[1994] FCA 1335; (1994) 53 FCR 92

Sales Tax - printer selling goods by retail - whether assessment based on sale value calculated by applying discount to tax exclusive retail price excessive - whether arbitrary sale value - whether Commissioner wrongly applied inflexible rule.

Sales Tax - assessment - appeal - burden of showing assessment excessive on taxpayer - whether need to establish proper sale value/sales tax liability less than as assessed - s.14ZZO(b)(i) Taxation Administration Act 1953 (Cth).

Sales Tax Assessment Act (No.1) 1930 (Cth), s.18(1)(b)

Taxation Administration Act 1953 (Cth), s.14ZZO(b)(i)

Commissioner of Taxation v Dalco [1990] HCA 3; (1989-90) 168 CLR 614; applied.

Trautwein v Federal Commissioner of Taxation [1936] HCA 77; (1936) 56 CLR 63; applied.

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

Counsel and Solicitors BR Pape with JA Higgins

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

HILL J Vale Press Pty Limited ("Vale Press"), the applicant, is a commercial and general printing company, printing, collating, folding, bookbinding and packaging printed material custom ordered. It employs no sales commission agents or representatives, generally quotes for the work it does before printing and does not do printing work for other printers who sell the outcome of the work by retail.

2. As a printer the applicant is by definition a "manufacturer", within the meaning of that expression in the Sales Tax Assessment Act (No.1) 1930 (Cth) ("the Assessment Act"): s.3(1). Accordingly it is liable to pay sales tax in respect of sales of the printed material which it produces, which printed materials are admittedly "goods" within the meaning of that expression in the Assessment Act: s.3(1).

3. It was accepted by all parties before me that the transactions between the applicant's customers and the applicant were properly to be described as involving a sale of goods and that each such sale was, for the purposes of the Assessment Act, a sale of goods by retail and not a sale of goods by wholesale. In the result sales tax, as imposed by the Sales Tax Act (No.1) 1930 (Cth), became payable on all sales made by the applicant in the month of December 1992. The Assessment Act ceased, as and from 1 January 1993, to apply to sales of the applicant which thereafter became liable under the provisions of the Sales Tax Assessment Act 1992 (Cth). The present case is concerned with the applicant's sales tax liability prior to the 1992 legislation.

4. The sales tax imposed under the Sales Tax Act (No.1), as assessed under the Assessment Act, fell to be determined by reference to what the Assessment Act referred to as the "sale value of the goods". For relevant purposes, s.18(1)(b) of the Assessment Act provided that, in the case of goods sold by retail by a manufacturer, the sale value was to be:

"... the amount for which the goods could

reasonably be expected to have been sold by the

manufacturer by wholesale."

5. In earlier proceedings, the applicant sought to challenge in this Court the validity of s.18(1)(b) of the Assessment Act on the grounds that it sought to impose an impost which was arbitrary or uncontestable and so not a law with respect to taxation within the meaning of s.51(ii) of The Constitution. That challenge was unsuccessful, both at first instance (see Vale Press Pty Limited v Commissioner of Taxation (1991) 31 FCR 357) and in the Full Court (see Vale Press Pty Limited v Commissioner of Taxation (1992) 34 FCR 238). Special leave to appeal from the judgment of the Full Court of this Court was refused by the High Court (see (1992) 176 CLR 706). The gravamen of that challenge was that the application of s.18(1)(b) to the applicant's business required the making of a guess as the applicant did not in fact sell goods by wholesale.

6. A related company to the applicant, Boxvale Holdings Pty Ltd ("Boxvale"), applied (also in earlier proceedings) to this Court for a declaration that no sales tax was payable by it because of the impossibility in the circumstances of establishing appropriate sale values in accordance with s.18(1)(b)(ii) of the Assessment Act as it stood, prior to its amendment effective 23 August 1988. Those proceedings were likewise unsuccessful before Wilcox J who expressed the view that while there could be difficulty in fixing the amount under s.18(1)(b)(ii), this did not mean that the sub-section was so unworkable that it could, in effect, be disregarded: Boxvale Holdings Pty Limited v Commissioner of Taxation (1989) 89 ATC 4927 at 4930-31. His Honour's comments in this respect were echoed by the Full Court decision in Vale Press (at 241).

7. The applicant alleged to the Commissioner that it had found it impossible to apply s.18(1)(b) to calculate the sale value upon which sales tax was payable by it and requested the now respondent Commissioner of Taxation to make a special assessment, pursuant to s.25AA of the Assessment Act, in respect of the month of December 1992. It disclosed to the Commissioner that its gross retail sales for that month were $19,134.26. It invited the Commissioner, should additional information be required, to contact it.

8. Ultimately, on 15 February 1993 the Commissioner assessed the sales tax which the Commissioner alleged was payable in respect of printed matter manufactured by the applicant and sold by it during the month of December 1992 in the sum of $3,016.05. The assessment was based upon the relevant sale value determined under s.18(1)(b) as being $14,936.20. The applicant objected to that assessment, the objection was disallowed and the applicant then appealed to this Court against the objection decision.

9. The applicant sought particulars of "the precise manner of calculation of the alleged total sale value of $14,936.20" calculated by the Commissioner. The Australian Government Solicitor replied, giving a formula which amounted, in effect, to saying that the Commissioner had commenced with the retail price charged by the applicant, had deducted therefrom an assumed amount of sales tax as if that retail sale had been a tax inclusive sale and had then discounted the resultant figure by 7.5%. Put shortly, as the particulars said, this meant that the assessment was based on a "Sale value calculated as 7.5% of tax exclusive retail sales" or probably more accurately, as a correcting letter from the Australian Government Solicitor also in evidence said, "Sales value calculated as tax exclusive retail selling price less 7.5%."

10. The applicant then sought to know from whence the figure of 7.5% was derived. The Australian Government Solicitor replied:

"I advise that it is within the discretion of

the Commissioner to decide an appropriate sale

value where no sale value of the relevant goods

has been provided. For guidance as to what is

fair and reasonable my client has taken into

account Sales Tax Ruling 3001 and in particular

paragraph 5.12 of the Ruling."

11. Before me, apart from admitting the quantum of retail sales in the month of December 1992, the applicant adduced no evidence in support of any figure which it suggested should be substituted for that adopted by the Commissioner. This was because Mr Blackwood, on behalf of the applicant, expressed the view that he was unable to determine any basis for doing so. Instead the applicant tendered the request for particulars of the basis of the assessment and replies to which I have referred which were admitted into evidence without objection. There was also adduced into evidence, to explain the reply, the Ruling ST(NS)3001 to which the Australian Government Solicitor referred in the reply. That document purports to be a guide to sales tax liability for manufacturers of printed matter. It deals, inter alia, with various matters not at issue in the present case. The relevant part of the Ruling is that concerned with retail sales and particularly paras.5.11 and 5.12 which deal with the case of printers who sell goods by retail but not by wholesale. The relevant paragraphs read 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 wholesale value should

include all manufacturing costs, direct

and indirect, a value for administration

and selling costs at the wholesale 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."

12. The applicant contends before me that the objection decision and in consequence the assessment made by the Commissioner should be set aside and the matter remitted to the Commissioner to reassess on the grounds that the particulars provided by the Commissioner, when read together with the Ruling, make it clear that the Commissioner has adopted an arbitrary sale value unrelated to the circumstances of the applicant. As an alternative submission, it is said that the Commissioner has relied on a predetermined ruling rather than approaching the matter on a case by case basis, applying a policy without regard to the conditions particularly appertaining to the applicant.

13. Mr Blackwood was cross-examined by counsel for the Commissioner as to the printing activities undertaken by the applicant, the sort of items which make up costs or overheads of the applicant such as material costs leased machinery and the like, and as to the activity of print brokers in the industry who bring about a situation where one printer may print for another printer who ultimately sells by retail. The applicant had never itself undertaken such work, although the related company, Boxvale, had.

14. The assessment under consideration arose largely out of the printing by the applicant of mortgage forms for Westpac Banking Corporation Limited. There was some discussion in the evidence of the possibility that blank mortgage forms were sold to the public by stationers who might, if they did not themselves print the forms, arrange for them to be printed by a printer and in respect of which it might reasonably be expected that they would have, unlike the applicant, retail costs for employees and the like.

15. I should note here that an argument that in making the calculation of sale value the Commissioner had treated the applicant's sales prices as including sales tax, when the applicant had never charged sales tax, ultimately disappeared as irrelevant to the real issues between the parties. For that reason I would reject the material objected to in paras.(3), (4) and (7) of Mr Blackwood's affidavit on the grounds that the relevant passages were irrelevant.

16. In the course of discussion with counsel the major issue between the parties crystallised as being whether, once the applicant had tendered the particulars indicating how the sale value was calculated and showing that the calculation was made by the application of what was said to be an arbitrary percentage of 7.5%, the applicant must succeed in its appeal in the absence of some evidence of the Commissioner as to the correctness or appropriateness of the 7.5% figure.

17. Section 18(1)(b) of the Assessment Act constructs, to adopt the language of Evatt J in Commonwealth Quarries (Footscray) Proprietary Limited v Federal Commissioner of Taxation [1938] HCA 13; (1938) 59 CLR 111 at 123 in the context of s.18(1)(b)(i) of the Assessment Act, a "statutory hypothesis". That hypothesis is that a sale by wholesale should be supposed to have taken place between the manufacturer and a retailer and the question asked as to the amount which could reasonably be expected to have been produced by the hypothetical wholesale sale. A fortiori, there has been no actual wholesale sale from which the required sale value can be drawn. I agree with Wilcox J in Boxvale (at 4931) that while the calculation may have its difficulty and may admit of disputes in particular cases, it is not an impossibility. A taxpayer might, for example, be able to adduce evidence to show the markup adopted by printers who actually sell printed goods by wholesale. Equally a taxpayer seeking to challenge a sale value calculated by the Commissioner might demonstrate the profit margin adopted by retail printers who purchase printed goods in a wholesale transaction. Neither of those courses was adopted by the applicant here.

18. Counsel for the Commissioner submitted that the applicant must fail in the absence of any other evidence. He submitted:

(1) That the burden of proof of showing the assessment was

excessive lay upon the applicant by force of s.14ZZO(b)(i)

of the Taxation Administration Act 1953 (Cth). That legal

burden remained at all times with the applicant and did not

shift and that this burden would be the same whether the

Commissioner had assessed under ss.18(3A), 25(2A) or (as was

the case here) s.25AA of the Assessment Act.

(2) That for the applicant to discharge the burden imposed upon

it of showing that the assessment was excessive, the

applicant must show not merely that the sale value

calculated by the Commissioner was wrong and in consequence

the sales tax assessed was too high, but also must show what

the appropriate sale value was and in consequence what the

appropriate sales tax to be assessed was.

(3) The evidential burden imposed upon the applicant in

consequence of s.14ZZO(b)(i) may shift if the applicant were

to prove matters such as the cost of manufacture and profit

margin and arrive at a sale value less than that which the

Commissioner had adopted in the assessment. That was not

the present case.

(4) That the evidentiary burden imposed upon the applicant by

s.14ZZO(b)(i) did not shift merely by proof that the

Commissioner had adopted a particular sale value, at least

in the absence of evidence which positively established the

actual sale value being a figure less than that adopted by

the Commissioner and in consequence a sales tax liability

less than that assessed.

(5) Since in the present case the figure adopted by the

Commissioner was by definition less than the retail sale

price at which the applicant sold its goods and there was no

evidence that any sale value less than that fixed by the

Commissioner should be adopted in substitution for that

accepted by the Commissioner, the applicant had failed in

showing the assessment to be excessive.

19. The applicant properly accepted that the ultimate burden lay upon the applicant to show the assessment was excessive. The matter really at issue between the parties depends, in my view, ultimately upon whether it was necessary for the applicant, in discharging its burden under s.14ZZO(b)(i) of showing the assessment to be excessive, to show that the proper sale value is a figure less than that adopted by the Commissioner so that there can be quantified a lesser sales tax liability than that adopted by the Commissioner in the assessment.

20. Counsel for the Commissioner referred me to the decision of the High Court of Australia in the context of income tax in Commissioner of Taxation v Dalco [1990] HCA 3; (1989-90) 168 CLR 614 and in particular to the decision of Brennan J in that case at 623-4 (referring to comments made by Latham CJ in Trautwein v Federal Commissioner of Taxation [1936] HCA 77; (1936) 56 CLR 63 at 88) and of Toohey J at 633-34.

21. It is now well settled that, in the context of income tax assessments made under s.167 of the Income Tax Assessment Act 1936 (Cth), a taxpayer will not succeed in showing the assessment to be excessive unless the taxpayer has shown not merely that the assessment proceeded on a wrong basis, but that the amount assessed as his taxable income in fact exceeded his real taxable income with the consequence that he has shown the extent of the excessiveness. Brennan J in Dalco was of the view that this followed from the provisions of s.190(b) of the Income Tax Assessment Act, as it then stood (now s.14ZZO(b) of the Taxation Administration Act) which places the burden upon the taxpayer on an appeal to show the income tax assessment to be excessive. Mason CJ, Deane, Dawson, Gaudron and McHugh JJ all agreed with the separate judgments of Brennan and Toohey JJ, Toohey J's judgment, for relevant purposes, being to the same effect as that of Brennan J.

22. The view that for a taxpayer to succeed it was necessary to establish not only that the assessment was wrong but the extent of the excessiveness, originated from the decision of the High Court in Trautwein to which reference has already been made. Trautwein's case, like Dalco, concerned a challenge to what is commonly referred to as a default assessment, that is to say, an assessment not based upon taxation returns lodged by the taxpayer under the then equivalent of s.167 of the present Income Tax Assessment Act. The legislation at the time, the Income Tax Assessment Act 1922-1934 (Cth), differed somewhat from the present legislation. The Commissioner's power to make a default assessment was found in s.36 of the 1922 Act which empowered the Commissioner to make an assessment of the amount upon which in his judgment income tax ought to be levied. The section thereafter continued:

"and the person assessed shall be liable to

income tax thereon, excepting so far as he

establishes on objection that the assessment is

excessive." (emphasis added)

23. Section 39 of that Act, which corresponds to s.177 of the present legislation, made the assessment prima facie evidence in the case of an appeal against it.

24. The language of s.36 makes it clear that a taxpayer, in the event of a default assessment, could only succeed by showing the extent of the excessiveness. This having been said, however, Latham CJ appears rather to have based his conclusion upon the provisions of the then s.39 which did no more than make the assessment prima facie evidence in a taxation appeal. In Trautwein Latham CJ said (at 88):

"The application of sec.39 is not, in my

opinion, excluded as soon as it is shown that an

element in the assessment is a guess and that it

is therefore very probably wrong. It is prima

facie right - and remains right until the

appellant shows that it is wrong. If it were

necessary to decide the point I would, as at

present advised, be prepared to hold that the

taxpayer must, at least as a general rule, go

further and show, not only negatively that the

assessment is wrong, but also positively what

correction should be made in order to make it

right or more nearly right. I say `as a general

rule' because, conceivably, there might be a

case where it appeared that the assessment had

been made upon no intelligible basis even as an

approximation, and the court would then set

aside the assessment and remit it to the

commissioner for further consideration."

25. In the same case, Dixon and Evatt JJ (at 111) in rejecting an argument that proof that the assessment was merely a conjectural estimate meant the taxpayer must succeed said:

"In our opinion the title of the taxpayer to be

relieved against any of the assessments depends

upon the question whether it is incumbent upon

him to show no more than that the assessment is

erroneous, or, on the other hand, to show that

it should be reduced by some ascertained amount.

If sec. 36 provides machinery which may be

availed of under sec. 37, it would, we think,

result in imposing upon the taxpayer the burden

of showing that the assessment should be reduced

by some figure. For he is to be bound,

excepting so far as he establishes on objection

that the assessment is excessive. But in any

case the Act throws upon the taxpayer the burden

of objecting to and appealing against an

assessment or an amendment. ... The burden lies

upon him in the judicial proceedings which he is

thus required to take of establishing that the

assessment or amendment imposes upon him a

liability to which the taxing provisions of the

Act do not subject him. Within the limits of

his objection he must show that the assessment

is contrary to law or to fact."

26. The view originating in Trautwein that a taxpayer was required to show not merely that the assessment was wrong but the extent to which it was wrong, at least in a case involving a default assessment, thereafter prevailed: McEvoy v Federal Commissioner of Taxation (1950) 9 ATD 206 at 210-11; George v Federal Commissioner of Taxation [1952] HCA 21; (1952) 86 CLR 183 at 189 (per Kitto J) and more recently in Dalco's case. The foundation, however, for the view appears now, as Brennan J observed in Dalco, to rest upon the provisions of s.14ZZO(b)(i) which casts upon the appellant in a tax appeal the burden of proving the assessment to be excessive. With respect, this view would seem to be soundly based because the word "excessive" requires that the taxpayer show that the assessment made by the Commissioner exceeds some nominated figure being the taxpayer's liability. Merely to show the assessment to be wrong would not demonstrate that it was excessive.

27. Although the cases to which I have made reference have all been decisions made in the context of default assessments, it seems to me that there is no particular reason why the comments so made should be confined to a default assessment. As the Full High Court said in George's case (at 203-4) in the context of the income tax legislation the power to make a default assessment is "epexegetical" to the general assessing power. The power to make a default assessment is not an independent power. Thus their Honours said, with respect to s.167 empowering default assessments (at 204):

"What it does is to mention with particularity

three situations which might arise in carrying

out the duty imposed by s. 166, and to direct

how in those situations the commissioner shall

proceed for the purpose of s. 166. Just as

under s. 166 considered alone the commissioner

ascertains the amount of the taxable income and

thus assesses it so does he under s. 167, used

in aid of s. 166, ascertain the amount upon

which, in his judgment, income tax ought to be

levied and thus assesses it. By definition

`assessment' means the ascertainment of the

amount of the taxable income, and of the tax

payable thereon. This is the view of ss. 166

and 167 adopted by Williams J in McEvoy v

Federal Commissioner of Taxation ... The fact is

that unless the taxpayer discharges the burden

laid upon him by s. 190(b) of proving that this

ascertainment or judgment is excessive, he

cannot succeed and it can be no part of the duty

of the commissioner to establish affirmatively

what judgment he formed...".

28. There is nothing in Dalco's case which would confine the obligation of a taxpayer, to show not merely that the assessment was wrong but the correct taxable income, to a case arising under s.167. The comments which I have cited from George's case which suggest to the contrary were indeed referred to with approval both by Brennan J (at 618) and by Toohey J (at 630). The example given by Toohey J (at 631-2) immediately after the quotation from George's case would suggest his Honour did not understand George's case to be confined to an assessment made under s.167. The view that the obligation (to show not merely that the assessment was wrong but the extent to which it was wrong) applied not merely to a default assessment, was taken, in my view correctly, in the Supreme Court of New South Wales in Black v Federal Commissioner of Taxation (1986) 86 ATC 4113.

29. The sales tax legislation differs from the income tax legislation in that the assessment is not prima facie evidence in a sales tax appeal (cf s.67 of the Assessment Act). However, s.14ZZO applies not only to income tax appeals but also to sales tax appeals. In sales tax, as in income tax, therefore, the statutory issue will ultimately be the excessiveness of the assessment. Hence, although a sales tax assessment is not given any prima facie status when tendered in a sales tax appeal, it is clear that it is for the taxpayer in a sales tax matter to show the assessment to be excessive, just as it is for a taxpayer in an income tax matter to show the assessment to be excessive. A taxpayer will not, in my view, show the assessment to be excessive merely by showing that the assessment is one made by the Commissioner by applying some arbitrary percentage (if indeed it be the case that the percentage applied by the Commissioner in the present case) was arbitrary. Ultimately the taxpayer will not have shown thereby the assessment to be in excess of the actual substantive liability of the taxpayer.

30. The present is not a case where the assessment has been shown to be but a guess or where the assessment proceeded upon no intelligible basis, such as is discussed in the passage earlier cited from Latham CJ's judgment in Trautwein. All the taxpayer has shown in the present case is that the assessment proceeded by applying a discount from a notional tax exclusive retail price. It may well be that the Commissioner's inquiries, as reflected in Ruling ST(NS) 3001 have indicated some average discount from retail prices as reflecting, in a general way, wholesale prices in the printing industry. I do not know. It is no answer, in my opinion in any event, for the taxpayer to say that once the taxpayer has shown the manner in which the calculation of taxable value was made, the onus shifts to the Commissioner to show that the method of calculation was a correct one. That misunderstands the application of s.14ZZO.

31. It follows, in my view, that the taxpayer has not in the present case shown the assessment to be excessive because the taxpayer has not shown that the sale value and therefore the sales tax payable for the relevant month was less than the amounts shown in the assessment.

32. The applicant's alternative submission is likewise misconceived. It was based upon what was said by the High Court in Green v Daniels [1977] HCA 18; (1977) 51 ALJR 463. That was a case where an application for unemployment benefits had been refused pursuant to a policy laid down in the "Unemployment and Sickness Benefit Manual" in circumstances where that policy conflicted with the Act. Stephen J, in setting aside the refusal, referred specifically (at 467) to the fact that the policy laid down guidelines "inconsistent with a proper observance of the statutory criteria" as a result of which conclusions reached which had regard to those guidelines were vitiated.

33. First, it has not been shown in the present case that the Ruling ST(NS) 3001 was inconsistent with the Act. All the Ruling did was invite taxpayers, subject to the result being no less than cost, to adopt a 7.5% discount from the tax exclusive price as being a fair basis for calculating the s.18(1)(b) sale value. Second, and more importantly, the alternative argument is but a variation of the main submission. Even if I were to accept that in applying the 7.5% discount the Commissioner acted in accordance with some inflexible (and wrong) policy (and I do not suggest that he so acted) the applicant would not have shown the assessment to be excessive, merely probably wrong. For the reasons already given that would not entitle the applicant to succeed.

34. Accordingly I would dismiss the application with costs.