State Electricity Commission of Victoria v Commissioner of Taxation

Federal Court of Australia|1999-09-29|Before: Dawson J, Merkel JJ

Introduction 1 This is an appeal from a Judge of this Court who refused to make declarations that various classes of electrical transformers were exempt from sales tax.

Factual background 2 Prior to the privatisation of the Victorian electricity system in 1994 the first appellant State Electricity Commission of Victoria ("SECV") generated, transmitted, distributed and sold electricity to industrial and domestic customers in accordance with the State Electricity Commission Act 1958 (Vic) and the Electric Light and Power Act 1958 (Vic). 3 Privatisation was carried out in a number of stages. The end result was that privately owned entities took over the following functions previously conducted by SECV: (i) Generation Victoria (or, more correctly from 31 January 1995, it and four generation entities) generates electricity; (ii) PowerNet Victoria owns and operates the high voltage grid; (iii) Victorian Power Exchange acts as the systems controller and administers the wholesale electricity market; (iv) Five distribution companies, including the second appellant United Energy Limited ("United"), own and operate the distribution network comprising sub-stations and distribution lines, transforming electricity purchased through the wholesale electricity market operated by Victorian Power Exchange, into lower voltage electricity, and then sell the electricity to consumers. 4 In the early phase of privatisation SECV held all the shares in United. During this period goods acquired for use in distributing electricity were exempted from sales tax by Item 126 of Schedule 1 to the Sales Tax (Exemptions and Classifications) Act 1992 ("the Exemptions Act"). On 6 September 1995 SECV sold its shares to a privately owned company. One of the terms of the agreement for sale was that SECV undertook to reimburse United for any sales tax incurred by it after the sale of the shares. Similar agreements were made between SECV and the other four distribution companies. 5 On 17 April 1997 SECV caused a writ to be issued against the respondent Commissioner of Taxation in the High Court of Australia. On 8 May 1997 Dawson J, by consent, ordered that further proceedings in that action be remitted to this Court. Shortly before the hearing of the present appeal United was added as an additional appellant. 6 Declarations were sought that five classes of transformers used by United in distributing electricity were not liable to sales tax. The five classes are used as follows: (i) Power transformers contain two windings per phase and are used in two positions in the electrical transformation/distribution process. The first position is in Zone Sub-stations (the secondary transformation stage) where electrical power is received from the transmission company (via a transmission power transformer; the primary transformation stage) at sub-transmission voltage (eg. 66,000 volts) and is transformed to electrical power of distribution voltage (eg. 22,000 or 11,000 volts) for practical and economical distribution around United's geographic area. These transformers are large units having capacities in the range of 10 to 33 MVA (mega volt amps). A few large electricity consumers are supplied with electrical power at distribution voltage. The second position is in distribution sub-stations (tertiary transformation stage) where electrical power at distribution voltage is transformed to electrical power at low voltage (eg. 415 or 250 volts) suitable for use by the majority of industrial or domestic consumers. (ii) Auto-transformers are a special class of power transformers which are used in distribution feeders (and sometimes in sub-transmission lines in rural areas) to transform electrical power being carried at less than the required voltage to electrical power at the required voltage. A few of these units are used to transform electrical power being carried at above the required voltage to power at the required voltage in order to match the feeder voltage of a particular area (eg. 11,000 to 6,600 volts). (iii) Isolating transformers are used in a variety of applications. The most common is to transform electrical power carried by the normal three phase distribution system to a single phase Single Wire Earth Return ("SWER") distribution branch. From this point on, SWER type power transformers are used to convert from SWER distribution voltage to low voltage, suitable for use by consumers. (iv) Current transformers are used throughout the distribution system to transform current flowing in high voltage conductors to a much smaller current, at a safe low voltage level. They measure or detect current flow to initiate protection signals to open circuit breakers if there is a fault (short circuit) on high voltage conductors; or for metering and display of electrical energy used. (v) Voltage transformers are used throughout the distribution system to transform the voltage present in the high voltage conductors to a much smaller and safe low voltage level. They measure or detect the voltage for use in automatic voltage control systems to keep the voltage level within prescribed statutory limits; or for metering and display of electrical energy used. 7 What transformers do (as distinct from how their function is to be characterised for the purposes of sales tax legislation) was not in dispute. The following account is taken from an affidavit sworn by Professor William James Bonwick on behalf of United. 8 Electricity consists of an electric current which passes through conductors in a transmission or distribution system under the pressure of a voltage. The amount of electrical power which can be transmitted (carried) depends upon the voltage and the current. Voltage is the term used for electrical pressure and can be compared with pressure under which water flows through a pipe. Current is the term used for the rate of the flow of electricity in a conductor and, in the above analogy, corresponds to the rate of flow of water in a pipe. Electric current consists of moving electrons. 9 A transformer comprises coils of electrical conductors coupled together by a magnetic core. It takes in electrical power to a voltage and current on the primary side which is unsuitable for the proposed use at that stage and through the transformer mechanism transforms electrical power to a voltage and current which is suitable for the proposed use. 10 The two windings of a standard transformer are linked by a magnetic core, and this creates the interface between the two different voltage circuit systems. The transformer core therefore links the two independent electrical circuits connected to the two transformer windings. The current in one winding is independent of the current in the second winding even though the magnitudes of the currents are related. 11 In cross-examination Professor Bonwick was asked: "Q. And is it right to say that no electrical energy is produced in a transformer? A. Yes, you're right to say that. No, there isn't any energy produced in a transformer. There's energy dissipated unfortunately, because of losses, but there's no intrinsic energy produced within the transformer."

The legislative scheme 12 Section 24 of the Sales Tax Assessment Act 1992 (Cth) ("the Assessment Act"), when read with s 4 of the Exemptions Act, provides in effect that sales tax shall not be payable in respect of goods covered by any item or sub-item in the First Schedule to the Exemptions Act. The appellants claim that all five classes of transformers fall within one or all of Items 18(1)(a), (b) or (c) of Schedule 1 of the Exemptions Act. They also claim that a limited number of transformers fall within Item 192 of Schedule 1. The presently relevant parts of Item 18 are as follows: 18. (1) Goods for use by a person ("the exemption user") mainly in carrying out one or more of the following activities: (a) a manufacture-related activity carried out by the exemption user in the course of a business; (b) an activity that is ancillary (as defined by section 10) to one or more activities covered by paragraph (a); (c) an activity that is ancillary (as defined by section 10) to one or more activities covered by paragraph (b). (2) Eligible raw materials and parts (as defined by section 11) in relation to activities covered by subitem (1)." 13 Counsel for the appellants accepted that the exemptions conferred under Item 18(1)(b) and (c) could not apply to any of the classes of relevant transformers unless the exemption conferred by Item 18(1)(a) applied to at least one of those classes of transformers. It was thus necessary to determine whether any of the transformers were used mainly in carrying out a "manufacture-related activity" as that term was defined in Item 18(5)(a) and (b) of the First Schedule. Item 18(5) relevantly provides: "(5) In this Item: "goods/equipment" means goods, or machinery, implements or apparatus; "manufacture-related activity" means: (a) applying a process or treatment to goods that are to be used as raw materials for other goods to be manufactured by the exemption user or anyone else; [For example, purifying chemicals that are to be used in manufacturing cosmetics] (b) applying a process or treatment to goods so that the goods, or an essential element of the goods, become an integral part of other goods that are being manufactured by the exemption user or anyone else; [For example, applying a moulding process to plastic in order to make plastic door knobs] (c) applying a process or treatment to goods for the purpose of bring them into, or keeping them in, the form or condition in which they are to be marketed or used by a person: (i) who is the manufacturer of the goods; or (ii) in relation to whom the goods are wholesaler's-materials goods; or (iii) in relation to whom the goods are qualifying goods because paragraph (ac) of the definition of that expression in subsection 3(2) applies; whether or not the person is the exemption user; [For example, applying a coating of grease to manufactured hand tools to prevent corrosion]" 14 Thus a manufacture-related activity is defined in terms of applying a process or treatment to "goods". "Goods" means, subject to some exceptions not presently relevant, "any form of tangible personal property": Assessment Act s 5. 15 "Manufacture" is defined to include, inter alia, production: Assessment Act s 5. 16 As to "raw materials", s 7(1) of the Assessment Act provides: "Goods ('the materials') are taken to be used as raw materials in manufacturing other goods if, and only if, the materials are dealt with in such a way in manufacturing the other goods that the materials, or some essential element of the materials, becomes an integral part of the other goods." 17 Item 18(3)(d) of Schedule I excepts some property from Item 18 but then provides for an exception to that exception. Relevantly for present purposes it states: "(3) This Item does not cover: (a) . . . (b) . . . (c) . . . (d) property for use mainly in producing electric current, gases, steam, compressed air or hydraulic power, except where the production is for purposes of: (i) sale by the producer; or (ii) use by the producer mainly in carrying out one or more activities covered by subitem (1);" 18 Independently of the above provisions, a limited category of transformers were said to be subject to Item 192 of Schedule I which exempts: "Goods for use by a person so that the goods become an integral part of property (not being goods) where: (a) the use is under a contract with an always exempt person … or under a sub-contract under such a contract; and (b) either: (i) the property is owned by or leased to the always-exempt person …; or (ii) … "

The decision at first instance 19 The learned primary judge held that electricity was not "tangible personal property" within the meaning of the definition of "goods" in s 5 of the Assessment Act. His Honour considered that "property" denoted concepts of ownership or belonging. He accepted that electricity was something capable of quantification, but did not regard that capability as enabling electricity to be regarded as "tangible personal property". His Honour noted that while electricity was capable of being transferred along an electrical circuit, it was not possible to isolate a given "piece" of electricity and attach rights of ownership to it. Similarly, his Honour reasoned that it could not be said that a producer of electricity made an identifiable "piece" of electricity. He said that what was produced was power. His Honour referred to authorities in the criminal law to the effect that electricity was not property capable of being stolen at common law. Accordingly, his Honour held that none of the transformers was used by United in carrying out a manufacture-related activity or mainly in carrying out an activity that was ancillary to a manufacture-related activity, or ancillary to an ancillary activity under Items 18(1)(b) and (c) respectively. 20 His Honour then turned to the question whether any of the transformers were exempt under Item 18(3)(d). Given his Honour's conclusion on the first set of questions, this issue boiled down to whether United could be said to be using transformers in producing electric current for the purposes of sale by it to consumers. The exemption contained in Item 18(3)(d) could be seen to be available only if United was a producer of electric current. His Honour held that the modification of the voltage of electricity by reducing it to render it useable by consumers did not amount to production of electric current. Accordingly the relevant transformers did not fall within the sub-item. 21 Finally, his Honour had to decide whether a particular category of transformers fell within Item 192(1) of Schedule 1. This depended upon whether the transformers were used by United under a contract with an "always exempt person" so that they were an integral part of property (other than goods) of that person. There was evidence in relation to one such transformer which had been installed at Mount Waverley College ("the College"). The College was conducted by the State of Victoria, which was an "always exempt person" for the purposes of Item 192. The question was whether the transformer had become an integral part of the College premises. His Honour referred to the evidence concerning the installation of the transformer at the College and what would be required to remove it. His Honour held that although the transformer (contained inside what was described as a "kiosk sub-station", a shed-like structure about the size of a small motor car) was attached to the College's land by a series of wires, cables and bolts, this did not render it an integral part of the College property. The primary purpose of the cables and earthing wires was not structural but rather to connect electricity to the transformer. They were attached to the kiosk sub-station by a series of detachable bolts. His Honour rejected an argument that goods which were not physically an integral part of the College property could nevertheless be said to be functionally integral to the property. Electricity and electrical power conceded to be "goods" 22 On the appeal the respondent conceded that electricity and electrical power were "goods" as defined in s 5 of the Assessment Act and that the primary judge erred in so finding. 23 In our view that concession was correct. The qualifier "tangible" primarily has the effect of excluding choses in action. Clearly electric power is something subject to the dominion of United. It can be transported from place to place. It can be bought and sold. Other provisions of the Exemptions Act are consistent with electricity or electrical power being goods: s 10(1)(d)(vii), Schedule 1 Items 18(3)(d)(1) and 56. See also Explanatory Memorandum par 6.7.

"Manufacture-related activity" 24 Pars (a), (b) and (c) of Item 18(5) of the Exemptions Act deal with a continuum. The common feature is the application of a process or treatment. Paragraph (a) is concerned with the processing of raw materials prior to the stage of manufacture, whether the processor is or is not to be the manufacturer. Paragraph (b) is concerned with the actual process of manufacture. Again the processor can be the manufacturer or someone else. Paragraph (c) is concerned with a post-manufacture stage. But the person who is to market or use the goods has to be the manufacturer. Importantly, the paragraph contains an implicit assumption that bringing goods into a marketable form or condition need not necessarily form part of the process of manufacture of such goods. 25 In the judicial task of characterising a particular form of commercial or industrial operation to ascertain whether it answers a statutory description or not; analogies can be dangerous: M P Metals Pty Ltd v Federal Commissioner of Taxation (1968) 117 CLR 631 at 637-639. Nevertheless the examples given in Item 18(5)(a)(b) and (c) are part of the statute itself. They are not analogies but rather illustrations of the underlying concepts. The items and the illustrations provide the statutory context within which the relevant terms including "goods" and "manufacture" are to be construed. The illustrations are also consistent with the view we take.

What are the "goods"? 26 Questions as to what are "goods" and what is "manufacture" are to be interpreted as those terms are used in their statutory context and, subject to that context, as matters of general impression according to the common usage of ordinary language: M P Metals at 639-640 per Windeyer J at first instance and on appeal at 649 per Menzies J with whom Barwick CJ, McTiernan and Kitto JJ agreed, Federal Commissioner of Taxation v Rochester (1934) 50 CLR 225 at 226 per Dixon J. 27 In M P Metals at 639 Windeyer J said in respect of "manufacture", which was defined in the Sales Tax Acts to include "production": "The resulting phrase is very wide and apt to cover 'all operations conducted for the purpose of bringing tangible things into existence for sale'." 28 In the context of the Exemptions Act, and in particular Item 18, the tangible "goods" brought into existence for sale in the present case is electrical energy. Energy is a function of power over time. That is the "commodit(y) of commerce" (M P Metals at 637) which is bought and sold. The commodity is electrical energy, rather than electric current having a particular voltage. On this view, a change in current or voltage does not result in the manufacture or production of a different commodity or different goods. 29 Notwithstanding what was said by the learned primary judge, electrical energy can be bought and sold, as such, in a quantifiable amount or by the piece. A consumer purchases and consumes energy by turning on a switch and subsequently turning it off.

Item 18(5)(a) 30 We accept that what happens in a transformer is a process or treatment. But Item 18(5)(a) is not applicable because the electrical energy that emerges from the transformer is not "other goods". What goes into the transformer and emerges from it is the same goods, namely electrical energy which has been generated by Generation Victoria or another generation entity. No electrical energy is manufactured or produced in the transformer.

Item 18(5)(b) 31 For the same reason, Item 18(5)(b) does not apply. There is no electrical energy entering the transformer to become "an integral part of other goods".

Item 18(5)(c) 32 For transmission over long distances electric current must, inter alia, be at high voltage. When first acquired by United, energy in that condition is quite unsuitable for industrial or domestic consumption. The transformers, the subject of the present case, by inter alia progressively reducing the voltage bring the electrical energy into a form or condition in which it is to be marketed or used. 33 Thus Item 18(5)(c) would apply, were it not for the fact that United is not the manufacturer or, more relevantly in respect of electrical energy, the producer of the energy. 34 A similar question arose for decision in Quebec Hydro-Electric Commission v Deputy Minister of National Revenue (1969) 69 DTC 5372, a case which also concerned transformers. A Canadian statute provided for a lower rate of sales tax on "machinery and apparatus sold to or imported by manufacturers for use by them directly in the manufacture or production of goods". It was common ground that electricity fell within the meaning of the word "goods" and that the appellant was a "manufacturer or producer of goods". The majority of the Supreme Court of Canada (Fauteux, Abbott, Martland, Judson, Ritchie and Hall JJ) upheld (at 5374) a finding by a Tariff Board (which had been reversed by the Exchequer Court) that "the transformation [in the transformer] … that turns the electrical energy into a form that can be used by the customer … must be considered to be part of the manufacture and production of electricity." 35 The majority rejected the argument that "manufacture or production", when applied to a commodity such as electricity, must be construed to mean manufacture or production in the sense of generation. 36 Abbott J stated, delivering the majority judgment (at 5374): "The principal contention of the respondent before the Tariff Board, the Exchequer Court and this Court was that the words 'manufacture or production', when applied to a commodity such as electricity, must be construed to mean manufacture or production in the sense of 'generation'. That contention was rejected by the Tariff Board, but was accepted by the learned President of the Exchequer Court. As Duff C.J. said in The King v. Vandeweghe Limited, (1934) S.C.R. 244 at 248 [1 DTC 265 at 266]: 'The words 'manufacture' and 'production' are not words of any precise meaning and, consequently, we must look to the context for the purpose of ascertaining their meaning and application in the provisions we have to construe.' Nevertheless, taking these words in their natural and ordinary sense, there is nothing in the Excise Tax Act which would compel such a restrictive meaning as that contended for by the respondent. Moreover such a meaning would be contrary to evidence which was accepted by the Board. In my opinion the Board correctly construed para. (a) of Schedule V of the Excise Tax Act, and did not misdirect itself as to the law. The Board found as a fact that the transformers in issue in this appeal are 'apparatus sold to or imported by the appellant for use by it directly in the manufacture of goods'. There was ample evidence to support that finding and, under the provisions of s. 57 of the Excise Tax Act, it is not subject to judicial review." 37 However the dissentient, Pigeon J (at 5375), considered that the exemption was limited to things used in the production of goods as opposed to things used in their transportation or distribution. In his Honour's view the uncontradicted evidence showed that in usual language a transformer is never designated as an apparatus used in the production of electricity, but as an apparatus used in its transmission or distribution. 38 For present purposes the significance of the case does not depend on whether the majority or minority view is to be preferred. The role of Quebec Hydro as described in the case is directly comparable to that of SECV prior to privatisation. However, now that the former SECV functions of generation, transmission and distribution have been reposed in separate commercial entities, which buy and sell electrical energy between themselves, it is clear in our view that an entity at the level of United cannot be considered a manufacturer of energy. Put another way, the assumption of all members of the Court in Quebec Hydro was that electricity is manufactured or produced when it is generated from some other source of power such as hydro or thermal. The only dispute was how far down the line (so to speak) the process of manufacture by the manufacturer extended. It was also undisputed that Quebec Hydro was at all material stages the only entity involved. There was but one manufacturer. The transformers, when used by SECV before privatisation, were plainly goods or machinery falling within Item 18(5)(c) as they were used in the process by which SECV as the "manufacturer" of the electrical energy brought the electrical energy into the form or condition in which it was to be marketed or used. 39 By contrast, in the present case United is several removes from the manufacturer. This is illustrated strikingly by Exhibit TJD3 to the affidavit of Mr Timothy James Densen, the Network Services Manager for United. Mr Densen deposes: "15. The operation of the Victorian electricity industry, including the distribution role of United and its use of transformers as part of the distribution process can be illustrated pictorially. There is now produced and shown to me and marked 'TJD:3' a diagrammatic representation of the Victorian Electricity Industry. On the diagram the distribution role of United is marked. The diagram also shows where the 5 categories of transformers referred to above are used by United as part of the distribution process." 40 The exhibit shows a schematic representation along a horizontal plane commencing with "Generation", followed by "Transmission (Powernet)" and the "Distribution Companies (United Energy)". 41 As explained earlier the statutory context in the present case differs significantly from that in Quebec Hydro. Items 18(5)(a), (b) and (c) relate to a continuum which is described as embracing "manufacture related activity" commencing with activities prepatory to manufacture and concluding with activities bringing the manufactured goods into marketable or useable condition. In that context, it is plain that reduction of voltage brings the electrical energy produced into a marketable or useable condition. Thus, it is fairly described as a "manufacture related activity" within item 18(5)(c) in respect of which only the producer of the electrical energy is entitled to exemption as a "manufacturer".

Item 18(3)(d) 42 By a parity of reasoning, this item does not apply. United is not a producer of electrical energy. It is a distributor.

Item 192(1) 43 In addition to the evidence about Mount Waverley College already mentioned (par 21 above) there were in evidence two contracts between United and the College. Both were dated 25 June 1997. The first, described as "Commercial/industrial extension contract - low voltage enclosed substation" recited that the College ("the Customer") applies to "take a supply of electricity" at its premises at Stephensons Road Mount Waverley and "… requests United Energy to undertake the construction of high and low voltage works as required including works already constructed and the works specified in the Schedule ('the Extension Works') to provide a supply of electricity to the Customer." 44 By cl 6 United agreed to design the Extension Works in accordance with its "current distribution practices" and in conformity with certain designated electricity supply and town planning Acts and regulations. 45 By cl 12 the registered proprietor of the property to which electricity was supplied was to grant to United a lease at a rental of 10 cents for a period of thirty years, renewable for a further thirty years, over an area of land necessary for the erection and continued operation of the substation, the access road from a public road to the site and a similar strip of land for the installation, operation and maintenance of United owned overhead lines or underground cables required. The lease was to be recorded by means of a caveat lodged by United at the Victorian Titles Office. 46 Clause 28 provided: "28. Property of United Energy The extension Works will be and remain the property of United Energy Ltd and United Energy Ltd may provide a supply of electricity to other persons from their Extension Works upon such terms and conditions as it thinks fit." 47 The Extension Works were described in the Schedule as: "New 300KVA radial kiosk type substation on property along the School boundary (Lechte Rd - near Bicton St) and install approximately 35 m of high voltage underground cable from the existing pole on Lechte Rd near Bicton St." 48 The kiosk area was said to be 8 m x 4.2 m. 49 The second contract was for the supply of electricity at 240/415 volt three phase at the College's premises. 50 Reference should also be made to s 28(2) of the Landlord and Tenant Act 1958 (Vic) which provides in effect that, subject to some exceptions not presently relevant, buildings, machinery or fixtures erected by a tenant on leased land remain the property of the tenant and can be removed by him during the tenancy. 51 In our opinion, "property" in Item 192(1) refers to goods which become an integral part of the physical property of the always exempt person. The transformer never became part of the physical property of the College. In our view the primary Judge was clearly correct in concluding that the transformer did not become an integral part of the property of the College. It is not to the point that the supply of electricity was doubtless essential for the College's operations.

Order 52 The appeal will be dismissed with costs, including reserved costs. I certify that the preceding fifty-two (52) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Heerey and Merkel.

On appeal from a single judge of the Federal Court of Australia

CARR J: 53 I have had the advantage of reading, in draft form, the reasons for judgment of Heerey and Merkel JJ. I had some part in the drafting of the first twenty-one paragraphs of those reasons. I gratefully adopt the remainder of that text which sets out the factual and procedural background and the legislative scheme. 54 I agree with the conclusion that electricity and electrical power are "goods" as defined in s 5 of the Assessment Act. In that regard I agree generally with the reasons given by Heerey and Merkel JJ. 55 Where I differ from the majority in this matter starts with the identification of the particular goods with which we are concerned. The majority identify the goods as being electrical energy. I agree with that. But they then (in paragraph 27 of their reasons) specifically distinguish electrical energy from electric current and, in particular, electric current having a particular voltage. In my view, the evidence shows that there is such a close relationship between electrical energy and electric current (and the particular voltage at which electric current is delivered) that I cannot join in making such a distinction. Electrical energy, electricity and electric current are interchangeable concepts. From paragraph 7 of Professor Bonwick's affidavit, it can be seen that electricity consists of an electric current which is transmitted under the pressure of a voltage. It can also be seen from Professor Bonwick's affidavit generally, but in particular from paragraphs 17 to 22, that electrical power is the rate of delivering electrical energy expressed in kilowatt-hours. Power is measured in kilowatts and energy is measured in kilowatt-hours. Electrical power is the product of voltage, multiplied by current, multiplied by power factor, where power factor is usually between 0.8 and 1.0. As Professor Bonwick explained in paragraphs 7 and 17 of his affidavit, the amount of electrical power or energy depends on both the current and the voltage, and is measured over time. The higher the voltage, the greater will be the rate of flow of current. The analogy, suggested by Professor Bonwick, between voltage (electrical pressure) with pressure under which water flows through a pipe is a strong one. With high voltage electricity it is possible to transmit a large amount of electrical power through comparatively thin wires in the same way as a lot of water power can be passed at high pressure through small pipes (see paragraphs 11 and 12 of Professor Bonwick's affidavit).

56 I turn first to what happens at the secondary transformation stage where United receives electricity from Victoria Power Exchange. The technical aspects of what happens are non-controversial. We were given to understand that the process falls within the domain of elementary physics. I have found a convenient description of the process in the findings of the Tariff Board which were set out in Quebec Hydro-Electric Commission v Deputy Minister of National Revenue (1969) 69 DTC 5372 at 5374: "From the evidence it appears that the current in the primary coil of a transformer is electrically insulated from the core of the transformer and from the secondary winding of the transformer. By electromagnetic induction, initiated by the electrical energy of the primary alternating current, a new and separate alternating current is produced in the secondary winding of a transformer. The current in the secondary circuit usually differs, not in the number of watts or of cycles, but in the number of volts and of amperes. However the operation of a transformer is no mere transmission in the sense of causing the primary current to pass, go or be conveyed or conducted from the primary circuit to the secondary circuit. . . . The electrical energy produced by the applicant is not a commodity which is ordinarily used by or sold to its customer until it has been transformed: it exists, prior to such transformation, in a form which is not generally marketable because it is unsuited for the use of most customers. . . . Because it is the transformation in issue that turns the electrical energy into a form that can be used by the customer, this transformation must be considered to be part of the manufacture and production of electricity. Because the transformation of voltage is done exclusively in the transformers and by the transformers, they are apparatus sold to or imported by the applicant for use by it directly in the manufacture or production of goods." 57 At the secondary transformation stage (in the Zone Sub-Station) the process, described above, falls, in my opinion, within the definition of "manufacture" contained in s 5 of the Assessment Act. Electric current is received at a voltage of 66,000 volts and is transformed into current at a voltage of either 22,000 or 11,000. That process is, at the very least, "production" which is specifically included in the definition of manufacture. The definition is "very wide" so that it "… appears to cover all operations conducted for the purpose of bringing tangible things into existence for sale": Federal Commissioner of Taxation v Riley (1935) 53 CLR 69 at 78. The authorities show that the only safe guide is to apply the words "manufacture" and "produce" as they are ordinarily applied in English speech, see Federal Commissioner of Taxation v Rochester (1934) 50 CLR 225 at 226-227 and M P Metals Pty Ltd v Federal Commissioner of Taxation (1968) 117 CLR 631 at 640. In my view, what takes place in the transformer mechanism produces relevantly different electrical power by a process of physics. I do not need to consider whether that process would amount to "manufacture" in its unextended sense. This means, in my opinion, that when the electric current leaves the Zone Sub-Station at a voltage of either 22,000 or 11,000, United is the producer of that commodity and hence the manufacturer of it. 58 With due respect to the majority in this appeal, I do not think that in Quebec Hydro the Supreme Court of Canada made the assumption referred to in paragraph 38 of their reasons. The Supreme Court rejected the respondent's contention that the "manufacture" of electricity is confined to its generation. It was not reviewing Quebec Hydro'sintegrated activities, but was focussing on what went on in the transformers. The Supreme Court held that the Tariff Board made no error of law in finding that what went on in the transformers was manufacture or production. In my opinion, the fact that United had no role in the original generation of the electricity which it receives at the secondary transmission stage, does not preclude it from being the manufacturer of what comes out of the power transformer at that stage. 59 When the electricity or electrical power arrives at the tertiary transformation stage, United applies to it a similar process whereby a current emerges on the secondary circuit this time at a voltage of either 415 or 250. 60 I accept the appellant's contention that what emerges in the secondary circuit at both the secondary and the tertiary transformation stages is "other goods" within the meaning of that expression in Item 18(5)(a) and (b) of Schedule 1 of the Exemptions Act. The primary winding (except in the case of an automatic transformer) is not connected to the secondary winding. The primary current induces a changing magnetic flux in the magnetic core circuit. That changing magnetic flux induces a changing voltage in the secondary circuit which will, when the secondary circuit is loaded (drawn upon), cause a current to flow in the secondary circuit. The electrons in the primary circuit do not travel across to or enter the secondary circuit. Furthermore, the electric current in that secondary circuit is at a vastly reduced voltage. It is, in my view, a different commodity of commerce from that which is in the primary winding of the transformer. 61 I agree, but for reasons which are different from those of the majority, that the activity above described was not a "manufacture-related activity" within the meaning of that expression in Item 18(5)(a) or (b) of Schedule 1 at either the secondary or the tertiary transformation stages. So far as Item 18(5)(a) is concerned, that is because the definition of "raw materials" in s 7(1) of the Assessment Act requires that the materials be dealt with in such a way in manufacturing the "other goods" that the materials or some essential element of the materials become "an integral part of" the other goods. In my view, the electricity or electrical power in the primary coil of the transformer does not become an integral part of the goods on the secondary coil. As senior counsel for the appellant stressed in his arguments relating to "other goods", the electricity or electrical energy on the primary side is different from the electricity or electrical energy on the secondary side. My assessment of the evidence is that the former does not become "an integral part of" the latter. An amount of electric energy or power may be found in the secondary circuit which is almost the same in amount to the energy which was in the primary circuit (any difference being due to electric energy or power consumed in the process), but that does not mean that one has become an integral part of the other. The appellant suggested that, in the alternative, the current on the primary circuit was an essential element of the electric energy or power on the primary circuit and became an integral part of the electric energy or power on the secondary circuit. For the same reasons, I do not think that the evidence sustains that suggestion. The same reasoning applies in relation to Item 18(5)(b). 62 In my opinion, Item 18(5)(c) of the definition of "manufacture-related activity" fits the description of what the appellant's transformers do at the tertiary transformation stage. That is, they apply a process or treatment to the incoming electricity or electrical power for the purpose of bringing that electricity or electrical power into a condition in which it is to be marketed by the appellant who is (by then) the manufacturer of the goods. 63 This process of reasoning means that the power transformers at the tertiary transformation stage are exempt under Item 18(5)(c). To the extent that the isolating transformers, current transformers and voltage transformers carry out similar production after the secondary transformation stage, they would, in my view, also fall within Item 18(5)(c). To the extent that they monitor or control [see s 10(1)(a) of the Exemptions Act] the activities at the tertiary transformation stage then they would be used by United in an activity that is ancillary to the activity described in Item 18(5)(c) and would thus fall within Item 18(1)(b) or (if ancillary to that ancillary activity) Item 18(1)(c). 64 That leaves the question of whether power transformers at the secondary transformation stage are used for a purpose which falls within Item 18(5)(c). I do not think that is the case, because "the goods" referred to in sub-para (c)(i) must relevantly be the electricity received by United at that stage, and it is not the manufacturer of those goods. It does not apply a process or treatment to goods of which it is the manufacturer. It becomes, on my reasoning, a manufacturer when electricity emerges on the secondary circuit of those transformers after the secondary transformation stage. 65 There was a tentative suggestion in argument that I understood (possibly wrongly) to the effect that perhaps, in the circumstances which I have held to be the case, the transformers at the secondary transformation stage were used in an activity ancillary to the activity at the tertiary transformation stage. No such submission was developed. 66 At paragraph 61 of the learned primary judge's reasons, his Honour stated that Dr Emmerson, senior counsel for the appellant, had contended that it relied upon the exemption contained in Item 18(3)(d). It emerged in argument before us that that was literally true, but the reliance was in the context of whether electricity or electrical power were goods. It may well be that Item 18(3)(d) does not do any exempting work, but is simply an exception to an exception [in para 18(3)] from the exemption in Item 18 as a whole.

Conclusion 67 Accordingly, for the foregoing reasons, I would have allowed the appeal in relation to all power transformers which are used to carry out the above process after the secondary transformation stage, and all the other transformers to the extent that they are used in activities ancillary to such use (or ancillary to such ancillary activity). I would have ordered that factual issue to be remitted to the trial judge.

Item 192(1) 68 I agree with Heerey and Merkel JJ that this portion of the appeal should be dismissed, for the same reasons as they give. I certify that the preceding sixteen (16) numbered paragraphs are a true copy of the Reasons for Judgment of Justice Carr.

Dr J M Emmerson QC and Mr T P Murphy Counsel for the Appellant:

Solicitor for the Appellant: Mallesons Stephen Jaques

Counsel for the Respondent: Mr B J Shaw QC and Ms J Davies

Solicitor for the Respondent: Australian Government Solicitor

Landlord and Tenant Act 1958(Vic)s 28(2)

State Electricity Commission Act 1958(Vic)

Electric Light and Power Act 1958(Vic)

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