Diethelm Manufacturing P/L v Commissioner of Taxation
[1993] FCA 606
•06 SEPTEMBER 1993
DIETHELM MANUFACTURING PTY LTD v. COMMISSIONER OF TAXATION
No. NG889 of 1992
FED No. 606
Number of pages - 33
Sales Tax
(1993) 93 ATC 4703
(1993) 116 ALR 420
(1993) 26 ATR 465
(1993) 44 FCR 450
COURT
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
FRENCH(1), HILL(2) AND WHITLAM(3) JJ
CATCHWORDS
Sales Tax - exemptions and classifications - Sales Tax (Exemptions and Classifications) Act 1935 - Third Schedule - statutory purpose - approach to construction - general principles - essential character of goods - objective criteria - relevance of manufacturer's and purchaser's purposes - office furniture - whether goods of a kind ordinarily used for household purposes.
Words and Phrases - "namely", "goods of a kind ordinarily used for household purposes", "for use as".
Sales Tax (Exemptions and Classifications) Act 1935 (Cth)
O.R. Cormack Pty Ltd v. Federal Commissioner of Taxation 92 ATC 4121
Federal Commissioner of Taxation v. Newbound and Co. Pty Ltd (1952) 10 ATD 59
Hygienic Lily Limited v. Deputy Commissioner of Taxation (1987) 13 FCR 396
Deputy Commissioner of Taxation v. Stewart (1984) 154 CLR 385
Cuming Smith and Co. Pty Ltd v. Melbourne Harbour Trust Commissioners (1905) 2 CLR 735
Jackett v. Deputy Federal Commissioner of Taxation (1932) SASR 405
Collector of Customs v. Cliffs Robe River Iron Associates (1985) 7 FCR 271
Herbert Adams Pty Ltd v. Federal Commissioner of Taxation (1932) 47 CLR 222
D. and R. Henderson (Mfg) Pty Ltd v. Collector of Customs (NSW) (1974) 48 ALJR 132
Collector of Customs v. Bell Basic Industries Ltd (1988) 83 ALR 251
Deputy Federal Commissioner of Taxation v. Polaroid Australia Pty Ltd (1971) 71 ATC 4249
Commissioner of Taxation v. Sherwood Overseas Pty Ltd (1985) 75 FLR 474
Kentucky Fried Chicken Pty Ltd v. Federal Commissioner of Taxation (1986) 86 ATC 4701
Deputy Federal Commissioner of Taxation v. Rotary Offset Press Pty Ltd 71 ATC 4170
Rotary Offset Press Pty Ltd v. Deputy Commissioner of Taxation (1972) 46 ALJR 609
Downland Publications Ltd v. Deputy Commissioner of Taxation (1983) 57 ALJR 286
Deputy Federal Commissioner of Taxation v. Thomson Publications (Aust) Pty Ltd (1979) 79 ATC 4296
Deputy Federal Commissioner of Taxation v. Lincoln Industrial Cleaners Pty Ltd (1975) 75 ATC 4208
Federal Commissioner of Taxation v. Hamersley Iron Pty Ltd (1981) 37 ALR 595
Thomson Australian Holdings Pty Ltd v. Commissioner of Taxation (1988) 20 FCR 85
Commissioner of Taxation v. Thomson Australian Holdings Pty Ltd (1989) 25 FCR 481
I.C.I. Australia Operations Pty Ltd v. Deputy Federal Commissioner of Taxation (1987) 87 ATC 5110
Chandler v. Collector of Customs (1907) 4 CLR 1719
Federal Commissioner of Taxation v. Kentucky Fried Chicken Pty Ltd (1988) 12 NSWLR 643; 91 FLR 242
HEARING
SYDNEY, 19 May 1993
#DATE 6:9:1993
Counsel and Solicitors for Appellant: DH Bloom QC and AH Slater QC
instructed by Vaughan Zarb and Capolupo
Counsel and Solicitors for Respondent: SW Gibb instructed by the
Australian Government Solicitor
ORDER
THE COURT ORDERS THAT:
1. The appeal is dismissed.
2. The appellant to pay the respondent's costs of the appeal.
Note: Settlement and entry of Orders is dealt with in Order 36 of the Federal Court Rules.
JUDGE1
Introduction
FRENCH J A manufacturer of office furniture sells chairs by wholesale to a related company which in turn sells them by retail, largely to commercial customers. Some ten per cent of purchasers from the retailer buy the chairs for domestic use. The manufacturer claims to be entitled to pay sales tax at a special rate applicable under the Sales Tax (Exemptions and Classifications) Act 1935 (Cth). To attract the special rate the goods must fall within para.(a) of Item 1 of the Third Schedule to that Act. They must answer the description embodied in that paragraph of "(g)oods... of a kind ordinarily used for household purposes, namely ... furniture."
The Commissioner of Taxation rejected the manufacturer's contention and issued an assessment on the basis that its chairs are not covered by the Third Schedule. The manufacturer appealed to a single judge of this Court but that appeal was dismissed. It now appeals from that decision to the Full Court.
Background History
3. Diethelm Manufacturing Pty Ltd (DMP) manufactures chairs which it largely sells by wholesale to an associated company called Diethelm Office Furniture Pty Ltd (DOF). DMP and DOF have the same shareholders and directors. Most of the chairs produced by DMP are designed or adapted for what was accepted in evidence by the General Manager of both companies as "extended use at a work station or in an office environment".
Between 1 April 1987 and 30 April 1990, DMP was registered as a "manufacturer or wholesale merchant" pursuant to s.11(3A) of the Sales Tax Assessment Act (No. 1) 1930 (Cth). Each of the sales to DOF during that period was a sale by wholesale and sales tax was paid to the Commissioner of Taxation in respect of it. Early in 1990, DMP's auditors and tax advisers undertook an audit for the company and concluded that the sale price to DOF of DMP's chairs had been understated. Prices shown on inter company invoices were said not to reflect an arm's length price. The auditors calculated what ought to have been the gross receipts and profit to DMP for the sales by allocating a share of factory and office overheads to the manufacturing cost of the chairs. They also added a higher gross profit margin of 12% to give the price (presumably the minimum) which should have been received on an arm's length transaction. On this basis the understatement in sale value for the period was $1,309,291. On the assumption that the applicable rate of sales tax was 10%, DMP wrote to the Commissioner on 19 June 1990 conceding an understatement of sales tax in the sum of $130,930 and enclosing payment of that amount. It is to be noted that sales tax which had already been paid during the period had been paid at rates of 10% and 20% according to categories of furniture sold.
When calculating the tax to be paid on the understated sale prices, DMP took the view that all sales attracted the lower rate. Its remitter of the amount of $130,930 did not take into account the sales tax already paid on some sales (albeit their value was understated) at what was now regarded as the erroneous rate of 20%. This matter was however pursued. On 21 June 1990 DMP filed its May 1990 sales tax return and claimed a credit for tax overpaid on sales for the period August 1987 to April 1990, contending that sales treated as taxable at 20% during that time should have been taxed at 10%. A credit of $337,882 was claimed.
DMP asked the Commissioner for a ruling in accordance with its contention as to the appropriate rate. The Commissioner advised in December 1990 that no such ruling would be given retrospectively. In February 1991, the Commissioner undertook a sales tax audit of DMP and on 19 March 1991 advised that the company was not entitled to the rebate of $337,882 claimed in the May 1990 return. Further, it was asserted, an underpayment of $130,929 remained outstanding. An assessment therefore issued for that amount. The assessment was evidently issued on the basis that the sum of $130,929 already remitted represented tax calculated at 10% over all categories and that to make up the requisite 20% the same amount again should be paid. Even assuming the claimed application of the 20%, DMP says that would not be the amount due. The conceded adjustment to the sale price of $1,309,290 related in part to chairs which the Commissioner had ruled in March 1984 were taxable at 10%. That component of the adjusted sales tax paid in June 1990 was $31,197. If right about the application of the 20% rate otherwise, the Commissioner was entitled to claim only the difference between $130,929 and $31,197, namely $99,732. There did not appear to be any dispute as to that aspect of the case. The model numbers of the chairs which fall within the contested category were set out in an exhibit to an affidavit sworn by Mr Paul Todd, the General Manager of both DMP and DOF.
On 5 September 1991, DMP lodged an objection to the assessment issued on 19 March 1991 and the Commissioner's determination not to make the claimed refund. On 7 April 1992, notice of disallowance of the objection was given by the Commissioner. On 27 May 1992, an appeal was filed in this Court against that disallowance. After a hearing on 6 November 1992, the learned trial judge delivered an ex tempore judgment dismissing the appeal. DMP now appeals against that dismissal. The issue before his Honour and on this appeal is whether or not the chairs in question were within Item 1 of the Third Schedule to the Sales Tax (Exemptions and Classifications) Act 1935 as "goods of a kind ordinarily used for household purposes, namely... furniture". It is not in dispute that, if within that classification, DMP's claim attracts sales tax at the rate of 10%. If outside it, a rate of 20% is applicable. Before turning to the trial judge's reasons it is desirable to refer briefly to the evidence before him at the hearing.
Evidence Before the Trial Judge
8. There were before his Honour two affidavits sworn by Mr Paul Todd, the General Manager of DMP and DOF. Catalogues showing photographs of various chairs manufactured by DMP were exhibited to the first affidavit. Also exhibited were photographs of particular models in the private homes of three separate purchasers from DOF. The second affidavit set out the history which has already been recounted in these reasons.
In oral evidence before his Honour, Mr Todd gave some of his previous history of experience in the furniture manufacturing industry, which included time spent as General Manager for the New South Wales branch of Namco and later as National Sales and Marketing Manager for Email. His impressionistic observations of the trade in that time included the proposition that orders for office useable chairs from domestic purchasers represented 10 to 15% of overall purchases. Another firm for which Mr Todd had worked, called Mini Cost Office Furniture, sold a range of chairs of the same general type as those sold by DOF. His recollection was that 30% of those sales would have been domestic purchases. On the other hand, he thought that only 10% of the range of chairs sold by DOF were sold to domestic purchasers. DOF's chairs were of a higher quality and commensurately higher price than those which could be bought from Mini Cost.
Various aspects of design features to be considered in the manufacture of chairs were touched upon in a rather general way, no doubt intended to indicate their relevance to both household and office purposes. The function of a chair used at a computer terminal in an office was said to be the same as that of a chair used at a computer screen at home. Although the quality and price of the chairs sold by DOF was higher than chairs sold through other outlets, the functional considerations were much the same.
In cross-examination, Mr Todd accepted that almost all of the chairs shown in the brochures produced by DOF are:
"... of a special kind designed or ... adapted ... for extended use at a work station or in an office environment."
Various features relevant to the use of chairs at a workstation were identified. These included height adjustment, swivel, and tension adjustable recliner facilities, as well as the provision of castors.
The Trial Judge's Reasons for Judgment
12. The learned trial judge began by characterising the furniture manufactured by DMP as "primarily office furniture". The question was whether or not the chairs in issue fell within Item 1, para.(a) of the Third Schedule to the Sales Tax (Exemptions and Classifications) Act 1935 (Cth). His Honour referred to his own previous interpretation of Item 1 in O.R. Cormack Pty Ltd v. Federal Commissioner of Taxation 92 ATC 4121. A crucial part of that interpretation required the words in the Item to be given their application in ordinary parlance and the question to be asked was whether the goods fitted within that description and whether they were fairly described by those ordinary English words. His Honour was of the view that the Item is directed to domestic goods and that the reduction in sales tax for which it provides is given to goods that have that essential character. There is, he considered, a distinction generally understood in the community between office furniture and domestic furniture and Item 1, in his Honour's view, looks to furniture of the type ordinarily found in households. His Honour rejected a submission that the purpose referred to in Item 1 governed its application and that the purpose for which chairs are used, being seating, is a household purpose. This submission also involved the proposition that it is sufficient for the goods to be within Item 1 that they are chairs. His Honour went on to say:
"Obviously, some furniture found in households, such as desks for use with computers or by children for doing their homework or study, are goods which could be described equally as office or household goods and might be bought equally for either purpose. It seems to me that such goods might very well be described as goods ordinarily used for household purposes even though, as a general category, they might appear to be office furniture."
His Honour referred to the evidence that DMP's furniture is high quality office furniture and that less than 10% is sold for domestic purposes. He found that all the subject goods are chairs which, on occasions, could be bought for use in a home, but that the high proportion of those goods are bought for office use, and that they are high quality chairs designed for that purpose. The fact that the goods are of a particular quality relevant to office use is a factor which may take them out of the category of goods ordinarily used for domestic purposes. In reference to Mr Todd's evidence about the predominance of quality related differences over functional differences between office and domestic chairs, his Honour said:
"It seems to me that Item 1 does not direct its attention specifically to function and that it is not of great assistance to say that these goods serve the same function as other goods. I think the task is simply to determine whether the goods satisfy the description in the Item, and that description is furniture of a kind ordinarily used for household purposes."
In the event his Honour came to the view that Mr Todd's evidence that less than 10% of his company's high quality furniture went to households clearly put the goods out of the category of goods ordinarily used for household purposes.
The Contentions
14. DMP conceded in its submission that the chairs the subject of this appeal are sold primarily, though not exclusively, to persons who will use them in offices. It was submitted that Item 1 of the Third Schedule, by using the word "namely", assumes that all goods which answer the description "furniture" are "goods of a kind ordinarily used for household purposes". In the alternative it was said that the chairs were, in any event, goods of a kind ordinarily used for a household purpose, that being "sitting". O.R. Cormack Pty Ltd v. Federal Commissioner of Taxation (supra) was said to have been wrongly decided and inconsistent with the decision of the High Court in Federal Commissioner of Taxation v. Newbound and Co. Pty Ltd (1952) 10 ATD 59 and with the decision of Gummow J in Hygienic Lily Limited v. Deputy Commissioner of Taxation (1987) 13 FCR 396.
Further, in the alternative, if DMP's chairs were to be regarded as "office chairs" they would nevertheless fall within Item 1. This is because, on the evidence, chairs found in offices are commonly, regularly, or ordinarily found in households. There was no legislative warrant for a distinction based on quality. To make that distinction is to substitute for the test chosen by the legislature a different test that looks to the particular use to which the goods are in fact put. Reference was made to Deputy Commissioner of Taxation v. Stewart (1984) 154 CLR 385 at 401.
The Commissioner contended that the words in Item 1 should be read as a compound description which simply means furniture of a kind ordinarily used for domestic services. Reliance was placed on the Newbound (supra) and Cormack (supra) cases. To qualify for the exemption, the primary purposes for which the chairs are intended to be used and are in fact customarily used must be for domestic purposes, though it is not necessary that they be solely or exclusively or principally so used. What was required was a determination of the essential character of DMP's chairs by reference to their basic nature. The test is one of popular usage and involves a question of fact to be decided on an inspection of the chairs themselves guided by commonsense. It is also partly impressionistic. The decision of Gummow J in Hygienic Lily (supra) was said to have itself rested upon the essential character test, and if that were not so it turned on its own facts and would not bind this Court nor would it bind Davies J.
Statutory History and Framework
17. The Sales Tax Exemptions Act 1935 (Cth), as it was originally called, was enacted, as the then Commonwealth Treasurer said in his second reading speech:
"... to provide one self-contained, classified and numerically itemised schedule covering the whole of the sales tax exemptions, and to consolidate the many unclassified provisions relating to exemptions which are contained in various acts, regulations and proclamations under the existing law." (Parl. Deb. H of R 1935 p 2714)
The Act was described as a statutory reform of great importance replacing the then existing law relating to exemptions which had "no semblance of order or classification". It had one schedule. Sales tax was not payable upon the sale value of any goods covered by any item in the schedule under such of the Assessment Acts as were specified opposite such item. In 1940 differential rates of sales tax were introduced into the legislative scheme. The Sales Tax Exemption Act 1935 was amended by the creation of three schedules in lieu of one. The amending Act, which was the Sales Tax (Exemptions and Classifications) Act 1940 (No. 76 of 1940), renamed the Sales Tax Exemptions Act 1935 as the Sales Tax (Exemptions and Classifications) Act 1935-1940. None of the three schedules contained any item corresponding to that in issue in this case. By 1953 a First Schedule had been added to the Act. By the Sales Tax (Exemptions and Classifications) Act 1953 (No. 53 of 1953) the Second, Third and Fourth Schedules were replaced by one Second Schedule. Again, there was no equivalent to the item presently under consideration.
In 1954, a Third Schedule was reintroduced by the Sales Tax (Exemptions and Classifications) Act 1954 (No. 45 of 1954). It contained only three items. Paragraph (a) of Item 1 was in the same terms as that paragraph in Item 1 of the Third Schedule as it presently stands. In his second reading speech the Treasurer, the Hon. Sir Arthur Fadden, said:
"There is a wide demand for exemption of furniture and household goods. These goods cover a very wide range, indeed, and the cost of a complete exemption would be so heavy as to render this impracticable at present. It is proposed, however, to reduce from the general rate of 12 1/2 per cent to a special rate of 10 per cent a wide range of furniture and household goods as specified in the Bill. It is believed that this will appreciably reduce the costs of home establishment." (Parl. Deb. H of R 18/8/1954 p 418)
Section 6B(1) of the Sales Tax (Exemptions and Classifications) Act 1935 provides:
"6B(1) The goods specified in a Schedule other than the First Schedule are so specified for the purposes of the Acts imposing sales tax upon goods so specified."
Sub-section (2) is not material for present purposes.
Item 1 of the Third Schedule provides, inter alia:
"1. Goods (not being goods covered by an item in the Second Schedule or cutglass ware) of a kind ordinarily used for household purposes, namely -
(a) furniture, but not including pictures, picture frames, statuary, sculptures, plaques, medallions, medals, inlays, mosaics, tapestries, cameos or representations of mottoes, proverbs or verses;"
There are a number of other paragraphs in Item 1 which it is not necessary to set out in full. They include the following:
"(e) refrigerators, ice chests and other appliances used for the cooling or freezing of food;
.
.
.
(hb) air conditioners of a kind used exclusively, or primarily and principally, for air cooling; .
.
.
(l) floor coverings and bath and door mats;"
The Approach to Construction
21. As a general proposition the taxpayer claiming the benefit of an exemption from the imposition of a tax has the burden of proving the facts necessary to fall within that exemption - Cuming Smith and Co. Pty Ltd v. Melbourne Harbour Trust Commissioners (1905) 2 CLR 735 at 742; Jackett v. Deputy Federal Commissioner of Taxation (1932) SASR 405 at 407. On the other hand an exemption which exists for the purpose of encouraging, rewarding or protecting some class of activity is not to be given a narrow application. The liberal construction of provisions of Customs and Excise legislation allowing rebates on duties and excise payable in respect of fuel used in mining operations is one application of that general proposition - Collector of Customs v. Cliffs Robe River Iron Associates (1985) 7 FCR 271 at 275. Underlying the exemptions created in Item 1 of the Third Schedule was the recognition made explicit in the Second Reading Speech in 1954 of "a wide demand for exemption of furniture and household goods" and the purpose of "appreciably (reducing) the costs of home establishment". Within the framework of that stated policy, the classes of goods set out in Item 1 of the Third Schedule are to be widely construed.
The construction of a revenue statute requires at the outset a consideration of whether or not its words are used in their natural and ordinary meaning, or in some commercial sense, or perhaps, between those poles, some extension or limitation of the ordinary or commercial meaning. Revenue laws directed to commerce frequently employ the descriptions and adopt the meanings in use among those in the relevant trade - Herbert Adams Pty Ltd v. Federal Commissioner of Taxation (1932) 47 CLR 222 at 227 (Dixon J). On the other hand, the inclination to adopt commercial construction must not be taken to exclude the possibility that the words of a relevant statute may bear their ordinary and natural meaning - D. and R. Henderson (Mfg) Pty Ltd v. Collector of Customs (NSW) (1974) 48 ALJR 132 and see generally Collector of Customs v. Bell Basic Industries Ltd (1988) 83 ALR 251 at 261-262. In the present case there is nothing in the text of para.(a) of Item 1 nor any evidence to indicate that any of the words there used have a particular commercial meaning. The opening words of Item 1 of the Third Schedule and of para.(a) that follows can be construed according to their ordinary English meaning.
Item 1 begins with a general class description of the exempted goods as those "... of a kind ordinarily used for household purposes". That general class is linked by the word "namely" to the specific classes set out in the various paragraphs which follow. The word "namely" was used in a similar way in Item 90D of the First Schedule which was considered by the High Court in Federal Commissioner of Taxation v. Newbound and Co. Pty Ltd (1952) 10 ATD 59. The Item provided:
"90D. Household fittings and sanitary ware ... of a kind installed in houses or other buildings so as to become fixtures therein, viz:-
(1) Baths, bath and shower screens, pedestal lavatory basins, wall and bowl basins, earthenware bathroom fittings, towel rails and towel rail holders, sinks, sink tops, draining boards, combination sinks and drainers, wash troughs and stands or pedestals therefor; ..."
The article in issue in that case was a large round pedal operated wash fountain designed for use in factories and institutions where large numbers of people wash at the same time. A majority of the Court (Williams, Webb and Fullagar JJ) found it to be a "pedestal lavatory basin" within the meaning of Item 90D. The Item was held by Fullagar J, with whom Williams J agreed, to bring each of the specific classes of goods into the general class described by its opening words. Their Honours did not go so far as to say that the specific classes exhausted the general class. But they expressly rejected the suggestion that the general class qualified or limited the specific class:
"Prima facie any article which falls within one of the specific descriptions is an article which falls within the generic description. Prima facie it must be right to regard the specific descriptions as limiting the generic description, and it must be wrong to regard the generic description as limiting the specific descriptions." (at 62)
This was at odds with the view expressed by Dixon CJ at p 60:
"No doubt, the words "household fittings" are descriptive of the character of the things that follow and do not require that the sale of the article shall be to a person who intends to use it for household purposes. It means rather to describe the general character of the things listed, independently of the actual use intended in any particular instance. It is also true that if a thing clearly came within any one of the descriptions in the list, the fact that it was placed under the general title of "household fittings" ought not to be used to restrict the primary meaning of the description. But in the case of terms like "pedestal lavatory basin", "baths", "wash troughs", "draining boards" and the like, the introductory expression "household fittings" shows in what context words, which are possibly capable of various applications, are used and gives them a definite application. It was not, for example, intended to include a wash trough in a wool scour, or a draining board in a dye works."
In his short judgment McTiernan J seems to have taken a similar approach:
"... it is the plain intention of this paragraph that the "Exemption Items" which are enumerated in clauses 1, 2, 3 and 4 are "household fittings and sanitary ware."
Webb J, who concluded that the article was within the Item, did so on the basis that the term "of a kind installed in houses or other buildings" qualified the term "household fittings" as well as the term "sanitary ware" in the opening words. The basin was "of a kind installed in a building". Its exclusive purpose, the washing of hands, was of an essentially domestic nature and so it could be said to be suitable for use in at least a limited number of households, and therefore it came within the category "household fittings". While the factual conclusion at which his Honour arrived was the same as that of Fullagar and Williams JJ, his approach to the construction of the Item was similar to that adopted by Dixon CJ.
In an analogous context involving Item 42 in the Second Schedule,
the word "namely" was given an effect including all specific classes in the generic class in Deputy Federal Commissioner of Taxation v. Polaroid Australia Pty Ltd (1971) 71 ATC 4249 at p 4251 (Gibbs J):
"The word "namely" ... has, in my opinion, the ordinary dictionary meaning of "To wit; that is to say". The goods whose description follows are not mere examples of goods covered by the introductory general words but paras (a), (b) and (c) are intended to be an exhaustive statement of the goods covered by the item."
The first reported judicial consideration of Item 1 in the Third Schedule appears to have been the decision of Olney J in Commissioner of Taxation v. Sherwood Overseas Pty Ltd (1985) 75 FLR 474. His Honour held that the language of the Schedule is to be understood in its ordinary sense, and in relation to the effect of the word "namely" at the beginning of Item 1, said:
"The general words and the particular are of course separated by the word "namely" which suggests that the descriptions which appear in the numbered sub paragraphs are an exclusive definition of the goods covered by the item." (at 477)
His Honour also held that the opening words qualify each of the groups of goods described in the numbered paragraphs:
"... in so far as the item refers to furniture it is to furniture of a kind ordinarily used for household purposes and likewise with refrigerators, washing machines, vacuum cleaners and indeed all of the other goods mentioned. Many, if not most, of the goods that are described have an application in industrial or commercial contexts as well as within the household. The item clearly does not refer to office furniture, commercial refrigerators, industrial vacuum cleaners or air conditioners designed for use in a public hall."
Olney J observed that the use of the adjective "household" suggested an intention to distinguish goods covered by the Item from those that have uses outside a domestic establishment. The intention of the words "ordinarily used for household purposes" was to exclude goods of a similar description ordinarily applied to commercial or industrial uses. He proposed what he called a "robust approach" to the construction of the Third Schedule, particularly in view of the fact that it is part of a statute imposing taxation. It seems by this that his Honour envisaged a broad construction of the exemption. He held that a submersible vacuum cleaner used for cleaning domestic swimming pools was "an appliance for cleaning purposes" within paragraph (g) of Item 1 of that Schedule. Yeldham J at first instance in Kentucky Fried Chicken Pty Ltd v. Federal Commissioner of Taxation (1986) 86 ATC 4701 at 4710 agreed with the robust approach to the construction of the Third Schedule advocated by Olney J. He was concerned, inter alia, with Item 8(1)(p) and (r) of the Third Schedule which provided:
"8(1) Household drapery and soft furnishings, namely
.
.
.
(p) ... table napkins... .
.
.
(r) towels, face cloths and face washers."
He held that paper serviettes and refresher towels sold by a fast food company came within that Item. The decision did not involve the construction of Item 1. While it was upheld by the Court of Appeal in Federal Commissioner of Taxation v. Kentucky Fried Chicken Pty Ltd (1988) 12 NSWLR 643, it has little bearing on the present problem. It is to be noted, however, that in the appeal decision Hope JA, with whom Samuels and McHugh JJA agreed, generally supported the robust approach, expounded in Sherwood (supra), linked to a purposive construction of the statute:
"Sales tax legislation is not intended to stultify trade and commerce but is intended to produce revenue for the government from trade and commerce. A construction which aids these general purposes is to be preferred to one which operates, as it were, in a vacuum, detached from the reality of trade and commerce." (at p 654)
More recently in O.R. Cormack Pty Ltd v. Federal Commissioner of Taxation 92 ATC 4121, Davies J said of the word "namely" in Item 1:
"The adverb is used to specify in detail goods which, having the general character earlier described, fall within the item. Thus, the impression gained from the item as a whole is that the legislature has specified in detail the goods which are to fall within the classification provided that they are "of a kind ordinarily used for household purposes"." (at p 4,123)
Having considered the relationship between the general and specific class descriptions in Item 1 and the aspects of the word "namely" in linking them, it is necessary to turn to the collocation "ordinarily used for household purposes" which appears in the opening words of the Schedule. The question whether goods are "ordinarily used for household purposes" does not depend critically upon the use to which they are in fact put but an assessment of their "essential character". That assessment does not involve fine semantic distinctions but a judgment which pays regard to the commercial realities of their manufacture and sale.
In Newbound (supra), Dixon CJ accepted that the term "household fittings" in the general class description with which Item 90D of the Sales Tax (Exemptions and Classifications) Act 1935-1950 opened was "descriptive of the character of the things that follow and (does) not require that the sale of the article shall be to a person who intends to use it for household purposes" (at 60). Fullagar J, with whom Williams J agreed, rejected as "unnaturally narrow" the meaning of "intended or adapted for use in an ordinary dwellinghouse" (at 62-63). The tendency to an objective test for characterisation of goods said to fall within an exemption provision was reflected in the judgment of Gibbs J in Deputy Federal Commissioner of Taxation v. Rotary Offset Press Pty Ltd 71 ATC 4170 at 4175. The question whether a periodical was to be treated as "advertising matter" was held to depend "on whether the periodical, viewed objectively and without regard to the actual intentions of those publishing it, answers that description". That decision was approved on appeal to the Full High Court in Rotary Offset Press Pty Ltd v. Deputy Commissioner of Taxation (1972) 46 ALJR 609. Stephen J there also approved a test of "popular usage" in determining what are or are not newspapers for the purpose of exemption from sales tax. It was a "question of fact to be decided upon an inspection of the document guided by common knowledge". That approach was in turn approved by the Full High Court in Downland Publications Ltd v. Deputy Commissioner of Taxation (1983) 57 ALJR 286 at 288. The objective nature of the characterisation process was reiterated by Waddell J in Deputy Federal Commissioner of Taxation v Thomson Publications (Aust) Pty Ltd (1979) 79 ATC 4296 at 4306.
Sheppard J in Deputy Federal Commissioner of Taxation v. Lincoln Industrial Cleaners Pty Ltd (1975) 75 ATC 4208 considered purposive elements of the definition of goods in Item 139 of the First Schedule to the Sales Tax (Exemptions and Classifications) Act 1935 as it then stood in relation to "preparations and materials for use in the destruction of insect pests". He accepted a submission that the words "for use" are intended to denote some quality apparent in the article itself to persons who know its character which shows that it is specially fit for the particular purpose specified rather than for any other. Given that the sales tax is imposed and that the time of the last wholesale sale is not known it is difficult, as his Honour observed, to have regard to the purpose of the ultimate purchaser in acquiring the article (at p 4210).
The relevance of subjective intention as a factor in the process of characterisation of goods as being "for" a specified use appears to have been accepted in Federal Commissioner of Taxation v. Hamersley Iron Pty Ltd (1981) 37 ALR 595. The question was whether machine parts were "for use in the mining industry in carrying out mining operations and in the treatment of the products of those operations". Lush J, with whom Kaye and Brooking JJ agreed, said at p 605:
"The machines in question in this case were intended to perform, built to the respondent's order to perform, and did perform particular operations in a continuing process. The expression "for use in" is purposive, and this conjunction of facts, all relevant to purpose, leads to the conclusion that, if the operations of the machines constituted in a significant degree "treatment", the machines and the parts were "for use in treatment"."
The role of subjective intention was made explicit by the High Court in Deputy Commissioner of Taxation v. Stewart (1984) 154 CLR 385 where the question was whether lottery ticket vending machines supplied free of charge on a non-exclusive basis to public benevolent institutions were exempt under Item 81(1)(c) of the First Schedule to the Sales Tax (Exemptions and Classifications) Act 1935 as "goods for use... and not for sale, by ... a public benevolent institution". Gibbs CJ (Dawson J agreeing) observed that items in the First Schedule describe exempted goods in two main ways - by reference to their nature and by reference to the use to which it is intended to put them:
"In many cases of the second kind the words "for use" indicate the purpose to which it is intended the goods shall be put, rather than the use for which the goods were designed." (at p 390)
The intention of the manufacturer as a relevant factor appears to have been accepted by both Gibbs CJ and Brennan J. At p 401 Deane J said:
"While the subjective intentions of manufacturer or purchaser are relevant and may well be conclusive, what is required is an objective characterization of the goods themselves in the light of all the relevant circumstances. That characterization must be made as at the time when liability to sales tax would otherwise attach. It will, in an appropriate case, be made with the benefit and in the context of knowledge of the actual use which was subsequently made of the goods."
The phrase "essential character" appears in a number of cases as an indicator of the kind of process necessary for characterisation of articles for the purpose of determining whether or not they are caught by some goods related impost. In Thomson Australian Holdings Pty Ltd v. Commissioner of Taxation (1988) 20 FCR 85, that phrase was used by Davies J to describe what must be ascertained to determine whether a liquor guide and a car dealer's guide fell within the First Schedule exemption of "books, pamphlets, periodicals, magazines and printed music, (not including) catalogues or price lists". There was no express purposive use element in the classification in issue. Nevertheless the question of the "essential character" of an article said to fall within an exemption is a question to be posed even in those cases in which the class is partly defined by reference to purpose. As explained by his Honour at p 86, the essential character of goods is "what essentially the goods are, not some characteristic that the goods might have. Essential character derives from the basic nature of the goods, from what they are, though composition, function and other factors necessarily play a part". In the context of the newspaper exemption, his Honour linked that test with the popular usage criterion referred to by Stephen J in Rotary Offset Press (supra). A purposive element was also admitted:
"Evidence which clarifies the manner in which a publication circulates and the use to which it is put, that is to say its function or purpose, is undoubtedly of assistance in determining what the essential character of the publication is." (at pp 86-87)
The formulation of the "essential character" test was not disputed on appeal to the Full Court which, in affirming the decision given by Davies J, did not question the formulation - Commissioner of Taxation v. Thomson Australian Holdings Pty Ltd (1989) 25 FCR 481 at 482.
The question of characterisation under Item 1 of the Third Schedule was considered by Gummow J in Hygienic Lily Limited v. Deputy Commissioner of Taxation (1987) 13 FCR 396. The issue in the case was whether wax coated paper cups sold at a fast food outlet were within para.(c) of Item 1 as "... articles that are made of a material other than glass and are used for purposes similar to the purposes for which glassware is used". Referring to the opening words of Item 1, his Honour held that goods are able to be classed as "ordinarily used for household purposes" even though not exclusively or principally so used. And the phrase "goods of a kind" in this setting was directed to the nature, quality and adaptation of goods in the relevant class:
"Thus, goods are "of a kind ordinarily used for household purposes" if they are to be recognised as members of a class or genus which commonly or regularly (albeit not necessarily exclusively or principally) is used for household purposes." (at p 399)
His Honour referred to Deputy Commissioner of Taxation v. Stewart (supra) as being consistent with, although not compelling, the approach he took. He concluded that the paper cups in issue were of a kind ordinarily used for household purposes because they were members of a class or genus (paper cups) which commonly or regularly is used for such purposes. The relevant purposes he defined were the carrying of beverages and their consumption. His Honour found support for his approach in Commissioner of Taxation v. Sherwood Overseas Pty Ltd (supra) and the decision of Yeldham J in Kentucky Fried Chicken Pty Ltd v. Federal Commissioner of Taxation (supra).
A little later in the same year, the Full Court of the Supreme Court of Victoria in I.C.I. Australia Operations Pty Ltd v. Deputy Federal Commissioner of Taxation (1987) 87 ATC 5110 considered the phrase "ordinarily used for" in the context of Item 14 in the First Schedule, which excludes from an exemption relating to machinery used in the mining industry "road vehicles of the kinds ordinarily used for the transport of persons or the transport or delivery of goods, or parts for those road vehicles". Gray J, with whom Kaye J agreed, referred to the category of vehicles excluded from the exemption and said at p 5112:
"The test for inclusion in this category is that one can stipulate that the primary purpose of the vehicle and its customary use is to transport goods or persons in the course of commercial activity. In applying this test, the concept of "ordinarily used for" equals "whose primary but not necessarily exclusive purpose and customary use is". I say that because in my view the expression "ordinarily used" in the present context cannot be divorced from the concept of the primary purpose for which the vehicle is intended to be used and is in fact customarily used."
The reasoning of Dixon CJ in Newbound (supra) found favour with Davies J in O.R. Cormack Pty Ltd v. Federal Commissioner of Taxation (supra). His Honour noted that what he described as "the view adopted by the majority of the Justices in Federal Commissioner of Taxation v. Newbound and Co. Pty Ltd..." had been applied by Gummow J in Hygienic Lily. He said he preferred the approach taken by Dixon CJ and believed that it expressed "the correct approach to classifications of this type". The articles in issue in that case included paint brushes, paint rollers and associated equipment manufactured for traders and for domestic purposes. The question was whether they came within para.(j) of Item 1 which refers to "brooms, mops, dusters, brushes, buckets, dippers and basins". His Honour held the various products to fall outside Item 1 except for a pastry brush and a duster brush. In the course of his reasons for judgment in that case, Davies J observed that while the genus of goods described by the opening words of Item 1 is somewhat imprecise, it nevertheless conveys a "readily understood concept". His Honour said:
"With respect to most goods, it would not be difficult to decide as a matter of fact whether they fall within or without the description." (at p 4124)
And in a passage with which I would respectfully agree, his Honour said at p 4124:
"Thus, the description of the genus, when read together with each description in the individual paragraphs assists in the identification of the goods to which the item applies. As Dixon CJ said in Newbound's case..."the introductory expression...shows in what context words, which are possibly capable of various applications, are used and gives them a definite application." So to read an item such as Item 1 gives appropriate force and effect to all the words used, for the words are used in combination, as the legislature intended."
The reasoning in Cormack's case was incorporated by his Honour into his reasons for judgment in the present case.
The creation of statutory classes of goods or services which attract special rates of tax or rebates or exemptions from tax is a common device of revenue laws. Generalisation about the construction of such statutory classifications is to be undertaken with caution. Decisions on one such classification may have only limited application to another, albeit they share similar features. While purposive construction is desirable, the purpose to be served by a particular exemption or rebate may be beyond discovery. The efforts of special interest groups or perceptions of political imperatives at the time the classification was enacted may all be reflected in the definition of the particular category of goods in question. Subject to those caveats, some broad general principles emerge from the cases:
1. Classifications of goods attracting exemptions or beneficial rates should be liberally construed unless the text or context requires a narrow construction.
2. Revenue laws addressed to commercial people frequently but not always classify goods in terms known to those in the relevant trade or industry.
3. The question whether the words of a statutory classification are to be interpreted according to their ordinary natural meaning or a special commercial meaning or some extension or limitation of either is a threshold question of law.
4. Words or phrases not accorded a special meaning should be construed according to popular usage.
5. Generally speaking where a statutory classification adopts the form of a generic class description followed by specific classes linked to it by the word "namely" or some synonym, it is intended that the specific classes will exhaust the generic class.
6. The statutory classification of goods to define exemptions or particular liabilities under revenue laws requires the determination, by reference to objective criteria, of the "essential character" of such goods. Where design purposes are referred to in the classification by such phrases as "for use as", the subjective intention of the manufacturer and purchaser and actual uses to which the goods are put may be taken into account in the process of characterisation.
The Particular Case
35. The statutory purpose served by Item 1 in the Third Schedule emerges clearly from the Minister's Second Reading Speech delivered in 1954. It is to reduce the costs of home establishment. That purpose does not extend to providing a special rate for what would be regarded in ordinary English and popular usage as office furniture. Consistently with that purpose, the natural meaning and grammatical arrangement of the words in Item 1 leads to a construction which requires that the goods described in the specific paragraphs answer the description "goods...of a kind ordinarily used for household purposes". The Item does not operate by deeming articles in specific classes to be automatically members of the general class. Such a construction leads to applications which fall outside the statutory purpose and gives rise to artificial extensions of the benefits of the Schedule beyond its evident purpose. This approach is consistent with the observations of Olney J in Sherwood Overseas Pty Ltd (supra) and Davies J in O.R. Cormack Pty Ltd (supra). The Court is not bound to a different view by the decision of the High Court in Newbound (supra). And to the extent that the reasoning in that case has, by analogy, persuasive significance, three of the judges seem to have adopted an approach consistent with that enunciated by Olney J and Davies J. It cannot be enough to say that because some goods fall into a genus wide enough to encompass goods ordinarily used for household purposes, they are therefore "goods of a kind ordinarily used for household purposes". The mere fact that office chairs and domestic chairs both provide "seating", which in some applications is a household purpose, is not sufficient to establish that office chairs are of a kind ordinarily used for household purposes. It may be that some of what was said by Olney J and Davies J in Sherwood Overseas Pty Ltd (supra) and O.R. Cormack Pty Ltd (supra) respectively conflicts with some of the reasoning in Hygienic Lily Pty Ltd (supra). It is not, however, necessary for the purposes of this appeal to pass upon that decision.
In the present case the essential character of the chairs in issue was correctly identified as office furniture. That characterisation reflects the market in which the chairs were manufactured and sold having regard, inter alia, to their quality, cost, design, and intended and actual purchasers. While they were chairs sometimes used for household purposes, and performing physical functions similar to such chairs, they were not of a kind ordinarily so used. Having regard to the purpose of Item 1 and applying the canons of popular usage and objective characterisation with due regard to the market purposes to which I have referred, the chairs in question fell outside Item 1. In my opinion his Honour's decision was correct and the appeal should be dismissed with costs.
JUDGE2
HILL J The appellant, Diethelm Manufacturing Pty Ltd ("Diethelm"), appeals against the judgment of a judge of this Court (Davies J) so far as his Honour dismissed Diethelm's appeal against the disallowance of its objection against a decision of the respondent Commissioner of Taxation ("the Commissioner") not to refund to Diethelm an amount of $337,882.08 as sales tax overpaid.
Diethelm is a manufacturer of furniture which, as its advertising brochure proclaims:
"... has been developed for the value conscious who want a comprehensive range of office seating that is strong, durable and aesthetically pleasing."
The range of chairs manufactured by Diethelm include chairs for typists and secretaries as well as for executives, conferences, visitors and senior management. Between 1 August 1987 and 30 April 1990, Diethelm paid to the Commissioner sales tax of $675,764.15 in respect of sales by it of chairs. This sales tax was calculated at the rate of 20 per cent of the sale value of the chairs. On 19 June 1990 Diethelm advised the Commissioner that it had underpaid sales tax on sales in this period because it had understated the sale value of those chairs, by reference to which the sales tax payable was calculated, by amounts totalling $1,309,290. It paid at that time to the Commissioner $130,129 as sales tax upon that amount at a rate of 10 per cent. It also claimed a refund of $337,882.08 being one half of the amount of $675,764.15 sales tax which it had paid for the period 1 August 1987 to 30 April 1990. The claim was on the basis that the appropriate rate of tax was 10 per cent. The Commissioner disallowed the claim for refund and demanded an additional $130,929 sales tax in respect of the sales where the sale value had been understated. Diethelm objected to the decisions to refuse the refund and to assess as payable a further sum of $130,929 and this objection was disallowed. In consequence Diethelm referred to the Court the Commissioner's decision on the objection by way of appeal. His Honour dealt only, in the judgment appealed against, with that part of the objection decision as concerned the refusal to refund sales tax to Diethelm.
The only question at issue before his Honour and before us was whether the chairs, manufactured and sold by Diethelm in the period 1 April 1987 to 30 April 1990, fell within Item 1(a) of the Third Schedule of the Sales Tax (Exemptions and Classifications) Act 1935. If they did, then sales tax was properly payable, as Diethelm contended, at the rate of 10 per cent. If they did not, then it is agreed by the parties that the appropriate rate of sales tax payable with respect to sales of the chairs was 20 per cent pursuant to the provisions of s.4(d) of the Sales Tax Act (No 1) 1930. Item 1 of the Third Schedule to the Sales Tax (Exemptions and Classifications) Act 1935, at the relevant time, read:
"Goods (not being goods covered by an item in the Second Schedule, goods of a kind used exclusively or principally in sport or games or goods designed for use exclusively or principally in, or in connection with, swimming pools or spa baths) of a kind ordinarily used for household purposes, namely:-
(a) furniture, but not including pictures, picture frames, statuary, sculptures, plaques, medallions, medals, inlays, mosaics, tapestries, cameos or representations of mottoes, proverbs or verses;
(b) crockery and articles of a material other than earthenware used for purposes similar to the purposes for which crockery is used:
(ba) jardinieres and vases;
(c) glassware and articles that are made of a material other than glass and are used for purposes similar to the purposes for which glassware is used;
(d) cutlery and cutlery sharpeners;
(e) refrigerators, ice chests and other appliances used for the cooling or freezing of food;
(f) washing machines, wringers and other appliances used for or in connexion with laundering;
(g) vacuum cleaners, carpet sweepers, floor polishers and other appliances for use for cleaning purposes;
(ga) space heaters, radiators and other appliances for use for room heating;
(h) grillers, stoves, ranges, ovens, cookers, toasters, mixing machines, immersion heaters, hot water jugs and kettles, percolators and other appliances for use for culinary purposes;
(ha) electric fans;
(hb) air conditioners of a kind used exclusively, or primarily and principally, for air cooling;
(i) kitchen utensils and hardware;
(j) brooms, mops, dusters, brushes, buckets, dippers and basins;
(ja) incinerators, compost bins, garbage cans and stands and holders for garbage sacks;
(jb) fire grates and fireplaces;
(k) fruit bottling outfits and fruit preserving bottles and jars;
(l) floor coverings and bath and door mats;
(m) blinds;
(n) mattresses, pillows, other bedding and cushions;
(o) sewing machines, knitting machines, carding equipment, spinning wheels and weaving looms;
(p) appliances and fittings used for or in connection with electric, gas or other lighting; candles and tapers."
The Item was inserted into the Sales Tax (Exemptions and Classifications) Act 1935 by the Sales Tax (Exemptions and Classifications) Act 1954 as the result of a wide demand for exemption from sales tax of furniture and household goods. Rather than grant an exemption, which was too costly, the general rate, then 12 per cent and now 20 per cent, was reduced to the special rate of 10 per cent. In introducing the Item the then Treasurer, Sir Arthur Fadden, expressed the belief that the provisions would "appreciably reduce the costs of home establishment".
The Item, as the present case illustrates, is not without its difficulties of construction. These difficulties give rise to the two submissions made by on behalf of Diethelm both before his Honour and before us. The two submissions may be shortly summarised as follows:
1. That it suffices that the particular item of goods in question is "furniture" to fall within the Item and it is not necessary as well to determine whether that item falls also within the words "goods or a kind ordinarily used for household purposes".
2. That, in the alternative, the chairs in question were goods of a kind (namely chairs) ordinarily used for household purposes, namely to sit upon.
Each of these submissions was rejected by his Honour. The first by reference to his Honour's own judgment in the case of O R Cormack Pty Ltd v Federal Commissioner of Taxation (1992) 92 ATC 4121 at 4123. His Honour's rejection of the second submission founds upon the following passage from the judgment appealed against (at 6) and which is critical to it:
"It seems to me that Item 1 does not direct its attention specifically to function and that it is not of great assistance to say that these goods serve the same function as other goods. I think the task is simply to determine whether the goods satisfy the description in the Item, and that description is furniture of a kind ordinarily used for household purposes."
In his Honour's view, the chairs in question were high quality office furniture and thus outside the category of goods ordinarily used for household purposes. There was, in his Honour's view, a well-understood distinction between goods ordinarily used for household purposes and goods ordinarily used for other purposes and, in his Honour's view, office furniture did not fall happily to be characterised as goods ordinarily used for household purposes.
In the course of his judgment his Honour referred to evidence that less than 10 per cent of Diethelm's furniture was sold for domestic purposes, that is to say, to persons who, it is anticipated, would use the goods in their home. His Honour concluded that all of the chairs were chairs which, on occasion, could be bought for use in a home but that the greater proportion of the goods were in fact bought for office use and furthermore that the chairs in question were high quality chairs designed for office use. "Quality" was a relevant matter, according to his Honour, to take into account. The high quality of Diethelm's chairs put them out of competition with other cheaper chairs sold by retail outlets for domestic purposes. At the conclusion of the judgment, his Honour said (at 7):
"It seems to me that Mr Todd's evidence that less than 10% of his high quality furniture went to households clearly puts these subject goods out of the category of goods ordinarily used for household purposes."
While there is no judgment binding upon this Court determinative of either of the two issues, there is authority which counsel for Diethelm submitted led to a resolution of the case in favour of his client. I shall deal with that authority in the discussion which follows as to each of the two issues. Issue One - the meaning of "namely"
The short argument made on behalf of Diethelm was that it sufficed for an item to fall within para.(a) without also having to fall within the opening words of the Item. Thus it was said that it sufficed that the chairs were "furniture" for the exemption to become applicable to the goods.
There are, as a matter of construction, two difficulties with the submission. The first is that if the submission holds good for para.(a) it must hold good for each and every of the other lettered paragraphs in the Item. While it is possible that the legislature listed "furniture" as an example of goods which are of a kind ordinarily used for household purposes, the same could not be said, for example, for the glassware referred to in para.(c).
Secondly, and perhaps a more cogent argument, is that so to interpret the Item leaves no scope at all for the opening words which precede the word "namely". Rather, the Item would more appropriately be worded, if the submission be correct, as an exemption directed purely at the goods falling within paras.(a) to (p) respectively.
The submission, however, gets some support from the decision of the High Court in Federal Commissioner of Taxation v Newbound and Co Pty Ltd (1952) 10 ATD 59 in the judgment of Fullagar J with whose judgment Williams J agreed.
The Item under consideration in Newbound was Item 90D in the First Schedule of the Sales Tax (Exemptions and Classifications) Act 1935-50. That Item was in the following terms:
"Household fittings and sanitary ware (and parts therefor, including chains, plugs and washers) of a kind installed in houses or other buildings so as to become fixtures therein, namely:-
(1) Baths, bath and shower screens, pedestal lavatory basins, wall and bowl basins, sinks, sink tops, draining boards, combination sinks and drainers, wash troughs and stands or pedestals therefor".
The goods in question are referred to in the judgment as being a wash fountain (at 61):
"designed to fulfil the function of an ordinary lavatory or wash-hand bowl or basin, but ... adapted to be used by a number of persons at the same time."
Clearly the wash fountain in question was well adapted for use in a factory and was not intended or adapted for use in an ordinary domestic establishment. It was, so his Honour found, a "pedestal lavatory basin" and so fell within the catalogue of goods in para.(1) of the Item. It was argued, however, that it was not comprehended within the words "household fittings", the argument being that it was not sufficient that the wash fountain be a pedestal lavatory basin but rather that it must also qualify within the opening words of the Item. In apparently rejecting this argument Fullagar J said (at 62):
"The collocation of general and specific descriptions is of an unsatisfactory character and such as is likely to lead to difficulty. But the word which connects the general description, 'household fittings,' with the series of specified articles is the word 'namely'. Prima facie, therefore, every one of the specified articles is to be regarded as falling within the generic description of household fittings. Prima facie any article which falls within one of the specific descriptions is an article which falls within the generic description. Prima facie it must be right to regard the specific descriptions as limiting the generic description, and it must be wrong to regard the generic description as limiting the specific descriptions. There is no reason for giving to the words used any other meaning than that which they naturally bear, or for giving any qualified significance to the word 'namely'."
However, it is clear enough that in the passage cited his Honour has expressed only a prima facie view. The judgment then proceeded to found upon quite a different matter, namely the meaning of the words "household fittings". Giving those words what his Honour believed to be their natural interpretation, his Honour found that all difficulty of interpretation disappeared. It is of some significance to note that his Honour expressly did not hold that the words "household fittings" were superfluous. Indeed his Honour then continued (at 62):
"They would, of course, serve to exclude articles in an industrial establishment which had a purely industrial function - for example, a wash trough in a tannery in which hides were soaked in the course of an industrial process. The manufacture of leather is not a household or domestic purpose, but the washing of hands is."
But whatever the significance of the word "namely" in Newbound's case, we are here concerned with the construction of a different item, differently expressed and while no doubt the comments of his Honour are entitled to great weight, ultimately they do not assist greatly in the resolution of the present problem.
The force of the word "namely" in Item 1(a) is to delimit the goods falling within the exemption because they are goods "... of a kind ordinarily used for household purposes", to those goods which are listed in the lettered paragraphs of the Item. That is to say, for particular goods to fall within the Item those goods must first fall within the opening words of the Item and also fall within one of the categories of goods described in the lettered paragraphs.
Issue Two - Are the chairs goods of a kind ordinarily used for household purposes?
21. Although, at one point in the judgment, his Honour described the task for him as to determine whether the chairs in question were "furniture of a kind ordinarily used for household purposes", that way of describing the issue does not greatly differ from what, with respect, was the correct issue before his Honour and stated by him in another part of the judgment as being:
"Whether, having regard to all the facts, the subject goods should be described as goods of a kind ordinarily used for domestic purposes."
It must be noted that the question to be asked is not whether these particular goods are ordinarily used for domestic purposes. Clearly Parliament was at pains to ensure that the actual destination of the goods the subject of a taxable sale would be irrelevant to the question whether they fell within the exemption. There are other items in the Sales Tax (Exemptions and Classifications) Act 1935 which do look to the use to which the particular goods sold are put; cf definition to "aids to manufacture", First Schedule , Division 1, which states:
"ITEM 1 Agricultural machinery, implements and apparatus (and parts therefor) for use in agricultural industry...
ITEM 3
(1) Equipment, preparations and materials for use in agricultural industry for the checking or eradication of diseases or pests..." and so on.
Because sales tax is a tax ordinarily imposed upon the last wholesale sale in the course of the flow of commerce between manufacture (or importation) and consumption, it may be said that generally the task of classification to determine whether particular goods fall within a particular Item is one which looks at the essential character of the goods themselves rather than the purpose of the purchaser or the proposed destination of the goods in the mind of the manufacturer or importer: Deputy Commissioner of Taxation v Lincoln Industrial Cleaners Pty Ltd (1975) 7 ALR 118. The reason why the Court is impelled to a search for objective criteria to be found within the goods themselves, rather than subjective purpose, is discussed by Griffith CJ and Barton J in their dissenting judgments in Chandler v Collector of Customs (1907) 4 CLR 1719, a case dealing with the related problem of classification in customs legislation.
Phrases such as "essential character" have sometimes been used to express this search for objective criteria, as is illustrated by the judgment of French J which I have had the privilege of reading. And there may be cases where the search for the essential character of an item may be useful in determining whether particular goods constitute advertising matter or a catalogue: cf Thomson Australia Holdings Pty Ltd v Commissioner of Taxation (1988) 20 FCR 85. In other cases the phrase "essential character" may be thought itself to suffer some lack of precision.
In each case, however, the precise language of the item must be borne in mind. If the item, as here, calls for a determination of whether the goods themselves are of a particular kind, that issue must, no doubt, be determined objectively but, with respect to what French J has said, is little assisted by a consideration of the particular "realities of their manufacture and sale".
Once it is appreciated that the question for issue is concerned with the kind of goods in question rather than the actual goods, it is clear that evidence such as was given in the case as to the market into which the actual goods are sold will be of little relevance. The fact that a high proportion of the chairs in question were bought for office use would tell little as to the use of the kind of goods, the genus, of which the particular goods in question form a part. Similarly, it seems to me that a finding that the goods are of high quality making them too expensive for general sale for use in households will be of little or no significance. This will be particularly so if the class of goods in question is capable of encompassing goods of high quality as well as goods of lesser quality.
The use of the words "goods of a kind" entail the determination of a relevant genus. Therein lies an initial difficulty. The wider the genus is stated, the more likely it will be that it will be found that that class of goods is commonly used for a particular household function. That point is well illustrated by the decision of Gummow J in Hygienic Lily Ltd v Deputy Commissioner of Taxation (1987) 13 FCR 396. That case concerned the question whether three sizes of wax coated paper cups bearing designs including the trademark "McDonalds", fell within the same Item. His Honour held that the goods did, being of the genus "cups", that class of goods being of a kind ordinarily used for household purposes. Those purposes being, in his Honour's view (at 400):
"The carrying of beverages and the consumption thereof."
Had the cups in question been categorised in a more narrow way, for example, as cups delineated with the trademark of the manufacturer of the goods to be contained therein, then it might more readily have been held that the cups in question were of a kind ordinarily used in take-away restaurants, rather than for household purposes.
In the course of his Honour's judgment, Gummow J said (at 399):
"... the setting in which the phrase 'goods of a kind' appears suggests it is directed not to the use to which the particular goods in question were designed or manufactured, nor to the purpose to which it is intended those particular goods shall be put, but rather to the nature, quality and adaptation of goods in the class or genus in question. Thus, goods are 'of a kind ordinarily used for household purposes' if they are to be recognised as members of a class or genus which commonly or regularly (albeit not necessarily exclusively or principally) is used for household purposes: cf Customs and Excise Commissioners v Mechanical Services (Trailer Engineers) Ltd (1979) 1 WLR 305 at 312-313, 315, 316-317."
Reference was made to the decision of Olney J in Commissioner of Taxation (Commonwealth) v Sherwood Overseas Pty Ltd (1985) 75 FLR 474 and to the decision of Yeldham J in Kentucky Fried Chicken Pty Ltd v Federal Commissioner of Taxation (1986) 86 ATC 4701, affirmed by the Court of Appeal of New South Wales sub nom Federal Commissioner of Taxation v Kentucky Fried Chicken Pty Ltd (1988) 12 NSWLR 643; 91 FLR 242. Neither of these cases is of great assistance. In Sherwood Overseas, the issue was whether a device for cleaning swimming pools known as the "Kreepy Krauly" fell within the Item. His Honour held that the device in question was a "cleaning appliance" (see para.(g) of the Item) ordinarily used for household purposes. Much of the argument appears to have been placed upon the question of the narrowness of the expression "household" and its relation to a domestic swimming pool. That is not an issue of concern in the present case. In the course of his judgment his Honour, however, said (at 478-479):
"The use of the adjective 'household' suggests that the intention has been to distinguish the particular goods in question from similar goods that have uses outside a domestic establishment. I have already made reference to commercial and industrial uses to which goods of a similar description can be put and I think that in broad terms this is the intention of using the words 'ordinarily used for household purposes'."
It having been conceded that Kreepy Kraulys were goods of a kind ordinarily used for domestic swimming pools, that concession sufficed to bring the goods within the relevant Item in the Third Schedule.
The Kentucky Fried Chicken case was concerned, inter alia, with the question whether paper napkins distributed for use by customers purchasing products from Kentucky Fried Chicken Pty Ltd, qualified as "household drapery and soft furnishings". At first instance, Yeldham J held that the napkins so qualified because they were articles ordinarily used in or about a dwelling house for household purposes. On appeal, this decision was affirmed. However, this aspect of the matter in the Court of Appeal appeared to turn upon an argument that household drapery and soft furnishing encompassed articles made only of textile materials and not of paper.
For the appellant it was submitted that there were two separate questions to be answered. The first was how the goods in question should be categorised. The second, once that had been answered, was whether that class of goods was of a kind ordinarily used for household purposes. In respect of this second question it was submitted function should be taken into account. This submission would then, as I have already indicated, proceed to characterise the goods in question as being chairs and the function of those goods being to sit upon, that being, so it was said, a function performed in the household.
With respect to this approach, I do not think it is necessary, or desirable, to separate out the two separate questions as submitted. Rather, I think the proper approach is to ask, in respect of the goods in question, whether they are of a kind ordinarily used for household purposes. This approach requires consideration of each of the particular chairs in question. Of some of them the question may readily be answered in the negative. A high back executive office chair is clearly not a chair of a kind ordinarily used for household purposes. Rather, it is of a kind ordinarily used for office purposes. The question, however, becomes more complicated with smaller chairs of a kind which may, on the one hand, be used in an office and on the other hand, are, in accordance with the evidence, sold by retail outlets such as Ikea, Freedom Furniture and Harvey Norman for what are clearly household purposes. The onus lies upon the appellant to show, in respect of each of the items of goods, that they are of a kind ordinarily used for household purposes. I should say that chairs sold by Ikea or Freedom Furniture and some of the chairs sold by Diethelm are clearly of the same kind, notwithstanding that they may be differently constructed, that one may be constructed in Australia and one overseas, or that one may be upholstered in a better fabric than the other, or have better spring work than the other. The same sales tax consequences must apply where the goods are the same class of goods, notwithstanding that the destination of each of the actual goods under consideration may be to a different market.
I have carefully read the evidence before his Honour. The evidence shows no more than this:
1. Some persons purchase chairs from Diethelm for use in their own homes.
2. Chairs similar in appearance to those sold by Diethelm are sold by Freedom Furniture, Ikea and Harvey Norman to customers who, it can be inferred, ordinarily purchase them for use in the home.
3. Chairs manufactured by Diethelm and other manufacturers of office furniture are mainly sold to purchasers for use in offices.
4. Nine out of ten homes where there is a computer or where there are student children have chairs of a kind similar to some of the models sold by Diethelm. There is no evidence of the number of homes using such chairs or the ratio of chairs used in such situations to chairs used in an office environment.
The evidence does not, it seems to me, permit a conclusion on the balance of probabilities that any of the types of chairs sold by Diethelm is of a kind ordinarily used for household purposes. That may not be surprising, as the case was apparently run on the basis that either all of the chairs were within the Item or none were. It is quite possible, given that some of the chairs in question are of the same kind as those sold by Ikea and Freedom Furniture, that if it had adduced further evidence the appellant might have established that some of the chairs at issue in the present proceedings were of a kind ordinarily used for household purposes. However, Diethelm had the burden of proof. To the extent that it has not established on the evidence that a particular chair was of a kind ordinarily used for household purposes, it must fail.
I would accordingly dismiss the appeal with costs.
JUDGE3
WHITLAM J I agree with the judgment of Hill J.
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