Judiciary Act 1903

Administrative Decisions (Judicial Review) Act 1977

O'Toole v Charles David Proprietary Limited (1991) 171 CLR 232

Genex Corporation Pty Ltd v Commonwealth of Australia (1991) 101 ALR 161

Commonwealth Quarries (Footscray) Proprietary Limited v The Federal Commissioner of Taxation [1938] HCA 13; (1938) 59 CLR 111

MacCormick v The Commissioner of Taxation of the Commonwealth of Australia [1984] HCA 20; (1984) 158 CLR 622

Deputy Commissioner of Taxation of the Commonwealth of Australia v Truhold Benefit Proprietary Limited [1985] HCA 36; (1985) 158 CLR 678

The Federal Commissioner of Taxation v Hipsleys Limited [1926] HCA 34; (1926) 38 CLR 219

Herald and Weekly Times Limited v The Commonwealth of Australia [1966] HCA 78; (1966) 115 CLR 418

Boxvale Holdings Pty Limited v Federal Commissioner of Taxation (1989) 89 ATC 4927

Estee Lauder Pty Limited v Federal Commissioner of Taxation (1988) 88 ATC 4412, (1989) 89 ATC 4299

Federal Commissioner of Taxation v McCabe (1990) 90 ATC 4968

Giris Pty Limited v The Federal Commissioner of Taxation of the Commonwealth of Australia [1969] HCA 5; (1969) 119 CLR 365

Green v Daniels [1977] HCA 18; (1977) 51 ALJR 463

Messrs Whitehead Green and Cooper

Counsel and solicitors

for the Respondent: Mr S.W. Gibb and Mr D.M. Mendelssohn

instructed by the Australian Government

Solicitor.

The applicant pay the costs of the respondent.

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

This is an application for an order of review under the Administrative Decisions (Judicial Review) Act 1977 ("the ADJR Act"). The applicant carries on the business of a printer, filling the orders of individual customers. As a printer, it is a "manufacturer" within the definition in sub-s. 3 (1) of the Sales Tax Assessment Act (No. 1) 1930 ("the Assessment Act"). A person who is a manufacturer is required by s. 11 of the Assessment Act to apply for registration by the respondent ("the Commissioner").

2. However, subject to qualifications not here relevant, sub-s. 11 (3C) provides that in his discretion the Commissioner may dispense with the registration of, inter alia, a person who is a manufacturer and who "engages only in transactions, acts or operations in respect of which sales tax is not payable by (that) person".

3. The applicant's position is that not only does it manufacture goods to the order of individual customers, but it sells those goods, not by wholesale but by retail, to the customers in question. The consequence, the applicant contends, is that it engages only in transactions, acts or operations in respect of which sales tax is not payable by it within the meaning of sub-s. 11 (3C).

4. Upon an application by the applicant, the Commissioner refused to dispense with the requirement of registration of the applicant. A statement of the Commissioner's reasons was provided pursuant to s. 13 of the ADJR Act. The crucial passages in that statement are as follows:

"2. I noted that Section 11 of the Sales Tax Assessment Act (No.

1. imposes a general obligation on a manufacturer to be

registered and that the definition of a manufacturer in

Section 3 (1) of the same Act, includes a printer. As Vale

Press Pty Limited is in the business of printing, the

company is required to be registered for Sales Tax purposes.

3. Further to Sections 17 (1) and 19, I decided that sales tax

is payable by Vale Press Pty Limited upon the sale value of

taxable goods manufactured by the company and sold by the

company or treated by it as stock for sale by retail or

applied to the company's own use.

4. As the company is not considered to be a manufacturer

engaging only in transactions, acts or operations in respect

of which sales tax is not payable, there is no discretionary

power available to the Commissioner under sub-section 11

(3C) of the Sales Tax Assessment Act (No. 1) to dispense

with the requirement for registration of the Company."

5. The present dispute revolves around the interpretation of the Assessment Act as it stands after the coming into force on 23 August 1988 of the Sales Tax Assessment (No. 1) Amendment Act 1988. Section 17 of the Assessment Act provides that the sales tax imposed by the Sales Tax Act (No. 1) 1930 shall be levied and paid upon "the sale value of 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". Sales tax shall be paid by the manufacturer of goods manufactured in Australia and treated by the manufacturer as stock for sale by retail: s. 19 of the Assessment Act.

6. Sub-section 18 (1) was amended by the 1988 statute. It now provides:

"18 (1) Subject to sub-sections (1B), (1C) and (4A), where

goods (other than goods treated by a manufacturer as

stock for sale by retail) have been sold by the

manufacturer to an unregistered person or to a

registered person who has not quoted his certificate

in respect of the sale, the sale value of the goods,

for the purposes of this Act, is -

(a) if the goods were sold by wholesale - the amount

for which the goods were sold; or

(b) if the goods were sold by retail - the amount

for which the goods could reasonably be expected

to have been sold by the manufacturer by

wholesale."

7. The applicant submits that goods manufactured by it are sold not by wholesale but by retail, and that to compute "the sale value" of those goods for the purposes of the Assessment Act by application of a criterion expressed as the amount for which the goods could reasonably be expected to have been sold by the applicant by wholesale, as indicated by para. 18 (1) (b), is to fix "the sale value" by a means that is arbitrary in the constitutional sense. The applicant submits that, at least in its application to the applicant, para. 18 (1) (b) is not a valid law of the Commonwealth. Therefore, the applicant continues, no sales tax is payable by it, with the result that the Commissioner should have exercised his discretion pursuant to sub-s. 11 (3C) and dispensed with registration by the applicant.

8. I should add that sub-s. 18 (5A) of the Assessment Act and Reg. 26 of the Sales Tax Regulations make special provision for ascertaining the sale value of clothes for human wear and certain photographs, in each case manufactured in Australia to the order of an individual customer; the sale value is the total payable by the customer to the manufacturer less 60%. The present applicant submits that this illustrates a computation of sale value by a means that is not arbitrary.

9. In correspondence between the Commissioner and the solicitors for the applicant, there was discussion as to the allegedly arbitrary operation of para. 18 (1) (b) of the Assessment Act. In that setting, the Commissioner wrote in terms reflecting those of a Sales Tax Ruling dated 5 April 1990. Paragraphs 5.11 and 5.12 of that Ruling are as follows:

"5.11 Where a printer sells goods by retail and does not sell

similar goods by wholesale, then the wholesale value is to

be determined. A whole-sale value should include all

manufacturing costs, direct and indirect, a value for

administration and selling costs at the whole-sale stage,

and a wholesale profit margin.

5.12 Some manufacturers may find that calculating a wholesale

value in relation to each retail transaction is

time-consuming and inconvenient. As an alternative, where

similar goods are not sold by wholesale, the Commissioner

will accept as a standard wholesale sale value, tax

exclusive retail selling price less 7.5% provided this

results in an amount greater than the cost of manufacture."

10. In its application for an order of review under the ADJR Act, the applicant complains that the Commissioner wrongly relied upon those paragraphs, and exercised his discretion under sub-s. 11 (3C) in accordance with a rule or policy, without regard to the merits of the particular case. The applicant also complains that the decision involved an error of law in that the Commissioner determined that the applicant was or would be liable to sales tax.

11. The foundation of the decision of the Commissioner not to dispense with the registration requirement in respect of the applicant was that, by reason of ss. 17 and 19 of the Assessment Act, sales tax was payable by the applicant upon the sale value of taxable goods manufactured by it and sold by retail, and that therefore, for the purposes of sub-s. 11 (3C), no occasion arose for the exercise of his discretion to dispense with registration. The applicant contends that the pre-conditions for the exercise of the discretion were satisfied because, by reason of the invalidity of para. 18 (1) (b), sales tax is not payable in respect of the relevant transactions, acts or operations of the applicant.

12. The application under the ADJR Act was made on 23 August 1990, but the applicant then sought from the High Court of Australia an order pursuant to sub-s. 40 (1) of the Judiciary Act 1903 ("the Judiciary Act") for removal of the cause, on the ground that an issue in the cause was the validity of para. 18 (1) (b) of the Assessment Act. On 10 May 1991, the High Court refused this application. The result is that the whole of the cause remains in this Court. I was told that the necessary notices had been given under s. 78B of the Judiciary Act.

13. Jurisdiction in respect of the applicants' application for an order of review is conferred by s. 5 of the ADJR Act. The matter in respect of which the Court has jurisdiction contains within it the issues raised as to constitutional validity of para. 18 (1) (b) of the Assessment Act: O'Toole v Charles David Proprietary Limited (1991) 171 CLR 232.

14. It is necessary first to consider the structure of the sales tax legislation. That task is made easier by the recent analysis, in the Full Court, by Hill J. in Genex Corporation Pty Ltd v Commonwealth of Australia (1991) 101 ALR 161 at 165-170. His Honour points out that, although the tax in terms of policy is a wholesale sales tax, if confined in its operation to sales by wholesale, many goods would escape the tax. In particular, a manufacturer who appropriated into his retail stock goods manufactured by him would, without special legislative provision, have a commercial advantage over other retailers. This is because retailers who are not manufacturers would have acquired their retail stock in a prior wholesale sale upon which sales tax would already have been levied at the appropriate "taxing point". Accordingly, the legislation is designed to ensure that when a manufacturer brings into retail stock goods manufactured by him, sales tax is payable, but upon a notional wholesale value.

15. Counsel for the Commissioner submitted that since its inception nearly 60 years ago, the sales tax legislation has necessarily involved a degree of artificiality in the specification of criteria for the imposition of the tax where the goods go into use or consumption without a purchase from a wholesaler by a retailer.

16. Thus, in respect of the legislative scheme as it then stood, the following was said by Dixon and McTiernan JJ. in Commonwealth Quarries (Footscray) Proprietary Limited v The Federal Commissioner of Taxation [1938] HCA 13; (1938) 59 CLR 111 at 120:

"It is the plan of the legislation to tax the

goods once during the course of dealing between

manufacture or importation and the transaction

by which they go into use or consumption. The

stage in the course of commercial dealing chosen

for the imposition of the tax is the last

wholesale disposal of the goods before the

retailer performs his function in distributing

them to the consumer. The tax is levied upon

the immediately preceding sale by wholesale, or,

if the goods go into use or consumption without

such a purchase from a wholesaler by a retailer,

then upon the immediately antecedent wholesale

value possessed by the goods."

(Emphasis supplied).

17. What then is the sense of the term "arbitrary exaction" in constitutional law?

18. In MacCormick v The Commissioner of Taxation of the Commonwealth of Australia [1984] HCA 20; (1984) 158 CLR 622 at 639, Gibbs C.J., Wilson, Deane and Dawson JJ., in speaking of the recoupment tax which was in question in that case, said that the exactions imposed by the legislation were not arbitrary, and continued:

"Liability is imposed by reference to criteria

which are sufficiently general in their

application and which mark out the objects and

subject matter of the tax: see Federal

Commissioner of Taxation v Hipsleys Ltd (1926)

[1926] HCA 34; 38 CLR 219 at 236."

In Deputy Commissioner of Taxation of the Commonwealth of Australia v Truhold Benefit Proprietary Limited [1985] HCA 36; (1985) 158 CLR 678 at 684, Gibbs C.J., Mason, Wilson, Deane and Dawson JJ. referred to what had been said in the earlier decision, as follows:

"In MacCormick v Federal Commissioner of

Taxation it was held that the recoupment tax,

for which (the Taxation (Unpaid Company Tax)

Assessment Act 1982) provides, answers the usual

description of a tax. Amongst the

characteristics which were said by the majority

to bring it within that description was the fact

that the tax is not arbitrary. This was, as the

relevant passage shows, a reference to the fact

that liability can only be imposed by reference

to ascertainable criteria with a sufficiently

general application and that the tax cannot

lawfully be imposed as a result of some

administrative discretion based upon individual

preference unrelated to any test laid down by

the legislation. To say that a tax may not be

arbitrary in that sense does not, of course,

preclude the pejorative description of a tax as

arbitrary in the sense that the criteria which

are laid down for its application give it a

harsh or unreasonable incidence with regard to

either its subject-matter or objects. To

describe a tax as arbitrary in the latter sense

is to do so in a manner which does not go to its validity."

19. The reference in the first of the two recent High Court authorities to The Federal Commissioner of Taxation v Hipsleys Limited supra at 236, is to a passage in which Higgins J. discussed the operation of s. 55 of the Constitution. This indicates the juridical root of the principle that liability to tax be imposed by reference to ascertainable criteria which are not arbitrary and which, on the contrary, are sufficiently general in their application and mark out the objects and subject matter of the tax.

20. The second paragraph of s. 55 of the Constitution requires that laws imposing taxation deal with one subject of taxation only, with the qualification that laws imposing duties of customs deal with duties of customs only, and laws imposing duties of excise deal with duties of excise only. The question whether a particular law does not comply with s. 55 is one arising under the Constitution or involving its interpretation. Lest the law rise above its constitutional source, the legislation must be so drawn as to permit of a decision by a court exercising the judicial power of the Commonwealth upon the question of whether the law imposing taxation complies with s. 55. If liability for a particular exaction is imposed by reference to criteria which do not mark out the objects and subject matter of the tax, there has been an impermissible attempted evasion of the mandatory requirements of s. 55.

21. Section 55 deals only with laws imposing taxation, and the Assessment Act is not such a law: MacCormick's Case supra at 644. But the Sales Tax Act (No. 1) 1930, s. 2, provides that the Assessment Act is to be incorporated and read as one with it.

22. The validity of legislation is not to be tested, as the applicant would have the Court do, by reference to extreme possibilities: Herald and Weekly Times Limited v The Commonwealth of Australia [1966] HCA 78; (1966) 115 CLR 418 at 435-438. The Parliament has not sought to create a statutory fiction as the means of bringing within legislative power a subject otherwise beyond it; cf. Milicevic v Campbell [1975] HCA 20; (1975) 132 CLR 307 at 316, 318-319. The imposition of a wholesale sales tax upon the sale value of goods brought by the manufacturer into retail stock, involves the attribution of a notional wholesale value. The criteria for making that attribution are "ascertainable", in the constitutional sense, even though (i) in some respects they require an assumed state of affairs which in fact has not come to pass (e.g. a wholesale sale rather than a retail sale), and (ii) they posit a particular standard of conduct in a given situation (e.g. what could reasonably be expected). The objects and subject matter of the tax are sufficiently marked out by these means. In a given case, and the applicant says it is one such case, the criteria laid down by para. 18 (1) (b) of the Assessment Act for the application of the sales tax may give the tax a harsh or unreasonable incidence. But that does not make the tax arbitrary in the constitutional sense.

23. The point is underlined by considering the operation of para. 18 (1) (b) in its previous form. Two authorities are in point, neither of them decided on constitutional issues.

24. Before the amendment introduced by the 1988 statute, sub-s. 18 (1) of the Assessment Act provided that if the goods were sold by retail, but were not of a class which the manufacturer himself sold by wholesale, their sale value for the purposes of the Assessment Act was:

"the amount for which the manufacturer could

reasonably be expected to have purchased

identical goods from another manufacturer if the

other manufacturer had, in the ordinary course

of his business, manufactured the identical

goods for sale and had sold them to the

first-mentioned manufacturer by wholesale."

25. In Boxvale Holdings Pty Limited v Federal Commissioner of Taxation (1989) 89 ATC 4927, it was held, that whilst the fixing of sale values as then required by the provision would not be free of difficulty, and it would be expected that disputes would occur from time to time between taxpayers and the Commissioner, the difficulty of application was not a reason for saying that the particular statutory provision was so unworkable that it should in effect be disregarded. Then, in Estee Lauder Pty Limited v Federal Commissioner of Taxation (1988) 88 ATC 4412, (1989) 89 ATC 4299, this Court held that the ascertainment of the amount referred to in the earlier provision involved the reasonable expectation that the manufacturer of the identical goods envisaged by the provision would bear the expense of royalties at the rate in fact paid by the taxpayer.

26. There is a further point. The applicant also submitted that the effect of para. 18 (1) (b) of the Assessment Act is to make the incidence of the tax dependent upon the formation of an opinion by the Commissioner of the reasonableness of the result. I accept the submissions by the Commissioner that the criterion now found in para. 18 (1) (b) of reasonable expectation in the particular case is objective rather than subjective, that it is expressed in terms which are not ambiguous, and that it is undesirable to paraphrase them or to use other words; cf. Federal Commissioner of Taxation v McCabe (1990) 90 ATC 4968 at 4,971-4,972. As was pointed out in Truhold Benefit supra at 686, a submission that the incidence of a tax cannot be made dependent upon the formation by the Commissioner, guided and controlled by the policy and purpose of the enactment, of an opinion of the reasonableness of the result is not open in the light of the decision in Giris Pty Limited v The Federal Commissioner of Taxation (of the Commonwealth of Australia) [1969] HCA 5; (1969) 119 CLR 365. In any event, it follows from the construction which I have accepted of para. 18 (1) (b), that the incidence of the tax is not made dependent upon the formation of such an opinion by the Commissioner.

27. The attack on validity fails. I should add that the application of para. 18 (1) (b) will depend upon the particular circumstances of each case and that the present litigation has not been concerned with the correctness or otherwise of any sale value attributed to any particular goods.

28. Nor is it appropriate in the present proceeding to determine whether the provisions of the paragraphs to which I have referred in the Sales Tax Ruling dated 5 April 1990, are inconsistent with proper observance by the Commissioner of the statutory criteria found in para. 18 (1) (b) of the Assessment Act, thereby calling into play the principles referred to by Stephen J. in Green v Daniels [1977] HCA 18; (1977) 51 ALJR 463 at 467.

29. The application should be dismissed with costs.