Avon Products Pty Limited v Commissioner of Taxation

[2005] FCAFC 63

FEDERAL COURT OF AUSTRALIA

Avon Products Pty Limited v Commissioner of Taxation
[2005] FCAFC 63

SALES TAX – indirect marketing on substantial scale of variety of goods – reduction in tax rate pursuant to sales tax ruling – consequential credit entitlements claimed – whether amount overpaid passed on to buyers – meaning of statutory expression ‘passed on’ – application thereof to circumstances of the taxpayer

Sales Tax Assessment Act 1992 (Cth) ss 5, 20, 51(1)-(4); Schedule 1 and Tables AD2, 12d thereof and Note 2 thereto
Sales Tax Assessment Act (No 1) (1930-1933) (Cth) s 26(1), ss 70A to 70D

Worthington Pump & Machinery Corp v United States (1954) 122 F.Supp. 843 discussed
Tenneco Inc v United States (1989) 18 Cl. Ct. 345 discussed
Amway Australia Pty Ltd v Commonwealth of Australia (1998) 158 ALR discussed
Amway Australia Pty Ltd v Commonwealth of Australia (1999) 41 ATR 443 discussed
Otto Australia Pty Ltd v Federal Commissioner of Taxation (1990) 25 FCR 257 referred to
Otto Australia Pty Limited v Federal Commissioner of Taxation (1991) 28 FCR 477 discussed
Customs and Excise Commissioners v National Westminster Bank plc [2003] STC 1072
Case 45/95 (1995) 95 ATC 395 referred to
Marks & Spencer plc v Customs and Excise Commissioners [1999] STC 16 discussed
Estee Lauder Pty Ltd v Federal Commissioner of Taxation (1988) 88 ATC 4412 cited

AVON PRODUCTS PTY LIMITED v COMMISSIONER OF TAXATION

N 764 OF 2004

RYAN, MERKEL & CONTI JJ
20 MAY 2005
SYDNEY

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	N 764 of 2004

ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA

BETWEEN:	AVON PRODUCTS PTY LIMITED APPELLANT
AND:	COMMISSIONER OF TAXATION RESPONDENT
JUDGES:	RYAN, MERKEL & CONTI JJ
DATE OF ORDER:	20 MAY 2005
WHERE MADE:	SYDNEY

THE COURT ORDERS THAT:

1.        The appeal be dismissed.

2.        The appellant pay the respondent’s costs, to be taxed in default of agreement.

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

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	N 764 of 2004

ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA

BETWEEN:	AVON PRODUCTS PTY LIMITED APPELLANT
AND:	COMMISSIONER OF TAXATION RESPONDENT

JUDGES:	RYAN, MERKEL & CONTI JJ
DATE:	20 MAY 2005
PLACE:	SYDNEY

REASONS FOR JUDGMENT

RYAN AND MERKEL JJ:

1. We have had the considerable advantage of reading in draft the reasons for judgment prepared by Conti J.  We are therefore relieved of the need to rehearse the factual background to this appeal or to set out the relevant legislative provisions and authorities which have been so carefully and comprehensively canvassed by his Honour.  Regrettably, however, we have come to a different conclusion as to the disposition of the appeal.  It is therefore necessary to explain in some detail our reasons for being unpersuaded that the learned primary Judge fell into error. 

2. As Conti J has observed, neither the expression “passed it on” nor the concept of passing on is defined in affirmative terms by the Sales Tax Assessment Act 1992 (Cth) (“the Act”). However, s 5 of the Act provides;

   ‘In this Act, unless the contrary intention appears:

   … … …

   ‘"passed on", in relation to an amount of tax that has been borne by a person, does not include an amount that the person has passed on to another person, but has later refunded to that other person.

   "Person" means any of the following:

   (a)      a company;

   (b)      a partnership;

   (c)       a person in a particular capacity of trustee;

   (d)      a body politic;

   (e)       any other person.

3. It has not been contended on either side on the hearing of the appeal that “passed on” is a technical expression or a term of art. Accordingly, the definitional approach taken by the framers of the Act leaves the concept signified by the expression “passed on” to be applied according to its ordinary English meaning. In the relevant sense “pass on” is defined by the Oxford English Dictionary, 2^nd Ed Vol XI p 299 as “To send or hand (anything) to the next member of a series.”  That suggests that a tax on goods is “passed on” if, instead of “stopping with” or being “absorbed by” one element in the series commencing with the original producer and ending with the ultimate consumer, it is sent from one element to the next.  Put another way the tax is passed on if its burden is passed on.  In the present context that means the sales tax has been passed on by Avon to the consumers of its products if they, rather than Avon, bear the burden of the tax.

4. The findings of fact by the learned primary Judge make it clear that Avon’s policy in fixing prices at which its goods were sold to purchasers from it was to ensure that it always recovered, at least, the cost of the goods including sales tax exigible on them.  In that sense, Avon, in common with other manufacturers or wholesalers who do not incur a loss on re-selling their goods, can be said to have “passed on” to purchasers of the goods the sales tax which was regarded as a component of the costs of those goods.  Put simply, if Avon ensures it sells its products in a manner that recovers all of its costs, including sales tax, it has passed the burden of those costs on to the purchasers of its products.

5. The legislative history recounted by Conti J in his reasons makes clear that the current provision for a refund of sales tax which has been overpaid was framed to guard against “profiteering in sales tax.”  That is not the same as making an equitable adjustment as between the Commissioner on the one hand and the vendor or purchaser on the other, of an amount of sales tax which has concededly been overpaid.  Rather, the legislative intent is that the Commonwealth is to retain overpaid sales tax unless the taxpayer establishes that it, rather than the consumer, bore the burden of paying the tax.

6. It is true, as Conti J points out at [35] of his reasons, that “market dynamics may be normally or frequently expected to dictate or influence the setting of prices for goods intended for sale to the public.”  However, we do not regard that general economic truth as illuminating the question of statutory construction of whether an imposition of sales tax has been “passed on”.  For example, a vendor who enjoys a monopoly in a commodity for which demand is inelastic may extract a monopoly rent by fixing its prices with little or no regard to sales tax or other components of the cost of producing or marketing the commodity.  Nonetheless, by doing so it will be recovering all of its costs and the monopoly rent.  At the other end of the spectrum, a vendor under competitive market pressure may fix a price which involves selling the goods at a price that only recovers its costs.  In both cases the market has determined the selling price but that does not assist in determining whether that price has enabled the vendor to pass on the burden of its costs, including sales tax.  

7. There are set out in Conti J’s reasons six propositions that the learned primary Judge distilled from authorities in this Court and elsewhere in which credit for overpaid sales tax which has not been passed on has been discussed.  The third and fourth of those propositions are particularly relevant to the issues arising on the appeal:

   ‘(3)Where the sales tax is not separately identified in the price it will be necessary for a taxpayer seeking to prove that the tax has not been passed on to show that the price charged is calculated without regard to the sales tax and that the proper conclusion is that it is the taxpayer who is bearing the sales tax.  As the onus of proof lies on the taxpayer it will normally be difficult (although not impossible) for the taxpayer to satisfy the onus of showing that the taxpayer bore the incidence of the sales tax where the taxpayer sells at a price above cost plus sales tax.

   (4)Where the price charged is calculated so as to exceed the cost (including sales tax) by a profit margin, it will be the customer who bears the incidence of the sales tax and not the vendor of the goods.’

8. We do not understand the learned primary Judge to have laid down the propositions as a universal or inflexible rule.  Rather, the propositions were formulated as general principles that were helpful in determining a question of fact being whether a taxpayer has discharged the onus identified in proposition 3, of proving that sales tax, or some specific component of it, has not been “passed on.” 

9. The fact that Avon’s “regular” prices did not change in response either to increases in sales tax in 1993 and on 1 July 1995 or reductions which took effect respectively on 1 December 1995 and 5 February 1999 we regard as neutral on the question of whether part of the sales tax as imposed from time to time was “passed on” to consumers.  It might have been otherwise had evidence been adduced of a deliberate decision by Avon, uninfluenced by competitors’ prices or other market forces, to absorb the increases when they occurred.  However, there was no attempt to adduce any such evidence.  Moreover, even if there had been, it would not have assisted in determining whether that part of the sales tax component of Avon’s prices for its goods which reflected the amount of the later decreases in sales tax had been “passed on” to consumers.  It has to be borne in mind in this context that the credit made available to a claimant under Table 3 is not the sales tax as an indivisible whole which has been paid but “the amount overpaid to the extent that the claimant has not passed it on.” 

10. We also regard as, at best, neutral for Avon the fact that no adjustment to prices was made in respect of goods sold to Norfolk Island and Christmas Island for which, as we understand it, a total exemption from sales tax could have been claimed.  Had a certificate of exemption been produced by purchasers from those islands, Avon would have been obliged to adjust the prices charged to them unless it could have been shown that Avon had absorbed the whole of the applicable sales tax before fixing the prices charged for its goods to the purchasers on the two islands.  However, that does not entail that the corollary also holds good.  In other words, the failure to charge a differential price for goods sold to Norfolk and Christmas Islands does not signify that the sales tax had never been “passed on” to purchasers in those islands and elsewhere.  In our view, the preferable inference is that the sales tax component of the cost of Avon’s goods was indiscriminately “passed on” to purchasers wherever they resided as part of Avon’s costs and Avon did not attempt to preserve for purchasers on the two islands the benefit of the exemption to which they were entitled.

11. Of the two United States authorities relied on by the appellant, we derive no assistance in resolving the present appeal from Worthington Pump & Machinery Corp v United States (1954) 122 F.Supp. 843.  In that case, in the year in which a credit or refund was allowed, the vendor made a loss, albeit a loss greater than the amount of excise tax paid.  Another important distinction between that case and the present is that the vendor’s prices for its goods remained unchanged after the overpayment of excise tax from what they had been before the overpayment occurred.  That permitted the Chief Judge to draw the inference, which he did for the 1948 fiscal year, that the vendor had not intended to pass the overpaid tax on to the purchasers of the unit.  The drawing of that inference seems to have been based on an implicit finding that the vendor, Delta, had been aware of the amount by which excise tax had been overpaid but nevertheless made a deliberate choice not to pass on that amount.  By contrast, in the present case, it is not possible to identify a fixed price for each item of Avon’s goods which prevailed at all relevant times before and after the sales tax changes.  Rather, Avon’s techniques of adjusting or “tweaking” prices in response to a number of market forces subject only to the requirement that the price for any item not fall below its cost to Avon (including sales tax), meant that no inference could be drawn one way or the other as to whether any overpayment of sales tax occurring from time to time had been “passed on”.

12. Avon’s method of setting prices was a hybrid of the two methods identified in the second United States case of Tenneco Inc v United States (1989) Cl. Ct. 345 because its prices were partly based on market prices – what its competitors charged or what the market could bear – but were partly cost-based because of Avon’s determination that in no case should an item be sold at a loss, ie less than cost including sales tax.  In that sense, the following observations of Foster J in Amwayof Australia Pty Ltd v Commonwealth of Australia (1998) 158 ALR 652 can be paraphrased to apply with equal force to Avon’s pricing technique;

    ‘There was ample evidence before the Commissioner’s delegate that Amway took into account in relation to its pricing the incidence of increased sales tax.  Indeed, it is accepted in Amway’s case that these increases were not ignored.  They were referred to in correspondence between Amway and the parent company in America which, apparently, exercised a general supervisory role over pricing, whilst allowing considerable autonomy to the Australian company.  It is quite clear that the tax increase was taken into account as a relevant cost along with other costs.  It seems that on some occasions the increase was effectively negatived by cost reducing factors such as favourable exchange rates.  In my view, the evidence is clear, and would have been clear to the Commissioner that the increase in sales tax was taken into account by Amway in determining whether lines of merchandise to which it applied could be sold at a profit.  If an acceptable profit margin existed, notwithstanding that there was a decrease in relation to the previous margin, the product would be made available to the distributors.  If no such acceptable margin existed, the distribution of the product was discontinued in favour of some product where an acceptable margin would exist.  The evidence demonstrated that this happened.  As indicated a bias occurred in favour of low taxed items, such as clothing, in the relevant period.’

13. The factors identified by the Court in the second passage from its judgment quoted by Conti J at [55] of his reasons are either equivocal or have no application in deciding whether Avon has discharged its burden of proof.  For example, as already noted, there was no evidence of any refund of sales tax or reduction in prices charged to exempt purchasers on Norfolk and Christmas Islands.  It is impossible to draw any conclusion about taxpayer profitability other than to acknowledge that, if Avon were to obtain the refund which it claimed, its profitability would have been increased by the amount of refund.  However, that begs the question of whether some part of the sales tax component of the cost of the goods has been “passed on” or borne once and for all by the taxpayer personally. 

14. The same question, we consider, was restated in the third proposition formulated by the Full Court in Amway of Australia Pty Ltd v Commonwealth of Australia (1999) 41 ATR 443 at 456;

    ‘55.     ……

    3.Where the evidence in the case falls short of [showing that the vendor’s price was calculated so as to include within it the sales tax component] the finder of fact may be satisfied that the sales tax has been passed on unless satisfied that the sales tax was not in fact included in the price.  Sales tax will not have been passed on where the taxpayer bears the tax personally.’

15. In our view, the test which Counsel for Avon postulated of “whether the seller made a profit less than (or sustained a loss greater than) had the sales tax not been overpaid”, likewise begs the same question.

16. We are unable to distinguish the present case from Otto Australia Pty Ltd v Federal Commissioner of Taxation (1990) 25 FCR 257 where, as we understand it, Lockhart J, at first instance, and Sheppard and Burchett JJ on appeal [(1991) 28 FCR 477], all held that, once it was found that the price charged for an item was calculated by reference to costs including sales tax, the sales tax component had been passed on. The same finding is compelled in the present case by Avon’s acknowledgement that the calculation of its prices was driven by the need to ensure that at no time did they fall below cost (including sales tax). We can discern nothing in their Honours’ reasoning which suggests that a change in the sales tax component which is later shown to have resulted in an overpayment by the vendor makes any difference to whether the whole or some part of the sales tax component has been passed on.

17. As with the United States authorities, we derive little or no assistance from the VAT cases decided in the United Kingdom to which we have been referred.  That is partly because the Customs and Excise Commissioners bore the onus or proving that the “undue” VAT had been passed on so that the vendor would have been unjustly enriched if it had received a refund of the “undue amount.”  In the second place, when their Lordships in Customs and Excise Commissioners v National Westminster plc [2003] STC 1072 identified the key question as being “what in the light of all the known facts would have been the financial position of Lombard if the undue tax had not been imposed?” – they were referring to the financial position of the lessee which occupied a situation analogous to that of the purchasers from Avon in the present case.  There is no evidence which would permit a finding as to what would have been the position of those purchasers had Avon not paid the excessive or undue amounts of sales tax.

18. Conti J has held to be persuasive of the discharge by Avon of its burden of proof two factors acknowledged by the learned primary Judge to be in Avon’s favour.  The first is that Avon’s “regular” prices for its products did not change in response to movements which occurred in the rate of sales tax.  We are unable to attribute the same significance to that factor for two reasons.  In the first place, the scope for movement in the individually small “regular” prices for all, or almost all, of Avon’s goods in response to increases or decreases in sales tax was too small to impinge on the “price points” which had been established for those goods.  Secondly, it was conceded by Avon that 85-95% of all sales of CFT products were at discounted, not “regular” prices.  The evidence was not as clear in relation to non-CFT products which represented about 40% of total sales and which were sold for two consecutive campaigns at their “regular” prices before being discounted.  The available inference seems to be that only about 30% of total sales of both CFT and non-CFT items occurred at their “regular” prices. 

19. The second factor identified at first instance which Conti J has regarded as persuasive was that “Avon did not set its prices at least principally upon the basis, or by reference to costs.”  We are unable, with respect, to attach the same weight to that factor in light of Avon’s concern noted at [4] and [16] above that in no case should the price charged for an item result in Avon’s incurring a loss, ie fall below the cost (including sales tax) to Avon of that item.

20. Finally, we see no anomaly arising from the practical difficulties that will confront a taxpayer in discharging the onus of establishing that it did not pass on the burden of overpaid sales tax to consumers.  Those difficulties arise, because, in order to make a profit taxpayers must pass the burden of their costs, including sales tax, on to the consumers of their products.

21. For the above reasons we have concluded the appeal should be dismissed with costs.

I certify that the preceding twenty-one (21) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Ryan and Merkel.

Associate:

Dated:            May 2005

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	N 764 OF 2004

ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA

BETWEEN:	AVON PRODUCTS PTY LIMITED APPELLANT
AND:	COMMISSIONER OF TAXATION RESPONDENT

JUDGE:	RYAN, MERKEL and CONTI JJ
DATE:	20 MAY 2005
PLACE:	SYDNEY

REASONS FOR JUDGMENT

CONTI J

The circumstances giving rise to the present proceedings

1. Avon Products Pty Limited (‘Avon’) carried on the business throughout all material times of selling by retail a variety of goods of two categories, one being cosmetics fragrances and toiletries (so-called ‘CFT products’), and the other being jewellery, accessories, gifts, apparel and home items (so-called ‘non CFT products’).  The former accounted for approximately 60% of total Avon sales and the latter accounted for approximately 40% of total Avon sales.

2. Avon conducted its business during the material times through a network of sales representatives who were independent contractors, and not employees in any traditional sense.  Those representatives sold Avon’s products directly to the public per medium of door-to-door sales, which constituted ‘indirect marketing sales’ within the meaning of s 20 of the Sales Tax Assessment Act 1992 (Cth) (‘the Act’). Consequently the taxable value of those sales, for the purposes of sales tax, was the notional wholesale selling price in the hands of the seller under Assessable dealings AD2d or AD12d of the Tables of Schedule 1 to the Act, the former relating to Australian goods and the latter to Imported goods. 

3. Section 20 of the Act provides as follows:

   ‘Indirect marketing sale (AD2d and AD12d)

   20A sale of assessable goods is an indirect marketing sale if it is a retail sale made by a person (“the marketer”) who is not the manufacturer of the goods and the sale is made:

   (a)under an arrangement that provides for the sale of the goods to be made by a person who is acting for the marketer but is not an employee of the marketer; or

   (b)from premises that:

   (i)are used, mainly for making retail sales of goods, by a person or persons other than the marketer; and

   (ii)are held out to be premises of, or premises used by, the other person or persons.’

4. Until 1 December 1995, according to the findings of the primary judge, Avon paid sales tax upon its indirect marketing sales on the basis that the taxable value was determined by reference to ‘cost plus 35%’, in accordance with sales tax ruling ST2424.  After that time, Avon utilised instead the so-called ‘safe harbour’ ruling of cost plus 15% issued by the respondent Commissioner.  On 5 February 1999 however, the Commissioner issued to Avon a sales tax private binding ruling, which determined that the taxable value of Avon’s products should be the ‘store cost of the goods plus 11.63%’.  Accordingly Avon claimed from the Commissioner a refund of sales tax, because during the relevant period, Avon had remitted sales tax to the Commissioner upon the basis of taxable values in excess of the ‘store cost of the goods plus 11.63%’.

5. Avon’s claim for overpayment of sales tax relates to the period from 1 March 1993 to 31 August 1998, and amounts to $3,610,261. Part 4 of the Act headed ‘CREDITS’ provides for the entitlements to credits for sales tax in the following terms:

   ‘Credit entitlements

   51(1)Table 3 sets out the situations in which a claimant is entitled to a credit.

   (2)A claimant is not entitled to a credit for an amount of tax for which a credit entitlement has previously risen (whether for the claimant or another person).

   (3)A claimant is not entitled to a credit unless the claim for the credit is lodged within 3 years after the time when the credit arises.

   (4)A claim for a credit must be made in the form and manner approved by the Commissioner, and must be accompanied by such supporting evidence as the Commissioner requires.’

   Table 3 to the Act, headed ‘Credit grounds’, contains inter alia the following:

[1] No.	[2] Summary of ground	[3] Details of grounds	[4] Amount of credit	[5] Time credit arises
CR1	Tax overpaid	Claimant has paid an amount as tax that was not legally payable	the amount overpaid, to the extent that the claimant has not passed it on	when the amount became overpaid

I should record that the Act does not contain an affirmative definition of the above expression ‘passed it on’; s 5 merely describes ‘passed on’ in negative terms as follows:

‘… in relation to an amount of tax that has been borne by a person, does not include an amount that the person has passed on to another person, but has later refunded to that other person.’

1. As may have become apparent from the foregoing legislative stipulations for establishing entitlement to a refund of sales tax, the primary judge indicated, at the outset of his reasons, that the question whether sales tax has been passed on may be a difficult hurdle for taxpayers seeking a refund to overcome.  His Honour observed at the threshold of his reasons in that regard as follows:

   ‘In some cases taxpayers may be able to demonstrate that while not having given refunds, they have priced products in such a way as, in effect, to refund amounts previously overpaid to customers by reducing the price at which future goods are sold.  Whether a taxpayer in such a case would be successful would depend upon the evidence which is adduced.  In other cases a taxpayer may seek to show that it has priced its goods at a price that has the consequence that it is the taxpayer, and not the purchaser from the taxpayer, who bears the sales tax.  That is what the applicant seeks to do in the present case.’

   Accordingly the primary judge found it necessary to examine carefully the evidence, particularly as to Avon’s methodology for setting prices, in order to determine whether or not changes in sales tax affected that methodology.

   Threshold findings made by the primary judge

2. Avon sold all of its goods through marketing campaigns which were standardised across its 110 sales districts within Australia.  Avon customarily conducted 18 campaigns of that description during a calendar year, each having a duration of about three weeks; thus many of the campaigns, temporarily speaking, were overlapping.  The primary judge found that although Avon would set a so-called ‘regular price’ for each product to be sold during a campaign, there was ‘heavy’ discounting put in place during each campaign.  Discounting constituted an integral part of Avon’s business, in that between about 85% to 95% of at least its CFT sales were in reality made at a discounted price.

3. The primary judge described thereafter in some detail Avon’s method for setting regular prices. Prior to introducing a new product, Avon would engage in the so-called ‘benchmarking’ of its prices against those charged for comparable products by competitors, ‘benchmarked’ prices thereupon becoming the regular prices for products.  In the absence of a directly comparable product, Avon set its price equal to that of a similar product from within the Avon range, or if there was not any such similar product, at the price which Avon thought the market could bear.  His Honour considered that although there was detailed evidence as to the way Avon’s products, in particular its CFT products, were priced from time to time, and how they were introduced as a product line, all that evidence could be condensed to a few simple propositions as follows:

   (i)the lowest figure at which Avon would price its products was cost, where cost included sales tax; thus Avon did not seek to sell any products at a loss; to that extent at least, so the primary judge pointed out, pricing included consideration of the sales tax payable as a cost component;

   (ii)the highest figure at which Avon would price its products was the price charged by its competitors for comparable products or the price it charged for the time being for those comparable products;

   (iii)between those two so-called ‘extremes’, Avon set its price at a level to maximise its profits, and thus achieved over a given sales period a projected product profit margin averaged over a range of products, and a projected volume of sales; and

   (iv)although Avon set what it called a ‘regular price’ for a product, in fact that price was frequently discounted, with the consequence that prices appeared to rise and fall.

4. Thus his Honour considered that Avon retained its pricing policy, notwithstanding changes in either the rate of sales tax or the method of calculation of sales tax during the relevant period involved in the proceedings.  In other words according to his Honour, ‘… it can be said that the regular price advertised remained constant, but as a result of discounting, the prices actually went up and down’, and moreover ‘[t]he pricing of products thus did not specifically depend upon the amount of sales tax payable except so far as at all times it was ensured that Avon would sell its products at a figure which exceeded costs of production plus sales tax’.  My difficulty with that conclusion, in the light of all of the evidence tendered by Avon in the proceedings, any such postulation can be realistically deduced therefrom.

   The primary judge’s historical survey of relevant statutory provisions

5. The primary judge foreshadowed that a historical survey of relevant statutory provisions demonstrated that the Legislature was ‘clearly alert to the problem that the grant to a taxpayer of a right to claim a refund, where tax had been overpaid, might create a windfall gain to that taxpayer where in truth the tax refunded had been borne by some person other than the taxpayer’.  It is instructive to reproduce his Honour’s convenient summary relevantly of this Legislative evolution.

6. When sales tax was first introduced by the Sales Tax Assessment Act (No 1) 1930 (Cth), s 26(1) thereof provided for the right to a refund of sales tax found to be overpaid, there being no requirement to show that the overpaid sales tax had not been passed on. In the following year (1931), that Act was amended by the insertion of ss 70A, 70B and 70C. Sections 70A and 70B concerned the right of a taxpayer to recover additional sales tax from the other party to a contract for sale, where an alteration in the rate of sales tax had occurred. Section 70C provided that in the case of a sale of goods by wholesale, the taxpayer was required to deliver an invoice to the purchaser which set out the amount of sales tax payable in respect of the sale. The Second Reading Speech to the Bill, which became the Sales Tax Assessment Act (No 1) 1931 (Cth), referred to the circumstance that those amending provisions were inserted at the request of the great majority of vendor traders, in order to enable them to recover the sales tax from purchasers by pricing.  His Honour observed that ‘[i]t presumably facilitated proof of the sales tax paid in recovery proceedings’. 

7. Section s 70D was thereafter introduced by the Sales Tax Assessment Act (No 1) 1933 (Cth). It prohibited a vendor from demanding or seeking to receive a sum of money upon the sale of goods in excess of the sales tax payable on the pretence that the sum was payable by the vendor as sales tax. At the same time, s 26(d) of the No 1 Act was repealed, and there was substituted a new subsection which provided as follows:

   ‘Where the Commission finds in any case that tax has been overpaid and is satisfied that the tax has not been passed on by the taxpayer to some other person, or if passed on to some other person, has been refunded to that other person by the taxpayer, the Commissioner may refund the amount of tax found to be overpaid.’

   Similar changes were made to the comparable sections of the other Assessment Acts, so that in all cases where liability to sales tax might arise, there was a requirement that the Commissioner be satisfied that overpaid sales tax had not been ‘passed on’.

8. In the Second Reading Speech to those amendments to the various Sales Tax Assessment Acts in 1933, the Assistant Treasurer said inter alia:

   ‘There is provision with regard to refunds of sales tax overpaid; such refunds are not to be made to a vendor who has passed on the overpaid tax to his purchasers, unless he first credits those purchasers with the tax overpaid’.

   The Assistant Treasurer further observed that there were:

   ‘… provisions guarding against the fraudulent passing on of tax in excess of liability; that is to say, against profiteering in sales tax.’

   The only other significant change to the sale tax legislation, for present purposes, was introduced by the Parliament in 1992 by way of the Sales Tax Assessment Act 1992 (Cth). The primary judge described the same in terms of a rewriting of the sales tax law, whereby the Commissioner’s discretion was eliminated, and the question as to whether sales tax had not been passed on as an exercise in fact finding was to be objectively ascertained. In that latter regard however, the primary judge observed that ‘[o]bviously it was not intended to change the meaning of the statutory words “passed on”.’

9. In the context of that legislative summary, and certain authorities to which his Honour referred, it was acknowledged by the primary judge ‘… that it is the hallmark of an indirect tax that the economic burden of it is passed on to the ultimate consumer’.  However his Honour further observed that ‘… if taken at face value [that principle] may lead to the conclusion that sales tax is always passed on to purchasers in the price for which the goods are sold’, and further ‘[w]hile that will ordinarily be the case it is implicit in the provisions with which we are here concerned that there will be circumstances where the sales tax will not have been passed on to the purchaser’.  In that context, the primary judge said that he preferred ‘… the formulation relevant to the present context as informed by the legislative history to be that sales tax will be passed on where it is shown that the price at which the goods are sold includes sales tax expressly or, if not expressly, where that price is calculated in such a way that the burden of sales tax will be borne by the purchaser’, and further that ‘[t]here may or may not be any real difference in these formulations’.  As will later appear, that was a controversial observation, in that market dynamics may be normally or frequently expected to dictate or influence the setting of prices for goods intended for sale to the public.

   The conclusions of the primary judge

10. The primary judge first recorded that two Full Federal Courts had considered the meaning of the statutory phrase passed on in the context, relatively speaking, of recent decisions, namely Otto Australia Pty Limited v Federal Commissioner of Taxation (1991) 28 FCR 477 and Amway Australia Pty Ltd v Commonwealth of Australia (1999) 41 ATR 443. After discussing both of those authorities and the factual background against which there were determined, and additionally the decision of the Administrative Appeals Tribunal in Case 45/95 (1995) 95 ATC 395 (which was discussed in Amway), the primary judge emphasised that each of those cases needed to be viewed on the footing of their respective circumstances.  For instance in Case 45/95, his Honour observed that ‘… there was an inability of the wine company to increase its prices having regard to competing cellar vendors and retailers which led to a specific decision that the wine company would itself carry the burden of the sales tax’.

11. In the light of each of those authorities, the primary judge formulated the following principles as applicable to the present context at [58]:

    ‘(1)The question whether overpaid tax has been passed on will raise the question whether it is the taxpayer or the purchaser from the taxpayer which bears the incidence of the sales tax.

    (2)Where the sales tax is separately identified in the price it will be the purchaser from the taxpayer who will bear the incidence of the sales tax.

    (3)Where the sales tax is not separately identified in the price it will be necessary for a taxpayer seeking to prove that the tax has not been passed on to show that the price charged is calculated without regard to the sales tax and that the proper conclusion is that it is the taxpayer who is bearing the sales tax.  As the onus of proof lies on the taxpayer it will normally be difficult (although not impossible) for the taxpayer to satisfy the onus of showing that the taxpayer bore the incidence of the sales tax where the taxpayer sells at a price above cost plus sales tax.

    (4)Where the price charged is calculated so as to exceed the cost (including sales tax) by a profit margin, it will be the customer who bears the incidence of the sales tax and not the vendor of the goods.

    (5)Where sales tax increases but prices remain the same there may be a prima facie case that the vendor bears the increased sales tax.  However the vendor will still need to show that other factors such as decrease in costs, including exchange variations as in Amway, do not affect the conclusion.

    (6)Where there is a change in sales tax rate but prices remain the same it will generally be necessary to know who bore the sales tax before the sales tax change to determine who bears the sales tax thereafter.’

    It is the fourth proposition above which is most controversial, at least in the present context of the appeal.

12. The conclusion of the primary judge was that Avon had failed to demonstrate that the overpaid sales tax had not been borne by customers in the relevant period of time the subject of assessment, with the result that Avon was not entitled to the refund of sales tax which it sought.  His Honour’s reasoning leading to that conclusion is summarised below.

13. The primary judge first referred to common ground between the parties that Avon’s regular prices for its products did not change in response to either increases in the sales tax rate that occurred, that is, the increases from 20% to 21% on 18 August 1993, and from 21% to 22% on 1 July 1995, or the reductions in the taxable value for its goods from cost plus 35% to cost plus 15%, and later to cost plus 11.63% (the emphasis upon the words regular and in response was made by the primary judge).  I would observe at once that those circumstances implicitly tended to favour Avon’s case below.  His Honour secondly referred to Avon’s contention that it did not set its prices as a function of cost, reliance having been placed below by Avon upon the evidence relating to its methodology of setting regular prices, having regard to the prices of competitors, and what the market could bear, and not having regard to cost.  His Honour thirdly recorded Avon’s reliance upon the circumstance that where sales tax was not payable, for example in particular on Norfolk Island and Christmas Island, its regular prices did not change.  Clearly of course, those circumstances further tended objectively to favour Avon’s case.

14. As to what may be described as the Norfolk Island and Christmas Island factor, the primary judge concluded that the same was of little consequence, not only because the amount of Avon’s sales effected in those islands was relatively insignificant, but also because the evidence ‘suggested’ that the real reason for Avon not charging different prices was that it would have been too expensive to print separate catalogues merely for circulation in those two islands.

15. The primary judge acknowledged that the evidence as to Avon’s pricing methodology established that its regular (his Honour’s emphasis) prices were not calculated as a function of cost, other than to determine than it did not sell at a loss, and further that Avon did not go about changing its prices in response to changes in the amount of sales tax payable.  Those factors tended to support Avon’s case.  The primary judge further acknowledged that there was no evidence that Avon’s costs increased throughout the relevant period of time. 

1. A major difficulty confronting Avon’s case however, the primary judge concluded, was its system of discounting sale prices in each merchandising campaign.  That was considered by his Honour to be a clearly important factor, given that 85% to 95% of its CFT goods were sold at a discount price.  His Honour pointed out that the evidence in that respect demonstrated that ‘through various conferences and meetings, a gross profit margin target was set for each of [Avon’s] 18 sales campaigns during a 12 month period’.  Moreover, as his Honour further pointed out, that target was achieved by ‘tweaking’ the prices for the items that were being discounted in each campaign.  Thus if it became apparent that a particular profit target was not likely to be achieved, so his Honour’s findings continued, ‘… a high margin product would be discounted, so as to drive more units of that product, and therefore bolster the overall gross profit margin for the campaign’.

2. The primary judge acknowledged that ‘… the actual discount prices themselves were based upon information from previous sales history, and in particular the price elasticity of each product’.  Despite that factor however, and the further fact that ‘… Avon did set its regular prices without much regard to cost’, the reality was, so the primary judge further found, that ‘Avon targeted a profit margin for each sales campaign’.  It followed, his Honour’s reasoning continued, that the overall campaign objective, and the extent of discounting, ‘was set to achieve an overall profit margin’, being ‘an overall margin over cost including sales tax’.  Put another way according to his Honour, Avon determined the extent of discounting by reference to ‘cost overall, even if not by reference to the individual cost of each item’.

3. The primary judge therefore considered that it was difficult to see what ‘real difference’ there was between ensuring a particular overall profit margin and pricing at cost plus a profit margin.  One was only another way of saying the other, in his Honour’s view.  Accordingly, his Honour concluded that Avon had failed to show that ‘its prices were not set with regard to cost’, and that therefore ‘the tax was passed on’ by Avon to the purchasers of its products.  His Honour acknowledged however that ‘[i]t was certainly true that the discounting was worked out on an overall profit margin, rather than the profit margin applicable to particular goods’, and that therefore ‘… it might be the case that in respect of a particular good it could be that the sales tax was not passed on’.  An example provided by his Honour in that regard was that ‘it could be possible that a particular item was so discounted that it was priced below cost’. His Honour concluded nevertheless as follows (at [6]):

   ‘I am quite satisfied that that was not the case, but even if it were, the applicant would not have, in respect of any individual product, satisfied the burden of proof of showing with respect to it that it had no regard at all to cost or profit margin.’

4. The primary judge therefore concluded his reasons for judgment in the following terms:

   ‘In my view [Avon] has failed to show that the overpaid sales tax was not borne by customers in the relevant period.  In the result, [Avon] is not entitled to a refund.’

   The issues raised by Avon on the appeal

5. Avon’s principal theme advanced on the appeal was what it contended to be the primary judge’s erroneous finding to the effect that in all circumstances where the price charged by Avon was so calculated as to exceed the cost of goods, inclusive of sales tax, by a profit margin, it would be the purchaser who bears the incidence of sales tax, and not the seller of the goods.  Senior counsel for Avon characterised that purported restatement of the critical finding of the primary judge as ‘a key issue in this appeal’. 

6. Avon’s submissions next focused on the definition of national wholesale selling price, which comprises note 2 to Schedule 1 of the Act, and is defined in the following terms:

   ‘… means the price (excluding sales tax) for which the taxpayer could reasonably have been expected to purchase the goods by wholesale under an arm’s length transaction.’

7. That definition was not explicitly referred to in the reasons for judgment of the primary judge in the course of his Honour’s reference to Assessable dealing AD2d.  It was the Commissioner's determination of a reduced taxable value of Avon’s products on 5 February 1999 as the ‘store cost of the goods plus 11.63%’, to which I have earlier referred, which led to Avon’s presently disputed claim for a refund of sales tax.  Up to the time of that reduced determination, Avon had paid sales tax based on taxable values the subject of public rulings, which were later identified in a private ruling as based upon ‘into store cost plus 35% pursuant to ST2424 and into store cost plus 15% pursuant to SST6’.

8. Avon contended that the true test as to whether sales tax has been ‘passed on’ should be whether the seller thereby made a profit less than, or else sustained a loss greater than, what would have been the case had sales tax not been overpaid.  The operation of that test was said by Avon to turn on whether the purchaser paid more for the goods than he or she would have done if the sales tax had not in fact been overpaid.  If the answer to that question should be in the affirmative, then the overpaid tax was submitted by Avon to have been passed on.  If on the other hand the answer to that question should be in the negative, or in other words, if the price would have remained unchanged, the overpaid tax would not have been passed on, and the seller simply would have made less profit than it would have done if the sales tax had not been overpaid.  There is I think substance in those contentions, for reasons that will hereafter appear. 

9. In the context of that contention, the Court was referred by Avon to two United States authorities, each of which need to be referred to in some detail.  The first was Worthington Pump & Machinery Corp v United States (1954) 122 F.Supp. 843, being a decision of the United States Court of Claims given on 13 July 1954 comprising a bench of five judges, including the Chief Judge.  The legislation there under scrutiny, which related to the recovery of excise taxes paid by a seller and collected from a buyer, being taxes which had been ruled by the Bureau of Internal Revenue not to have been due, was relevantly in the following terms (set out at 845):

   ‘No overpayment of tax under this chapter shall be credited or refunded (otherwise than under subsection (a)), pursuant to a court decision or otherwise, unless the person who paid the tax establishes, in accordance with regulations prescribed by the Commissioner with the approval of the Secretary, (1) that he has not included the tax in the price of the article with respect to which it was imposed, or collected the amount of tax from the vendee, or (2) that he has repaid the amount of the tax to the ultimate purchaser of the article, or unless he files with the Commissioner written consent of such ultimate purchaser to the allowance of the credit or refund.’

   At 847, the Chief Judge (with whose reasons all other members of the Court agreed), observed as follows:

   ‘At the outset it must be noted that under ordinary competitive conditions no tax can be passed on completely since a rise in price has the tendency of reducing the volume of business.  It is for this reason that the problem of determining the tax burden is so difficult since it involves in most cases a question of degree.  Secondly, the fact that a firm is making a profit or loss does not in itself determine whether or not it has passed on the tax.  The only test is whether the seller has made a profit less than or sustained a loss greater than had the tax not been imposed on him.  Nevertheless, the fact that a loss has occurred shows that the seller was unable to recover the total costs which he incurred in connection with the particular transaction.  The tax may be deemed to have been absorbed to the extent that the loss is attributed to the tax, rather than to the other costs of the transaction.’

   The conclusion drawn in favour of the US plaintiff taxpayer was expressed in the following terms:

   ‘[5,6]  In the instant case, there also had been a loss.  Plaintiff alleges that Delta’s loss was due to the tax.  It was too big for that alone.  Delta’s obvious inefficiency of operation is an equally plausible explanation.  There is in fact no reason to assign any order in the occurrence of either cost.  It would seem to be fairer to apportion the loss among all cost factors in the degree of their monetary importance.  There are, however, two additional factors in this problem: Delta’s prices remained unchanged and there was no evidence indicating an intention to shift the burden of the tax.  For these reasons the court finds that the plaintiff has sustained the burden of proof as to units sold in the fiscal year 1948, and that as to these units plaintiff has absorbed the tax.  As to the units sold during the fiscal year 1947 we find the proof insufficient.  Plaintiff, therefore, is entitled to recover the tax it paid on units sold by Delta in the fiscal year 1948, that is, $767.23, with interest as provided by law.’

10. The second US authority cited was Tenneco Inc v United States (1989) 18 Cl. Ct. 345, where the plaintiff manufacturer failed to establish before a single judge that it had borne the burden of mistakenly paid excise tax.  The Court described the ‘Methods of Setting Prices’ at 350 (1^st column) as follows:

    ‘[3]   A taxpayer’s method of setting prices directly affects the nature of proof necessary to establish that those prices lacked an excise tax component.  A manufacturer may base its prices either on market prices – competitive pricing – or on its production costs plus a profit margin – cost-based pricing.  In general terms, when a manufacturer uses cost-based pricing, the court must ascertain if excise taxes are one of the cost components of the final price… When a manufacturer uses competitive pricing, the court must ascertain if the market prices include an excise tax component… In simple terms, if the taxpayer bases prices on costs, did those costs include excise taxes?  If the taxpayer bases prices on the market, did the market include excise taxes within its prices?  Again, plaintiff has the burden of providing evidence to answer the question which applies to its pricing method.’

    Thereafter the Court continued at 350 (2^nd column) its consideration of guiding factors as follows:

    ‘In addition to direct evidence about the components of market prices, courts have weighed a variety of actors to help answer the question.  These factors examine the taxpayer’s actions for evidence of whether its prices contained an excise tax component.  Some of those factors are: (1) the correlation between price changes and application of the tax, (2) the refunding of tax to exempt purchasers, (3) the reference to taxes in invoices or sales literature, (4) the existence of negotiated contracts including excise taxes, (5) the correlation between prices for taxable domestic sales and exempt foreign sales, (6) the methods of accounting for the tax, and finally, (7) taxpayer profitability.  Some of these factors have different weight and applicability depending on whether the taxpayer used cost based or competitive pricing.’

    In finding that the plaintiff failed to meet the requirements of the revenue statute in question, the Court concluded as follows:

    ‘Plaintiff had the burden of proving that its prices did not include excise taxes.  Because it set prices based on its competitor’s prices, plaintiff therefore had the burden of proving that its competitor’s prices lacked an excise tax component.  Plaintiff did not meet this burden.

    Plaintiff also had the burden of showing that it consistently acted as if it had absorbed the tax.  An examination of plaintiff’s actions in light of several factors, however, indicates that plaintiff instead often acted as if it passed on the tax to its customers.’

11. Of course each case must be considered in the light of the text of the particular fiscal statutory provision under consideration, but the judicial discussions I have cited serve to illustrate the conceptual difficulties inherent in the present Avon claim, and the critical importance of the evidence tendered by a taxpayer in circumstances such as the present.  Avon sought to draw from those authorities for present purposes the following principle which it framed in its submissions:

    ‘Ultimately the test which should be applied is whether the seller made a profit less than (or sustained a loss greater than) had the sales tax not been overpaid.  This turns on whether the purchaser paid more for the goods than he or she would have done if the sales tax had not in fact been overpaid.  If the answer to this question is yes, then the overpaid tax was passed on.  If on the other hand, the answer to this question is no (ie the price would have been unchanged), the overpaid tax was not passed on and the seller simply made less profit than it would have done if the sales tax had not been overpaid.’

12. In the context of citation of those United States authorities, Avon analysed the two cases in this Court to which the primary judge had given close attention.  Avon pointed first to what had been stated by Lockhart J at first instance in Otto Australia Pty Ltd v Federal Commissioner of Taxation (1990) 25 FCR 257 at 263, as follows:

    ‘Counsel for the applicant conceded that the applicant’s charge to each council is computed or calculated by reference to its costs which include but are not limited to the landed costs of the Otto carts, and that the landed cost itself includes customs duty and sales tax… it is plain from the facts of the present case that the applicant did in fact “pass on” the sales tax to councils concerned in that, when calculating the contract rice for the tender with the council, the applicant included a component, though not shown separately in the contract documents with the councils, of sales tax paid by it on importation of the Otto carts.  In other words the applicant bore the burden of the sales tax and passed it on in the price which it charged the councils for the performance of its contractual obligations.  Had it not done so and had the sales tax not been exigible then s 11(1) would require the Commissioner to refund the amount of the overpaid tax.’

    The Full Court unanimously dismissed the appeal from Lockhart J.  In the reasons for judgment of Sheppard J (with whom Burchett J agreed), his Honour concluded that ‘[o]nce it is conceded, as it has been, that the charge for each bin was computed by reference to costs which included sales tax, that cost was passed on’.  Beaumont J did not address the issue of passing on, and otherwise affirmed the decision at first instance.

13. Moving then to the litigation in Amway, Avon referred initially to the decision of Foster J at first instance (Amway of Australia Pty Ltd v Federal Commissioner of Taxation (1998) 158 ALR 652), and in particular, to what appeared at 678-679, including the following:

    ‘… neither principle nor authority requires that a finding of passing on can be made only in circumstances where profit margins pre and post the tax cost increase remain the same or where the price to the consumer is deliberately calculated to include the amount of a tax increase.  I agree with the submission made on behalf of the Commissioner that Amway’s case that sales tax could not be passed on where the amount of the tax was “absorbed” into its profit margins was fallacious, in that, taken to its logical conclusion, its effect would be that there could never be passing on by a taxpayer who sold goods in a competitive market.  As goods are, for the most part, sold in such markets, that result would be that sales tax would not ordinarily be passed on.

    There was ample evidence before the Commissioner’s delegate that Amway took into account in relation to its pricing the incidence of increased sales tax.  Indeed, it is accepted in Amway’s case that these increases were not ignored…

    In these circumstances, I consider that what was said by Sheppard J in the Full Court in Otto is very much in point… If an acceptable profit margin could be made despite the increase in tax, then the merchandise was put on the market.  The “competitive” price obtained for the merchandise included the amount of the tax.  When a customer paid the price, it included within it the amount of the tax.  I am satisfied that, in those circumstances, a relevant “passing on” occurred.’

14. Avon submitted however, in my opinion correctly, that while the result at which Foster J arrived at first instance was affirmed by the Full Court in Amway, reported as (1999) 41 ATR 443, not every aspect of his Honour’s reasoning received the endorsement. At 456, the joint judgment of Hill, Lehane and Hely JJ stated as follows:

    ‘[55]   The case stands for 3 propositions relevant to the present question:

    1.The question whether sales tax is passed on requires no separate identification of sales tax in the price.

    2.Sales tax would clearly be passed on in circumstances where the evidence was that the price was calculated so as to include within it the sales tax component.

    3.Where the evidence in the case falls short of (2) the finder of fact may be satisfied that the sales tax has been passed on unless satisfied that the sales tax was not in fact included in the price.  Sales tax will not have been passed on where the taxpayer bears the tax personally.

    [56]Ultimately the question of whether the sales tax has been passed on is an issue of fact.  There may obviously be difficulty in resolving the issue.  No doubt that is why the matter is entrusted to the Commissioner, initially, and in the event of an application, to the Tribunal.  The burden of proof lies on the taxpayer.’

    The Full Court’s conclusion at 458 included the following:

    ‘[68]… But it seems clear that it was open on the evidence for the Commissioner to find that Amway had not satisfied the overall burden of showing that the retail price at which it sold goods by direct marketing incorporated no amount to recoup sales tax, or the converse that it had absorbed the increased sales tax in its profit margin and thereby reduced that margin. …’

    Senior counsel for Avon pointed out that of the above numbered three propositions, the first and second ‘clearly follow from Otto’, whilst the third proposition departed significantly from the approach suggested by Foster J at first instance.  The third proposition was further said by Avon to be consistent with the test for the existence of passing on, that being whether, by reason of having overpaid the tax, the seller has made a profit less than, or sustained a loss greater than, would have been the case had the sales tax not been overpaid.

15. Avon’s third proposition above would appear to derive some assistance from United Kingdom authority related to the defence of claims brought by United Kingdom traders for refunds of overpaid value added tax, which is similar to the defence in the Australian legislation here involved, save that the revenue there bore the onus of proof of establishing the defence of unjust enrichment.  Avon cited the following dicta (inter alia) of the Court of Appeal in England (Schiemann LJ with whom Ward and Stuart-Smith LJ agreed) in Marks & Spencer plc v Customs and Excise Commissioners [2000] STC 16 at 42:

    ‘[The tribunal] expressly held that there was no legal presumption that the erroneously charged VAT was passed on to the customers and also held that it was for the commissioners to prove unjust enrichment.  This inevitably involved an examination of what sales might have been had the true VAT position been appreciated and what total profits would have been on those sales.  That is agreed to have been the correct legal approach.’

1. Avon further referred to Customs and Excise Commissioners v National Westminster Bank plc [2003] STC 1072, where in the reasons for decision of the Court of Appeal at 1083, the following (inter alia) appears:

   ‘[38]   This reasoning is flawed for a number of reasons: (1) The tribunal says the commissioners “have not shown this VAT was expressly passed on”.  But express passing on is unnecessary.  (2) The tribunal says “the onward supply was not of goods but of services”.  But that is a distinction without a difference.  The calculation of the lease rental included a cost due to the unjustified tax.  (3) The tribunal says “the undue ‘VAT’ was only one factor”.  That is irrelevant – indeed it is not possible to imagine a transaction where an undue charge was the only factor being passed on.  All costs are passed on.  (4) The tribunal relied on the example which, for the reasons I have given, is unhelpful.  (5) The tribunal did not address the key question – what in the light of all the known facts would have been the financial position of Lombard if the undue tax had not been imposed?’

   Particular emphasis was placed by Avon on that concluding sentence.  It suggests a broader approach perhaps not so evident in the Australian sales tax authorities to which I have referred in these reasons.  There is I think significant commercial reality inherent in that kind of approach to the statutory notion of passing on, in that recognition is thereby afforded to any resulting decline in profitability of the sales of a manufacturing or trading company in particular contextual circumstances falling to be adjudged on a case by case basis.  In the case of a publicly listed company for instance, any significant reduction in profit in the normal course would in turn tend to crystallise, or having the potentiality to crystallise, in a corresponding reduction of the funds available for dividends to shareholders, and perhaps also in the stock market share price, with consequential adverse implications of a potentially significant kind to the existing shareholders, and perhaps indirectly to the directors.  It is an approach which therefore requires a conspectus to be broadly taken of the nature of what I think to be reflected in the foregoing dicta in National Westminster. 

   Avon’s submissions in summary to the effect that in the circumstances established by the evidence, Avon did not pass on the overpaid sales tax

2. Avon’s testamentary evidence in the proceedings was provided by its Vice President of Sales, Mr Stevens.  Senior counsel for Avon pointed to the following matters established by Mr Stevens’ affidavit evidence:

   (i)the standard prices of both Avon’s CFT and on-CFT products were set by reference to the retail prices charged by Avon’s competitors for similar products; he spoke of ‘[e]xternal benchmarking [having] involved the Product Managers in consultation with myself identifying the comparable products sold by Avon’s competitors and collecting data on the prices of those products’, and further, that ‘[w]here there was no directly comparable product, Avon set its price at that of a similar product from within the Avon range or if there was no such similar product, at what I thought the market could bear’;

   (ii)most sales of CFT products, that is, between 85% and 95% thereof, were made at discount prices in the course of Avon’s sales campaigns; statistical illustrations were provided by Mr Stevens in that regard;

   (iii)Avon’s prices were designed to meet price points which Avon’s customers would find attractive; thus Mr Stevens explained in his affidavit evidence:

   ‘By offering particular products at a discounted price, sales units and revenue were increased.  The Product Managers suggested discounts and promotions to increase sales based on their previous experience and knowledge of the market and particularly the price points that customers found attractive.  Each time a discount was offered, the value proposition to the customer was enhanced by displaying the regular price in the campaign brochure.  Whenever a regular price is shown as being reduced in [for instance the brochure for “Campaign 14, 1997”] this is an example of price point discounting.’

   Moreover those discount prices were designed to enable Avon to meet the overall level of gross profit margin, sales volume and sales revenue for the campaign as a whole.  Thus Mr Stevens further explained in his affidavit evidence:

   ‘The depth of the discount was driven by information from previous sales history.  Knowledge of product price elasticity based on past sales performance was used to project unit volume, sales and gross margin from an offer proposed for a campaign.  If during the course of consolidating the campaign, the planned sales revenue, units of sales and gross margin requirements for that proposed campaign did not meet the required profit margin, then the offers for that campaign were modified.  Discounted prices could be raised or lowered depending on plan requirements.’;

   (iv)as to the subject of correlation between price changes and applications of sales tax, Avon did not change its prices as a consequence of changes in the rate of sales tax in 1993 and 1995, or in the sales tax uplift factor in 1995; Mr Stevens explained in his affidavit in that regard as follows:

   ‘Effective 1 December 1995, the sales tax uplift factor for the calculation of the taxable value was changed from 35% to 15%.  During this period, Avon did not change the prices of its products to reflect this decision.’;

   (v)Avon did not treat its tax exempt purchasers any differently to its so-called domestic customers; I refer here of course to the residents of Norfolk Island and Christmas Island, who enjoyed at all material times Australian sales tax exempt status;

   (vi)Avon made no reference to sales tax in its invoices or sales literature;

   (vii)although the evidence did not reveal how Avon treated sales tax in its accounts, or the extent of Avon’s profitability, that was said to be ‘of little weight’.

3. Avon’s concluding submission was to the effect that the question ultimately arising on the appeal boiled down to what Avon would have done if it had known that one of its direct costs, being sales tax, was lower than anticipated.  To address that question, Avon produced a compilation of its products the subject of evidence in the proceedings, which listed the retail cost thereof inclusive of sales tax, as determined by Avon when each product was introduced, and the retail cost of the product if sales tax had been calculated using the correct taxable value (being into store cost plus 11.63%).  A copy of that document is exhibited to these reasons and marked annexure A.  That material was said by Avon to demonstrate that the difference in cost resulting from the overpayment of sales tax was marginal in quantification.  Accordingly it was submitted that in the light of that relatively small differential in cost, and of the manner in which Avon set its prices in the relevant period, whether regulated or discounted, it should be concluded that if Avon had not overpaid sales tax during that period of time, Avon’s prices would have remained the same.  On that footing, Avon sought to conclude that the overpaid tax was not passed on to its buyers.

   The Commissioner’s responses to Avon’s submissions on the appeal

4. The Commissioner’s responses to Avon’s submissions on the appeal were essentially to the effect of entire support of the reasoning and findings of the primary judge, and need not therefore be repeated to that extent.  There are several additional matters which I would record however for completeness, which do not bear critically upon the issues arising.

5. The Commissioner pointed out that Avon did not adduce satisfactory or sufficient evidence as to the manner in which its competitors’ products were sold on the market, and in particular, did not adduce evidence that any of its competitors actually sold equivalent products by wholesale to retail stores, but merely recorded that its competitors’ products were sold ‘by department stores and pharmacies’.  The Commissioner thus submitted that the situation may well be that some or all of Avon’s competitors were selling through the retail outlets in circumstances where those outlets operated as agents.  In other words, the Commissioner pointed out, Avon’s competitors did not sell products to retail outlets for resale, but sold directly to the public and paid the retail outlets a commission (as for example Estee Lauder Pty Ltd v Federal Commissioner of Taxation (1988) 88 ATC 4412, and also Amway, where retail outlets sold the competitors’ products as agents).  In those circumstances, the Commissioner submitted, the competitors would also have used a ‘notional sale value’, and if that ‘notional sale value was too high, then by setting an equivalent price, Avon would also have passed on the sales tax’.  But what would be the ascertainable benchmark for the notion of ‘too high’, it may be legitimately asked in complex merchandising contexts such as the present. 

6. Moreover, the Commissioner emphasised that Avon mostly sold its products at prices which it first discounted, and further that the regular on-market prices ‘simply determined the boundaries within which Avon set the discounted prices, the same being its so-called normal selling prices.’  Those discounted prices were described by the Commissioner as ‘determined having regard to an acceptable margin over costs, including sales tax’; that description tends to predicate an elusive notion, by reason of the words ‘acceptable margin’, in any context of competitive merchandising activity.  It was further pointed out by the Commissioner moreover that the sale by Avon of products at a discount to the regular price was consistent with the perception of consumers that the Avon brand was ‘somewhat dated, and old-fashioned and comparatively cheap’, when compared to its competitors’ (referring in that regard to the report of Research International Australia tendered by Avon in evidence).

7. The Commissioner also criticised Avon’s evidence as not addressing ‘the effect on costs over the whole range of products sold during the period’, and contended that ‘… the manner in which the discount pricing was set by Avon (taking into account costs including the overpayment of sales tax) would invariably have meant higher prices having been charged by Avon than otherwise would have been the case after the ‘tweaking’ had taken place to achieve the desired margin over cost (including the excess sales tax component)’.

   My conclusions on the appeal

8. A consideration in particular of the Australian authorities indicates that it is not sufficient to introduce into the present fiscal context the economic precept that in a competitive business environment, the lowering of costs of production reflects inherently in lower prices, and therefore maximises sales.  In competitive circumstances such as those in which Avon was engaged at the material times, the seller must confront not only the reality of largely known costs, but also costs capable only of estimation which also need to be accommodated if the seller is to merchandise its goods profitably.  Does it follow from those circumstances that the seller has not passed on any windfall gain to its buyers which has not yet crystallised, but which in the events which thereafter occur, does in fact crystallise?  One can more readily appreciate a definitive answer to that question in the context, for instance, of a large piece of expensive machinery, but the answer tends to become more elusive in the case of mass-produced consumer products of the kind merchandised by Avon.

9. The United States and British authorities, to which I have earlier referred, did not take any materially different approach to refund of overpaid revenue issues than that taken by the Australian authorities, or at least those to which my attention has been drawn in the present proceedings.  As in the case of the two Full Court Australian authorities, the burden of proof in Tenneco became the ultimate insurmountable obstacle to success for the taxpayer.  However the approach of the US appellate Court in Tenneco, as appears from the passages I have extracted, does not I think reflect the extent of commercial reality implicitly required in the application of the statutory test.  The approach of the earlier US appellate Court in Worthington seems to have addressed the test as to the operation of the burden of proof in a more commercially realistic, if not also analytical way, in light of the threshold observation there made that ‘… under ordinary competitive conditions no tax can be passed on completely since a rise in price has the tendency of reducing the volume of business’, and further that ‘[t]he only test is whether the seller has made a profit less than or sustained a loss greater than had the loss not been imposed on him’.  The subsequent test enunciated in Tenneco (which I have reproduced at [30]) tends to reflect a form of accounting approach more characteristic of or applicable generally to public sector accounting, where the need for profitability (if at all) does not necessarily or at least compelling arise.  It encapsulates a test of greater difficulty in practical application. 

10. Moreover I have encountered similar conceptual difficulty with tests enunciated in Otto, in particular by the two members of the Full Court who addressed the issue of ‘passing on’.  It is not enough to my mind that in a commercial context, or at least in substantial and competitive commercial contexts such as here involved, to mathematically undertake an analysis as to whether resale prices exceeded the total cost price to the seller by any significant margin.  As I have earlier indicated, that test may well satisfy bureaucratic requirements for surpluses, but in a commercial environment, which will be always the case in sales tax disputes, the ascertainment of profitability is normally more complex, and hence the likely existence of varying accounting conventions depending on the kind of trading involved. 

11. The primary judge acknowledged the force of two principal factors established by Avon in its favour, being first, that Avon’s regular prices for its products did not change in response to the increases and decreases in the sales tax rate that occurred, and secondly, that Avon did not set its prices at least principally upon the basis of or by reference to cost, but rather by reference to market circumstances for the time being prevailing.  It may be accepted incidentally, in favour of the Commissioner, that the third factor relied upon by Avon, namely the Norfolk and Christmas Island pricing regimes adopted by Avon, was more likely than not explicable to expediency rather than by reference to local sales tax exemption, and may therefore be put to one side.  The first two factors were in my opinion of sufficient significance, such as to prima facie satisfy, on the balance of probabilities, the onus of proof imposed by relevant fiscal legislation upon Avon.  The conceptual difficulty which troubled the primary judge’s thoughtful process of reasoning, involving as that difficulty did his Honour’s perception of the absence of any ‘real difference’ between ensuring a particular profit margin on the one hand, and pricing at cost plus a profit margin on the other, does not seem to me to so operate as to negate necessarily the application of either of those first two principal factors.

12. Satisfaction of the critical statutory expression contained in Table 3 to the Act, namely has not passed it on, reflecting as it does a normal economic notion of business practice, would normally fall to be determined according to the nature and extent of the particular business operations, the taxpayer bearing the onus of proof on the balance of probabilities of negating those circumstances as to passing on of costs, being an onus which the primary judge characterised as ‘normally difficult’, but ‘not impossible’, to discharge.  It would seem that if that critical statutory expression is to be afforded a realistic or practical operation, which I think should be inferred, if not in any event presumed to be the legislative intent, the Court is obliged to adopt a broad and practical approach, rather than require a taxpayer, in particular in the case of a seller of mass produced products such as here involved, to establish its entitlement with mathematical precision.  Otherwise those elliptical words comprising the statutory expression has not passed it on would tend to be robbed of practical and realistic operation in a context involving trading or merchandising activity, in commercial contexts such as the present, where the primary judge had found that discounting was a normal incident of trading.

13. In order therefore to afford the Credit grounds provisions of Table 3 to the Act a realistic prospect of sensible invocation at the instance of a taxpayer, particularly in circumstances, such as here, of business operations involving the sale of mass produced goods conducted on a large and widespread scale, and where (as the primary judge found) what should reasonably suffice as a threshold step in establishing the ‘passing on’ of sales tax, or otherwise, is satisfactory evidence as to regular business practices implemented by the taxpayer in the normal course.  Upon that footing, all that would thereafter remain for consideration is whether ‘the evidence as to the applicant’s pricing methodology does establish that its regular prices are not calculated as a function of cost (other than to determine that it did not sell at a loss) and also that it did not go about changing its prices in response to changes in the amount of sales tax payable’, to cite the primary judge’s description of the next step in the process of adjudication.  Or put affirmatively rather than negatively, was Avon’s setting of prices dictated or substantially influenced primarily by market dynamics rather than as a function of cost, and therefore by the need to cover all costs inclusive of sales tax.  The evidence here in my opinion indicated on the balance of probabilities an affirmative answer to that necessarily broad proposition.

14. Having established a negative response to that last mentioned consideration upon the footing of established merchandising practice, I think that Avon was not required to go further than it did in its presentation of evidence price setting in order to discharge the statutory onus of proof, and that the primary judge pitched the operation of the evidentiary onus at a level not required of Avon to reasonably satisfy in circumstances of mass marketing. His Honour having made the acknowledgment reproduced at [41] above, that evidence of Avon’s pricing methodology established that its regular prices were not calculated as a function of costs, was in my opinion compelling. Particularly was that so in cases such as the present, involving the merchandising of numerous different products on a substantial scale. It could not have been reasonably intended by the Legislature other than that the statutory notion of passing on of the fiscal exaction is to be capable of establishment by the taxpayer at no greater level than proof of the taxpayer’s practice as to the pricing of its goods for sale, particularly in the circumstances of sellers of more than a limited range of goods subject to overpaid sales tax, such as Avon.  When all is said and done, the potentially complex enquiry postulated by the statutory words under scrutiny, namely to the extent that the claimant has not passed it on, the moneys the subject of attempted recovery by Avon here pursued comprise those to which the revenue had no lawful entitlement to exact, and the retention whereof would have constituted an unintended gain to the revenue.  The evidence as to commercial practice tendered by Avon in my opinion sufficed in the particular circumstances of this particular case.  It would be difficult to conceive otherwise how the refund provisions, in the practical reality of trading operations, could have operated in favour of a taxpayer engaged in selling such a broad scale of consumer products in substantial quantities to numerous consumers.  The Legislature must be taken to have known that these refund provisions would be required to have an operation in favour of a retailer of an extensive, as well as of a relatively minor, range of consumer products, and that as a consequence, the statutory test required the adoption of a broad as well as commercially realistic conspectus, in the context of the determination as to what would be enough to discharge of the statutory onus. 

1. I am of the opinion that on the balance of probabilities, Avon discharged the statutory onus of showing that the overpaid sales tax was not passed on to Avon’s customers in the relevant period of time, and therefore that Avon’s prices were not so calculated in the normal course so as to exceed cost, inclusive of sales tax, by a profit margin.  It may therefore be reasonably concluded in my further opinion that Avon bore the tax ‘personally’, to cite the third proposition of the Full Court in Amway to which I have earlier referred.  It is rightly to be conceived that the statutory test is intended to be afforded a practical operation in favour of substantial, as well as insubstantial, sellers of consumer goods on a wide as well as limited scale.  It was enough in principle for Avon to have demonstrated that customers did not pay more for their goods than they would have done if sales tax had not in fact applied in relation to the sale thereof.  A conclusion to that effect, which was open on any broad conspectus of the evidence, requires that Avon was entitled to a refund of the amount of the overpaid sales tax the subject of the proceedings.

I certify that the preceding fifty (50) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Conti.

Associate:

Dated:            20 May 2005

Counsel for the Appellant:	S Gageler SC and M Richmond
Solicitor for the Appellant:	Ernst & Young Law
Counsel for the Respondent:	DB McGovern SC and AJ O’Brien
Solicitor for the Respondent:	Australian Government Solicitor
Date of Hearing:	1 November 2004
Date of Judgment:	20 May 2005