Commissioner of Taxation v Softex Industries Pty Ltd (formerly Cosco Holdings Pty Ltd)
[2001] FCA 397
•11 APRIL 2001
FEDERAL COURT OF AUSTRALIA
Commissioner of Taxation v Softex Industries Pty Ltd (formerly Cosco Holdings Pty Ltd) [2001] FCA 397
SALES TAX – application for refund of sales tax allegedly paid in respect of bales of waste paper – appeal from a decision of the Administrative Appeals Tribunal – whether bales of paper had been “manufactured” – ordinary meaning of term – extended definition of term to include combining of parts to form an article commercially distinct – meaning of “combine” – meaning of “commercially distinct” – whether AAT made an error of law – whether the purchaser of the bales of waste paper had “borne tax” under subs 11(3) of the Sales Tax Assessment Act1992 (Cth)
WORDS AND PHRASES – “article”, “Australian-used goods”, “manufacture”, “combine”, “commercially distinct”
Administrative Appeals Tribunal Act 1975 (Cth) s 44
Sales Tax Assessment Act 1992(Cth) s 5, s 16, s 11 (3), Schedule 1 CR6, AD1aMcNicol v Pinch [1906] 2 KB 352 referred to
WEA Records Pty Ltd v Federal Commissioner Of Taxation (1990) 21 ATR 799 cited Commonwealth v Genex Corporation Pty Ltd (1992) 176 CLR 277 cited
M P Metals Pty Ltd v Federal Commissioner of Taxation (1968) 117 CLR 631 referred to
In re Searls Ltd (1932) 33 SR (NSW) 7 referred to
Federal Commissioner of Taxation v Jack Zinader Pty Ltd (1949) 78 CLR 336 referred to
Hudson Bay Co v Thompson [1960] AC 926 referred to
Carfax Waste Paper Co Ltd v Minister of Labour [1968] 1 WLR 1166 referred to
Minister of Labour v Wandex Plastics Ltd (1968) 4 KIR 256 referred to
Commissioner of Taxation v Jax Tyres Pty Ltd (1984) 5 FCR 257 applied
Irving v Munro & Sons Ltd (1931) 46 CLR 279 referred toKuswardana v Minister for Immigration and Ethnic Affairs (1981) 35 ALR 186 cited
Tefonu Pty Ltd v Insurance and Superannuation Commissioner (1993) 44 FCR 361 cited
Federal Commissioner of Taxation v Glennan (1999) 90 FCR 538 referred toCOMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA v SOFTEX INDUSTRIES PTY LTD (ACN 010 152 913 FORMERLY COSCO HOLDINGS PTY LTD)
Q 162 OF 2000
RYAN, DOWSETT & HELY JJ
11 APRIL 2001
BRISBANE
IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY
Q 162 OF 2000
ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA
BETWEEN:
COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
APPELLANTAND:
SOFTEX INDUSTRIES PTY LTD
ACN 010 152 913 (FORMERLY COSCO HOLDINGS PTY LTD)
RESPONDENTJUDGES:
RYAN, DOWSETT & HELY JJ
DATE OF ORDER:
11 APRIL 2001
WHERE MADE:
BRISBANE
THE COURT ORDERS THAT:
1.The appeal from the decision of the primary judge be allowed.
2.The orders made by the primary judge be set aside.
3.The appeal to the Court from the decision of the Administrative Appeals Tribunal be dismissed.
4.The respondent pay the costs of the proceedings before the primary judge, and the costs of the appeal.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY
Q 162 OF 2000
ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA
BETWEEN:
COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
APPELLANTAND:
SOFTEX INDUSTRIES PTY LTD
ACN 010 152 913 (FORMERLY COSCO HOLDINGS PTY LTD)
RESPONDENT
JUDGES:
RYAN, DOWSETT & HELY JJ
DATE:
11 APRIL 2001
PLACE:
BRISBANE
REASONS FOR JUDGMENT
RYAN & HELY JJ:
The respondent, Softex Industries Pty Ltd (“Softex”), manufactures paper products such as facial tissues and toilet paper. This appeal has its origins in a claim by Softex for a refund of sales tax said to have been paid by it in the period 1 January 1993 to 30 June 1995 on the purchase by it of baled recycled waste paper for use as feed stock in its manufacturing operations. The claim was disallowed by the appellant (“the Commissioner”), whose decision was affirmed by the Administrative Appeals Tribunal (“AAT”). The matter comes to this Court under s 44 of the Administrative Appeals Tribunal Act 1975 (Cth).
Softex’s claim for a refund of sales tax is based on an alleged entitlement to a credit under item CR 6 in Schedule I to the Sales Tax Assessment Act 1992 (Cth) (“the Act”). That requires Softex to prove:
(a)that it is liable to tax on an assessable dealing with output goods (ie the facial tissues and toilet paper);
(b)that it has borne tax on input goods (ie the baled recycled waste paper); and
(c)that the input goods have a sufficient link with the output goods in terms of s 52 of the Act.
Paragraphs (a) and (c) are not in issue. The contest is as to par (b).
It is common ground that the par (b) issue can be subdivided into the following elements:
-whether the vendors to Softex of the bales of waste paper had manufactured the bales within the meaning of the Act;
-whether the bales are goods within the meaning of the Act;
-whether Softex purchased the bales for a price that included the sales tax imposed on the vendors as manufacturer of the goods (s 11(3)).
The first two elements arise because sales tax is only payable by the vendors under s 16 of the Act and Item AD1a of Schedule 1 if goods were sold to Softex by a person who manufactured the goods, so as to give rise to an “assessable dealing”. (The primary judge referred to Item AD1a. We were informed during the course of argument by counsel for the Commissioner that the appropriate item is AD2a, but it makes no difference to the outcome of this appeal whether the sale is properly characterised as a wholesale or retail sale by the vendors of the bales, and so we simply note the information given to us in this respect.)
Manufacture
The issue which arises under this heading is whether, on the facts as found or undisputed before it, AAT was bound to decide that the bales were manufactured either within the ordinary meaning of that term, or within par (b) of the definition of manufacture. Paragraph (b) includes within the definition:
“combining parts or ingredients so as to form an article or substance that is commercially distinct from the parts or ingredients.”
The primary judge held that there had been no error in AAT’s conception of the ordinary meaning of “manufacture”, and that AAT’s conclusion that no manufacture had occurred within the ordinary meaning of that word was reasonably open to it on the facts. Softex, by notice of contention, challenges this conclusion. However, his Honour held that AAT misapplied sub-par (b) of the definition, and that the only conclusion reasonably open on AAT’s findings of fact was that the paper collectors’ activities came within the extended definition of manufacture in sub-par (b). The Commissioner appeals against this conclusion.
AAT made the following findings of primary fact:
-the paper collected by the paper collectors has all either been owned or used by another. It is paper of varying shapes, sizes, qualities and textures.
-The paper collected by the paper collectors is, with varying degrees of sophistication and by varying methods, sorted, shredded or not shredded as the case may be and sold. Foreign objects such as paper clips and staples are removed to varying degrees from the paper.
-The paper collectors make use of items of equipment which might possibly be expected to be found in a manufacturing plant, such as conveyor belts and, to varying degrees, hammer mills, shredders and automatic balers.
-The shredding processes have led to the loss of clay and filler that assists in the disintegration process in Softex’s mill.
-The bales contain waste paper of particular grade determined with reference to the needs of the paper collectors’ customers.
-When the paper is baled, the paper is compressed, but each piece within the bale retains its individual identity. There has been no joining of them in any sense, be it physical, chemical or otherwise.
-The bales sold by the waste paper collectors attract a higher price than did the waste paper of which they are formed. The bales are a more saleable product to paper mills and board mills.
-Waste paper which has been sorted and baled is in a form that is generally more commercially acceptable to paper mills and board mills than the material in the form in which it is collected by the paper collectors.
The legal conception of manufacture involves the making of “a different thing from that out of which it is made”: McNicol v Pinch [1906] 2 KB 352 at 361 (“McNicol”); WEA Records Pty Ltd v Federal Commissioner Of Taxation (1990) 21 ATR 799 at 803; Commonwealth v Genex Corporation Pty Ltd (1992) 176 CLR 277, at 288-289. Whether a thing is so different from the thing or things out of which it was made as properly to be described as a new commodity may depend “not only upon physical characteristics but also on differences in its utility for some purpose”: M P Metals Pty Ltd v Federal Commissioner Of Taxation (1968) 117 CLR 631 at 638 (“M P Metals”). Alteration of an existing thing without production of a new item is not manufacture: Federal Commissioner of Taxation v Jack Zinader Pty Ltd (1949) 78 CLR 336, at 345 (“Jack Zinader”).
In In re Searls Ltd (1932) 33 SR (NSW) 7 wreaths, bouquets and the like were held to be manufactured by a florist, notwithstanding that there was no change in the composition of the flowers. Harvey CJ in Equity said at 11:
“In my opinion the fact that a new saleable entity is brought into existence by means of skill applied to the component elements of that new entity goes a long way to establish that the result is a manufactured article and if to that new entity people would in every day language apply the words “made” or “manufactured” and that entity is purchased for its own sake by reason of the skill which has been exhibited in putting the component parts into combination, I think it is proper to call the completed article a manufactured article.”
Likewise, in Jack Zinader the removing of worn fur and the remodelling of the remainder of a garment was held to result in manufactured goods. At 344-345 Dixon J said:
“On the whole the commissioner’s view appears to be the more correct. The work of the furrier is to use skins to form garments. In skins he works with materials often of great value and usually of some permanence. His skill lies in the use he can make of them and the descriptions of garment he produces. Fashion, commercial usage and his customer’s tastes combine to distinguish the various descriptions of garment he makes and to compel the recognization of them as separate categories of ‘goods’. When he takes skins made up into one description of fur garment and produces another, he cannot be treated as having altered an existing thing without producing a new one. He has made a different article.”
In M P Metals it was held that cutting metal scrap to length and compressing the metal into bales was not manufacture. It was pointed out, however, that manufacture not only includes changes in physical characteristics, but also includes differences in utility. At 638 after referring to McNicol and Jack Zinader, Windeyer J said:
“Identity and difference, as concepts, must always be related to some quality of the thing or things in respect of which identity or difference is to be determined. It may be colour, shape, chemical composition or any other quality. To speak of ‘substantial differences’, as distinct from small differences, means little or nothing, unless some quality of the thing is postulated as its essential. And whether a thing is so different a thing from the thing or things out of which it was made as to be properly described as a new commodity may depend not only upon physical characteristics but also on differences in its utility for some purpose.”
His Honour later emphasised the utility aspect at 641:
“I am unable to accept the view that by treating the scrap it collected as it did the taxpayer derived from it manufactured goods within the meaning of s 62AA(2)(a). These operations did not create a thing having a new industrial use; and according to what seem to me the ordinary usages of the language of commerce, the processed scrap is not manufactured goods.”
The myriad of decided cases dealing with whether particular processes constitute “manufacture” for the purposes of revenue legislation are largely without precedential value, as they all depend upon their own facts, and upon the terms of the legislation in question. For example, the legislation under consideration in Hudson Bay Co v Thompson [1960] AC 926, Carfax Waste Paper Co Ltd v Minister of Labour [1968] 1 WLR 1166 and Minister of Labour v Wandex Plastics Ltd (1968) 4 KIR 256 was quite different from the present. Although these cases were pressed upon us as providing useful analogies, they are of little, if any, assistance in the resolution of the present problem having regard to the different legislative context.
In the present case AAT had regard to the fact that items of equipment which might possibly be expected to be found in a manufacturing plant were used by the paper collectors in the production of the bales, but concluded:
“The processes themselves are not, however, determinative of the issue. The issue is whether the goods at one end of those processes are different from the goods at the other end.
...
In our view, they are not. They are still waste paper albeit sorted, perhaps shredded and certainly in a form more easily handled by the paper mills and the board mills than the individual pieces of waste paper collected by the paper collectors.
...
Processes such as these assist the applicant’s case but, at the end of them all, what has happened to the paper in the hands of the paper collectors is that the wastepaper has been brought into a condition in which it can more readily be sold or used and nothing more.”
There was no dispute as to the scope of the legal conception of manufacture. AAT did not misdirect itself as to the applicable law in that respect. Whether the article which results from a process is a different product from the constituents or ingredients from which it is made is a question of fact: Commissioner of Taxation v Jax Tyres Pty Ltd (1984) 5 FCR 257 at 261 (“Jax Tyres”). Hence AAT’s conclusion could only involve an error of law if the only conclusion reasonably open on the evidence was that the baling of the recycled waste paper involved a process of manufacture in the ordinary sense in which that term is used.
The primary judge expressed his conclusion on this issue as follows:
“I think it emerges from this discussion of the authorities that it is impossible to say that the only conclusion open to the Tribunal on the facts found by it or not in dispute before it was that the bales of waste paper were manufactured goods. The characterisation of this kind of process, ie, one that it is not immediately obvious falls within the ordinary meaning of the term “manufacture”, necessarily involves matters of impression and of judgment upon which reasonable minds can differ. It would, I think, be open to a decision-maker charged with forming a conclusion on whether the collectors’ processes for producing bales amounted to manufacture to place more weight than the Tribunal did on the nature of the process engaged in by each in converting delivered waste paper into bales of graded feed paper for sale to paper manufacturers. That is on the authorities referred to by the Tribunal, a relevant though not decisive consideration. It would also be open to the decision-maker, applying the comment of Windeyer J in M P Metals at 638 - 639, to place more weight than the Tribunal did on the fact that the collectors added very substantial value to the waste they collected by cleaning, sorting, shredding, grading and baling it to bring it into forms of particular utility as feed to paper manufacturers. But such criticisms of the Tribunal’s decision, if it is correct to describe them as criticisms, go only to the weight the Tribunal chose to give to aspects of the evidence.”
The primary judge correctly recognised that different minds might give different weight to aspects of the evidence, and that the decision which AAT reached involved matters of impression or judgment. We agree with the primary judge’s conclusion that it cannot be said that the only approach reasonably open to AAT having regard to its primary findings of fact, was to conclude that the baling of the waste paper involved a process of manufacture in the ordinary sense in which that term is used. Whether that conclusion should be drawn from AAT’s findings of primary fact is, at best for Softex, a matter on which minds might reasonably differ. Accordingly, AAT made no error of law in coming to the conclusion which it did.
Paragraph (b): Combination into a commercially distinct article
The equivalent of par (b) in the former sales tax legislation was introduced in 1932 in response to the High Court’s decision in Irving v Munro & Sons Ltd (1931) 46 CLR 279. In that case, “motor-cycles” in a disassembled form were imported from England in individual cases which contained all of the parts necessary to assemble a particular motor cycle, except for tyres and tubes. On arrival, the motor-cycles were assembled at the distributing agent’s works, usually by a man with the aid of a spanner only. The High Court held that there was no activity which amounted to “manufacture”.
In the Second Reading Speech for the Sales Tax Assessment Bills (Nos. 1-9) the Prime Minister and Treasurer said:
“The proposed amendments, which have as their object the removal of defects and anomalies and the clarification of the law, may be briefly stated and explained as follows:-
(a)Extension of the definition of ‘manufacture’ –
In consequence of a decision of the High Court, some doubt exists as to whether a person who imports or purchases fabricated parts and combines them into a distinct commercial article can be treated as a manufacturer.
It is essential that the law should be clarified for the purpose of ensuring that the tax should fall, as intended, on the sale value of the completed article, and that the person who both fabricates and combines the parts of any commercial article should not be at a disadvantage in competition with persons who produce a similar article by a combination of purchased or imported parts.”
See Hansard, 16 September 1932 at 586.
There is authority for the proposition that par (b) is limited to a mere combination of parts or ingredients so as to form a commercially distinct article or substance. In Jax Tyres at 261 Lockhart J (with whom Wilcox J agreed) said:
“In my opinion, par (b) of the definition applies only where there is a mere combination of parts or ingredients. This conclusion follows from the legislative history of the definition and the language of par (b) itself, especially since the word ‘whereby’ in par (b) relates back to and is governed by the previous word ‘combination’ in the whole expression ‘the combination of parts or ingredients whereby an article or substance is formed ...’.
This was the conclusion reached by the Full Court of the Supreme Court of Victoria in Cohns Industries Pty Ltd v Deputy Federal Commissioner of Taxation (1979) 37 FLR 508; but the point was not central to the case and their Honours did not give reasons for their conclusion. See also Adams v Federal Commissioner of Taxation (1948) 8 ATD 332 per Williams J at 335.”
In the current par (b), the words “so as to” perform the same role that “whereby” did in its predecessor, which was the subject of consideration in Jax Tyres.
AAT accepted that the waste paper collectors sort and grade the waste paper; they shred or tear the waste paper into smaller pieces which are then compressed into bales. The processes to which the waste paper is subjected add value to it, as the bales are more readily saleable to paper mills and board mills, and for a much greater price.
Specifically AAT found:
-par (b) of the definition requires that there be a joining together to form a commercially distinct product;
-the fact that the paper collectors may sort, grade and bale their waste paper does not lead to the conclusion that the waste paper has been “combined”;
-the essence of the word “combined” is that there must be a joining together in some way or another which does not occur as “each piece within the bale retains its individual identity;
-waste paper has been brought into a condition in which it can more readily be sold and used and nothing more. The baled paper is not commercially distinct. “They [the bales] cannot be commercially distinct if they are essentially the same”.
The primary judge identified two errors of law in AAT’s decision. First, his Honour found that AAT based its conclusion on the finding that each piece of waste paper collected retained its individual identity in the compressed and graded bales, and thereby misapplied sub-par (b) of the definition. Whether a particular fact or situation comes within the definition does not depend upon whether the original parts remain identifiable at the end of the process, but on whether the parts have been combined so as to form an article that did not previously exist, which is commercially distinct from the original parts. Second, his Honour found that having regard to AAT’s primary findings of fact, the only conclusion reasonably open to AAT was that the paper collectors’ activities came within the extended definition of manufacture in sub-par (b).
It is convenient to deal with the second of these matters first, if only because if it were resolved in favour of Softex, it would be unnecessary to deal with the first matter.
Whether the bales are commercially distinct from the waste paper of which the bales are made is a question of fact, the resolution of which may involve matters of impression and judgment. If the only conclusion open on the evidence is that the bales are commercially distinct, then a failure on the part of AAT to draw the only conclusion reasonably open to it would be an error of law. See, eg Sharp Corporation of Australia Pty Ltd v Collector of Customs (1995) 59 FCR 6 at 12, 16.
The primary judge dealt with this aspect of the matter is this way:
“The Tribunal found that the waste paper is sorted into separate lots of uniform grades of paper; it is cleaned of impurities; it is generally shredded and finally compacted into bales of waste paper of the same grade. A bale, homogeneous in content, is thus significantly different from the lots of waste paper picked up at the collection points which (save only for the unused letterhead) are heterogeneous in content. The bales, moreover, have a use as feed for paper product manufacturers, including the applicant, in their own industrial processes that the unsorted, dirty waste picked up from the collection points does not have to those manufacturers. They are prepared to pay a sum for the bales much greater than the prices that equivalent tonnages of the unsorted waste paper command. Bales of paper, all of a particular grade, are commercially distinct from that same paper in the form in which it was collected as waste mixed promiscuously with other grades of waste paper.
Once the Tribunal made findings to this effect, the only conclusion reasonably open was that the paper collectors’ activities came within the extended definition of manufacture in sub-par (b). By holding otherwise, the Tribunal made a further error of law.”
AAT did find that at least to some extent, the bales had a quality, utility and value not possessed by the waste paper of which the bales were made. However, AAT was not persuaded, in the context of the ordinary meaning of “manufacture”, that the bales were different things than the waste paper from which they were made. Waste paper had been adapted for sale and no more. For similar reasons, in the context of sub-par (b) AAT was not persuaded that the bales were commercially distinct from the waste paper out of which they had been made.
The primary judge accepted either that the former conclusion was one which was open to AAT (see, in particular the last two sentences of the judgment extracted at par 15 above) or at least that, in coming to that conclusion, AAT did not commit any legal error. If that is so, (and we agree that it is so), then we cannot agree with the primary judge’s finding that the only conclusion open to AAT when considering sub-par (b) of the definition was that the bales were commercially distinct from the components from which they had been made. There is a tension or inconsistency between the two propositions.
Both in the context of the ordinary meaning of manufacture, and in the context of sub-par (b) of the definition, an assessment was required of whether the qualities possessed by the bales made them a different thing or a commercially different article from the waste paper from which they were made, or whether the case was simply one in which waste paper was subjected to processes which made it more attractive for sale as waste paper and nothing more. It may be difficult to decide on which side of the line a particular fact situation falls but the decision is one committed to AAT, and unless the facts necessarily fall on one side or the other, there is no error of law in the decision as to the side of the line on which the matter falls.
In our view, both in the context of the ordinary meaning of manufacture, and in the context of sub-par (b), AAT was involved in an exercise of evaluation – in deciding what weight should be given to different aspects of the evidence, not all of which pointed in the same direction. That involves matters of judgment and degree such that it cannot be said that the case necessarily falls on one side of the line rather than the other. That being so, AAT did not commit any error of law in finding that the bales were not articles commercially distinct from the waste paper from which they were made.
Thus it is necessary to determine whether AAT made the first of the errors of law identified in par 23 above, and if so whether the matter should, for that reason, be recommitted to AAT for further consideration.
AAT noted that for sub-par (b) to apply, there must be a joining together to form a commercially distinct product. AAT concluded that the processes to which the waste paper was subjected did not amount to a combining of the individual pieces of paper, because each piece of paper within the bale retained its original identity.
We agree with the primary judge that whether a particular factual situation comes within par (b) of the definition does not depend upon whether the original parts remain identifiable at the end of the process, but on whether the parts have been combined so as to form an article that did not previously exist, which is commercially distinct from the original parts. For the purpose of determining whether there has been a “combining” of components, it is not critical whether the physical identity of the parts or ingredients is retained, or lost by fusion or some other process. The fact, if it be a fact, that “each piece within the bale retains its original identity” does not entail that there has been no “combining”. In coming to a different conclusion in this respect AAT misdirected itself as to the scope of par (b) of the definition and thereby fell into legal error.
The question then, is whether the matter should be remitted to AAT for reconsideration in the light of this conclusion, or whether it would be futile to do so having regard to AAT’s conclusion that the bales of waste paper were not commercially distinct articles from the waste paper of which they are composed. The appellant has to show that the error of law is material, in the sense that it might have affected the outcome of the proceeding. In Australian Broadcasting Tribunal v Bond (1990) 170 CLR 321, Mason CJ said this (at 353):
“A decision does not ‘involve’ an error of law unless the error is material to the decision in the sense that it contributes to it so that, but for the error, the decision would have been, or might have been, different.”
His Honour went on to identify “the critical question on this aspect of the case” as:
“whether, but for the alleged error of law on which the respondents rely, the decision might have been different by reason of the possibility that the Tribunal would not have made the findings of fact relating to the settlement in the terms in which they were made.” (Emphasis added.)
Toohey and Gaudron JJ expressed the principle as follows (at 384):
“For an error of law to be involved in a decision something more than the mere occurrence of error is necessary. The error must have contributed to the decision in some way or, at the very least, it must be impossible to say that it did not so contribute. Conversely, an error is not involved in a decision if it did not contribute to the decision or if the decision must have been the same regardless of the error. Thus, to show that an error of law is involved in a decision it is necessary, at the very least, to show that the decision may have been different if the error had not occurred.”
There may be some cases in which a legal error as to the scope of the notion of “combining” might affect the determination of whether the resultant article is commercially distinct from the components from which it was made, as the two notions are not completely separate.
But in the present case, there was no issue as to what the processes were which, in Softex’s contention, attracted the description of “combining”. On Softex’s case, the shredding, compression and binding of the pieces of paper was the means by which a combination of the pieces of paper into a commercially distinct article – the bale of paper – was effected.
AAT accepted that shredding, compression and binding of the pieces of paper were involved in the production of the bales. However, it denied to those processes the label “combining”. In our view, that denial, even though accompanied by legal error, does not undermine AAT’s other conclusion that the bales are not commercially distinct from the waste paper from which they are made. That conclusion flows from AAT’s assessment that the processes to which the waste paper was subjected (whether called “combining” or not), resulted in waste paper being adapted for sale, rather than in the production of something new or commercially different.
In our view, AAT made alternative findings in this respect, rather than dependent findings such that a legal error in relation to the first necessarily undermines the second. It follows that it is not appropriate for the matter to be remitted to AAT for reconsideration in the light of these reasons. Rather, the appeal from the decision of the primary judge should be allowed. The orders of the primary judge should be set aside, and in lieu thereof it should be ordered that the appeal should be dismissed. Softex should pay the costs of the proceedings before the primary judge, and the costs of the appeal.
Tax borne
In view of the conclusion which we have reached, it is not necessary to address this issue, but as the matter was argued we should say something about it. AAT’s conclusion was that Softex had not borne tax under subs 11(3) of the Act. That conclusion, whilst it stands, is fatal to Softex’s claim to a refund, as Softex must establish that it purchased the bales at a price which included sales tax imposed on the paper collectors as manufacturer of the goods.
Thus, even if we had come to a different conclusion on the issue of manufacture, it would not have been appropriate to remit the matter to AAT for reconsideration of the “tax borne” issue, unless AAT’s conclusion on this issue itself involved an error of law.
There was a body of evidence before AAT (not referred to in its reasons for decision) that many paper collectors believed that sales tax was not exigible on the sale of bales of waste paper, and they fixed a price for the bales which did not include any sales tax component. It was common ground that the paper collectors have not themselves paid sales tax in respect of the bales sold to Softex.
Softex contends that as the issue of “tax borne” was before AAT, AAT was required to determine the factual question of whether the price charged for the goods was sufficient to recover the sales tax liability of the vendors, whether or not the vendors recognised that liability. AAT, it was submitted, made an error of law in failing to consider “whether the price recovered the unacknowledged liability to tax”, and so the proceedings must be remitted to AAT “for the relevant facts to be found”.
The issue under s 11(3) is whether the price included the tax, rather than whether the price was sufficient to recoup the tax. A failure on the part of AAT to consider a matter which it is required to consider may itself be an error of law. In the appellant’s contention, AAT was obliged to deal with the issue which it now propounds even if the point was not argued, or inadequately argued before the Tribunal: Kuswardana v Minister for Immigration and Ethnic Affairs (1981) 35 ALR 186; Tefonu Pty Ltd v Insurance and Superannuation Commissioner (1993) 44 FCR 361.
The authorities in this area were recently reviewed by a Full Court of this Court in Commissioner of Taxation v Glennan (1999) 90 FCR 538. At 558 the Court concluded:
“As a matter of general administrative law, it has long been accepted that it is no part of the duty of the decision-maker to make out a case for the applicant: Prasad v Minister for Immigration and Ethnic Affairs (1985) 6 FCR 155 at 170, per Wilcox J. In a statutory context in which a taxpayer seeking to challenge an assessment is required to specify the grounds of his objection, and bears the burden of proving that it is excessive, as a general rule it cannot be said that the AAT is bound to make findings of fact and rulings on issues not relied upon by the taxpayer in the proceedings before it. It follows that, as a general rule, there is no error of law if the AAT fails to address issues of fact and law not the subject of argument by the taxpayer.”
The primary judge, having found in favour of Softex on the issue of manufacture, stated as follows:
“It therefore seems to me correct to say that the matter must be sent back to the Tribunal to determine whether the applicant should be taken to have borne tax on the bales it purchased from the collectors and that a conclusion can only be drawn on this issue after facts have been found additional to those the subject of the concession that the paper collectors did not, in fact, pay tax on any of the sales of bales to the applicant. The respondent accepted that if the Tribunal went wrong in concluding that the paper collectors were not manufacturers of the bales, the case should be remitted.”
We were informed by counsel for the Commissioner that the passage we have quoted does not accurately reflect the submission put by the Commissioner at first instance. Counsel for Softex did not dispute the information given to the Court by counsel for the Commissioner in this respect. However, the primary judge addressed this issue in a supplementary judgment delivered on 6 December 2000 in which he concluded that the Commission had acquiesced in Softex’s contention that remitter was necessary given Softex’s success at first instance. In our view, the issue is whether AAT made an error of law in failing to make findings beyond those which it in fact made, and that issue is not necessarily concluded against the Commissioner by his acquiescence in remitter at first instance.
In those circumstances we invited submission of schedules as to the evidence which was before AAT, which would support the conclusion that Softex had borne tax on the goods in question (putting aside Professor Walker’s economic tracing theory, which was rejected by AAT and not thereafter pursued by Softex). The purpose of inviting submission of those schedules was to ascertain whether AAT made an error of law in failing to make findings on the point on which Softex now wishes to rely.
The schedules submitted after the conclusion of the argument are with the papers. Having regard to the conclusion which we have reached on the issue of “manufacture”, it is sufficient to say that the material submitted does not persuade us that AAT erred in law in failing to make a finding on the point now sought to be raised. The materials fall short of establishing that the point was exposed to AAT for its consideration.
I certify that the preceding forty-seven (47) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Ryan and Hely. Associate:
Dated: 11 April 2001
IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY
Q 162 OF 2000
ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA
BETWEEN:
COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
APPELLANTAND:
SOFTEX INDUSTRIES PTY LTD
ACN 010 152 913 (FORMERLY COSCO HOLDINS PTY LTD)
RESPONDENT
JUDGES:
RYAN, DOWSETT & HELY JJ
DATE:
11 APRIL 2001
PLACE:
BRISBANE
REASONS FOR JUDGMENT
DOWSETT J:
I have read the reasons prepared by Ryan and Hely JJ. As their Honours have rehearsed the facts of the case it is not necessary that I do so. The respondent claims to be entitled to a credit pursuant to the Sales Tax Assessment Act 1992 (Cth) (the “Act”). Apart from matters not now in dispute, this entitlement depends upon the respondent’s demonstrating that it has borne tax on “input goods” used in its manufacturing business. As their Honours have pointed out, this conclusion must be based upon affirmative answers to three questions, namely:
·whether those who sold bales of waste paper to the respondent manufactured them within the meaning of the Act;
·whether the bales were goods within the meaning of the Act;
·whether the respondent purchased the bales for a price which included sales tax imposed on the vendors as manufacturers of the goods.
The Tribunal answered questions 1 and 2 in the negative. There is a dispute between the parties as to whether it answered the third question. Drummond J considered that the Tribunal had erred in law in its answer to the first question and that the third question had not been finally resolved. He remitted the matter to the Tribunal. The appellant challenges that order, submitting firstly, that the Tribunal correctly answered the first question.
The word “manufacture” is relevantly defined in s 5 of the Act as including:
(a) production;
(b)combining parts or ingredients so as to form an article or substance that is commercially distinct from the parts or ingredients;
(c)applying a treatment to foodstuffs as a process in preparing them for human consumption;
(d)processing or treating exposed photographic film or cinematograph film so as to produce a negative, transparency or film strip;
(e)duplicating a computer program;
(f)duplicating visual images or sounds, or both;
…
With the possible exception of par (a) (production), the various paragraphs of the definition are generally thought to extend the meaning of the term “manufacture” beyond that which it ordinarily carries. I agree with their Honours that the learned Judge at first instance was correct in finding that the process by which the respondent’s vendors assembled the bales of paper did not constitute manufacture within the ordinary meaning of that term.
Paragraph (b) extends the meaning of the word to include a process which involves:
·the combining of parts or ingredients,
·so as to form an article or substance,
·which is commercially distinct from those parts or ingredients.
The Tribunal found that the vendors’ process did not fall within this extended definition of “manufacture”, adopting a definition of the word “combine” derived from the Macquarie Dictionary as follows:
Unite, join together; associate (persons etc) in a joint action, feeling, etc …
to bring or join into a close union or whole; unite; associate; coalesce … .
The Tribunal then observed (at par 59):
The essence of the word “combine” is that there must be a joining together in some way or another. It must also be read with the remainder of the paragraph. There must be a joining together to form a commercially distinct product. The “combining” could be as simple as mixing together parts or ingredients without any chemical process or mechanical process to link the various parts or ingredients. Baking powder is an example of that. Ground rice, bicarbonate of soda and tartaric acid are mixed together and passed through a sieve. The process leads to an inextricable mixing of the parts or ingredients and so to their combination as baking powder. The individual ingredients can no longer be separately identified but exist only as part of a new and distinct product. When that baking powder is mixed with ingredients such as flour, eggs and sugar to make a cake, there has been a chemical reaction and the ingredients in the cake are no less inextricably mixed into a new and distinct product than those in the baking powder. That process too is a combination of parts or ingredients. So too is the physical process of combining the various parts of a motor cycle into a motor cycle. A new and distinct product is formed from those parts even though, unlike the cake, those parts may be able to be physically separated.
I have quoted this paragraph in its entirety because, in my view, it demonstrates a misunderstanding of the effect of the word “combining” as used in par (b) of the definition. To combine ingredients in order to produce baking powder or to mix ingredients so as to make a cake would clearly be manufacture according to ordinary terms. In each case a new product is created. To speak of these examples as demonstrating the approach to be taken to the construction and application of par (b) of the definition is to overlook the fact that, as is pointed out by Ryan and Hely JJ, the precursor of par (b) was inserted so as to include within the concept of “manufacture” for the purposes of the Act, processes which, pursuant to the decision of the High Court in Irving v Munro & Sons Ltd (1931) 46 CLR 279, would not be manufacture in the ordinary sense. The facts of that case were briefly alluded to by the Tribunal in its reference to the assembly of a motor cycle.
In pars 60 and 61 of the reasons, the Tribunal held:
60.
In the case of waste paper sold by the paper collectors, the waste paper (with the exception of the letterhead referred to previously) is gathered together in bales. It is not, however, combined in the sense in which that word is used in the definition. There is a sorting and grading process which does not amount to a combination of the waste paper in any sense. There may be a shredding or tearing process of some form but again the waste paper still has its individual identity even if each piece is by now in several smaller pieces. When the paper is baled, we find that the paper is compressed but, again, each piece within the bale retains its individual identity. There has been no joining of them in any sense be it physical, chemical or otherwise. Waste paper has been sorted, shredded perhaps, and baled and has come out as waste paper. That is so even though some value may have been added to it in that it is now a more saleable product to paper mills and board mills.61.
In view of our earlier findings, we have also concluded that the paper sold to the paper collectors is waste paper and no different from the waste paper of which it is comprised, we must also find that the goods are not commercially distinct. They cannot be commercially distinct if they are essentially the same. That is so even though the waste paper may be in a form which is more readily saleable because it is in a form more easily used by the paper mills and board mills.With the greatest of respect to the Tribunal I am of the view that these paragraphs demonstrate two errors. The first is the assertion that there must be some form of “joining” in order to satisfy the requirement for “combining”. As the dictionary definition demonstrates, the word “combine” includes to “bring … into close union” and also to “associate”. These meanings do not necessarily imply any degree of “joinder”. I consider that the word “combining”, when used in par (b) bears no such implication. To assemble pieces of paper into a bale is to combine those pieces. For the purposes of the Act it is necessary that such combination “form an article or substance”. The Shorter Oxford Dictionary defines “article” relevantly to be “a particular material thing (of a specified class); a commodity; a piece of goods or property.” A bale of paper is an article which is formed by the combining of parts, namely individual pieces of paper. These may be findings of fact, but I cannot see that any other view is open on the evidence. In any event, it is clear that the Tribunal failed to apply the correct test because it misunderstood the meaning of the word “combining”.
In my view the Tribunal again erred in concluding that the bale could not be commercially distinct from its parts because it was “no different from the waste paper of which it is comprised.” It also found that the bales were “more commercially acceptable” than loose paper. The Shorter Oxford Dictionary defines “commercial” as “engaged in commerce; of, pertaining to, or bearing on … .” It defines “commerce” relevantly as “buying and selling; the exchange of merchandise or services, especially on a large scale.” If a bale of paper is “more commercially acceptable” to potential buyers than unsorted paper, then it is at least arguably commercially distinct from that paper. I do not go so far as to say that increased value in the marketplace will necessarily always demonstrate commercial distinctiveness, but it will go a long way towards doing so. In my view the Tribunal failed to appreciate the difference between commercial distinctiveness and physical distinctiveness.
The two errors are, I suspect, closely connected. Once the broad meanings properly attributable to the words “combining” and “article” are acknowledged, it follows that commercial distinctiveness is the real discriminator for the purpose of determining whether or not a particular transaction is to be treated as a “manufacture”. If there has been a combining of parts to produce an article, the only remaining question is whether it is commercially distinct from them. I consider that the Tribunal mistook the meaning of the definition and so did not address the true question.
However, the appellant submits that even if the Tribunal erred in answering the first question, its answer to the second question disposes of the matter in a way which is unfavourable to the respondent. The Tribunal concluded that the bales of paper were not “goods” for the purposes of the Act. The respondent challenges the correctness of that decision. The term is defined in s 5 of the Act as follows:
“Goods” means any form of tangible personal property, but:
(a)does not include property that is sold as second-hand and is manufactured exclusively or principally from goods that:
(i)were already Australian-used goods before the manufacture began; and
(ii)in their condition as parts of the property so manufactured, retain their character as Australian-used goods … .
The term “second-hand” is not defined. The term “Australian-used goods” means:
(a)goods that have been applied to a person’s own use in Australia (whether the goods are Australian goods or imported goods); or
(b)imported goods that were a container at the time of importation.
The term “application to own use” means:
(a) consuming the goods;
(b)giving the goods away, or transferring property in the goods under a contract that is not a contract of sale;
(c)granting a lease of the goods, or granting any other right or permission to use the goods;
(d)using the goods as materials in manufacture, construction, repair, renovation or other treatment or processing, whether or not it relates to or results in other goods;
(e)doing anything with the goods that results in the goods becoming a container for other property;
(f)if a person other than the owner has locally entered the goods - anything done by the person that would be an application to own use of the goods by the owner if it had been done by the owner;
but does not include:
(g)selling the goods or consigning them for sale by consignment;
(h)if the goods are imported goods – anything done with them after importation and before they are locally entered;
(i)if a person processes or treats any exposed photographic or cinematograph film for another person (“the customer”) so as to produce a negative, transparency or film strip – anything done with the negative, transparency or film strip before it is delivered to the customer.
“Application to own use in Australia” means an application to own use that happens while the goods are in Australia.
The Tribunal found that the bales were sold as second-hand and that they were manufactured exclusively or principally from Australian-used goods which retained their character as such. These were findings of fact, and I have some difficulty in seeing why they were not fairly open to the Tribunal. As to the finding that the bales were sold as second-hand, the only attack made by the respondent is to assert that as the bales were “the product of manufacture”, they “must be something other than that from which it is manufactured: it is the output of the manufacture process, not the input.” This argument appears to overlook the distinction between the ordinary meaning of the word “manufacture” and its extended meaning pursuant to par (b) of the definition. It may well be that if the process which produced the bale was by way of manufacture according to the ordinary meaning of that term, it would follow that the product was a new article. However where, as here, there has been a manufacture in the extended sense prescribed by par (b) of the definition, it does not necessarily follow that a new product has been produced. As to whether or not the bales were manufactured from Australian-used goods, the respondent’s criticism of the Tribunal’s finding is that the paper constituting the bales must have “lost its identity as second-hand goods and no longer be within the exception.” This argument suffers from the same defect as that concerning “second-hand” goods. It does not follow from the fact that the vendors’ processes were within par (b) of the definition of “manufacture” that component parts lost their character as a result of combination. In the face of these findings, the respondent cannot succeed.
As to the third question, whether or not the respondent has “borne tax” by virtue of the fact that it purchased the bales for prices which included tax, I agree with the observations and conclusions of Ryan and Hely JJ. I concur in the orders proposed by their Honours.
I certify that the preceding eighteen (18) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Dowsett. Associate:
Dated: 11 April 2001
Counsel for the Appellant: Mr I Gzell QC
Mr J Logan SCSolicitor for the Appellant: Australian Government Solicitor Counsel for the Respondent: Mr A Slater QC
Mr H AlexanderSolicitor for the Respondent: Minter Ellison Date of Hearing: 13 February 2001 Date of Judgment: 11 April 2001
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