Plaintiff v Defendant

1 The Plaintiff appeals from a decision of the Victorian WorkCover Authority made 2 June 2011 in relation to the calculation of the Plaintiff's insurance premium for the 2010/2011 policy period. The appeal is brought pursuant to s 36J of the Accident Compensation (WorkCover Insurance) Act 1993 (Vic) and the appeal is a hearing de novo.[1]

2 The Plaintiff was obliged to have in force a WorkCover insurance policy with the Authority for the 2010/2011 policy period.[2] The premium payable by the Plaintiff for the insurance policy in respect of that period is to be determined in accordance with the Premiums Order[3] made by the Governor in Council.[4] WorkCover Insurance Premiums Order (No. 18) 2010/2011 dated 9 June 2010 came into force on 30 June 2010 and specifies the premiums payable by employers for WorkCover insurance policies in force in respect of policy periods between 4.00pm 30 June 2010 and 4.00pm 30 June 2011. The Authority determined that the Plaintiff's premium was to be calculated upon the basis that the predominant activities at its workplace caused it to fall within Group Class 246 "Footwear", C2460A "Footwear or Footwear Components Mfg" in Schedule 4 to the Premiums Order. The Plaintiff, in contrast, contended that its premium was more appropriately calculated by reference to Group Class 477 "Textile and Clothing Wholesalers", F4773A "Footwear Wholesalers". During the course of the hearing classification F4673T "Footwear Agencies" was relied upon in the alternative by the Plaintiff.

3 The premium payable by an employer depends upon the industry classification of a workplace. Item 7 of Schedule 1 of the Premiums Order provides that the industry classification of a workplace is that in Schedule 4 "to which the predominate activity at that workplace corresponds or most closely corresponds".[5] Item 7 also provides that in determining the industry classification regard must be had to the introduction to, and to all relevant elements of, Schedule 4. The schedule makes clear that the predominant activity (upon which the industry classification depends) is to be determined in accordance with Item 3 of Schedule 1 without regard to Schedule 4.[6] The process for determining the industry classification is set out in a flow chart contained in the Premiums Order which emphasises that the predominant activity is to be determined in accordance with Schedule 1 and not by reference to Schedule 4. That process is mandated to ensure that the factual inquiry necessary to determine the predominant activity at a workplace is not influenced by preconceived notions of the industry classifications.

4 Item 3 of Schedule 1 defines predominant activity. In the case of the Plaintiff the relevant sub item provides that:

Predominant activity, in relation to a period of coverage at an actual workplace of an employer, means the activity of the employer which during that period contributes, or is likely to contribute, more than any other activity of the employer to the value of goods and/or services produced or provided by operations carried on in that workplace.[7]

This provision does not call for a factual inquiry into a predominant activity at an employer's actual workplace. The predominant activity of an employer at a workplace is, rather, the consequence brought about by the operation of the provision after the determination of, and inquiry into, which of the activities contributes, or is likely to contribute, more than any other activity of the employer to the value of the goods and services produced or provided by operations carried on in that workplace. The case was conducted before me, and the issues had been debated between the parties previously, on the basis that the item in Schedule 1 required a factual inquiry and determination of the activity which was predominant at the workplace. However, Item 3 of Schedule 1 requires a more focused and disciplined inquiry requiring: first, the identification of the goods and services produced or provided by operations in a workplace; secondly, the identification of the value of those goods and services; thirdly, the identification of a causal link between the activities of the employer and the value of the goods and services; and fourthly, the identification of which of those activities contributes, or is likely to contribute, more than any other activity to the value of the goods or services. The reason for linking the outcome to the activity contributing most to the value of the goods and services produced or provided at the workplace is not stated in the provisions, but may perhaps lie in a general policy of ensuring that the economic burdens of the premium falls upon the activity which provides most to the economic returns from a workplace, notwithstanding that the activities producing the greatest value may not predominate by such other measures as time spent by the employer, cost to the employer of their provision, capital employed by the employer or physical size or space needed or allocated by the employer to undertake the activities.

5 The Authority placed some reliance upon the descriptions of its activities as a manufacturer which the Plaintiff had given in various places. Its company tax return for 2008, for example, described its main business activity as "shoes manufacturing", and it described itself as "footwear wholesaling" in a response to a questionnaire from the Victorian WorkCover Authority on 26 March 2010. In email correspondence and website promotion it had similarly adopted a description of its activities as manufacture. None of these, however, can substitute for, or determine, the factual inquiry required by Item 3 in Schedule 1.

6 The first step to be taken, therefore, is to identify the relevant goods and services. The parties in that regard agreed that the goods and services produced and provided by the Plaintiff at the workplace were: footwear manufactured in Australia; footwear and apparel manufactured in China for sale by the Plaintiff from the workplace; and services performed by the Plaintiff from the workplace and provided to its subsidiaries worldwide.

7 The second step to be taken is to identify the value of those goods and services. "Value" is not defined and may be taken to have its ordinary meaning. In Accident Compensation Commission v John Valves Pty Ltd[8] Ashley J (as his Honour then was) said of an earlier provision:

Second, if it be correct to examine the value of goods produced by the employer, consideration of external transactions is not necessarily required. By that I mean that the activity most contributing to value of goods produced may be determined even though the goods remain unsold or though the employer uses some of the goods itself without paying any purchase price for them.[9]

In this case there was no direct evidence of the value of the goods and services but the parties largely treated the gross revenue received by the Plaintiff in the policy period from the activities producing or providing the goods and services as sufficiently reflecting their value. In this case the evidence tendered about the gross revenue from the three classes of goods and services is that which best reflects their value notwithstanding the deficiencies which gross revenue may have to establish value.

8 The third step to be taken is to identify a causal link between "the activities of the employer" and the value of the goods and services. The parties agreed, in my view correctly, that the phrase "contributes, or is likely to contribute" imports into the operation of the item a requirement to find a casual link.[10] The causal nexus to be found is expressed as being either contributes or likely to contribute. No doubt the words "likely to contribute" were inserted to enable the provisions to apply prospectively; that is, to enable the determination of an industry classification for a policy period before commencement of that period. However the phrase "contributes, or is likely to contribute" applies equally when the period has past and the facts are known. There is no reason to read the phrase as if they contained words of limitation preceding or otherwise qualifying "likely to contribute" such as to confine their operation to prospective determinations only. The causal nexus that may be found to exist between activity and value is, therefore, both of actual contribution as well as likelihood of contribution of the activity to the value of the goods and services produced or provided at the workplace.

9 The Plaintiff conducts activities at premises in Barwon Terrace in South Geelong. Its parent company is EMU Ridge Holdings Pty Ltd which holds the shares in the Plaintiff as trustee for the EMU Ridge Trust. The Plaintiff has six subsidiaries operating worldwide including China, Europe, North America and New Zealand. In Australia it manufactures and sells footwear under the EMU mark and brand. Worldwide the group manufactures in China and sells footwear and apparel directly through the subsidiaries.

10 The growth and size of the offshore manufacturing and sales activities has resulted in a significant part of the Plaintiff's activities in the workplace being for the needs of the worldwide group, and a significant amount of its income being derived from those activities. Mr Cox, the Chief Financial Officer of the Plaintiff, gave evidence explaining that the global fashion brand is controlled from the workplace in Geelong. The staff at the workplace are responsible for designing the footwear sold under the Plaintiff's brand throughout the world and its staff at the workplace are also responsible for sourcing and dealing with manufacturers in China for the production of stock for wholesale sale worldwide. They are also responsible for organising and approving advertising campaigns to be run throughout the world for goods sold under the EMU brand and for dealing with overseas marketing and public relations agencies for particular territories together with any local staff employed by a relevant subsidiary. The value (in the sense of gross revenues) of those activities in the policy year was $4,903,395, being a charge of 13.05% applied to each of its subsidiaries to compensate it for the expenses incurred for the group as a whole. Those expenses were allocated to each of the companies within the group in proportion to the percentage of the turnover each company has of the group's total turnover. Each company, except the Plaintiff, was then charged a margin of 13.05% as a management fee.

11 The management fee was the subject of a report undertaken for the plaintiff by BDO Kendalls as a transfer pricing review in support of responses provided to the Commissioner of Taxation. The report described the changing nature of the group's manufacturing since 2005:

Until a few years ago most of the manufacturing for the group was undertaken in Geelong, Australia.

Following the acquisition by the current owners in 2005 some manufacturing has continued in Geelong but most is now conducted by arm's length third party contract manufacturers in China. This move was in keeping with that of many Australian companies which took advantage of the lower manufacturing costs in China. Indeed for many manufacturers the move of manufacturing operations to lower-cost operators in China became imperative to ensure survival in a much more cost competitive environment. This was particularly so in the footwear and clothing industries.

The report noted that the headquarters of the group continued to be in Geelong and that the model adopted for the business has meant that many of the employees in Geelong perform roles which are relevant for the group worldwide, with the result that the Australian company "incurs the costs of these people (and their departments) and on charges these across the various EMU subsidiaries based on the contribution to worldwide turnover of each subsidiary". For the 2009 calendar year the expense categories (as revealed in the table in the BDO Kendalls report) were described as employee benefits expense, insurance, design, overseas courier, marketing expenses, bank fees, conference, finance costs, international travel and other expenses. These group expenses were allocated to each of the subsidiaries by reference to the proportion of turnover that each subsidiary had to the total turnover of the group. To that a management fee (in the 2009 year 10% but in the 2010 year 13.05%) was charged. Activities of that kind were described by Osborn JA in United Petroleum Pty Ltd v Victorian WorkCover Authority[11] as "head office management and administration".[12] The management activity of the Plaintiff for the group carried on at the workplace in Geelong contributed $4,903,395 in the period of coverage as measured by the management fee the Plaintiff charged to its subsidiaries.

12 In the same year the Plaintiff also produced or provided goods manufactured at the workplace from manufacturing activities valued (by reference to gross receipts) at $6,694,229. There was also produced or provided from the workplace footwear and apparel manufactured in China valued (by reference to gross revenue) at $6,054,114. On the basis of these three figures it would seem that the predominant activity was the Plaintiff's activity of manufacturing footwear at the workplace. However, counsel for the Plaintiff contended that the activities contributing to the value of the Plaintiff's sale of goods manufactured in China were materially indistinguishable from its activity for which it derived a management fee and, therefore, that it could reliably be concluded that it was the Plaintiff's activities as corporate manager that predominated in the sense that they contributed, or were more likely to have contributed, more than any other to the value of the goods and services produced or provided by operations carried on in its workplace.

13 The Plaintiff's contention in this regard was that the activities which contributed to the whole of the value of the management fee were overwhelmingly the same activities which the Plaintiff undertook by the same people at the workplace in relation to the Chinese manufactured goods that it imported into Australia for sale. The only part of the sale process in respect of the Chinese produced goods that did not come within the management operational activities undertaken by the Plaintiff for the group was the sales and local distribution. Mr Cox gave evidence that a number of employees were employed solely to arrange for the domestic wholesale (within Australia and New Zealand) of locally manufactured and Chinese made goods and that the total cost of labour attributable to those employees was $987,889. Mr Cox's evidence was that the total cost could be spread 48% to Australian made goods and 52% to the Chinese made goods on the basis of the cost of goods sold. On this basis the activity representing the sale component was submitted to be roughly equal in respect of both the Plaintiff's Australian manufactured goods and the goods it bought from China for its own sale.

14 In the end the Plaintiff's submission depends upon establishing that the activities referable to the value of the Chinese manufactured goods provided by the Plaintiff from the workplace were substantially the same activities that gave rise to the fee it charged to its subsidiaries. The Plaintiff's counsel put the submission as follows:

[T]he activities, all of the activities except the sales activities which can conceivably add value to the goods which are traded throughout the world by virtue of the services at the plaintiff's premises are conducted by the plaintiff. All of the value for all of these goods throughout the world is done by the plaintiff's staff at the plaintiff's premises except for the sales function in relation to the overseas subsidiaries.

If that is accepted to be the case and logically it has got to be so, then if you look at a sub-set of those goods and look just at the stock that the Australian company imports for itself, it's the activities in ordering and arranging and designing the goods and the supply of the goods which most contributes we say to the value of the goods landed in Australia and to the extent that the sales which is the only thing left over adds to those goods, it adds equally to the value of the manufactured goods. That is it is not going to reduce the value of the imported goods at any greater rate than it produces the value of manufacturing in the Australian goods. It is the same activity that has to be further undertaken in relation to both classes of goods, if it adds value it's going to be roughly proportional.

So when your Honour comes to look at what activity is adding the most value to the goods and services, it is those activities which the plaintiff carried on, on its behalf and on behalf of its subsidiaries which generates the very substantial sales throughout the world.

It's only if, on the evidence before your Honour, your Honour was of the view that the performance of the sales might contribute far more than everything else in the value of the goods which are being sold and distributed that your Honour would be unconvinced that the predominant activity is the provision for services which the plaintiff provides and conducts on its own behalf in relation to production, design and marketing of the goods.

Although the evidence may not be as direct as it could have been, I think it must follow that the activities that contributed, or were likely to have contributed in the 2010 year, to the value of the Chinese manufactured goods are substantially the same activities as the Plaintiff provided in return for the management fee. The goods produced in China were those produced through the design by the Plaintiff and which were manufactured in China through the Plaintiff. The evidence of Mr Cox establishes that it was the Plaintiff's staff at the workplace who placed orders for manufacture with Chinese companies in all cases. The design, transport and promotion functions were all done from Australia and I accept that the only other activity contributing to the value to the Chinese manufactured goods provided from the workplace which was different from the management services provided by the Plaintiff to its subsidiaries was the sales and distribution activity. How much of the value of that activity contributed to the $6,054,114 cannot be determined precisely on the evidence but it is likely not to be very much more than the comparable contribution of the same activity to the $6,694,229 of the footwear manufactured in Geelong. In the case of each group of goods, it is unlikely that the sales activity was sufficiently great to outweigh the contribution to the value to the Chinese manufactured goods of the activities referable to the management fee. It follows that the fourth step to take (namely to identify which activity contributed or was likely to contribute more to the value) results in identifying the management services activities as those which contributed, or were likely to contribute, more than any other activity of the employer to the value of the goods and services produced or provided by operations carried on at the workplace. It therefore follows by operation of Item 3 in Schedule 1 that those activities are the predominant activity.

15 The case proceeded, as I have indicated, upon the assumption that the value could reliably be identified by the revenues received by the Plaintiff. The parties also made submissions on the basis of the values of the activities as reflected in the Plaintiff's data of the cost of goods and services. The cost of goods and services may be relevant to determine the value of goods and services and, relevantly, may assist in determining which activity contributes, or is likely to contribute, to their value. I do not accept, however, that the cost of goods and services produced or supplied from within the workplace is of itself sufficient to answer the test required by Item 3 in Schedule 1 or is sufficient to provide a reliable measure of their value in this case. Subclause (2) in Item 3 of Schedule 1 permits, but does not limit, reference to data relating to sales and the cost of goods and labour when having regard to measures of activities for the purpose of determining the predominant activity in relation to a workplace. The subclause more accurately relates to the source from which such information may be taken for the stated purpose rather than purporting to be a definition of value, but in providing that the measure of activity may be informed by such data it may be assumed that such data was intended to be taken into account to measure the value to the goods or services referable to an activity. However, such data should not be treated as sufficient to identify the value of the goods and services.

16 Schedule 4 next requires the identification of the appropriate industry classification to which the predominant activity corresponds or most closely corresponds. As part of that process, but not before, it may be appropriate to have regard to the Authority's opinion as a skilled and experienced person[13] bearing in mind, of course, that the Court must reach its own conclusion in respect of a matter "where minds can reasonably differ" and that the Plaintiff bears the onus of proof.[14] In this case I do not consider the classification adopted by the Authority to correspond or most closely to correspond to the predominant activity of the Plaintiff at the workplace.

17 The first step in the task required by Schedule 4 is to consult the index to identify the most likely division. The most likely division of the Plaintiff's predominant activity by reference to the index is Division F Trade. The second step requires a reading of the preambles of the likely division. The preamble to Division F provides:

1. This Division includes all workplaces predominantly engaged in the trading of goods either as a retailer, wholesaler (physically handling the goods and, usually, taking title to the goods) or as an agent or purchasing, marketing or buying office. The term 'agency' is used here to include those operations which trade in goods but do not usually take title to the goods traded and do not physically handle the goods. Typically an agency receives commission or fees which are directly related to the value of goods traded. A purchasing, marketing or buying office is a separate workplace, of a multi workplace employer, which is predominantly engaged in buying or marketing goods for use by other workplaces of the employer. Such a workplace which buys or markets for other workplaces of the employer does not physically handle the goods.
2. The term 'wholesale trade' is used here in the broad sense to include the sale (as principals) of new or used goods to retailers or other wholesalers. The more important types of businesses engaged in wholesale trade are wholesale merchants who take title to the goods they sell and separately located sales branches or sales offices (not being retail stores), operated by manufacturing enterprises, which do not merely take orders but supply goods to customers from stocks physically held at their own premises. Workplaces engaged in storing and distributing goods to other workplaces of the employer are included in Division G.
3. The term 'retail trade' is used here, generally speaking, to include the activity of selling new or used goods to final consumers. The more important types of business engaged in retail trade are department stores or other shops, stalls, mail order houses, hawkers, door to door sellers, milk or bread vendors, vending machine operators or consumer cooperatives. However, cafes, restaurants, licensed hotels, motels, wine saloons and clubs are included in Division L, Recreation, Personal and Other Services.
4. In addition to the foregoing it may be useful to note that while most types of goods can enter wholesale trade, not all goods may be considered to enter the retail sector even though they may be sold to the final consumer. Goods not normally entering retail trade include cereal grains, metal ores, crude petroleum, industrial chemicals, iron and steel and industrial machinery and equipment.
5. Workplaces predominantly engaged in selling their own goods by auction are included in this Division, but workplaces (except stock and station agents) which are predominantly engaged in providing auctioning services for others are included in Division I, Finance, Property and Business Services.
6. Workplaces predominantly engaged in leasing goods (not manufactured by the same workplaces) for periods in excess of one year, without operators, from stocks physically handled by the workplace are included in this Division, as are workplaces predominantly engaged in the hiring out of most types of consumer goods.
7. Certain kinds of activity other than selling are commonly carried out by workplaces classified to this Division and have therefore been designated as predominant to the relevant classes of either Subdivision 47 or 48. The more important of these activities are:

(i) Glazing (Class F4728R).

(ii) Blending industrial or lubricating oils from refinery base stock (Class F4741J).

(iii) Washing or packing (incl. contract packing) fresh fruit or vegetables (Class F4764X).

(iv) Pulping, dehydrating or preserving eggs (Class F4765A).

(v) Bottling or breaking down bulk quantities of wine or spirits (incl. contract packing) (Class F4767F).

(vi) Blending or repacking tea (incl. contract packing), repacking (incl. contract packing) flour, cereal food products, dried fruits or a wide range of other groceries (Class F4769K).

(vii) Custom tailoring or dressmaking (Class F4840R).

(viii) Repairing footwear (Class F4846C).

(ix) Making or installing curtains (Class F4847F).

(x) Repairing locks or providing key duplicating services (Class F4853A).

(xi) Repairing non-electric household appliances (Class F4856J).

(xii) Repairing or installing household electric appliances (except heating equipment) not requiring electrical work (Class F4857K).

(xiii) Repairing or servicing motor vehicles (Class F4861A).

(xiv) Repairing tractors, agricultural or construction machinery (Class F4863F).

(xv) Repairing or servicing business machines or equipment (Class F4897C).

1. The treatment of such activities as installation, assembly, blending, bottling and packing is usually specified in the class descriptions. Where these activities have not been specified it should be assumed that they are included in the class that trades in the product.
2. Workplaces predominantly engaged in both baking and retailing bread or cakes are included in this Division, but workplaces predominantly engaged in baking bread or cakes are included in Division C, Manufacturing.
3. In the case of workplaces which have goods manufactured for them on commission or contract a variety of situations are encountered with different treatments applicable to each. In general, if a workplace has no goods producing facilities itself (or, if it has, does not use these or does not employ contractors to use them on its behalf), i.e. the workplace undertakes no goods producing activities at all, then all its sales of goods produced for it on commission are treated for classification purposes as wholesale or retail sales, as appropriate.

The third step, having regard to the preambles, requires identification of the relevant division which, in this case, by reference to the preamble I consider to be Division F. The fourth step requires the identification of the appropriate industry classification within the relevant division. Two classifications come close to describing the predominant activity of the Plaintiff. The first is F4673T "Footwear Agencies" described in the schedule as consisting of "workplaces predominantly engaged in arranging the trade of footwear for a commission or a fee or for other workplaces of the employer". The other (for which the Plaintiff contended) classification is F4773A "Footwear Wholesalers" described as consisting of "workplaces predominantly engaged in wholesaling footwear".

18 Neither of the two classifications precisely correspond to the predominant activity of the Plaintiff at the workplace. The broad description of F4673T of "arranging the trade of footwear" more aptly describes the activities undertaken for the subsidiaries, but those activities reflected in the value of the Chinese manufactured goods sold by the Plaintiff are not apt to be described as arranged either "for a commission or a fee" or alternatively "for other workplaces of the employer".[15] That is because the Plaintiff does not receive a fee or commission for the activities represented by the value of the Chinese manufactured goods it sells and because its activities in respect of those goods are for its own workplace to sell directly. On the other hand the description of wholesaling in classification F4773A might generally be thought not to include many of the activities the Plaintiff undertakes for the fee paid by its subsidiaries or for the value contributing to the Chinese manufactured goods it sells directly. On balance I consider the classification F4673T to be the one which most closely corresponds to the predominant activity because "trade" rather than "wholesaling" encompasses more of the activities which make up the predominant activity. In that regard I note that para 2 of the preamble to Division F adopts a wide sense of the term "wholesale trade".

19 Accordingly there will be orders in favour of the Plaintiff and I will hear the parties on the costs of the proceeding.

[1] United Petroleum Pty Ltd v Victorian WorkCover Authority [2011] VSC 570 (Osborn J).

[2] Accident Compensation (WorkCover Insurance) Act 1993 (Vic) s 7.

[3] Accident Compensation (WorkCover Insurance) Act 1993 (Vic) ss 17 and 26.

[4] Accident Compensation (WorkCover Insurance) Act 1993 (Vic) s 15.

[5] WorkCover Insurance Premiums Order (No. 18) 2010/2011, sch 1, item 7.

[6] WorkCover Insurance Premiums Order (No. 18) 2010/2011, sch 4, Introduction.

[7] WorkCover Insurance Premiums Order (No. 18) 2010/2011, sch 1, item 3(1) (a).

[8] [1993] VicRp 53; [1993] 2 VR 10.

[9] Ibid 18 (Ashley J; Crockett and Smith JJ agreeing).

[10] See March v E & M H Stramare Pty Ltd [1991] HCA 12; (1991) 171 CLR 506; Federal Commissioner of Taxation v Sun Alliance Investments Pty Ltd (in liq) [2005] HCA 70; (2005) 225 CLR 488, 514-515 [80] (Gleeson CJ, Gummow, Kirby, Callinan and Heydon JJ).

[11] [2012] VSC 51.

[13] Jafferjee v Scarlett [1937] HCA 36; (1937) 57 CLR 115, 126 (Dixon J); Eclipse Sheep Products Inc v Registrar of Trade Marks [1957] HCA 86; (1957) 99 CLR 300, 308 (Dixon CJ, Williams and Kitto JJ).

[14] Victorian WorkCover Authority v IR Cootes Pty Ltd [2001] VSCA 85, [81] (Charles JA).

[15] United Petroleum Ltd v Victorian WorkCover Authority [2012] VSC 51, [60] (Osborn JA).