McDonald's Australia Ltd v Commissioner of Taxation

[1999] FCA 1045

FEDERAL COURT OF AUSTRALIA

McDonald’s Australia Ltd v Commissioner of Taxation

[1999] FCA 1045

SALES TAX – exemptions – whether Items 19 and 27 of Schedule 1 to the Sales Tax (Exemptions and Classifications) Act 1992 (Cth) apply to certain packaging materials used by applicant and its franchisees – whether use of packaging materials constituted the use of raw materials in manufacturing other goods – whether packaging materials are for use in marketing or delivering take-away foodstuffs

Sales Tax (Exemptions & Classifications) Act 1992 (Cth)

Sales Tax Assessment Act 1992 (Cth)

Federal Commissioner of Taxation v Rochester (1934) 50 CLR 225, cited
MP Metals Pty Ltd v Commissioner of Taxation (Cth)  (1968) 117 CLR 631, cited
Woolworths Ltd v Federal Commissioner of Taxation 99 ATC 4187, cited
Pepsi Seven-Up Bottlers Perth Pty Ltd v Commissioner of Taxation (1995) 62 FCR 289, cited
CCA Beverages (Sydney) Pty Ltd v Federal Commissioner of Taxation (1995) 133 ALR 755, cited
CCA Beverages (Sydney) Pty Ltd v Federal Commissioner of Taxation (1997) 143 ALR 212, cited
Federal Commissioner of Taxation v Kentucky Fried Chicken Pty Ltd (1988) 12 NSWLR 643, applied

McDONALD’S AUSTRALIA LIMITED (ACN 000 697 780) v COMMISSIONER OF TAXATION
NG1203 OF 1998

GYLES J
2 AUGUST 1999
SYDNEY

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NG1203 OF 1998

BETWEEN:	McDONALD’S AUSTRALIA LIMITED (ACN 000 697 780) Applicant
AND:	COMMISSIONER OF TAXATION Respondent
JUDGE:	GYLES J
DATE OF ORDER:	2 AUGUST 1999
WHERE MADE:	SYDNEY

THE COURT ORDERS THAT:

1.The matter be stood over to 6 August 1999 at 9.30am for the making of declarations and orders reflecting the reasons for judgment.

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

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NG1203 OF 1998

BETWEEN:	McDONALD’S AUSTRALIA LIMITED (ACN 000 697 780) Applicant
AND:	COMMISSIONER OF TAXATION Respondent

JUDGE:	GYLES J
DATE:	2 AUGUST 1999
PLACE:	SYDNEY

REASONS FOR JUDGMENT

1. McDonald’s Australia Limited (“the applicant’) seeks declarations concerning the application of Items 19 and 27(3) of Schedule 1 to the Sales Tax (Exemptions and Classifications) Act 1992 (Cth) to certain packaging materials when used by it or one of its franchisees. The Commissioner of Taxation (“the respondent”) raises no objection to the form of procedure.

2. The respondent, by itself and its franchisees, carries on a business of producing and selling packaged foodstuffs for human consumption from many stores throughout Australia.  It has a standard line of products and standard methods of preparation and presentation of those products.  The evidence is not in dispute.  The affidavits describe the standard products and the standard methods of preparation and presentation of them.  The videos which are in evidence assist in understanding the evidence.  There is no need for me to reproduce the evidence in this judgment.  I shall refer only to so much of it as is necessary to explain my reasoning.

   Exemption Item 19

3. Exemption Item 19 is in the following terms:

   “19(1)  Goods for use by a person exclusively as raw materials for goods to be manufactured by the person in Australia in the course of any business carried on by the person.

   19(2)  This Item does not cover materials or mixes for use in manufacturing any of the following:

   (a)thick-shakes or similar goods;

   (b)biscuit goods;

   (c)ice-cream goods;

   in premises or vehicles in which the business of manufacturing those goods is carried on mainly for the purpose of retail sale directly from those premises or vehicles.”

4. The expression “raw materials” is defined in s 5 of the Sales Tax Assessment Act 1992 (Cth) (“the Assessment Act”) to have the meaning given by s 7 of the Assessment Act. Section 7(1) of the Assessment Act provides:

   “Goods (“the materials”) are taken to be used as raw materials in manufacturing other goods if, and only if, the materials are dealt with in such a way in manufacturing the other goods that the materials, or some essential element of the materials, become an integral part of the other goods.”

5. That part of the definition of “manufacture” in s 5 of the Assessment Act upon which the applicant relies is “applying a treatment to foodstuffs as a process in preparing them for human consumption”.

6. The point at issue can be understood by taking one of the products – a Big Mac.  Big Macs are packaged hamburgers which consist of:

   (a)a bun in turn consisting of a crown, club and heel;

   (b)two meat patties having a weight of approximately 1.6 ounces each;

   (c)a sauce;

   (d)onions;

   (e)pickles;

   (f)cheese;

   (g)lettuce;  and

   (h)a collar and wrap.

7. The procedure for production of a Big Mac is that once the bun has been toasted, a cardboard collar is placed directly on the heel section of the bun.  The sauce is placed on the heel and the club.  The ingredients other than the meat patties are then placed on the heel of the bun inside the collar and on the club.  Once the meat patties are cooked, they are then placed one on the heel and one on the club.  The club is then placed on the heel section inside the collar.  The crown of the bun is then placed on the club section.

8. At the wrapping station in the store the hamburger arrives with the crown side up.  The hamburger is then wrapped in a paper wrap which has the description of “Big Mac” on it.  The Big Mac is then placed in the holding bit to await sale.  In order to ensure that the packaged hamburger when sold is fresh, a holding time card is placed behind the wrapped Big Mac with the time it is to be held in the bin on the card.  When an order is received for a Big Mac, the crew person takes a Big Mac out of the holding bin and provides it to the customer.  Big Macs which are not sold within a set period are disposed of.  No Big Mac is ever sold except those packaged as described above.

9. The wrapping paper used by the applicant is specially treated and is used to prevent heat loss from the food products prior to sale and to facilitate hygienic handling.  The wrapping of the food products is also necessary to hold the food products together in the form in which they are sold and to facilitate handling of such products in high volumes.

10. The reason for introducing the paper packaging or wraps was the concern of the applicant’s management with the environmental consequences of using foam clamshells and to bring about a significant reduction in the volume and weight of the packaging used in the applicant’s stores.  The paper wraps introduced by the applicant into its stores from October 1991 brought about a 90% reduction in the volume of the packaging materials and also had a consequential reduction of approximately 80% in the cartons used in the transport and storage of the packaging materials.

11. Before the decision was made by the applicant to introduce the paper wraps as a replacement for the foam clamshells, extensive testing was carried out to ensure that the paper wraps would have the necessary qualities in relation to:

    ·    The quality of food (particularly heat retention);

    ·    Hygiene;

    ·    Attractive presentation;

    ·    Fat, oil and moisture barriers.

12. The paper wraps which were introduced by the applicant in October 1991 are printed on one side with the description of the product for which the wrap will be used and on the other side it is waxed.  The wax coating on the inside of the wrap is what provides its heat and moisture retention qualities.  The wraps are manufactured by Australian Paper Manufacturers Ltd using an Australian bleach waxing Kraft paper.  They are then supplied to Detmold Packaging who, in turn, supplies the wraps to FJ Walker Foods for supply to the applicant’s stores.  The wraps are manufactured and supplied exclusively to the applicant’s stores.

13. The applicant submits that the goods sold are the food, the collar and the wrap as one item in the same way as carbonated soft drink and the can were viewed as one rather than separate integers in CCA Beverages (Sydney) Pty Ltd v Federal Commissioner of Taxation (1997) 143 ALR 212. If this is so, the applicant submits that the collar and wrap can then be categorised as raw materials within the meaning of that term as defined.

14. Even if those submissions be correct (and they are disputed by the respondent), it is still necessary that what is done be manufacture.  Is what is done involving the collar and wrap applying a treatment to foodstuffs as a process in preparing them for human consumption?  I do not regard what is done involving the collar and wrap as applying a treatment to foodstuffs.  It might, at a stretch, be seen as the treatment of foodstuffs as a process in preparing them for human consumption. Neither the wrap nor the collar do more than contain the foodstuffs and assist in maintaining the foodstuffs in a condition fit to be eaten.

15. If any doubt or ambiguity as to the meaning of this definition authorises resort to any aid to construction, the conclusion to which I have come is fortified when it is understood that the definition was included after the decision by the High Court in Federal Commissioner of Taxation v Rochester (1934) 50 CLR 225 that the cooking of fish and chips was not manufacture or production. See also the comments by Windeyer J on Rochester in MP Metals Pty Ltd v Commissioner of Taxation (Cth)  (1968) 117 CLR 631 at 639-40.

16. I hold that the collar and wrap are not exempt by reason of Item 19.  My reasoning in coming to this conclusion leads inevitably to a rejection of the exemption for all of the other packaging materials identified in the evidence relating to other products.

    Exemption Item 27

17. Exemption Item 27 is in the following terms:

    “27(1)  Goods (“the main container”) for use by a person (“the exemption user”) as a container exclusively for contents consisting wholly of assessable goods (or of assessable goods and containers for those assessable goods).

    27(2)  In addition, the exemption user must intend or expect that:

    (a)the main container will be used as a container in relation to the contents at the time of an assessable dealing that consists of:

    (i)a sale of the contents;

    (ii)…

    (iii)…;  and

    (b)possession or control of the main container will pass to the person who is the purchaser, customer or lessee, as the case requires, for that assessable dealing.

    27(3)  This Item does not cover goods that are for use by the exemption user in marketing or delivering:

    (a)ice-cream goods, or biscuit goods, that are manufactured in premises or vehicles in which the exemption user carries on a business of manufacturing goods of that kind mainly for the purpose of retail sale directly from those premises or vehicles;

    (b)take-away beverages or foodstuffs (whether for consumption on the premises from which they are sold or elsewhere).”

18. The question which arises is whether the packaging is for use in marketing or delivering take-away foodstuffs.

19. It is the policy of the applicant that staff follow certain procedures when serving customers in order to maintain consistent standards.  The procedure for serving customers when they come into the applicant’s stores is to first ask customers what they would like to order.  Once customers have placed their order, they are asked whether the food is to be “eat in” or “take away”, that is, to be eaten in the store or taken away.  If the customer chooses to eat their food in the store, it is placed on a tray with a tray liner.  If the customer chooses to take the food away, it is placed in an appropriate size paper bag designed for this purpose.  Particular recommendations are given to staff regarding the appropriate number of burgers or other McDonald’s products suitable to be placed in each of the different sized bags available.

20. All of the products are prepared and presented in precisely the same way, whether to be eaten in or taken away, save for the ultimate receptacle – in one case the tray, and in the other, the paper bag.  The system is such that the products are prepared for sale regardless of any precise order, so when the packaging materials in question are utilised it cannot be known whether the goods will be eaten in or taken out.  Of the “bank” of products which exist at any time, some will and some will not be taken away.

21. The applicant’s primary submission was that the exclusion from the exemption covered only containers used for marketing or delivering food or beverages in a manner that can be “taken away” for consumption elsewhere – that is, that the container in question must be one designed for transportation.  It was submitted that the packaging in question (as distinct from the paper bags into which it might be placed) does not answer that description.  The packaging remains the same whether the food is for eating in or taking away.  Its alternative submission was that in the case of food which is precisely the same whether eaten in or taken away, it is the communicated intention of the person placing the order which determines its character as take-away food.

22. The applicant submitted that I should apply the robust approach to the construction of exemptions referred to by Hely J in Woolworths Ltd v Federal Commissioner of Taxation 99 ATC 4187 at 4194 (paragraph 11).

23. Each party appealed to passages from the decision of Hill J in Pepsi Seven-Up Bottlers Perth Pty Ltd v Commissioner of Taxation (1995) 62 FCR 289 to support their case. Whilst what his Honour had to say is of interest, it was not directed to the problem before me. The same thing can be said of the decisions both at first instance and on appeal in CCA Beverages (Sydney) Pty Ltd v Federal Commissioner of Taxation (1995) 133 ALR 755 (at first instance) and (1997) 143 ALR 212 (on appeal).

24. The respondent submits that the applicant’s argument about containers designed for transportation is a gloss on the section.  It furthermore points out that for the packaging material to qualify for the exemption at all it must be a container which, by definition, is for use in marketing or delivering the take-away foodstuffs.  This seems to me to be correct and is an answer to the applicant’s initial proposition.

25. The respondent says that as the goods are all in a form capable of and adapted for being taken away, the fact that some may end up being eaten on the premises is beside the point, and rely upon the words in parenthesis in 27(3)(b) to support this position. In other words, it puts that the categorisation looks to the nature of the goods not the actual use to which they are put.  This construction is supported by the words “are for use” rather than “used”.  In relation to this submission, and in answer to the applicant’s alternative submission, the respondent points to the nature of sales tax administration.  The sales tax number is quoted at the time of purchase of the packaging material, and it will not be known whether the exemption applies or not.  It puts that application of an exemption depending upon the actual fate of individual products is inherently unlikely.

26. I have difficulty with the respondent’s principal submission.  The fact that an article of food might be adapted to being either eaten in the store or taken away does not seem to me to require the conclusion that all such food is take-away food regardless of the manner in which and the place where it is served.  Put another way, in my opinion, there is no class of food which can be categorised as take-away food simply by reason of its physical form.  It is a matter of common sense and common knowledge that, with modern packaging, most recently prepared meals can be either eaten on premises or taken away.  Many establishments cater for both, but some are devoted to one or the other.

27. Having rejected the preferred positions of each of the parties focuses attention upon the applicant’s alternate submission, which received most attention during the course of oral argument.  I see considerable force in the criticisms of this by the respondent.  However, there is an overwhelming common sense in endeavouring to construe the provisions to enable containers in fact used in take-away situations to lose the exemption but for containers used in an eat-in situation to receive the benefit of the exemption.  In this respect, at least, I am prepared to be slightly robust.  The applicant submitted that the answer to the problems raised by the respondent lies in the New South Wales decision in Federal Commissioner of Taxation v Kentucky Fried Chicken Pty Ltd (1988) 12 NSWLR 643, where a strong Court of Appeal upheld the decision of a very experienced commercial judge and construed similar sales tax provisions in a manner consistent with the submissions of the applicant here. I refer in particular to the judgment of Hope J between 652C-658A. I appreciate that the provisions there were not identical, and that, in particular, they included the phrase “containers used, or for use, in marketing goods …”. Nonetheless, I regard the approach of the Court there as compelling.

28. I therefore propose to make declarations which will have the effect that the exemption will apply to those containers used in relation to goods which are not taken away.  I will hear argument in due course as to the appropriate declarations to give effect to this.

I certify that the preceding twenty-eight (28) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gyles.

Associate:

Dated:             4 August 1999

Counsel for the Applicant:	Mr DH Bloom QC and Mr SJ Gageler
Solicitor for the Applicant:	Baker & McKenzie
Counsel for the Respondent:	Mr IV Gzell QC and Mr SW Gibb
Solicitor for the Respondent:	Australian Government Solicitor
Date of Hearing:	29 July 1999
Date of Judgment:	2 August 1999