FEDERAL COURT OF AUSTRALIA Commissioner of Taxation v The Distribution Group Ltd [2003] FCAFC 182 TAXATION – sales tax – exemptions – appeal to set aside decision of this Court – whether cable falls within the exemption under Item 43(4) of the Sales Tax (Exemptions & Classifications Act 1992 – whether cable is 'ordinarily used in provision of telecommunications services' Sales Tax (Exemptions & Classifications) Act 1992 (Cth) Sch 1 Item 43, 43(1), 43(2), 43(3), 43(4) Sales Tax Assessment Act 1992 (Cth) s 24 Taxation Laws Amendment Act (No 3) 1997 (Cth) Taxation Laws Amendment Bill (No 3) 1997 (Cth) CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384 referred to Eastman v Director of Public Prosecutions (ACT) (2003) 198 ALR 1 referred to Newcastle City Council v GIO General Ltd (1997) 191 CLR 85 referred to Telstra Corporation Ltd v Commissioner of Taxation (1996) 69 FCR 566 considered Australian/New Zealand Standard 3080: 2000 par 3.1.35 COMMISSIONER OF TAXATION v THE DISTRIBUTION GROUP LTD V 230 OF 2003 FRENCH, SACKVILLE & HELY JJ 15 AUGUST 2003 MELBOURNE IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY V 230 OF 2003 ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA BETWEEN: COMMISSIONER OF TAXATION APPELLANT AND: THE DISTRIBUTION GROUP LTD RESPONDENT JUDGES: FRENCH, SACKVILLE & HELY JJ DATE OF ORDER: 15 AUGUST 2003 WHERE MADE: MELBOURNE THE COURT ORDERS THAT: 1. The appeal be dismissed with costs. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY V 230 OF 2003 ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA BETWEEN: COMMISSIONER OF TAXATION APPELLANT AND: THE DISTRIBUTION GROUP LTD RESPONDENT JUDGES: FRENCH, SACKVILLE & HELY JJ DATE: 15 AUGUST 2003 PLACE: MELBOURNE REASONS FOR JUDGMENT THE COURT: 1 The appellant appeals from a judgment of a judge of this Court in which it was held that the goods the subject of the judgment, namely Category 5e local area network cable ('LAN cable') were exempt from sales tax under Item 43 of Schedule 1 of the Sales Tax (Exemptions & Classifications) Act 1992 (Cth) ('the Exemption Act'). The primary Judge set aside a decision of the appellant disallowing the respondent's objection to an assessment of sales tax made in respect of a transaction involving the sale of LAN cable. His Honour also made an order setting aside the assessment. 2 By virtue of s 24 of the Sales Tax Assessment Act 1992 (Cth) ('the Assessment Act'), a transaction otherwise assessable to sales tax is not taxable if the goods the subject of the transaction are covered by an exemption item in Sch 1 of the Exemption Act. 3 Item 43 of Sch 1 is in the following terms: [Electrical fittings etc] '(1) The following goods, if they are of a kind ordinarily used as part of fixed electrical installations in consumers' premises: (a) electrical fittings (including electronically operated electrical fittings); (b) electrical accessories (including electronically operated electrical accessories); (c) electrical materials (including electrical conduit); (2) Sub-item (1) does not cover: … (3) … (4) This item does not cover goods of a kind ordinarily used in the provision of telecommunications or audio visual services.' 4 At first instance, the appellant ultimately accepted that the LAN cable fell within the description of electrical materials of a kind ordinarily used as part of fixed electrical installations in consumers' premises within Item 43(1). It was common ground at first instance that the cable did not fall within Item 43(2) and that Item 43(3) was not relevant for present purposes. Thus the issue which the primary judge had to determine was whether the LAN cable was, within Item 43(4), goods 'of a kind ordinarily used in the provision of telecommunications or audio visual services' and therefore not excluded from the exemption in Item 43(1). Facts 5 LAN cable is designed for, and is used in, local area network systems ('LAN') to facilitate data communication. A LAN is a network of computers linked together, typically within a single organisation. In a typical LAN, computers and other applications, such as printers, communicate with each other whether or not the network is connected to a public network. However, often a LAN is connected to a public network to access facilities such as the Internet. The connection between a LAN and the public network is via a series of devices. The performance levels of LAN cables are not necessary for telephone communications, voice grade cable being adequate for these purposes. However, where a LAN is established for a computer network, it may also be used for telephone communications to avoid duplicating cabling. In such cases, the telecommunications services may be reticulated along and through the LAN network. 6 LAN cabling is installed within walls, partitions and ceilings as part of a building's fixed wiring infrastructure. It is generally installed as part of the fitout of commercial premises. 7 It was common ground between the parties that LAN cable is not used within the networks of telecommunications providers such as Telstra or Optus. Such providers do not use LAN cable in the provision and delivery of telecommunications services to the point at which the services are provided to buildings or structures. Telstra does not use LAN cable in any part of its network in Australia up to what is called the network boundary point or public network interface, ie the point at a consumers' premises at which the responsibility of Telstra as a provider of telecommunications services ends. The network boundary point or public network interface marks the boundary between the telecommunications carrier's network and the premises of the user. 'Public network interface' is defined in par 3.1.35 of Australian/New Zealand Standard 3080: 2000 as: 'a point of demarcation between public and private network. In many cases the public network interface is the point of connection between the network provider's facilities and the customer premises cabling'. The network boundary point is located at a building's main distribution frame, or at the first socket in domestic premises. Legislative history 8 Item 43(4) was inserted into the Exemption Act by the Taxation Laws Amendment Act (No 3) 1997 (Cth) which was enacted following the decision of the Full Court of the Federal Court in Telstra Corporation Ltd v Commissioner of Taxation (1996) 69 FCR 566. The Full Court held that the phrase 'fixed electrical installation', in what was then Item 90C (the predecessor to Item 43 and materially in the same terms), did not have any trade or technical meaning. The Full Court held that a main distribution frame and other telephone equipment used in a telephone exchange was 'electrical' and exempt under Item 90C. The consequence was that Telstra as a telecommunications provider, was entitled to an exemption from sales tax in respect of equipment used in its telephone exchanges. 9 The Explanatory Memorandum to the Taxation Laws Amendment Bill (No 3) 1997 (Cth) ('the Bill') relevantly provided: 'Background to the legislation 12.4 The Full Federal Court in Telstra Corporation Ltd v FC of T 1996 ATC 4805 held that certain items of equipment used in its telephone exchanges were not subject to sales tax under the former Item 90C of the Sales Tax (Exemptions & Classifications) Act 1935 (current Item 43 of Schedule 1 to the E & C Act). 12.5 Item 43 provides a sales tax exemption for certain electrical fittings, accessories and materials. 12.6 The Court decided that the words of the item do not have any trade or technical meaning, so that telephonic equipment, provided it can carry or store electricity, can be considered electrical equipment. Therefore the equipment, provided it is used as part of, or in connection with, "fixed electrical installations" in consumers' premises can be exempt from sales tax. 12.7 The Government considers that this decision has the potential to erode the wholesale sales tax base by exempting goods that are effectively key elements of a telecommunication provider's business inputs when its outputs are not taxable. 12.8 In line with its stated policy of preventing erosion of the sales tax base, the Government announced, through Treasurer's Press Release No 109 on 7 November 1996, that it would amend Item 43 to exclude from its coverage goods used in the provision of telecommunication and audio visual services. Explanation of the amendments 12.9 The proposed amendment inserts a new subsection (4) in Item 43 to specifically exclude from the exemption provided by that item, goods which are of a kind ordinarily used in the provision of telecommunication or audio visual services. The exemption will qualify all of Item 43 [Item 1].' 10 In his Second Reading Speech on the Bill, the Minister on 26 March 1997 said: 'The full Federal Court in Telstra Corporation Ltd v Federal Commissioner of Taxation held that certain items used in Telstra's telephone exchanges were exempt from sales tax as electrical fittings. The government considers that this decision goes beyond the intended coverage of the exemption for electrical fittings and therefore poses a threat to the existing coverage of the wholesale sales tax system.' 11 Telstra was a case which involved goods for use by the provider of the telecommunications services, rather than of goods for use by a consumer of those services. Item 43(4) was introduced in order to reverse for the future the result reached in that case. The decision of the primary judge 12 Although LAN cable is not used by providers of telecommunications services, such as Telstra and Optus, in their own networks, the question still remained whether it can be said that LAN cable is, nevertheless ordinarily used in the provision of telecommunications services. 13 The primary judge found that it was not so used because the word 'provision' contains within it the notion that some person or entity is making the provision of, or is providing the goods or services in question. The person or entity which sets up, maintains or uses the LAN network in a building, which is connected to a telecommunications service provided by a telecommunications network provider, is not itself providing telecommunications services. That person or entity is not providing telecommunications services itself. Rather it is connecting into a telecommunications network whereby the network operator provides the telecommunications services to the proprietor or operator of the LAN network in the relevant premises or building. 14 The primary judge did not accept that the expression 'the provision of telecommunications … services' applies to the entire process of communication or connection between the initial provider of the services, such as the network provider, and the ultimate consumer using a computer as part of a LAN network. In his view, 'provision of services ends at the point at which the delivery system of the provider of the services terminates, namely at the network boundary point or public network interface. Although the telecommunications services may be reticulated along and through the LAN network, he did not think it followed that the proprietor or operator of the LAN network is providing the telecommunications services, which have been delivered by the network provider to the network boundary point. 15 The primary judge said at par [34]: 'The proprietor or operator of the LAN network may be providing a means of connection between the network provider of the telecommunications services and the users of the LAN network, but that proprietor or operator is not, by means of the LAN network, providing telecommunications services itself. Rather it acts as a conduit for the provision of those services by the network provider such as Telstra or Optus. …' 16 His Honour considered that the use of the word 'in' in the expression 'in the provision of telecommunications … services', contemplates that the goods are ordinarily used by the entity which 'provides' the telecommunications services or makes them available, rather than by an entity which is merely a conduit, such as the proprietor or operator of the LAN network, for the passage of the services from the provider of the services to their ultimate consumer. 17 Finally, the primary judge derived some support for his conclusions from the legislative history referred to above. The primary judge also noted that in the context of construing sales tax legislation, there is a principle that classifications of goods attracting exemptions or beneficial rates of taxation should be liberally construed unless the text or context requires a narrow construction, but his Honour did not explicitly incorporate that principle into his process of reasoning. The appellant's case on appeal 18 The appellant submitted that in the case of telecommunications services, the provision of the services is not complete until the services are received by – that is, are available for use by – the person who will use the services. This means the person who will make the telephone call, send the facsimile message, or send or receive email over the Internet. Contrary to the primary judge's finding, the 'provision' of telecommunications services is not complete at the 'network boundary point' or 'public network interface'. The infrastructure in place beyond that point is an indispensable part of the process by which the services are provided to, and enjoyed by, the user. 19 According to the appellant, the issue is not whether Telstra, or any particular telecommunications provider, uses the LAN cable in the provision of telecommunication services, or whether the services provided by the person who sets up, maintains or uses the LAN network are telecommunications services. The phrase 'ordinarily used in the provision of' employs the passive voice, and is descriptive of the nature of the goods. Telecommunications services are reticulated along and through the LAN network, which provides a means of connection between the provider of the services and the user of them, and is a conduit for the passage of the services from provider to ultimate user. Goods may be used in the provision of television services even though the goods are provided by someone other than the provider of the services, eg by a consumer of those services. The LAN cable is thus used in the provision of telecommunications services. 20 The fact that the LAN cable is also used for internal communication purposes does not preclude a conclusion that the cable is within Item 43(4). Often a LAN is also connected to a public network to access facilities such as the Internet. Goods may fall within Item 43(4) even if the relevant use is not the predominant use to which the goods are ordinarily put and even if the relevant use is ordinarily in association with other uses. 21 The appellant submitted that the primary judge erred in having recourse to extrinsic materials because the meaning of Item 43(4) is plain and unambiguous. In any event, whilst Parliament may have been prompted by the decision in Telstra to introduce Item 43(4), it did not follow that the item is confined in its scope to a reversal for the future of the effect of that decision. Decision 22 It is inherent in the nature of a telecommunications service that it has a supply side and a demand side. Suppliers, such as Telstra or Optus, supply or provide the telecommunications service to consumers who receive the service. Goods may be used in connection with the provision of the service, as well as in connection with its receipt. It does not follow that goods which are used in connection with the receipt of a service are necessarily used 'in the provision of' that service. Whether goods are used in the provision of a service, as distinct from in connection with its receipt, may depend upon a number of factors, including whether there is a point prior to the receipt of the service by an end user at which the role of the service provider comes to an end. 23 In the present case the primary judge found, as a matter of fact, that the provision of telecommunications services by the suppliers of those services ends at the point at which the delivery system of the providers of the services terminates, namely at the network boundary point or public network interface. The service provider fulfils its responsibilities by reaching that point. There was no challenge to that finding. 24 The question then, is whether the notion of 'provision of telecommunications services', in the particular context under consideration, is confined to what the provider does in order to provide those services, or whether it extends so as to include things done by the recipient of those services to enable their enjoyment. 25 This is a matter on which opinions might legitimately differ. However, the better view is that the notion of provision of telecommunications services is confined to what the supplier of those services does in order to provide them. It may be necessary for the recipient of telecommunications services to supply a piece of equipment, be it a plug, cable or some other device, to enable enjoyment of the telecommunications services which the supplier has provided. But goods provided by a recipient of telecommunications services to enable the use of those services in a manner adapted to the consumers' own requirements are not appropriately characterised as goods used in the provision of those services. The LAN cables are goods of that type. 26 At the very least, contrary to the appellant's submission, Item 43(4) is ambiguous or obscure because of uncertainty as to the reach of the notion of 'provision'. It is therefore legitimate to have recourse to the legislative history and the extrinsic materials to throw light on the proper construction of the words in question: Eastman v Director of Public Prosecutions (ACT) (2003) 198 ALR 1, 21; CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384, 408; Newcastle City Council v GIO General Ltd (1997) 191 CLR 85, 99, 112. The extrinsic materials referred to above indicate that Parliament intended to amend Item 43 to remove (for the future) the benefits of the exemption otherwise afforded under sub-item 43(1) to telecommunications and audio visual services providers in respect of goods used by them in the provision of their services. The extrinsic materials do not suggest that any more far reaching change in the law was intended. 27 We therefore agree with the conclusion reached by the primary judge. The appellant criticises that conclusion upon the basis that it gives only the most attenuated operation to Item 43(4). We do not agree with this criticism. The issue is not where the goods in question are located inside or outside the consumers' premises, but whether they are for use in the provision of the relevant services, or for use in connection with their receipt. The extrinsic materials demonstrate that the legislative concern was that goods used on the supply side of telecommunications and audio visual services were, on the construction adopted in Telstra, receiving an exemption from sales tax which was not intended. This was because the expression 'fixed electrical installation' was held to include a main distribution frame in a telephone exchange. It was that exemption which the legislature intended to remove by Item 43(4). 28 The appeal should be dismissed with costs. I certify that the preceding twenty-eight (28) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Court. Associate: Dated: 15 August 2003 Counsel for the Appellant: Mr C Maxwell QC, Mr P Sest Solicitor for the Appellant: Australian Government Solicitor Counsel for the Respondent: Mr J de Wijn QC, Ms F Alpins Solicitor for the Respondent: Hall & Wilcox Date of Hearing: 11 August 2003 Date of Judgment: 15 August 2003