Optus Mobile Pty Ltd v Commissioner of Taxation

The Facts 5 Optus is incorporated in the ACT and is a subsidiary of Optus Communications Pty Ltd. Optus has carried on business at all material times as the seller of mobile telephone handsets and as the provider of a mobile telephone network. 6 At the material times, Optus purchased handsets both from local and overseas suppliers, although ninety-five per cent were purchased from local branches or subsidiaries of overseas manufacturers. The evidence did not make clear the source of the Nokia 3810, but the likelihood is that it was manufactured overseas and purchased by Optus from a local supplier. In any event, Optus has never manufactured mobile telephone handsets. 7 Ordinarily, a sale of a handset to Optus by a local supplier would be an assessable dealings under Item AD11b in Table 1 to Schedule 1 of the Assessment Act 1992 (a wholesale sale by any person of imported goods) and the sales tax would be payable by the supplier. However, in practice, Optus quotes its registration number at the time of purchase, in consequence of which the sale is not taxable: Assessment Act 1992, s 27(1). Where Optus imports mobile telephone handsets directly, it quotes its registration number at the time of local entry with the consequence that the "customs dealing" is not taxable: Assessment Act, 1992,ss 23(1), 27(1). 8 Optus sells mobile telephone handsets through a variety of distributors, including a network of franchisees operating under the name "Optus World". According to Optus' statement of issues, approximately nineteen per cent of sales of handsets by Optus are (and, I infer, were at the relevant time) wholesale sales to distributors. In relation to these sales, Optus calculates and remits sales tax based on the wholesale price at which the handsets were sold. There is nothing to indicate that these sales involve anything other than a simple sale and delivery of the handsets for on-sale to customers by the distributors. 9 According to the same source, Optus sells the balance of its mobile telephone handsets by means of "bundled sale contracts". These are contracts by which a customer purchases a handset below the suggested retail price, on the condition that the customer agrees to connect to the seller's mobile network and to remain as a subscriber for a stipulated minimum period at a minimum monthly fee. The sale in the present case was a bundled sale contract. 10 The use of bundled sales contracts by public mobile carriers was pioneered by Vodafone, a competitor of Optus, in early 1994. Optus itself launched its first bundled sale product in October 1994, in part because it had fallen behind budget in connecting customers to its digital network. At that time, Optus' marketing business unit formed the view that a particular difficulty was created by the fact that handsets for the digital network cost about $700 more than an equivalent handset using analogue technology. As Optus' then Marketing Manager explained in her affidavit, she "saw the sale of handsets as merely ancillary to [the] underlying objective of getting customers to purchase airtime". 11 Optus adopted the practice of using its distributors as agents to effect sales to customers of handsets and airtime under bundled sale contracts. This practice was apparently designed to overcome difficulties that might otherwise have arisen by virtue of the prohibition against engaging in practices of exclusive dealings, contained in s 47(1) of the Trade Practices Act 1974 (Cth) ("Trade Practices Act"). 12 The sale of the Nokia 3810, with which these proceedings are concerned, took place on 7 November 1997 as part of Optus' "Lift Off" promotion. An agent of Fields (the customer) attended the retail premises of Optus World Pymble and signed a printed form. By this document, Fields applied to purchase a Nokia 3810 handset from Optus under the so-called "'yes' 60" plan. The price for the handset under the "'yes' 60" plan was $199 (called the "upfront purchase price"). Field's agent signed an agreement in the following form: "5. AGREEMENT - TO BE COMPLETED BY ALL APPLICANTS ... I have read and agree to the terms and conditions overleaf and I understand that 'yes' 30, 'yes' 60 and 'yes' 90 have certain conditions which include: · a monthly access fee · an additional charge of $250 ('yes' 30), $350 ('yes' 60) or $450 ('yes' 90) if I choose any of the options in Clause 5 of the terms and conditions (overleaf) within 18 months; and that · a change of ownership or rate plan is not permitted during the first 18 months of this contract." 13 The second page of the form set out the terms and conditions of the "Lift Off" "'yes' 30", "'yes' 60" and "'yes' 90" promotions. Insofar as relevant, these were as follows: "1. This is an invitation from Optus Mobile Pty Ltd ("Optus") to apply for the 'yes' 30/60/90 promotions. 2. Under this promotion you may apply to purchase one of the mobile digital phones listed overleaf by paying the upfront purchase price at the time of delivery of the equipment to you. Delivery of the equipment to you constitutes acceptance by Optus of your application. 3. If Optus accepts your application to purchase one of the mobile digital phones under this promotion, you agree to connect to the Optus Mobile Digital network on the terms and subject to the conditions of Optus' relevant Standard Agreement of one of the following rate plans: · the Optus 'yes' 30; or · the Optus 'yes' 60; or · the Optus 'yes' 90. You agree to pay Optus: (a) the activation fee of $65; (b) the monthly access fee specified on the selected plan for each month you remain connected to the Optus Mobile Digital Network; and (c) the upfront purchase price. 4. (a) All calls made by you during this agreement will be charged at the rates specified in the 'yes' 30 and 'yes' 60 or 'yes' 90 sections in the relevant Optus standard agreement. (b) 'yes' 30, 'yes' 60 and 'yes' 90 include up to $5, $35 and $70 respectively of prepaid calls per month (excluding international roaming). ... 5. If within 18 months of the date of Optus' acceptance of your application: (a) you terminate this agreement; or ... you agree to pay Optus and agree that Optus may debit your next account with an additional amount of $250 for 'yes' 30 or $350 for 'yes' 60 or $450 for 'yes' 90. 6. Optus' acceptance of your application to purchase a mobile digital phone under this promotion and to connect to the Optus Mobile Digital Service is subject to Optus' applicable credit checking procedures. ... 8. You agree to the terms and conditions." 14 It will be seen that these terms and conditions contemplate (cl 6) that Optus' acceptance of the application was subject to credit checking procedures. I was informed from the bar table, without objection, that in practice credit checks took place while the customer waited at the distributor's retail premises and that, if those checks proved satisfactory, the handset was delivered to the customer before he or she left the store. It is safe to conclude that this procedure was followed in the sale to Fields. 15 The terms and conditions of the "Lift Off" promotion were agreed between Optus and its distributors, including franchisees. Under the terms of the promotion, a distributor could order handsets from Optus by paying a "deposit" equivalent to the upfront purchase price for customers who connected to the "'yes' 30" plan. If the customer purchased the handset under the "'yes' 30" plan, the distributor received no reimbursement from Optus (but was entitled to retain the upfront purchase price paid by the customer). If the customer purchased the handset under the "'yes' 60" plan, the distributor retained the upfront purchase price and received "reimbursement" from Optus of the difference between the "'yes' 30" price and the "'yes' 60 price". Similarly, if the customer elected to join the "'yes' 90" plan, Optus reimbursed the distributor the difference between the "'yes' 30" price and the "'yes' 90" price. 16 The following table, drawn from the terms of the agreement between Optus and its distributors, illustrates the pricing of selected handsets under the various plans: Upfront Purchase Price 'yes' 30 Upfront Purchase Price 'yes' 60 Upfront Purchase Price 'yes' 90 Mobile Digital Handset Ericson GA628 $159 $ 69 $0 Nokia 3810 $299 $199 $99 Ericsson GH688 $429 $349 $249 Motorola Startac 80 $649 $559 $459

It can be seen that in the case of the Nokia 3810, the distributor paid Optus a deposit equivalent to the upfront purchase price under the "'yes' 30" plan ($299). If the customer purchased the handset under the "'yes' 60" plan (as Fields did), the customer paid an upfront purchase price of $199. The distributor retained this sum and received reimbursement for the difference between the price it had paid and the price paid by the customer (that is, $100). Thus, the distributor recouped the deposit it had paid to Optus in respect of the handset. The distributor was rewarded for effecting the bundled sale by a commission from Optus, calculated in accordance with the terms of the "Lift Off" promotion agreement. 17 From the customer's point of view, the bundled arrangement involved the following components: (i) the upfront purchase price for the handset; (ii) the activation fee of $65; (iii) a monthly access fee for a minimum period; (iv) call charges (including pre-paid calls in accordance with cl 4(b) of the customer form); and (v) a cancellation fee. Except for the activation fee, the cost or minimum cost to the customer of each component of the arrangement varied, depending on the plan chosen. A customer prepared to agree to higher minimum charges and a higher cancellation fee obtained the benefit of a reduced upfront purchase price for the handset. 18 It was an agreed fact that the cost to Optus of acquiring a Nokia 3810 handset at the relevant time was $405. From Optus' point of view, therefore, the prices at which it sold Nokia 3810 handsets under the three 'yes' plans were all substantially below cost. In the case of the "'yes' 90" plan, the price attributed to the sale of the Nokia 3810 handset was $99, less than one quarter of the cost to Optus of acquiring the handset. (As the table shows, a customer accepting the "'yes' 90" plan, with an Ericson GA 628 handset, "paid" an "upfront purchase price" of $0.) 19 Optus' recommended retail price for the handset under an "unbundled" sale was $769. It was a further agreed fact that the price at which Optus in November 1997 would have sold a Nokia 3810 mobile telephone handset by wholesale to a retailer who did not enter into, and did not sell to a customer who entered into, a "Lift Off" 'yes' agreement was $538.30. This agreed fact is of considerable importance in this case. 20 Mr Slater QC, who appeared with Mr Wigney for the Commissioner, helpfully prepared a table which summarised figures emerging from the evidence relating to the Nokia 3810: Nokia 3810 (1997) Cost to Applicant $ 405 Unbundled Wholesale Price $538.30 Suggested Retail Price $ 769 (unbundled) 'Yes' plan 30: $ 299 retail price $ 904 Minimum total outlay $ 250 Cancellation fee 'Yes" plan 60: $ 199 retail price $1344 Minimum total outlay $ 350 Cancellation fee 'Yes' plan 90: $ 99 retail price $1784 Minimum total outlay $ 450 Cancellation fee

21 As I have noted, Optus at the material times sold handsets, including Nokia 3810 handsets, by wholesale to retailers. Optus' Marketing Manager gave affidavit evidence (incorporating an amendment that counsel agreed should be made) as follows: "If it were not necessary to appoint distributors as agents such that the handsets to be sold to customers under bundled sales contracts could be sold to the distributors by wholesale [Optus] could not sell the handsets to the distributors at a wholesale price [pursuant to a bundled agreement with the wholesaler] which was greater than the retail price to be paid by the customer for the handset under a bundled sales contract. As the Marketing Manager... I therefore would have had to set the wholesale price in respect of such sales at an amount no greater than the price at which the distributor could sell to its customers." I infer from this and other evidence that, at the relevant times, Optus did not sell handsets by wholesale under bundled sale contracts for fear of attracting adverse consequences under s 47(1) of the Trade Practices Act. The Issue 22 It was common ground that the sale of a mobile telephone handset by Optus directly to a customer, through a distributor acting as Optus' agent, is an "indirect marketing sale" as defined in s 20 of the Assessment Act 1992. This follows from the terms of s 20, which provides as follows: "20. A sale of assessable goods is an indirect marketing sale if it is a retail sale made by a person ('the marketer') who is not the manufacturer of the goods and the sale is made: (a) under an arrangement that provides for the sale of the goods to be made by a person who is acting for the marketer but is not an employee of the marketer; or (b) from premises that: (i) are used, mainly for making retail sales of goods, by a person or persons other than the marketer; and (ii) are held out to be premises of, or premises used by, the other person or persons." 23 For the purposes of Table 1 of Schedule 1 of the Assessment Act 1992, an "indirect marketing sale" is an assessable dealing under Item AD2d, in respect of goods purchased by the marketer in Australia and under Item AD12d in respect of goods imported by the marketer. In each case, the marketer, as the seller of the goods, is liable to pay sales tax in respect of the assessable dealing on the "notional wholesale selling price". This is so regardless of whether the marketer actually sells any goods by wholesale. The statutory definition of the expression "notional wholesale selling price" has been set out earlier in this judgment. 24 Optus submitted that the definition of notional wholesale selling price contemplated a price to be determined by reference to a hypothetical wholesale sale by Optus itself. According to Mr Gzell QC, who appeared with Mr Fraser for Optus, the hypothetical sale must be assumed to include the same terms and conditions as Optus' actual retail sales, except for those terms and conditions which would be absent or modified in a sale by wholesale. So much was said to flow from the decision of the High Court in Commonwealth Quarries (Footscray) Pty Ltd v Federal Commissioner of Taxation (1938) 59 CLR 111, a case decided under s 18(1)(b) of the Sales Tax Assessment Act (No 1) 1930 ("Assessment Act 1930"). Mr Gzell submitted that the hypothetical wholesale sale must be assumed to have incorporated a condition that the retailer require the customer to connect to Optus' mobile network and pay a minimum monthly fee. If such a condition were incorporated, having regard to the forces of competition, Optus could not have charged a price for handsets sold under the hypothetical wholesale sale greater than the retail price it actually charged.

Reasoning Is the Definition Satisfied? 25 The general scheme of the sales tax legislation was summarised by a Full Court of this Court recently in Amway of Australia Pty Ltd v Commonwealth of Australia [1999] FCA 283, at pars 30, 31: "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. 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." 26 As was pointed out in Amway, the sales tax legislation has adopted a variety of formulae to determine the wholesale sale value of goods sold by retail. The formula considered in Commonwealth Quarries, which applied to retail sales of goods by a manufacturer who sold the class of goods both by wholesale and retail, was as follows: "the amount for which the goods would be sold by the manufacturer if sold by wholesale". This formula was amended by the Sales Tax Assessment Act (No. 1) Amendment Act 1978 (Cth), to read as follows: "the amount for which the goods could reasonably be expected to have been sold by the manufacturer by wholesale." The amended formula was adopted in 1988 for all retail sales by a manufacturer, regardless of whether that manufacturer in fact sold goods of the same class by wholesale: Sales Tax Assessment (No 1) Amendment Act 1988 (Cth) s 3 and Schedule, inserting a new s 18(1)(b) into the Assessment Act 1930. Different formulae again were adopted by the Assessment Act 1930, where other taxing points brought about a liability for sales tax: Amway, at par 37; Estee Lauder Pty Ltd v Federal Commissioner of Taxation (1988) 80 ALR 314 (Burchett J); Commissioner of Taxation v Pacific Dunlop Ltd [1999] FCA 214 (FC). 27 Amway itself involved a sale of goods under an "indirect marketing arrangement", as defined in s 3(4A) of the Assessment Act 1930, which was similar, but not identical, to the definition of "indirect marketing sale" in s 20 of the Assessment Act. (The history of the indirect marketing provisions was traced in Amway at first instance: Amway of Australia Pty Ltd v Federal Commissioner of Taxation (1998) 40 ATR 200 (Foster J), at 204-205.) The sale value of the goods in the circumstances applied in Amway, was "the amount which would be the fair market value of those goods if sold by [the indirect marketer] by wholesale". 28 The Court in Amway described the concept of "fair market value" (which does not appear in the current definition of notional wholesale selling price) as "elliptical". The Court observed that there was no particular reason why the range of hypothetical purchasers should be restricted to retail stores selling the same goods in competition with Amway, as Amway's counsel had submitted. Nor did the Court see any reason why the hypothetical purchasers should be assumed to be restricted to the actual purchasers in the retail sale, as the Commissioner's counsel had submitted. The judgment continued (at par 43): "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." 29 While Amway provides guidance as to the construction of the definition of the notional wholesale selling price, I think that the safest starting point is the statutory language itself. That language makes it clear that the notional wholesale selling price is not the price for which the taxpayer actually sold the goods by retail. Rather, the question posed by the definition is: "What is the price for which the taxpayer could reasonably have been expected to sell the goods by wholesale under an arm's length transaction?" The answer to this question requires reference to a hypothetical transaction, namely a wholesale sale of the goods by the taxpayer under an arm's length transaction. 30 As far as the hypothetical transaction is concerned, it is the expectations of the taxpayer that must be considered (not those of a hypothetical third party). It is therefore necessary to consider the price for which the taxpayer itself could reasonably have been expected to sell the goods under an arm's length wholesale sale. I think it is clear enough that the question posed by the definition is one of fact, to be determined on the evidence in a particular case. This is consistent with the approach taken in Amway. 31 Depending on the circumstances, the factual inquiry may involve considerable difficulties. For example, the particular taxpayer may never have sold goods of the relevant class by wholesale. The determination of the price for which such a taxpayer could reasonably have been expected to sell the goods under an arm's length wholesale transaction may involve complex evidentiary issues. Similarly, there may be difficulties in a particular case in ascertaining the identity or characteristics of the hypothetical purchasers with whom the taxpayer could be expected to have dealt. The definition itself does not identify the hypothetical purchaser and, as the Court pointed out in Amway, the prices that large retailers are prepared to pay for goods may be lower than the prices smaller retailers are prepared or required to pay. 32 In my opinion, the terms and conditions of an actual retail or indirect marketing sale by the taxpayer may or may not be relevant to the hypothetical wholesale sale which determines the price for which the taxpayer could reasonably have been expected to sell the goods. It needs to be borne in mind that the definition of notional wholesale selling price is relevant not only to sales by indirect marketers, but also to other retail sales, such as those by manufacturers who have purchased goods free of sales tax (see Items AD2a and AD2b in Table 1 to Schedule 1 of the Assessment Act 1992). Under the statutory scheme, therefore, the definition determines the wholesale value of goods, regardless of whether the taxpayer who has sold the goods by retail (including an indirect marketer) also sells goods of the same class by wholesale. 33 If, for example, a taxpayer who sells the goods by retail has never sold goods of the relevant class by wholesale, the most convenient way of ascertaining the terms of the hypothetical wholesale sale may well be to commence with the terms of the actual retail sale, and to eliminate price and any other term or condition which would be absent or modified in a sale by wholesale. The result might fairly be described as the price for which the taxpayer could reasonably have been expected to sell the goods by wholesale under an arm's length transaction. 34 On the other hand, there may be cases where it is unnecessary or even inappropriate to take into account the terms and conditions of the retail sale in ascertaining the notional wholesale selling price. If, for example, the taxpayer actually sells goods of the relevant class by wholesale, it may be unnecessary to go further when determining the price for which the taxpayer could reasonably have been expected to sell the goods by wholesale under an arm's length transaction. In such a case, the best evidence of the taxpayer's reasonable expectations is likely to be the price the taxpayer actually receives from transactions of the kind hypothesised by the statutory definition: cf Bob Jane T-Marts Pty Ltd v Commissioner of Taxation [1999] FCA 415 (Finkelstein J), at par 68. 35 In my opinion, the present case is one where the notional wholesale selling price should not be determined by reference to the terms and conditions of Optus "bundled" retail sales of handsets. The evidence shows that Optus, at the material times, sold Nokia 3810 handsets by wholesale. It is an agreed fact that the price at which Optus would have sold a Nokia 3810 handset to a retailer under an unbundled transaction was $538.30. There was no suggestion that the sales to retailers from which this price was derived were otherwise than at arm's length. Nor was there any suggestion that the terms of those sales were inappropriate to a sale of the goods by wholesale under an arm's length transaction. Accordingly, there is no need in this case to identify hypothetical purchasers or to consider the possibility that different retailers would be prepared to pay different prices for the handsets. 36 Furthermore, the evidence demonstrates that the retail sales of handsets by Optus were at prices substantially below cost. The obvious inference (having regard to the fact that Optus' wholesale sales were at a profit) is that Optus was only willing and able to sell handsets by retail below cost because of the revenue and, presumably, profits derived by it from the charges to retail customers for services provided under the bundled arrangements. In these circumstances, the retail sales are of little assistance in determining the notional wholesale selling price of the handsets. The price for which Optus could reasonably have been expected to sell the handsets by wholesale under an arm's length transaction was the price for which it actually sold the goods by such a transaction. 37 In my opinion, it follows that the price for which Optus could reasonably have been expected to sell the Nokia 3810 handset by wholesale, under an arm's length transaction, was not $199 (or any lower figure). On the evidence, that price was $538.30.

Commonwealth Quarries 38 Is any different result to be reached because of the decision of the High Court in Commonwealth Quarries, on which Mr Gzell relied?In that case, the taxpayer sold quarry products, both by wholesale and by retail. Its prices, which were the same whether the sale was by wholesale or retail, followed a price list fixed by a trade association and varied according to the place of delivery. The customer paid one inclusive price for the goods, which included the cost of delivery. 39 In Commonwealth Quarries, the taxpayer contended that an amount representing the cost of cartage of the goods should be deducted from the inclusive price to arrive at the sale value for the purposes of the Assessment Act 1930, both in respect of wholesale and retail sales. In the case of wholesale sales, the "sale value" under s 18(1)(a) of the Assessment Act 1930 was "the amount for which the goods were sold". Retail sales were governed by s 18(1)(b)(i), which provided that, where a manufacturer sold goods by retail, the "sale value" of the goods was to be "(i) if the goods are of a class which the manufacturer himself sells by wholesale - the amount for which the goods would be sold by the manufacturer if sold by wholesale." 40 The High Court unanimously held that the sale value of the quarry products included the cost of cartage. Latham CJ held (at 116) that, in the case of the wholesale sales, it was clear that the amount for which the goods were sold was the amount which was agreed to be paid for them delivered to the point at which the taxpayer vendor agreed to deliver them. His Honour dealt with the retail sales as follows (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." 41 Dixon and McTiernan JJ held that, in the case of the goods sold by wholesale, the amount for which they were sold was simply the contract price. Their Honours said this (at 121): "In a contract under which for a single lump sum of money a party undertakes to do various things, including the transfer of property in goods, it is quite true that the entire money consideration or contract price cannot be regarded as the amount for which the goods are sold. In such a case the amount for which the goods were sold could not be ascertained from the transaction except by allocating part of the consideration to the other acts or things to be done by the seller. But delivery is so essential to a sale of goods that it cannot be distinguished in this manner from the sale as a separate and independent act or service to which part of the consideration forming the selling price must be allocated." They then addressed the sales by retail (at 122): "The words which we have described as constituting the chief or leading provision declaring the standard of sale value deal with the general case of a manufacturer selling by wholesale. They are followed in the sub-section where they occur, viz., sec 18(1) of the Sales Tax Assessment Act (No 1) 1930-1935, by a paragraph dealing with the special case of a manufacturer selling by retail. If in such a case the goods are of a class which he usually sells by wholesale, the sale value is to be the amount for which the goods would be sold by the manufacturer if sold by wholesale.... In the context we should interpret the paragraph as requiring that a sale by wholesale should be supposed with the same terms and conditions as the actual retail sale made, except in respect of price and any other term or condition which would be absent or modified in a sale by wholesale." 42 In rejecting the taxpayer's claim, Evatt J observed (at 123) that "[d]elivery at the point of actual sale may be of the essence of the sale value of goods." As to the retail transaction he reasoned as follows (at 123): "[T]he argument for the taxpayer is that the sale is hypothetical, not actual: therefore, why include cartage in such a case? It seems to me that the answer is that on a sale by retail by a manufacturer, presumably at a higher price than wholesale, the manufacturer will only be charged on the basis that the difference (if any) between retail and wholesale price will not be included in the sale value, but otherwise the actual transaction (e.g., as to the inclusion of cost of delivery in the retail price) will be regarded as controlling. If so, the statutory hypothesis is satisfied, and it is not necessary that any further hypothesis, e.g., sale at the ordinary point of time of wholesale sale, should be made." 43 In my opinion, there is nothing in the reasoning of the High Court in Commonwealth Quarries which requires the notional wholesale selling price of the Nokia 3810 handset to be ascertained by reference to a hypothetical wholesale sale in the form of a "bundled" arrangement, whereby the retailers oblige their customers to connect to Optus' mobile network and pay a minimum monthly call fee. Nor does the decision require the price to be ascertained by reference to a wholesale sale to retailers, the terms of which oblige retailers, in a manner not addressed by the evidence, to on-sell the handsets only to customers who agreed to connect to Optus' network under bundled arrangements. 44 Assuming that Commonwealth Quarries requires the inquiry to commence with the terms of Optus' retail sales, the test supported by Mr Gzell does not produce the result for which he contended. Mr Gzell relied especially on the judgment of Dixon and McTiernan JJ in Commonwealth Quarries, in which their Honours supposed a sale by wholesale on the same terms and conditions as the actual retail sale made, except in respect of price and any other term or condition which would be absent or modified in a sale by wholesale. 45 The evidence establishes that Optus, on its own understanding of the legal position, simply could not have sold handsets to retailers by "bundled" wholesale arrangements. To do so (as Optus accepted) would have contravened s 47(1) of the Trade Practices Act. Optus in fact sold handsets by wholesale, under straightforward unbundled arrangements, and did so at a profit. There is no evidence that it ever sold handsets by wholesalers to retailers on an understanding (short of a contractual arrangement) that the retailers would charge customers a price for the handsets below Optus' cost if the customers agreed to connect to Optus' network. Doubtless, an understanding of this kind would also have created difficulties under the Trade Practices Act. 46 In short, the bundling arrangements would have been absent in any wholesale sale by Optus of the handsets. Moreover, the price would have been different from that charged by Optus under its bundled retail arrangements. To put the matter another way, Optus could not reasonably have been expected to sell the goods by wholesale at a price that incorporated bundling arrangements. Accordingly, consistent with the reasoning in Commonwealth Quarries, the notional wholesale selling price of the handset is to be determined by reference to the unbundled wholesale sales actually made by Optus. 47 In any event, although it is unnecessary to decide in this case, I doubt whether Commonwealth Quarries requires that the hypothetical transaction always be constructed, at least in the first instance, by reference to the terms and conditions of the taxpayer's retail sales. While this will often be the appropriate course, it seems to me that the question posed by the definition is ultimately a factual issue, to be resolved in the particular circumstances of each case. 48 It is of some importance to remember the context in which Commonwealth Quarries was decided. The statutory formula applied in that case ("the amount for which the goods would be sold by the manufacturer if sold by wholesale") was different from the current definition of notional wholesale selling price ("the price...for which the taxpayer could reasonably be expected to sell the goods by wholesale under an arm's length transaction"). The formula in Commonwealth Quarries applied only to a manufacturer who sold goods by retail and who also sold goods of that class by wholesale. The current definition also applies to traders who never sell by wholesale and thus covers a wider range of circumstances. Moreover, the only term or condition in issue in Commonwealth Quarries related to the delivery of the goods. This was a term (as Evatt J said) that could be regarded as of the essence of a sale of goods. The High Court was not required to address the situation where a trader adopts completely different practices for retail sales and for wholesale sales. 49 In Genex Corporation Pty Ltd v Commonwealth (1991) 30 FCR 193 (FC), Hill J (with whom Beaumont and Burchett JJ agreed) observed (at 211) that, in carrying out the hypothesis of a wholesale sale postulated by s 18(1)(b) of the Assessment Act 1930, the Commissioner "may assume the hypothetical sale is made on the same terms and conditions as the actual retail sale is made, except in respect of price, there being no terms of the contractual arrangement which would be absent or modified if the real sale were a wholesale sale". His Honour was there speaking of a contract for the developing of film and the sale of prints, an issue that continues to present difficult issues: Tanu Pty Ltd v Commissioner of Taxation [1999] FCA 8 (FC). Hill J was not considering the current definition in the Assessment Act 1992. Nor was his Honour addressing a case where the wholesale and retail sales were conducted on very different terms and conditions (including price). (The High Court affirmed the decision in Genex, but did not consider any question of wholesale value: The Commonwealth v Genex Corporation Pty Ltd (1992) 176 CLR 277.) 50 Since argument in the present case concluded, Finkelstein J, in Bob Jane T-Marts, has expressed the view that the principles established in Commonwealth Quarries apply to the ascertainment of the notional wholesale selling price under the Assessment Act 1992 (par 47). If his Honour meant that, in many cases, it will be appropriate to determine the notional wholesale selling price by ascertaining the terms of actual retail sales and inquiring what terms and conditions would be absent in a wholesale sale, I agree. If his Honour meant to say that this approach must invariably adopted, regardless of the circumstances, the reservations I have expressed remain. I should add that I have some difficulty in adopting Finkelstein J's reading of the majority in Tanu as deciding that Commonwealth Quarries applies to the definition of notional wholesale selling price. But it is not necessary to pursue that question further. 51 The question may, in the end, be a semantic one only. If Commonwealth Quarries is regarded as governing the current definition in all cases, the qualification stated by Dixon and McTiernan JJ is probably sufficiently broad to accommodate situations where it is inappropriate to take the terms and conditions of retail sales as a guide in determining the notional wholesale selling price. As I have explained, Commonwealth Quarries does not assist Optus in the particular circumstances of this case. 52 In my view, Optus has not made out its case that the notional wholesale selling price of the Nokia 3810 handset was not more than $199. In the absence of a cross-claim, it is not strictly necessary to determine the price for which Optus could reasonably have been expected to sell the Nokia 3810 handset by wholesale under an arm's length transaction. However, on the evidence, in my opinion that price was $538.30. A Further Question 53 There is no need to consider in this case whether the statutory definition would ever produce a notional wholesale selling price for goods less than the taxpayer's cost of acquiring those goods. Amway suggests a negative answer to that question, but it may be that there are circumstances in which a taxpayer can reasonably expect to sell goods by a wholesale sale at arm's length at a price that produces a loss. If there are such circumstances, they are not present in this case.

Conclusion 54 Since it was agreed that the transaction I have examined was representative of all three dealings identified in the application, it follows that Optus' application should be dismissed. Optus should pay the Commissioner's costs. I certify that the preceding fifty-four (54) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Sackville .

Counsel for the Applicant: Mr I V Gzell QC with Mr P M Fraser

Counsel for the Respondent: Mr A H Slater QC with Mr M A Wigney

Solicitor for the Respondent: Australian Government Solicitor