Sales Tax Assessment Acts 1930, ss.3, 4, 11(1), 26(1)

Mr. J.C. Sheahan

Solicitors for the appellant: Clarke and Kann

Counsel for the respondent: Mr. R.W. Gotterson QC and

Mr. P.E. Hack

Solicitors for the respondent: Australian Government Solicitor

The appellant pay the costs of the respondent of and incidental to these appeals, to be taxed unless agreed.

NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

These are references to this Court of two decisions of the respondent under sales tax legislation. The referring taxpayer is, by virtue of s.42C(3) of the Sales Tax Assessment Act (No. 1) 1930 ("Act No. 1"), taken to have instituted appeals; it challenges the respondent's refusal to refund sales tax said to have been overpaid. The obligation to refund, if any exists, is created by s.26(1) of Act No. 1 and similar provisions in other Sales Tax Assessment Acts.

2. There are a number of such Acts dealing with sales and deemed sales of various kinds. Act No. 1 relates to goods "manufactured in Australia by a taxpayer and sold by him or treated by him as stock for sale by retail or applied to his own use": s.17(1). It was suggested during argument that perhaps some of the sales to which these proceedings relate are caught by Act No. 1, but there is no evidence that the appellant is a manufacturer; it is a vendor of goods to retailers. Sales Tax Assessment Act (No. 2) 1930 ("Act No. 2") relates to "goods manufactured in Australia and sold by a taxpayer who purchased them from the manufacturer": s.3. Sales Tax Assessment Act (No. 3) 1930 ("Act No. 3") relates to "goods manufactured in Australia and sold by a taxpayer, not being either the manufacturer of those goods or a purchaser of those goods from the manufacturer": s.3. On the evidence, the goods in question here are probably caught, in the main, by Acts Nos. 2 and 3, not Act No. 1. But that point does not seem to be of any significance, since the provisions of each of these three Acts are, so far as relevant to the present case, in substance indistinguishable from one another. It seems to me convenient to deal with the case as if all the sales were caught by Act No. 2.

3. Two years are in question, namely that ended 30 June 1985 ("the 1985 year") and that ended 30 June 1986 ("the 1986 year"). The case concerns rebates paid or credited by the appellant, in relation to goods purchased by its customers in those two years. The appellant asserts that the sums rebated produced a reduction in the price of the goods and that it is therefore entitled to a refund, the sums on which tax was initially levied having turned out to be too high. The respondent admits that rebates were paid or allowed in the sums claimed but says that the rebates did not reduce the price of the goods and that, therefore, no refund is due. The amounts in question are admitted; if the appeals succeed, then the appellant is entitled to a refund of $90,562.93 in respect of the 1985 year and $93,240.37 in respect of the 1986 year.

4. Although the cases were heard together, the facts relating to the 1985 appeal differ from those relevant to the 1986 year. It seems to me conducive to clarity to set out my reasons relating to the 1985 year before discussing the 1986 year. I should say at the outset that I have not found it necessary to deal with all the submissions on behalf of the respondent.

5. The appellant is a distributor of groceries, foodstuffs and other products to small, independently owned grocery and smallgoods stores. In the 1985 year, its controlling shareholder was a company called Retail Stores Development Finance Limited ("RSDF"). To obtain the benefit of rebates, the appellant's customers had to be shareholders in RSDF. Under clause 1 of the relevant rebate agreement, it was agreed that so long as a customer had a certain holding of "Z" class shares in RSDF -

"... the Company without obligation to do so may grant

to the customer a rebate on the Company's normal

wholesale selling price of such goods merchandise and

commodities as the Company may from time to time

determine and which shall be from time to time

purchased by the customer from the Company being goods

merchandise and commodities delivered out of the

Rocklea warehouse owned and operated by the Company or

delivered out of such other warehouse or warehouses of

the Company as the Board of Directors of the Company

may from time to time determine".

Under clause 2 of that agreement, the rebate was to be calculated on purchases of merchandise made by the customer from the month of June in any year to the month of May in the immediately following year -

"and shall be such percentage of the Company's normal

wholesale selling price of the merchandise purchased by

the customer during the rebate period as the Company

shall from time to time determine".

Under clause 3, the Company (i.e. the appellant) was obliged to notify the customer of the amount of the rebate determined as soon as practicable after the end of each rebate period and to send a cheque -

"... for an amount equivalent to such proportion as the

Company may determine from time to time of such rebate.

As soon as practicable thereafter the Company shall pay

the remainder of such rebate on behalf of the customer

to the credit of the customer's special rotating levy

fund account ...".

The amount in a special rotating levy fund account was, under clause 5, treated as an interest-bearing loan by the customer to RSDF, repayable after five years.

6. All the moneys in question in the 1985 year were paid under the agreement just discussed. The sales were made throughout the year, but the rebate was paid, under a resolution of 25 June 1985, in one lump, distributed half in cash and half by way of credit to rotating levy fund accounts. The rebate was at the rate of 1% on the price of certain goods and at 1.2% on the price of others.

7. Counsel for the appellant argued that the true effect of the rebate agreement was that the appellant was obliged to exercise a discretion as to whether or not a rebate was to be granted. They argued that, for that reason, when the rebate was paid, it should be treated as paid pursuant to obligations of the vendor (the appellant) under the numerous contracts for sale of goods entered into throughout the year. Counsel for the respondent said that the rebate agreement was no part of any contract of sale, but if it was part of any such contract, it created no obligation in the vendor and therefore the rebates paid could not be regarded as paid under contracts of sale. Further, the respondent contended the rebates were, although calculated by reference to the price paid, not in truth reductions in price.

8. Under s.3 of Act No. 2, sales tax imposed by that Act -

"... shall be levied and paid upon the sale value of

goods manufactured in Australia and sold by a taxpayer

who purchased them from the manufacturer".

"... for the purposes of this Act, the sale value of

goods shall be the amount for which those goods are

sold by a registered person, or a person required to be

registered, who purchased the goods from the

manufacturer thereof, to an unregistered person or to a

registered person who has not quoted his certificate in

respect of that purchase ...".

It is common ground that the expressions just quoted apply to such of the sales made by the appellant as are caught by Act No. 2; under Act No. 3, s.4(1) makes provision of a like kind for sales in the categories with which it deals.

9. For the appeal to succeed, it must be held that "the amount for which those goods are sold" within the meaning of s.4(1) of Act No.2 was not the price originally paid, but that price less the rebate.

10. Under s.11(1) of Act No. 2, subject to a presently irrelevant provision -

"... where the Commissioner finds in any case that tax

has been overpaid by a person, the Commissioner shall -

(a) refund the amount of any tax overpaid; or

(b) apply the amount of any tax overpaid

against any liability of the person to the

Commonwealth, being a liability arising under, or by

virtue of, an Act of which the Commissioner has the

general administration, and refund any part of the

amount that is not so applied".

11. The appellant contends that tax, although initially paid on the proper amount, has, because of subsequent events, come to be overpaid, the prices charged initially being reduced by the allowance of rebates.

12. It was not contended and (as it seems to me) could not be contended that sales tax has been overpaid where, after completion of a sale, the vendor voluntarily refunds to the purchaser part of the price paid. The respondent says that if, contrary to his contention, the allowance of a rebate is to be treated as a reduction in price, still that reduction did not flow from the contract and was made without any obligation.

13. Reference was made to the decision of the Full Court of the Queensland Supreme Court in Jackson v. Swift Australian Company Pty. Limited (1968) Qd R 1. There, the appellant, to obtain benefits under a superannuation scheme, had to show thirty years continuous service with the respondent or one of its subsidiaries. He had twenty-nine and a half years service with the respondent and six months with a subsidiary. But the relevant document had the effect that service of the latter kind was not necessarily taken into account; its effect was that such service "shall be taken into account only to such extent as the Company in its discretion may determine". A jury found that the Company, the respondent in the appeal, did not exercise its discretion on the point just mentioned and that it refused to include the relevant service from malice towards the plaintiff and in bad faith. Nevertheless, it was held that the appellant had no cause of action because the respondent was not obliged to do anything (p.12). Mack C.J., who dissented, said that -

"In my opinion the respondent has not a discretion or

option to exercise a discretion. It has a discretion

which it must exercise and the only qualification is

that the discretion should be exercised honestly ...". (p 5)

Although this decision has been referred to with apparent approval (Queensland Independent Wholesalers Limited v. Coutts Townsville Pty. Ltd. (1989) 2 Qd R 40 at 44), the view that the respondent in Jackson's case was not obliged to exercise any discretion (whether honestly or otherwise) appears to me difficult to reconcile with the approach taken in subsequent High Court decisions. At the time Jackson's case was decided, the idea that a party to a contract can have a contractual obligation to make a decision affecting the rights of the other party, and to do so honestly or reasonably, may have been a less familiar one than it presently is. In Godecke v. Kirwan [1973] HCA 38; (1973) 129 CLR 629, a document which gave the agents of one party the right to add to an agreement "such other covenants and conditions as they may reasonably require" was held to be a good contract. Walsh J., with whom Mason J. (as his Honour then was) agreed, expressed the view that, subject to certain qualifications -

"... there is no reason in principle for holding that

there cannot be any binding contract if some matter is

left to be determined by one of the contracting

parties". (p.642)

His Honour referred with approval to Powell v. Jones (1968) SASR 394, in which the contract was of a similar kind, except that it provided for inclusion of "such special clauses as (one party) may require"; that was held to be good, despite the absence of any reference to reasonableness.

14. In Meehan v. Jones [1982] HCA 52; (1982) 149 CLR 571, there was a contract for sale of land which was subject to the purchaser entering into "a satisfactory agreement or arrangement" of a certain sort and "receiving approval for finance on satisfactory terms and conditions". It was held that it was for the purchaser to determine these matters - i.e., the question was whether or not what was done or available was satisfactory to him. But the Court did not take the view that in doing so the purchaser had an unchallengeable discretion; the purchaser was held to be obliged to act honestly (p.581) or honestly and reasonably (p.589).

15. Applying this line of thought to the present case, the appellant would have it held that the rebate agreement created an obligation in the vendor (the appellant) to exercise its discretion and that therefore the granting of a rebate was not purely gratuitous or voluntary.

16. In my opinion, as a matter of construction of the rebate agreement, that is not so. It is true that it is possible to read the words "without obligation to do so" in clause 1 as intended to negate only the obligation to grant a rebate, not the obligation to exercise the discretion. But it appears to me that, reading the document as a whole, the intention of the parties was otherwise. The presence of the words "without obligation to do so" were intended to make it clear that the clause was to give rise to no legal obligation whatever, unless and until the appellant determined to grant a rebate. The alternative view is that the intention was that there should be an obligation at the outset, namely to give consideration (and presumably, proper consideration) to the question whether a rebate should be granted. A result of that reading would be that the appellant would have exposed itself to an action for damages, in certain circumstances, if it failed to grant a rebate; I cannot think that was the intention of clause 1.

17. It follows, in my opinion, that the appellant's decision to grant a rebate did not flow from any contractual obligation under the contracts of sale, even assuming those contracts are each taken to have incorporated the rebate agreement. It is true that, once the appellant determined to grant a rebate, the rebate agreement attached certain consequences. Nevertheless, the grant of a rebate was purely voluntary and did not, in my opinion, flow from any obligation the appellant had under any contract of sale.

18. It follows that the price initially paid was and remains, "the amount for which those goods are sold" within the meaning of s.4(1) of Act No. 2; this is so because a unilateral decision, not as a result of any obligation, to refund part of the purchaser's money does not, in my opinion, alter "the amount for which those goods are sold". It is not, in truth, an alteration of the sale price.

19. This conclusion makes it unnecessary to consider generally in what circumstances an alteration of the contract price creates an entitlement to a refund. One would think that an alteration after completion of the sale would ordinarily be irrelevant for sales tax purposes, but that is not necessarily so. If the purchaser successfully sets up a breach of warranty against a claim for the price (see s.54 of the Sale of Goods Act of 1896 (Q.) and corresponding provisions elsewhere), the price may be reduced; other circumstances may be postulated in which a subsequent reduction in price would give a right to refund. All it is necessary for me to decide here, however, is that a voluntary return, after completion of the sale, of part of the sum paid by the purchaser gives no right to a refund.

20. The circumstances changed towards the end of the 1986 year, in that the appellant, which had been controlled by RSDF, became a wholly owned subsidiary of a company called QIW Retailers Limited, and customers of the appellant took shares in the parent company. During that year, a new rebate scheme came into operation.

21. According to an affidavit of Mr. J.J. French filed on behalf of the appellant, the rebate scheme discussed in detail above operated in respect of the 1985 year and a new "QIW Retailers Rebate Scheme" operated in respect of the 1986 year. However, it was contended by counsel for the appellant that, on the basis of Mr. French's oral evidence, it should be held that the new scheme operated only from 29 April 1986, there being a gap from 22 April 1986 to that date during which no scheme operated. The relevant minute is in evidence and is dated 24 June 1986. Its terms appear to me more consistent with the notion that the new scheme was treated as operating retrospectively to the beginning of the 1986 year. As was pointed out by counsel for the respondent, it plainly could not do so with effect on sales tax obligations; the necessary foundation of the appellant's argument is that sales were made subject to a rebate agreement existing at the time of the sales, so that when the appellant determined to grant a rebate the purchaser's rights could be regarded as stemming from sales contracts.

22. However, even if one assumes that, as argued on behalf of the appellant, the new scheme operated prospectively only, from 29 April 1986, the same result ensues as if one proceeds on the footing that the 1986 rebates were all allowed under the new scheme.

23. As to the rebates in respect of purchases under the first agreement, discussed above, no further discussion is necessary. Rebates under the new scheme, however, raise different questions. During the period said to be that of operation of the new system (i.e. from 29 April 1986) the appellant's articles were in a form which is in evidence. Clause 29 established the "QIW Retailers Rebate Scheme". Clause 29.02 said that that scheme "will provide rebates on Gross Purchases by Scheme Members from the Company". This notion was underlined by clause 29.03:

"Participation in The QIW Retailers Rebate Scheme shall

be available to Scheme Members only".

24. The expression "Scheme Member" was defined to mean -

"a member who is the Registered Holder from time to

time of that number of Ordinary Shares in the capital

of the Company as the Directors shall from time to time

determine".

25. The difficulty is that all the shares in the appellant were at the relevant time held by QIW Retailers Limited. It was argued for the appellant that the intention obviously was that the scheme members should be persons registered as shareholders in QIW Retailers Limited, including customers of the appellant.

26. It appears that the basis of this suggestion lies in extrinsic circumstances, including the history of the shareholdings and its relation to the rebate scheme. During the 1985 year, and for most of the 1986 year, the shareholders in the appellant consisted in RSDF mentioned above, and others. It will be recalled that the appellant's discretion to grant a rebate under the rebate agreement depended on a customer's holding certain shares; the required shareholding was one of at least 200 "Z" class ordinary shares of $1.00 each in RSDF. In November 1985, QIW Retailers Limited made an offer to buy all the "Z" class shareholders out and that took place. QIW Retailers Limited also bought all the shares in the appellant and customers of the appellant were offered, and many took up, shares in its holding company, QIW Retailers Limited. They did so, it appears, because they were informed by letters from the holding company that taking up shares in it would entitle them to rebates.

27. Thus, the contention that the "Scheme Members" under the appellant's articles should be taken to be shareholders in its parent company is founded on the facts that the new structure replaced one under which RSDF had control of the appellant and rebates were paid to certain shareholders in RSDF and on the terms of the letters just mentioned. The assumption that the true contract was that customer shareholders in QIW Retailers Limited should be entitled to rebates under the articles of the appellant makes some commercial sense, but is legally untenable.

28. That is so because, firstly, whatever the content of the contract constituted by the appellant's articles, the customers were not parties to that contract, not being members of that company: see s.78 of the Companies Code. Secondly, if there was an error, it was not of the kind dealt with in cases like Fitzgerald v. Masters [1956] HCA 53; (1956-1957) 95 CLR 420 (at 427, 438). The obligation said to be intended is not one which a reader of the articles would be able to discern simply from intelligent examination of their contents. It might be deducible from a knowledge of other documents and of the history of the rebate scheme. The mistake is one of a kind which is able to be corrected, if at all, only by the process of rectification: but see Scott v. Frank Scott (London) Ltd. (1940) Ch 794. The appellant does not say that the articles should be treated as having been rectified.

29. It therefore seems clear that during the relatively short period during which, according to the appellant's argument, the new scheme was in operation, it could not effectively attach to any contract of sale.

30. This conclusion makes it unnecessary to reach a conclusion on the question whether, on the proper construction of the provisions of the new scheme (treated as rectified), it produced true reductions in price as a result of obligations attaching to each contract of sale. I should say, however, that the appellant's case as to that point seems to me difficult to sustain.

31. The articles of QIW Retailers Limited, in which customers held shares, required that company to procure the appellant to implement a rebate scheme for shareholders in QIW Retailers Limited. That seems to me irrelevant to the rights of the appellant's customers against the appellant, although breach of the obligation to procure a rebate agreement might have given shareholders of QIW Retailers Limited an action against it.