissioner did not assert any disadvantage if that course were taken. 37 The primary judge refused leave to file the further affidavit. His Honour expressed the view that it would 'open up a can of worms' and would necessarily invite responses from the experts whose earlier opinions were based on an agreed statement of the manufacturing process. Further, his Honour said that the effect of the further affidavit would be to subvert the scheme for the filing of evidence that had been set up sometime previously by Gordon J. 38 The further affidavit was said to go to two errors in the statement of manufacturing process as to the relative percentages of : yeast, which it would be asserted was not 1.5% but 1.5-2%; and water, which it would be asserted was not 35% but 35-40%. In our view neither of those matters would have affected the primary judge's conclusion that Mini Ciabatte is a cracker. 39 Further, the statement of the manufacturing process had been provided to each expert. Until the cross-examination of Mr Abbatangelo, it was the common understanding of the parties that there was no dispute about it. The appellants say that Mr Abbatangelo was not in a position to give evidence about the written statement but Mr Abbatangelo was presented by the appellants as the person able to give that evidence. Although Mr Abbatangelo admitted in cross-examination that he was not qualified to give detailed evidence about the written statement, he reiterated that he was intimately familiar with its manufacture. 40 The appellants have not shown that the primary judge erred in the exercise of his discretion not to accept the further affidavit of Mr Muntoni (together with accompanying affidavits of an interpreter and the translation of that affidavit).

CONCLUSION 41 The appellant has not established error on the part of the primary judge, either in his Honour's decision not to permit the appellants to file the further affidavit of Mr Muntoni during the course of the trial, or in his Honour's conclusion that the appellants had not established that Mini Ciabatte is not food of a kind specified in item 32 of clause 1 of Schedule 1 of the GST Act, namely food that is or consists principally of crackers. 42 It follows that the appeal should be dismissed with costs. I certify that the preceding forty-two (42) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Bennett, Edmonds and Nicholas.