The Commissioner of Taxation of the Commonwealth of Australia v Cosco Holdings P/L

[1994] FCA 373

COMMISSIONER OF TAXATION v. COSCO HOLDINGS PTY. LTD.
No. QG229 of 1993
FED No. 373/94
Number of pages - 11
Sales Tax
(1994) Aust Sales Tax Cases 85-187

COURT

IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY
GENERAL DIVISION
NEAVES(1), OLNEY(2) AND DRUMMOND(3) JJ

CATCHWORDS

Sales Tax - appeal from decision upholding taxpayer's objection to Commissioner's disallowance of objection to notice of sales tax assessment issued pursuant to s. 25AA Sales Tax Assessment Act (No. 1) 1930 assessing facial tissues at 20% - whether facial tissues within sub-items 8(1), 8(5) or 9(b) of the Third Schedule to Sales Tax (Exemptions and Classifications) Act 1935 - facial tissues not `towels, face towels and face washers' within sub-item 8(1)(r) - facial tissues not `handkerchiefs made of cloth' within sub-item 8(5) - facial tissues not `goods consisting wholly of synthetic absorbent material' within sub-item 9(b).

Sales Tax Act (No. 1) 1930 - s. 3
Sales Tax Assessment Act (No. 1) 1930 - ss. 25AA, 41, 42C(3)
Sales Tax (Exemptions and Classifications) Act 1935 - sub-items 8(1), 8(5) or 9(b) of the Third Schedule

Commissioner of Taxation v Sherwood Overseas Pty. Ltd. (1985) 75 FLR . 474 and 85 ATC 4267
Diethelm Manufacturing Pty. Ltd. v Federal Commissioner of Taxation (1993) 116 ALR 420
Kentucky Fried Chicken Pty. Limited v Federal Commissioner of Taxation 86 ATC 4701

HEARING

BRISBANE, 3 May 1994
#DATE 10:6:1994

Counsel:
Mr D.F. Jackson QC and Mr J.A. Logan (instructed by the Australian
Government Solicitor) appeared for the appellant.

Mr R.G. Bain QC (instructed by Minter Ellison Morris Fletcher) appeared
for the respondent.

ORDER

1. The appeal is allowed with costs.
2. The declaration and orders made at first instance are set aside.
3. The appellant's assessment of 1 October, 1990 is confirmed.
4. The application is dismissed with costs.
NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

JUDGE1

NEAVES J I have had the advantage of reading the judgment to be
delivered by Olney J. I agree with his Honour's reasons and with the orders he proposes and do not wish to add anything.

JUDGE2

THE APPEAL

OLNEY J This appeal is from a decision of a single judge of the Federal Cour t in relation to a reference to the Court pursuant to s 41 of the Sales Tax Assessment Act (No 1) 1930 (the Assessment Act).

1. On 1 October 1990 the Commissioner of Taxation (the Commissioner) issued a notice of an assessment of sales tax pursuant to s 25AA of the Assessment Act in which he assessed Cosco Holdings Pty Ltd (the respondent) liable to pay sales tax at the rate of 20% on the sale value of facial tissues manufactured and sold by it. The respondent gave notice of objection to the assessment and asserted that the sale of facial tissues was taxable at the rate of 10% on the ground that they came within one or other of several sub-items in the Third Schedule to the Sales Tax (Exemptions and Classifications) Act 1935 (the Classifications Act). The Commissioner disallowed the objection and the respondent requested that the matter be referred to the Court for resolution. The matter referred was treated as an appeal by the respondent against the Commissioner's decision. (Assessment Act s 42C(3)). The judge at first instance upheld the appeal and declared that the goods in question were taxable at the rate of 10% they being (as he held) goods which fell within sub-item 8(1)(r) in the Third Schedule to the Classifications Act. The Commissioner has appealed from that decision. In the proceedings at first instance the Court also dealt with a reference in relation to an assessment of sales tax payable on toilet paper in which Spender J found in favour of the Commissioner. The two matters were heard together. The respondent initially appealed against the latter decision but did not proceed with the appeal.

2. The principal issue in this appeal is whether goods manufactured and sold by the respondent which are described as facial tissues are properly classified (as the primary judge held them to be) under sub-item 8(1)(r). Other issues raised in the appeal are whether (contrary to the Judge's decision) the goods in question are properly to be classified under sub-item 8(5) or sub-item 9(b) in the Third Schedule. The respondent contends that the goods are capable of being so classified.

3. The full text of items 8 and 9 is set out:
   

8 (1) Household drapery and soft furnishings, namely -

(a) bed sheets;

(b) bed spreads;

(c) bolster cases, bolster shams and bolster slips;

(d) chair back covers;

(e) counterpanes;

(f) curtains and textile cords for fastening curtains; plastic eyelet tape for use as part of plastic shower curtains;

(g) cushion covers;

(h) laundry bags;

(i) loose furniture covers;

(j) mattress cases, mattress covers and mattress protectors;

(k) meat bags;

(l) mosquito nets;

(m) pillow cases, pillow shams and pillow slips;

(n) pudding cloths;

(o) quilts;

(p) table cloths, table covers, table mats, table napkins, table runners and doilies;

(q) tea-towels;

(r) towels, face cloths and face washers. but not including goods covered by sub-item (5) of item 124 in the First Schedule.

(2) Cleaning and polishing cloths (including dusting cloths, dishcloths and sweat-cloths) made of piece goods covered by sub-item (5) of item 120 in the First Schedule, but not including goods consisting, in whole or in part, of metal or a plastic abrasive substance.

(3) Braid, cloth belting, cloth ribbon, cloth tape elastic, fringe, insertion lace, wadding, webbing, lacing cord and other textile cords of a kind used on clothing, drapery or soft furnishings.

(4) Blankets and travelling rugs, but not including goods covered by sub-item (5) of item 124 in the First Schedule.

(5) Handkerchiefs made of cloth.

9 Goods of the following kinds for sale for cleaning purposes, namely -

(a) sponges, including synthetic sponges;

(b) goods consisting wholly of synthetic absorbent material;

(c) engine-cleaning cotton waste

THE LEGISLATIVE SCHEME
5. The Sales Tax Act (No 1) 1930 imposes sales tax at rates specified upon the sale value of goods manufactured in Australia by a taxpayer and sold by the taxpayer by retail (s 3). The rates of the sales tax imposed by s 4 of the Act are:

(a) in respect of goods covered by the Fourth Schedule to the Sales Tax (Exemptions and Classifications) Act 1935 - 20%;

(aa) in respect of goods covered by the Fifth Schedule to that Act - 15%;

(b) in respect of goods covered by the Third Schedule to that Act - 10%;

(c) in respect of goods covered by the Second Schedule to that Act - 30%; and

(d) in respect of goods not covered by the Second, Third, Fourth or Fifth Schedule to that Act and on the sale value of which it is not provided by that Act that the sales tax imposed by this Act shall not be payable - 20%.

1. The Classifications Act provides that the goods specified in a schedule to the Act other than the First Schedule are so specified for the purposes of the Act imposing sales tax upon goods so specified (s 6B(1)).

2. The First Schedule to the Classifications Act was amended in 1948 (Act No 42 of 1948) to include a new item 120 which provided (in part) as follows:
   

120. Clothing, footwear, drapery, piece goods, soft furnishings and yarns (other than goods covered by any item in the Third Schedule to this Act) viz:

...

(4) Household drapery and soft furnishings, viz:

(a) Bed sheets;

(b) Bed spreads, cot covers and pram covers;

(c) Bolster cases, bolster shams and bolster slips;

(d) Chair back covers;

(e) Counterpanes;

(f) Curtains;

(g) Cushion covers;

(h) Laundry bags;

(i) Loose furniture covers;

(j) Mattress cases, mattress covers and mattress protectors;

(k) Meat bags;

(l) Mosquito nets;

(m) Pillow cases, pillow shams and pillow slips;

(n) Pudding cloths;

(o) Quilts;

(p) Table cloths, table covers, table mats, table napkins, table runners and d'oyleys;

(q) Tea-towels;

(r) Towels, face cloths and face washers.

1. By Act No 53 of 1953 paragraph (f) of sub-item 120(4) was amended to:
   

(f) curtains and textile cords for fastening curtains;

and by Act No 45 of 1954 it was further amended by the addition of the words:

plastic eyelet tape for use as part of plastic shower curtains;

By Act No 93 of 1982 the First and Third Schedules to the Classifications Act were amended so as to render, inter alia, the goods previously exempt from tax under sub-item 120(4) in the First Schedule taxable at the rate applicable to the Third Schedule. The current form of sub-item 8(1) in the Third Schedule was adopted in 1982 and has not since been amended.

THE DECISION APPEALED FROM
9. In his reasons, the primary judge dealt at length with the manufact uring process involved in the production of facial tissues and toilet paper. He found both to be paper products. He also observed that a curious feature of the case was that, while there was a large body of expert evidence at to the papermaking process and the means by which goods come to be toilet paper or facial tissues, there was virtually no evidence as to the use to which those goods are in fact put. As to this, His Honour said:

Perhaps the parties were of the view that the uses were so obvious that there was no need for such evidence, but I do not know whether it is permissible to approach the question of classification of toilet paper on the basis that apart from its most usual use, it may serve as a substitute for facial tissue for the purposes of blowing one's nose.Further is it right for me to proceed on the assumption that, for men, the overwhelming use of facial tissue is for blowing one's nose, but that, for women, the uses are more varied, including the application and removal of make-up? I could not even guess the proportion of facial tissue used by men and what proportion is used by women. I know that in

certain countries and circumstances, facial tissue may serve as a substitute for toilet paper (and vice versa), and that facial tissues often perform a general cleaning function unconnected with personal hygiene, as well as a function in the cleaning of children, including infants, that is not necessarily restricted to the facial area.

1. Apart from the foregoing general observations his Honour made no findings as to the use to which the subject goods are put.

2. In his reasons his Honour said that in the matters then before him there was nothing to suggest that any relevant word or phrase in any relevant sub-item is used with a particular commercial meaning and that the sub-items have to be construed according to their ordinary English meaning. Furthermore, his Honour said that the question whether goods fall within the descriptions in an item requires an assessment to be made of the essential character of the goods. Neither party to the appeal has challenged either of these propositions.

3. After dealing with a number of other issues in respect of which he made findings adverse to the respondent (to which reference will be made later) his Honour dealt with the question of sub-item 8(1)(r) thus:
   

The final question is whether facial tissues come within sub-item 8(1)(r), namely, whether facial tissues are properly to be described as "towels, face cloths and face washers".

Sub-item 8(1)(r) of the Third Schedule speaks generically of towels, face cloths and face washers. The descriptions, in my view, focus on the identified function or type of goods rather than the constituent material from which they might be fashioned. There is, in particular, no requirement similar to that which appears in sub-item 8(5) that the goods be "made of cloth" or of any other type of material.

In Kentucky Fried Chicken Pty Limited v. Federal Commissioner of Taxation 86 ATC 4701, Yeldham J at first instance held, inter alia, that paper serviettes supplied by a vendor of fast food products in its business can properly be described as "table napkins" and were articles of household drapery covered by sub-item 8(1)(p) of the Third Schedule, which covers:

"(1) Household drapery and soft furnishings, namely:

(p) tablecloths, table covers, table mats, table napkins, table runners and doilies".

Further, Yeldham J held that refresher towels supplied by Kentucky Fried Chicken in the course of its business can properly be described as "towels, face cloths and face washers" and by definition are included within the extended meaning of household drapery and soft furnishings covered by sub-item 8(1)(r) of the Third Schedule.

...

Yeldham J said at 4710 of the Kentucky Fried Chicken case: "I see no reason why a refresher towel does not come within the expression 'towels, face cloths and face washers' notwithstanding that it is not made of textile fabrics. Adopting a robust approach to the construction of the items in question, I consider that in this day and age paper serviettes can properly be described as 'table napkins' which, by definition, come within the description 'household drapery and soft furnishings'. I consider also that refresher towels, which again are not made of cloth but of paper, are to be described as 'towels, face cloths and face washers' which again, by definition, are included within the extended definition of household drapery and soft furnishings."

...

An appeal from the judgment of Yeldham J to the Court of Appeal was dismissed: 88 ATC 4363. Responding to the submission by the Commissioner on the appeal, that "household drapery and soft furnishings" are articles necessarily made of textile material of some kind and that therefore paper serviettes and paper towels could not fall within either the general description or the particular descriptions in item 8, Hope JA said:

"Despite all the dictionary definitions that have been produced I find it difficult to imagine that paper refresher towels and paper serviettes cannot properly be regarded as falling within the 'towels, face cloths and face washers' and 'table napkins' specified in the item. Other listed particular items are 'chair back covers', 'laundry bags' and 'meat bags'. I would have thought that although these items may now often be made of textile material, they are also often made of other material, and I can see no reason in purpose or policy, to justify the restricted meaning which the Commissioner contends for." In my opinion, facial tissues manufactured by Cosco fall within sub-item 8(1)(r) of the Third Schedule.

1. Implicit in the opinion expressed in the final sentence quoted is the finding (to adopt the words of Hope JA) that facial tissues can properly be regarded as falling within the 'towels, face cloths and face washers' specified in sub-item 8(1)(r).

2. It is clear from the passages extracted from his Honour's reasons that his finding was heavily influenced by the reasoning, both at first instance and on appeal, in Kentucky Fried Chicken. The report of that decision at first instance does not disclose any finding of fact as to the function of a "refresher towel". The trial judge did however find that refresher towels are made of paper. But apart from that, the ultimate conclusion both at first instance and on appeal depended upon the respective judges' knowledge of the essential character of the goods in question.

THE GROUNDS OF APPEAL
15. The grounds upon which the Commissioner bases the appeal are:

a. That, as a matter of construction, the genus of goods which fall within Item 8(1)(r) of the Third Schedule to the Sales Tax (Exemption and Classifications) Act 1935 ("the Act") i.e. within the description "towels, face cloths and face washers" are goods of high wet strength and that His Honour erred in not so construing the provision.

b. That on the evidence it should have been concluded the subject goods did not fall within Item 8(1)(r) because: i. their essential character is that they are "facial tissues", and goods so described fall outside that provision particularly having regard to the former Item 60(1)(f) in the First Schedule to the Act; and/or ii. the properties of the subject goods and, in particular, their low wet strength are such that they fall outside the genus of goods to which the provision applied. iii. They are not within the expression 'Household drapery and soft furnishings' in the opening words of Item 8(1). iv. They are not within the description 'Towels, face cloths and face washers' in paragraph (r) of Item 8(1).

THE CONSTRUCTION OF SUB-ITEM 8(1).
16. One issue which has been canvassed in this appeal is whether or not the introductory words of sub-item 8(1) "Household drapery and soft furnishings, namely -" qualify the meaning of the specific items of goods particularised in the paragraphs which follow so that in order for an article to be classified within the sub-item it must both fit within one of the paragraphs and also be properly described as "household drapery and soft furnishings".

1. In Kentucky Fried Chicken Yeldham J took the view that paragraphs (a) to (r) in sub-item 8(1) defined, for the purpose of the sub-item, the terms "household drapery and soft furnishings". At p 4710 of the report, in the passage which immediately precedes the extract from his judgment quoted by Spender J, he said: I do not think that the inquiry is, as the Commissioner has submitted, into whether the items are household drapery or soft furnishings in the ordinary sense of those words. They have been defined to include towels, face cloths and face washers.

2. The legislative history of item 8 tends to suggest that it was not Parliament's intention to confine sub-item 8(1) to goods made of textile material. The changes made to the former sub-item 120(4)(p) in the First Schedule, which are now reflected in sub-item 8(1)(f) in the Third Schedule, suggest that, at least so far as curtains are concerned, as long ago as 1954 it was recognised that the term included plastic shower curtains, which goods would not normally be described either as "household drapery" or as being made of textile material.

3. Reference was made in argument to the decisions in Commissioner of Taxation v Sherwood Overseas Pty Ltd (1985) 75 FLR 474; 85 ATC 4267 and Diethelm Manufacturing Pty Ltd v Federal Commissioner of Taxation (1993) 116 ALR 420 but neither decision is helpful in the present context. Both had to do with the construction of item 1 in the Third Schedule in which the introductory words are:
   

Goods ... of a kind ordinarily used for household purposes namely -

These words raise a completely different issue in terms of construction to those used in sub-item 8(1) and neither of the cases referred to provides assistance in the resolution of the matter presently in issue.

1. Be that as it may, the first question to be addressed, whatever approach is taken to the construction of sub-item 8(1), is to determine whether the subject goods fall within one or other of the categories particularised in paragraphs (a) to (r). If they do not fit one or other of those descriptions, the sub-item cannot apply to them. In the present case the primary question is whether facial tissues can properly be categorised within the sub-item as "towels, face cloths and face washers". If they are not to be so classified then that is the end of the matter.

FACIAL TISSUES - "TOWELS, FACE TOWELS AND FACE WASHERS"?
21. In Kentucky Fried Chicken, both at first instance and on appeal, the court found that paper serviettes could properly be described as "table napkins" and that "refresher towels" made of paper could properly be described as "towels, face cloths and face washers" within the meaning of those terms as used in sub-item 8(1) in the Third Schedule. It is clear from the reports that these conclusions were arrived at not as a result of findings of fact based upon evidence but rather from the respective judges' knowledge and understanding of the ordinary use and function of the goods in question.

1. At first instance in this matter the judge had before him a sample box of the facial tissues in question. Apart from that he relied upon his own knowledge and understanding as to the ordinary use and function of the goods.

2. Although the subject goods are commonly described as facial tissues, the common experience of mankind is that they are extensively used for a multitude of purposes unconnected with the human face. It cannot be gainsaid that a very common use, perhaps the most common use, is as a substitute for a handkerchief. They may well fit the description of paper handkerchiefs. A man may well use a tissue as a substitute for a "face washer" to wipe his face after shaving whereas a woman may make a similar substitution to remove make-up. By the same token, a handkerchief made of cloth could be used in the same manner as indeed could many other types of goods. But such use, however common, does not change the essential character of the article used.

3. The Court has not been referred to any dictionary definition of the term facial tissue. The separate definitions of facial and tissue add nothing to the debate. But Parliament seemed to have no misunderstanding as to the meaning of the term when in 1990 (by Act No 18 of 1990) it amended the First Schedule to the Classifications Act to exempt from sales tax:
   

The following goods, if all the paper in the goods is recycled paper:

...

(f) facial tissue.

(Item 60(1)(f) in the First Schedule; since repealed by Act No 131 of 1992).

1. It would be a fair conclusion from the foregoing that at least by 1990 goods known as facial tissues were sufficiently common as to be capable of being identified by that description. This may not add much to the resolution of the matter presently under consideration other than to suggest that when Parliament wanted to exempt from duty facial tissues made of recycled paper it described them as facial tissues and not as towels, face cloths or face washers.

2. It is contrary to the ordinary use of language to regard a facial tissue as anything other than a facial tissue. The term is one of common usage. It is not a technical term. The meaning is precise and unequivocal. A facial tissue is not a paper towel, nor is it a paper face cloth or a paper face washer. It is not in accordance with ordinary usage to identify a facial tissue as either a towel, a face cloth or a face washer. In concluding that facial tissues fall within sub-item 8(1)(r) in the Third Schedule the judge at first instance was in error.

3. In the circumstances it is unnecessary to deal in detail with the Commissioner's submission to the effect that goods described as "towels, face cloths and face washers" are goods of high wet strength. The durability of an article may in some cases have a bearing upon how it is classified in ordinary language but an article which lacks durability when wet, may nevertheless in appropriate circumstances be so classified. The issue is not one which requires exhaustive analysis at this time and is best left for consideration in a more appropriate context.

FACIAL TISSUES - "HANDKERCHIEFS MADE OF CLOTH"?
28. In his reasons the primary judge said: In my opinion, facial tissues do not come within the description "handkerchiefs made of cloth" because "cloth" in sub-item 8(5) of the Third Schedule does not encompass paper products. In my opinion, "cloth", where it appears in sub-item 8(5) is used in its meaning according to the Macquarie Dictionary (1st ed.) as "a fabric formed by weaving, felting etc. from wool, hair, silk, flax, cotton or other fibre used for garments, upholstery and many other purposes". Cloth is used in its traditional understanding of the word in the sense of a fabric or textile. The requirement that the handkerchiefs be made of cloth is to exclude from the operation of the sub-section handkerchiefs made from, inter alia, cellulose fibre or paper.

1. The logic of this conclusion defies challenge. It is fanciful to suggest that Parliament could have intended that words as clear as "handkerchiefs made of cloth" were intended to encompass goods such as facial tissues notwithstanding that they can be and frequently are used as a substitute for goods of that description. If sub-item 8(5) had simply referred to "handkerchiefs" there may be some basis for argument, but the words used do not admit of any other meaning than that ascribed by the judge in his reasons. They do not mean "handkerchiefs made either of cloth or paper".

FACIAL TISSUES - "GOODS CONSISTING WHOLLY OF SYNTHETIC ABSORBENT MATERIAL"?
30. The primary judge was of the view that sub-item 9(b) does not apply to facial tissues. In this regard he adopted the reasoning he had applied in dealing with a submission that toilet paper fell within that item. In that context he said: The submission for Cosco is that the "goods" consist of tissue and that the tissue is a synthetic material. The tissue is said to be a synthetic material relying on the meaning of "synthetic", as defined in the Macquarie Dictionary (1st ed.), as meaning "of, pertaining to, proceeding by, or involving synthesis" or in its other meaning of "denoting or pertaining to chemical compounds, resins, rubbers etc formed by chemical reaction in a laboratory or chemical plant as opposed to those of natural origin". In my opinion, the reference to "goods consisting wholly of synthetic absorbent material" focuses attention on the characteristic of the constituent parts of the goods. In this case, the constituent parts of tissue paper are wood pulp fibres coming from trees, and water. Those products are, in my view, natural rather than synthetic and toilet paper does not consist "wholly of synthetic absorbent material".

1. In his reasons his Honour dealt at length with the manufacturing process involved in producing paper, and in particular, tissue paper. It is unnecessary to repeat that description. No issue has been raised as to its accuracy nor as to his Honour's understanding that the paper here in question consists substantially of a mass of cellulose fibres derived from wood pulp, and water, both being "materials" which occur naturally.

2. Sub-item 9(b) identifies the goods to which it refers by reference to the nature of their constituents. To the extent that the paper from which facial tissues are made is derived from the combining and treatment of naturally occurring materials, it is not appropriate to describe the end product as something which consists wholly of synthetic material.

CONCLUSION
33. The primary judge correctly rejected the respondent's submissions at first instance that facial tissues are capable of being classified under sub-item 8(5) in the Third Schedule to the Classifications Act as "handkerchiefs made of cloth" and under sub-item 9(b) as "goods ... for cleaning purposes ... consisting wholly of synthetic absorbent material".

1. However, in finding that facial tissues were properly to be classified under sub-item 8(1)(r) in the Third Schedule as "towels, face cloths and face washers" his Honour erred. Facial tissues cannot properly be so classified. Accordingly, the appeal should be allowed with costs. The declaration and orders made at first instance should be set aside and in lieu thereof there should be orders that the Commissioner's assessment, notice of which is dated 1 October 1990, be confirmed and the application be dismissed with costs.

JUDGE3

DRUMMOND J I have had the benefit of reading in draft the reasons of Olney J. I agree with both his Honour's reasons and with the order he proposes.