Avon Products Pty Ltd v Commissioner of Taxation
[2005] HCATrans 847
[2005] HCATrans 847
IN THE HIGH COURT OF AUSTRALIA
Office of the Registry
Sydney No S294 of 2005
B e t w e e n -
AVON PRODUCTS PTY LIMITED
Applicant
and
COMMISSIONER OF TAXATION
Respondent
Application for special leave to appeal
KIRBY J
CALLINAN J
TRANSCRIPT OF PROCEEDINGS
AT SYDNEY ON FRIDAY, 7 OCTOBER 2005, AT 11.32 AM
Copyright in the High Court of Australia
MR S.J. GAGELER, SC: If the Court pleases, I appear for the applicant. (instructed by Ernst & Young)
MR D.B. McGOVERN, SC: May it please the Court, I appear with my learned friend, MR A.J. O’BRIEN, for the respondent. (instructed by Australian Government Solicitor)
KIRBY J: Yes, Mr Gageler.
MR GAGELER: Your Honours, passing on is no defence to an action in restitution of common law, so held in Royal Insurance and repeated in Roxborough, but passing on is a defence or, more properly ‑ ‑ ‑
KIRBY J: You are not going to mention Roxborough again, are you, Mr Gageler?
MR GAGELER: No, not in this application, your Honour.
KIRBY J: An unkind cut.
MR GAGELER: I think on that point your Honour was not in a minority – at least I hope your Honour was not. Your Honours, the point I was coming to is although that is the position at common law, passing on is a defence, or the absence of passing on is a precondition to recovery under a significant number of Commonwealth and State statutes, which our learned friends have helpfully tabulated on the last two pages of the application book.
KIRBY J: There is no doubt that the issue arises in other legislation; it just does not arise in the legislation you are relying on. It is a dead question, as I understand it, in your legislation.
MR GAGELER: My point is that the legislation I am relying on, and certainly the approach taken in the Full Federal Court, both by the majority and the minority, focuses on the notion of passing on and does not focus on the particular statutory context. The same notion is repeated in very similar statutory contexts in a variety of legislation around the country, although this legislation ‑ ‑ ‑
KIRBY J: I understand the point. I think we understand you say although it is not applicable to your statute, it is still a live federal legislative question.
MR GAGELER: Exactly, yes.
KIRBY J: We do not give advisory opinions and therefore we are sort of dealing with a real live case here and it is on a statute that no longer applies, but I understand the way you deal with that.
MR GAGELER: Not an advisory opinion. There is about $6 million at stake for my client.
KIRBY J: I thought it was $3 million.
MR GAGELER: Plus interest, and it is a very long time that we have been waiting for the money.
KIRBY J: I see.
MR GAGELER: So it is very much a live issue from the point of view of the parties, and it is very much a relevant issue from the point of view of the ongoing administration of the law. Your Honours, what this case does, we say in a very crisp form, albeit in the context of now redundant legislation, is to raise an issue of principle – it was an issue of principle that divided the Full Court – as to the proper approach to the determination of the issue of passing on. If you go to the approach that was ‑ ‑ ‑
KIRBY J: Is it not a little bit like the intellectual property case we had earlier? I do not know if you were in Court when Justice McHugh and I dealt with it. In the end you have to apply the statute. The statute says passing on, and that involves matters of fact and degree in each case.
MR GAGELER: Yes. Your Honour is right, but your Honour is at danger of falling into the error that, we say, to some extent underlies the approach that was taken by the majority and by the judge at first instance. That is, it is all very well to say that it is a matter of fact and it is a matter of degree, but unless you know what you are looking for in the facts it really does not help. We accept that it is a question of fact.
KIRBY J: That is what they said in the earlier case today. You say a wrong test was applied.
MR GAGELER: Yes.
KIRBY J: I do understand that you say that at least if the result is upheld in this case it is very hard for a business to ever succeed in recovering overpaid tax.
MR GAGELER: Yes. Your Honour, a business could only succeed in recovering overpaid tax if the business was a very bad business – that is, if it was going out of business – because if you would take the view of the majority, if the business, being the taxpayer, sells at a profit – that is, if it recovers its costs including the tax that was overpaid – then it has necessarily passed on the tax to its customers and it cannot recover. What that means necessarily is that any decent business is never going to be able to recover. It is only failing businesses or failed businesses that will. That would be a very odd result.
KIRBY J: I suspect from my economics degree that economists would say that in every case it is passed on directly or indirectly.
MR GAGELER: If the ultimate question is ‑ ‑ ‑
KIRBY J: Unless you somehow isolate it. Was that the theory in the Federal Court?
MR GAGELER: No. The question is who has borne the economic incidence of this tax that has been overpaid? That is the question. We say that the way to test that is to say what has been the effect of the overpayment? Putting it another way, what would have happened if the overpayment had not been made? Now, if it was the case – this is really the simple way in which we put the case – that the prices would have stayed the same, if that is the fair inference to be drawn on the balance of probabilities on the evidence, that the prices would have stayed the same and the taxpayer, if it had not overpaid the tax, would have made a greater profit, then it is the taxpayer and not the customers who have borne the economic incidence of the tax. Really, that is the very, very, simple way in which we put it.
Your Honours, that is entirely consistent with the underlying notion that is accepted by the majority in the Full Court of asking about the economic incidence of the tax. It is entirely consistent with the way in which analogous provisions have been approached in relation to the VAT legislation by the Court of Appeal in England and by the United States Court of Claims in relation to sales tax legislation. Exactly the same question; you ask what would have happened to the price? Ultimately, you ask, as between the customer and the taxpayer, who would have been out‑of‑pocket, or was out-of-pocket as a result of the payment of the tax.
Your Honours, that essentially is the case. I could take your Honours to the authorities, I have summarised them, and your Honours have read about them. We do rely on the very strong dissent of Justice Conti, which your Honours have no doubt read. It is the case, and if necessary I could address it, that if the correct test were applied, and as Justice Conti said at page 61, we comfortably meet that test on the facts. I can elaborate that if necessary.
Your Honours, in summary, we say that the case turns on a question of principle. If the majority were right in principle, that is that if the taxpayer sells at a profit then the taxpayer has necessarily passed on; we lose. If the minority, Justice Conti, was right in principle, then on the facts we win.
KIRBY J: Now, how do you put your finger on the principle that you suggest is the correct principle? One starts here with a great respect for Justice Hill ‑ ‑ ‑
MR GAGELER: Yes, of course.
KIRBY J: ‑ ‑ ‑ at first instance, and for the experienced judges of the Federal Court ‑ ‑ ‑
MR GAGELER: Your Honour, can I do that in two stages? Can I identify the wrong principle, and I will come to the correct principle. The wrong principle is at page 30, line 35 through to line 40. This is in the judgment of the majority in the Full Court, line 35:
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.
That, we say, is wrong. The correct position for which we have contended all along is summarised by Justice Conti in a number of places, but perhaps most conveniently page 47, line 37, paragraph 49:
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.
That was the submission that his Honour ultimately accepted, and accepting that submission as to the correct ‑ ‑ ‑
KIRBY J: I suppose your submission is that the Commissioner’s construction, which has found favour, is a somewhat rigid approach to how business people make decisions. Unless they somehow isolate the tax, no doubt under taxation advice, which maybe they had not anticipated at the time, I just think in virtually all cases the tax is going to somehow be absorbed in the costs of the business.
MR GAGELER: That will always ‑ ‑ ‑
KIRBY J: But the statute does not permit, by the right of recovery of overpaid tax, a hypothesis that would defeat the availability of the recovery at all, therefore you have to look for some intermediate position.
MR GAGELER: Yes, your Honour, we certainly say that, and that is really one of the points I think really quite eloquently made by Justice Conti towards the end of his judgment.
KIRBY J: The question is whether or not, if it came to our Court, we would be able to do any better than the judges below, given that in every case it is going to be a search in the facts as to whether there has within the terms of the statute been a passing on.
MR GAGELER: If the search in the facts is a search that adopts the correct criteria, then your Honours will have done better than the majority below and your Honours would be setting the correct criteria for further analysis. If your Honours were to look at what has been done in the United States and the United Kingdom; for example, for the United Kingdom, if your Honours look at page 53 where the relevant extracts are taken from the VAT cases in the Court of Appeal in England, you will see some statements of principle - in the quotation at the top of page 53 from Marks & Spencer. The first sentence refers to the question of passing on, and then the next question says:
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 the test. If you look at the next quote from National Westminster, again the same question, the question of passing on, about line 30 on that page:
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 –
the taxpayer –
if the undue tax had not been imposed?’
Now, it is important if you are going to go delving in the facts looking at questions of fact and degree, that you know what you are looking for, that you ask the right question. Critically, your Honours, that is what did not occur here.
Similarly, if you look back at the position in the United States where there is a slightly different statute but same concepts occur, pages 48 and 49, you look at what appears to be the leading case, Worthington Pump, a case decided in 1954 – that is referred to at page 48. If your Honours look at the quotation that begins about line 37, it is said:
The only test is whether the seller –
that is the taxpayer –
has made a profit less than or sustained a loss greater than had the tax not been imposed on him.
Again, that is, in our respectful submission, the question. So the question has been approached in terms of consistent principle in the United Kingdom, in the United States and, in our respectful submission, it is the same approach that ought apply to the concept of passing on in domestic statutes in Australia. If the Court pleases.
KIRBY J: Yes, Mr McGovern.
MR McGOVERN: Your Honours, in terms of the questions of principle that were referred to, firstly, in our respectful submission, the matters that we would emphasise as a matter of generality are firstly that the case really does not present a matter of general importance. In our respectful submission, it was determined below on issues of fact. As to general importance ‑ ‑ ‑
KIRBY J: But Mr Gageler says that unless you have the correct test for the analysis of the facts, you are likely to come to the wrong conclusion at the end of the inquiry into the facts.
MR McGOVERN: Your Honours, in our respectful submission, the approach that was taken by the joint judgment was to consider the section, to take on board the proposition that neither of the parties suggested that the words were terms of art, that they had to be given their ordinary dictionary meaning. Their Honours said that the question essentially was in the circumstances who bore the burden of the tax, and that was a factual matter.
So far as Justice Conti was concerned, his judgment ultimately involved a consideration of the cases in a way which said that there was no difference between the US or the UK authorities and the approach that had been adopted in the Full Court in similar cases here, and that his ultimate conclusion was simply a difference of view on the facts. His Honour concluded that on the facts the burden was borne by the taxpayer.
KIRBY J: I take the force of that, but my difficulty is that in virtually every case the absorption of costs within a business, within the firm, is going to be passed on to the consumers ultimately, and yet the statute contemplates that normally overpaid tax will be refunded – will be recoverable unless it has been passed on. Therefore, you have to really accept the premise of the statute that there are some that are passed on and some that are not passed on and try and find a discrimen in the particular case that distinguishes the one where they are not passed on to the one – I just find it difficult to see what discrimen would be formulated that would assist in clarifying the meaning and purpose of the statute. Is there something in its purpose that throws some light on what “passing on” means in this context?
MR McGOVERN: Your Honour, nothing that is the subject of any discussion in the cases, and as a matter of the general principle of indirect taxation is that the tax as a matter of its nature is going to tend to be passed on. So far as the question of overpayment is concerned, so far as the burden of the tax, that really is a matter between the taxpayer and the consumer, and it is necessary in any particular case to look at the way in which – or the methodology of the operation of the particular business, and that ‑ ‑ ‑
KIRBY J: The tax inevitably becomes part of the costs of the business, and yet it cannot be so burdensome. I mean, in terms of principle, one would think an overpaid tax should, prima facie, be repaid.
MR McGOVERN: Yes, your Honour, that is correct. The competing parties, as it were, seek to recover the amount overpaid. The Commissioner is holding the money either at the expense of the taxpayer or, alternatively, at the expense of the consumers. That is why it becomes necessary to look at the particular methodology of the business. In the American cases, for example, they draw a distinction between the situation where a producer or a supplier of products will be essentially cost based or market based in the setting of their prices, and their Honours in the joint judgment here in the Full Court said that the situation here was a hybrid of those two situations.
What actually happened, as Justice Hill explained in the analysis that he gave at first instance, was that across a basket of particular products the regular prices were set to the market but in relation to the actual methodology of the taxpayer, the taxpayer engaged in the process of discounting, and the process of discounting involved considering the costs and including the prevailing sales tax rate for the basket of products at the particular time and then arriving at what his Honour referred to as a “desired profit margin”.
That is a critical fact in the findings of the trial judge, and that is to say that the process involved the consideration of the desired profit margin. It was the overall desired profit margin in the context of the basket, as it were, of products that were the subject of the discounting.
So the fact that the taxpayer followed the market in terms of the setting of the prices really ultimately was not to the point because the actuality of the way in which the sales were effected was by the process in effect of really looking at it on a cost plus basis – looking at the costs, including sales tax, and adding to that what was considered to be the desired margin and then selling over the basket of products at the desired margin. So if one ‑ ‑ ‑
KIRBY J: It rather suggests that they decided to absorb part of the costs themselves of the overpaid tax, and part of it may be passed on. This is why the hypothesis of the statute is somewhat naïve. I suppose your point is that there is just no getting away from a search in the entrails of the business of the particular taxpayer and an imposition of the statute, however naïve is the assumption that there is a clear-cut distinction between taxes that have been passed on and taxes that have not.
MR McGOVERN: That is so.
KIRBY J: Mr Gageler’s point is there have to be cases where, as a matter of practicality, the offence of overpaid tax is not perpetuated by the too narrow a view of the passing – or too broad a view of the passing on exception.
MR McGOVERN: But, your Honour, that issue is not going to be resolved by the Court seeking to essay a task of identifying, as a matter of principle ‑ ‑ ‑
KIRBY J: I do not know about that. Justice Conti thought that it could be helped by looking at the American and British ‑ ‑ ‑
CALLINAN J: That is what I was going to ask you. Do you accept that there is – leaving aside the question of onus, which is different in the United Kingdom – a disconformity now between the Federal Court and the Court of Appeal?
MR McGOVERN: In relation to the English case, for example ‑ ‑ ‑
CALLINAN J: In relation to the test.
MR McGOVERN: In relation to the English case, in say Westminster ‑ ‑ ‑
CALLINAN J: Yes.
MR McGOVERN: No, your Honours. It is a very neat ‑ ‑ ‑
CALLINAN J: Is that not – I thought that point No (5) on page 53 in National Westminster:
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 –
The Federal Court did not ask that question, did it?
MR McGOVERN: No, it did not, your Honour, but it is important to look at the context in which the statement is made in the Lombard Case. Perhaps it might just be useful to take your Honours briefly to the decision in Lombard. It is in my learned friend’s bundle at page 199.
KIRBY J: Yes, we have that.
MR McGOVERN: If your Honours go to page 209 to the analysis of the facts in issue in the case, your Honours will see from paragraph [30] right through to paragraphs [38] or [39], the way in which the issue presented itself. May I just take your Honours firstly to paragraph [31]. In relation to the court’s discussion it said:
Lombard’s evidence showed that one of the factors taken into account by Lombard in calculating their rental charges was the unjustified charge. It was included along with all other kinds of cost (price of car, apportioned overheads, estimated ultimate sales price) and so on. This is hardly surprising-that is how a normal businessman would set about the task. He would know for certain some of his costs (eg purchase price), he would estimate others (eg ultimate sale price), and would form a reasonable view about others based on known costs (eg overheads). He would then add a margin for his profit. In short a middleman tries to pass on his costs and make a margin on top of that.
Now, at the foot of the page at paragraph [36], because the onus was borne by the ‑ ‑ ‑
KIRBY J: Could I ask ‑ ‑ ‑
MR McGOVERN: Yes, your Honour.
KIRBY J: I understand the position is that Mr Gageler has to prove that he has not passed on.
MR McGOVERN: That is so, your Honour. The onus of proof being to the contrary in the UK legislation, and at the foot of page 209:
[36] Accordingly on the basis of all the known facts, I think the commissioners did establish that it was more probable than not that the tax was passed on.
So it was considered there, as we read it, that the fact that you do have a calculation of costs which includes the relevant impost and then one adds a margin to that, that that constitutes a passing on of the cost. It is more emphatically the case, in our submission, where you have the particular methodology that was involved here, where you have the costs, including the sales tax, and then you have the margin that you desire – neither more nor less.
So irrespective of the impact or whether the sales tax goes up or down, because of the discounting process the desired margin never changed. So in those circumstances the taxpayer was in fact passing on in its approach all of the costs ‑ ‑ ‑
KIRBY J: Mr McGovern, when I came in I was a bit inclined against the grant of special leave, but going through my mind are (1) there is quite a lot of money involved – it is $6 million we are told, 3.6 million plus the interest; (2) these are big parties and they want to have their day in Court; (3) there is a division in the Full Court of the Federal Court on the matter; (4) there is a reference to English and other authority, which it is said has taken a different direction; (5) it is a relatively small point, it could be over in half a day and if they want to fight it, it may well be the taxpayer will in the end lose and then have the added burden of the costs, but it may just tip over the balance. What do you say to those five points?
MR McGOVERN: Your Honour, so far as not necessarily dealing with them seriatim ‑ ‑ ‑
KIRBY J: You might win in the end, but ‑ ‑ ‑
MR McGOVERN: I do not think my ‑ ‑ ‑
CALLINAN J: They sound pretty good to me too, I might ‑ ‑ ‑
KIRBY J: Now, recover from there.
MR McGOVERN: Your Honours, my client is not a willing combatant in this process. My client is seeking to avoid the process, as it were.
CALLINAN J: The Commissioner does not like the list.
KIRBY J: Can I add a sixth, and that is that I just feel uncomfortable about burdening too heavily to an impossible degree recovery of an overpaid tax. It is fundamentally offensive. Let it be that the onus is on Mr Gageler, but it ought not to be like Atlas carrying the world around here.
MR McGOVERN: No, but if the actual burden of the tax is in truth borne by the consumers, then it becomes a situation where the taxpayer achieves the windfall gain. Your Honours, could I just invite your attention to page 49. If your Honours look at the extract of the United States authorities, your Honours will see that, in our submission, this extract in the judgment of Justice Conti does show how fact specifically the inquiry becomes. If your Honours look at paragraph 51, and then in particular the paragraph commencing just above line 40 ‑ ‑ ‑
CALLINAN J: Most tax cases are fact specific.
MR McGOVERN: If Justice McHugh was here he would probably suggest that ‑ ‑ ‑
KIRBY J: He is not here now.
MR McGOVERN: ‑ ‑ ‑ that this was seeking to elevate issues of fact into legal issues, your Honours.
KIRBY J: Well, that is why I was really against this, and that is why maybe ultimately the taxpayer will lose, that our Court will simply say, “Well, we can’t do better” and in the end you have to go back to the statute and ask has it been passed on – that is a factual question, it depends on all the facts of the case, and the judges below in the majority got it right.
MR McGOVERN: Yes.
CALLINAN J: I must say, Mr McGovern, I am uncomfortable sitting here on special leave and rejecting an application for special leave on the basis that I might think the case has been correctly decided below, when there are real arguments here. You have only two opinions, we do not have the benefit of a full argument on the matter, we have disagreement in the court below. It really just seems wrong to me, all other things being equal I emphasise, that we two should say, “No, Mr Gageler’s arguments are wrong”.
MR McGOVERN: In a wrestling match at about this time I would be tag teaming my learned junior, who would be leaping over the ropes and seeing if he could do any better. Your Honours, because the disagreement between the majority and the minority is as to the application of the ordinary words of the statute and who bears the burden, that it is an application of fact to what was uncontroversially a provision that was to be expressed or interpreted according to its ordinary language.
CALLINAN J: I am not persuaded at the moment. You may well be right about this, but I am not persuaded that the interpretative approach to “passed on” is the same in Australia as it has been in the English Court of Appeal. You may well be right about that but – and that would not be the end of the matter anyway.
MR McGOVERN: No.
CALLINAN J: We are perfectly entitled to take whatever view this Court saw fit on that. But to take that view now unequivocally, I am reluctant, I admit, to do that.
MR McGOVERN: Your Honours, as I was seeking to demonstrate in the reference to the English case, the approach to the issue of passing on appears to be no different, and in the passages that I referred your Honours to at paragraph 51 in the judgment of Justice Conti, extracting the references to Tenneco, you do see that all of the variety of factors that will determine the outcome of the ultimate factual issue depend upon their own particular facts.
Now, in the English situation there is a further complication, as it were, because it is necessary to go further and then determine whether or not the taxpayer has been unjustly enriched, and that becomes a question then of considering the taxpayer’s position qua the consumers, and then determining on a hypothesis that the tax had been ‑ ‑ ‑
KIRBY J: We start from the premise here that the Commissioner has been unjustly enriched.
MR McGOVERN: Well, that is the ‑ ‑ ‑
KIRBY J: That is the truth of the matter.
CALLINAN J: And it is not a foreign notion under our tax legislation either; Roxborough is an example of that. I know it is an entirely different statutory provision ‑ ‑ ‑
KIRBY J: I hope so.
CALLINAN J: But the notion of unjust enrichment on either side is relevant, or certainly to some extent I think affects the process ‑ ‑ ‑
MR McGOVERN: Your Honour, the statute proceeds upon the assumption that the Commissioner is entitled to retain the funds, so therefore he cannot in a classical sense be unjustly enriched, but then whether he can continue to retain them depends upon whether, as between the consumer and the supplier of the goods, there is any windfall gained one or to the other, whether in fact the supplier of the goods has passed on the impost ‑ ‑ ‑
KIRBY J: By definition, ordinarily the taxpayer would be better off in its profit base if it had not been unjustly taxed, or overtaxed, because it would have had that pool.
MR McGOVERN: Your Honour, that is looking at the matter ex post facto. One needs to look it at the time of the transactions in question, and at the time of the transactions in question, where you had costs, including sales tax, then over the top of that you had the profit margin that was desired being obtained, that in those circumstances the overpayment has no impact whatsoever upon the profit margin because the profit margin achieved is that which was desired.
So it is because of the particular facts of a case and the way in which the trial judge found that the desired profit margin was what was achieved in circumstances where the sales tax was taken into account, that it becomes an unsuitable matter because it did turn ultimately on its own facts.
KIRBY J: Your point is that this was a very fact specific arrangement, a rather unusual market arrangement by Avon and that they were driven by this margin of profit and they added that on and they got that, and that that left it open to the judges in the majority below to reach the view ‑ ‑ ‑
MR McGOVERN: That is so, your Honour.
KIRBY J: ‑ ‑ ‑ that they passed on that component of it, which was the tax that was overpaid.
MR McGOVERN: Had the tax been lower and had the “correct” tax been exacted at each particular point, because of its methodology of taking cost, including sales tax, then adding to that to achieve its desired margin, the probability is that the selling price would have been less, but that becomes a bit of a problem with my learned friend’s hypothesis as well because there was simply no attention given in the trial, as we would submit, to the question when there was a discounting process that was involved that there was any particular answer that could be given to the hypothesis. In other words, no one could really say what would have happened had they then been aware that they were in fact overpaid.
KIRBY J: Yes.
MR McGOVERN: All we know is that they approached the matter on the basis of achieving their desired profit margin, which included the full impost of the tax.
KIRBY J: Yes, thank you.
MR McGOVERN: Thank you, your Honour.
KIRBY J: Mr Gageler, what is the answer to that last point, that is to say that your client had a very peculiar and particular market arrangement and that that left it open to the judges in the majority below to reach the conclusion they did on the facts?
MR GAGELER: If they applied the right yardstick to the facts they would not have reached the conclusion. Applying the correct yardstick to the same facts, Justice Conti reached what we say is the correct conclusion.
KIRBY J: But if you take the base as the cost plus the tax and then pass that on, and add your own profit and make sure you get that profit ‑ ‑ ‑
MR GAGELER: That is right. If it were a cost-plus system, then if the costs included the sales tax overpaid then it would be a different case. But the facts here were not that Avon adopted a cost-plus system. The facts were that Avon priced to the market and then discounted from the market price to particular price points in various campaigns, always making a profit. Of course it always covered its costs, but it did not set its costs on a cost‑plus system. If it did then it would be a different case and be like some of the earlier cases.
To say, “Is it a unique case?” well even if it were it would not undermine the position for special leave, but it is not unique. It is not very different from the way Amway prices, or one would expect any other party to price ‑ ‑ ‑
CALLINAN J: Is it the evidence, Mr Gageler, that the price before discount was set solely by reference to the market?
MR GAGELER: Yes, that is the evidence. The evidence was that 40 per cent of the products were not discounted at all, and as to the other 60 per cent, yes it was set before discounting solely by reference to the market, and then the discounts were worked out, or arrived at, by reference to particular campaigns to get an overall profit and mix for the particular campaign.
CALLINAN J: Would it be relevant if Avon knew, as perhaps might not be an unreasonable inference, that the rest of the market had set its price to include sales tax, so that it could be confident that by setting its price to the market it was setting a price which allowed it easily to recover the sales tax.
MR GAGELER: That might be relevant, depending on the nature of the overpayment, your Honour, but the overpayment here was one that was peculiar to Avon in this sense. It was required to pay sales tax, calculated by reference to the notional wholesale value of the goods that it sold – it actually retailed the goods but sales tax was calculated by reference to a notional wholesale value – it ought to have calculated the notional wholesale value at cost plus 11.6 something per cent. It actually used a different figure. It used, for part of the relevant period, cost plus 25 per cent, and for part of the period cost plus 15 per cent. So it overcalculated the amount of tax that it had to pay, and therefore remitted too much tax throughout the period, but that was a problem peculiar to itself.
So the point is if it had properly calculated the tax at the relevant time, we say comfortably on the evidence it would still have charged the same price to its customers and it would have made $3.6 million more profit. Therefore, it is out of pocket. If your Honour ‑ ‑ ‑
KIRBY J: How much evidence was there in this case? Would we be combing through the market strategies of Avon, or is that agreed material?
MR GAGELER: No, there was one affidavit, your Honour.
KIRBY J: That was not contested ‑ ‑ ‑
MR GAGELER: A modest appeal book.
CALLINAN J: How long did the trial take, Mr Gageler?
MR GAGELER: One day, and the appeal ‑ ‑ ‑
KIRBY J: That was before Justice Hill.
MR GAGELER: A very efficient trial, but that was with my learned friend’s extensive cross‑examination, which your Honours would not need to put up with.
KIRBY J: Well, I think you see the way the wind is blowing, but you realise that at the end of the road the wind may turn very uncomfortably for your client.
MR GAGELER: Well, your Honours, I am only asking for special leave at the moment. I am not arguing the appeal.
KIRBY J: There will be a grant of special leave in this matter. Is this a matter that would be disposed of before the Full Court in half a day?
MR GAGELER: If we are told half a day we can do it in half a day.
KIRBY J: And the grounds of appeal have this defect, that they, instead of, as it were, containing within themselves the concept that you are arguing, contain it by reference to the dissenting opinion of Justice Conti or the majority opinion in the Full Court. I wonder if that could be improved so that the principle could be stated more clearly in the grounds of appeal. At least if you would both have a look at that and see if that could be expressed otherwise than by reference to the extensive reasons of the Full Court.
MR GAGELER: Yes, we will do that, your Honour.
KIRBY J: Very well. Special leave will be granted in that matter.
AT 12.14 PM THE MATTER WAS CONCLUDED
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