FEDERAL COURT OF AUSTRALIA State Electricity Commission of Victoria v Commissioner of Taxation [1999 FCA 203] SALES TAX – Exemptions – whether transformers used for distribution of electricity exempt from sales tax – whether used in a manufacture-related activity or in an activity that was ancillary to a manufacture-related activity or in an activity that was ancillary to an ancillary activity – whether electricity within the definition of "goods" – whether electricity is "tangible personal property" – whether transformers for use mainly in producing electric current where the production is for the purposes of sale by the producer – meaning of production – whether transformers were used under a contract with an always exempt person so that the goods became an integral part of property other than goods owned by or leased to the always exempt person – whether substation housing transformer used under a contract with a school conducted by the State of Victoria became an integral part of the property owned by or leased to the school WORDS AND PHRASES – "tangible personal property" – "production" – "integral part of property" Sales Tax (Exemptions and Classifications) Act 1992 s 10, Schedule 1 Items 18(1), 18(3)(d), 18(5)(a) and (b), 56, 126, 192 Sales Tax Assessment Act 1992 ss 5, 7, 24 State Electricity Commission Act 1958 (Vic) Electric Light and Power Act 1958 (Vic) s 51 Electricity Act 1994 (Qld) s 235 Landlord and Tenant Act 1958 (Vic) s 28(2) Telstra Corporation Limited v Commissioner of Taxation (1996) 68 FCR 566 Low v Blease [1975] Crim LR 513 Halsbury's Laws of England (4th Ed) Vol 19(2) Halsbury's Laws of Australia [170-6295] Bourke, Criminal Law Victoria, paragraph 3672 Stroud's Judicial Dictionary of Words and Phrases (5th Edn) Oxford English Dictionary (2nd Edn) Macquarie Dictionary (revised edition) STATE ELECTRICITY COMMISSION OF VICTORIA v COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA VG 207 of 1997 RYAN J 10 MARCH 1999 MELBOURNE IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY VG 207 OF 1997 BETWEEN: STATE ELECTRICITY COMMISSION OF VICTORIA Applicant AND: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent JUDGE: RYAN J DATE OF ORDER: 10 MARCH 1999 WHERE MADE: MELBOURNE MINUTES OF ORDER THE COURT ORDERS: 1. That the application 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 VG 207 OF 1997 BETWEEN: STATE ELECTRICITY COMMISSION OF VICTORIA Applicant AND: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent JUDGE: RYAN J DATE: 10 MARCH 1999 PLACE: MELBOURNE REASONS FOR JUDGMENT 1 This proceeding was commenced by writ in the High Court on 17 April 1997 and was remitted by consent to this Court on 8 May 1997. The proceeding is within the original jurisdiction of this Court pursuant to s 75 (iii) of the Constitution in that the respondent is a person sued on behalf of the Commonwealth of Australia. The applicant ("the SECV"), a statutory corporation incorporated under the State Electricity Commission Act 1958 (Vic), has sought declarations that various classes of transformers used in the electricity industry were not liable to sales tax. Background 2 The SECV generated, transmitted, distributed and sold electricity to customers in accordance with the State Electricity Commission Act 1958 (Vic)and the Electric Light and Power Act 1958 (Vic). From January 1994, following a reorganisation of the SECV, certain functions formerly undertaken by it were transferred to other bodies. The effect of the reorganisation was that, by 1995, the generation of electricity had been taken over by Generation Victoria. Power Net Victoria owned and operated the high voltage grid, while Victorian Power Exchange was the systems controller and administered the wholesale electricity market. 3 The distribution of electricity was allocated to five distribution companies, one of which was United Energy Limited ("United"). The distribution companies owned and operated the distribution network comprising sub-stations and distribution lines, transforming electricity purchased in the wholesale electricity market operated by Victorian Power Exchange into lower voltage electricity which was then on-sold to customers. 4 On 6 September 1995, the shares in United, which had formerly been held by the SECV, an agency of the State of Victoria, were sold to a privately owned company. For as long as the SECV distributed electricity, goods acquired for use by the SECV in performing that function were covered by Item 126 of Schedule 1 to the Sales Tax (Exemptions and Classifications) Act 1992 ("the Exemptions Act"), and were, accordingly, exempt from wholesale sales tax. That exemption continued to apply while the shares in the distribution companies were retained by the SECV. However, once the shares in the distribution companies formerly held by the SECV had been sold to privately owned companies, the exemption from wholesale sales tax contained in Item 126 in Schedule 1 of the Exemptions Act no longer applied. 5 On 6 September 1995, an agreement was made between the SECV and United whereby the SECV agreed to reimburse United for any sales tax incurred by it after its sale into private hands. Similar agreements were made between the SECV and the other four distribution companies. 6 The SECV's amended statement of claim, filed 16 September 1997, ("the amended statement of claim") contained the following allegations in respect of the transformers used by the distribution companies: "7. The Transformers may be divided into five classes: 7.1 Power transformers (being those identified in Schedule 1 hereto) which transform high voltage electrical power purchased by United into low voltage electrical power required by United's customers. 7.2 Auto transformers (being those identified in Schedule 2 hereof) which are a special type of power transformer used when the required change of voltage is relatively small. 7.3 Isolating transformers (being those identified in Schedule 3 hereof) which transform electrical power in one circuit to electrical power in another electrical circuit but are used to break the link between the two circuits. 7.4 Voltage transformers (being those identified in Schedule 4 hereof) which detect and/or measure voltage for the purpose of recording and controlling the voltage level. 7.5 Current transformers (being those identified in Schedule 5 hereof) which detect and/or measure current for the purpose of recording and controlling the current level. 8. The Transformers are and were at all materials times used by United as follows: 8.1 Power transformers, which contain two windings per phase, are used in two positions in the electrical transformation/distribution process. The first position is in Zone Sub-stations (secondary transformation stage) where electrical power is received from the transmission company (via a transmission power transformer; primary transformation stage) at sub-station voltage (eg. 66,000 volts) and transformed to electrical power of distribution voltage (eg. 22,000 or 11,000 volts) for practical and economical distribution around United's geographic area. These transformers are large units having capacities in the range 10 to 33 MVA (mega volt amps). A few large electricity consumers are supplied with electrical power at distribution voltage. The second position is in distribution sub-stations (tertiary transformation stage) where electrical power at distribution voltage is transformed to electrical power at low voltage (eg. 415 or 250 volts) suitable for use by the majority of consumers. 8.2 Auto-transformers are a special class of power transformers. They are used in distribution feeders (and sometimes in sub-transmission lines in rural areas) to transform electrical power being carried at less than the required voltage to electrical power at the required voltage. A few of these units are used to transform electrical power being carried at above the required voltage to power at the required voltage in order to match the feeder voltage of a particular area (eg. 11,000 to 6,600 volts). 8.3 Isolating transformers are used in a variety of applications. The most common is to transform electrical power carried by the normal three phase distribution system to a single phase Single Wire Earth Return ("SWER") distribution branch. From this point on, SWER type power transformers are used to convert from SWER distribution voltage to low voltage, suitable for use by consumers. 8.4 Current transformers are used throughout the distribution system to transform current flowing in High Voltage conductors to a much smaller current, at a safe low voltage level. They measure or detect current flow to initiate protection signals to open circuit breakers if there is a fault (short circuit) on HV conductors; or for metering and display of electrical energy used. 8.5 Voltage transformers are used throughout the distribution system to transform the voltage present in the High Voltage conductors to a much smaller and safe low voltage level. They measure or detect the voltage for use in automatic voltage control systems to keep the voltage level within prescribed statutory limits; or for metering and display of electrical energy used." The Legislative Scheme 7 Section 24 of the Sales Tax Assessment Act 1992 ("the Assessment Act") was in these terms: "An assessable dealing is not taxable if: (a) the goods are covered by an exemption Item that is in force at the time of the dealing; and (b) all the requirements of that Item have been met at or before the time of the dealing." 8 It was common ground between the parties that the sale and purchase by United of the transformers referred to in the amended statement of claim would constitute an assessable dealing for the purposes of s 24 of the Assessment Act unless the SECV could establish that the transformers were covered by an exemption item that was in force at the time of the dealing. 9 Dr Emmerson QC who appeared with Mr Murphy of Counsel for the SECV submitted that all five categories of transformers referred to in paragraphs seven and eight of the amended statement of claim were exempt items pursuant to Item 18 of Schedule 1 of the Exemptions Act. 10 Item 18, so far as is relevant, stipulated: "18(1) Goods for use by a person ("the exemption user") mainly in carrying out one or more of the following activities: (a) a manufacture-related activity carried out by the exemption user in the course of a business; (b) an activity that is ancillary (as defined by section 10) to one or more activities covered by paragraph (a); (c) an activity that is ancillary (as defined by section 10) to one or more activities covered by paragraph (b). 18(2) Eligible raw materials and parts (as defined by section 11) in relation to activities covered by subitem (1). 18(3) This Item does not cover: ... (d) property for use mainly in producing electric current, gases, steam, compressed air or hydraulic power, except where the production is for purposes of: (i) sale by the producer; or (ii) use by the producer mainly in carrying out one or more activities covered by subitem (1); ... 18(5) In this Item: "goods/equipment" means goods, or machinery, implements or apparatus; "manufacture-related activity" means: (a) applying a process or treatment to goods that are to be used as raw materials for other goods to be manufactured by the exemption user or anyone else; [For example, purifying chemicals that are to be used in manufacturing cosmetics] (b) applying a process or treatment to goods so that the goods, or an essential element of the goods, become an integral part of other goods that are being manufactured by the exemption user or anyone else; [For example, applying a moulding process to plastic in order to make plastic door knobs]." 11 "Goods" was defined in s 5 of the Assessment Act in these terms: "'goods' means any form of tangible personal property, but: (a) does not include property that is sold as second-hand and is manufactured exclusively or principally from goods that: (i) were already Australian-used goods before the manufacture began; and (ii) in their condition as parts of the property so manufactured, retain their character as Australian-used goods; and (b) has a meaning affected by section 12;" 12 "Manufactured" was not defined, but s 5 of the Assessment Act contained this definition of "manufacture": "'manufacture' includes: (a) production; (b) combining parts or ingredients so as to form an article or substance that is commercially distinct from the parts or ingredients; (c) applying a treatment to foodstuffs as a process in preparing them for human consumption; (d) processing or treating exposed photographic film or cinematograph film so as to produce a negative, transparency or film strip; (e) duplicating a computer program; (f) duplicating visual images or sounds, or both; but does not include: (g) any action or process by which goods come into existence incidentally to the performance of work whose essential character is the performance of skilled services and not the bringing into existence of goods for the essential object of selling the goods or applying them to own use; (h) the duplication of a computer program by a person ("the duplicator") if: (i) the duplication results in a tax-advantaged computer program that is embodied in goods that are to be for retail sale by the duplicator; and (ii) the duplicator did not manufacture the goods in which the program was to be embodied, and tax had become payable (either by the duplicator or someone else) on those goods sometime before the duplication; (i) any prescribed combination of parts or ingredients;" 13 "Manufacturer" was defined as follows in s 5 of the Assessment Act: "'manufacturer', in relation to particular goods, means the person who (not as an employee) manufactured the goods, whether or not the person owned the materials out of which the goods were manufactured." 14 Section 10 of the Exemptions Act provided, so far as is relevant: "(1) For the purposes of Chapter 1, the following activities of a person ('the exemption user') are ancillary to one or more other activities ('the higher level activities') carried out by the exemption user: (a) scheduling, sequencing, monitoring, controlling or costing the higher-level activities; (b) ordering, storing, handling, transporting, monitoring, controlling, costing, repairing or maintaining any of the following: (i) goods/equipment used, or for use, mainly in carrying out the higher-level activities; (ii) if each of the higher-level activities consists of applying a process or treatment to goods as described in paragraph (a) or (b) of the definition of "manufacture-related activity" in exemption Item 18 - the goods to which that process or treatment is applied. (iia) materials wholly or partly out of which wholesaler's-materials goods in relation to the exemption user are to be manufactured. (iii) goods for use exclusively as raw materials in the on-site construction of goods/equipment for use mainly in carrying out the higher-level activities; ... (d) an activity that is undertaken mainly for one or more of the following purposes: ... (vii) producing, supplying or regulating power (including electricity, gas, compressed air or hydraulic power) for use in carrying out the higher level activities; ... (2) In this section: 'eligible area' means an area that is used, or for use, mainly in carrying out the higher-level activities; 'goods/equipment' means goods, or machinery, implements or apparatus." 15 Section 5 of the Assessment Act also contained this definition: "'raw materials' has the meaning given by section 7;" 16 Section 7 of the Assessment Act provided: "(1) 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. (2) Goods are taken to be used as raw materials in constructing or repairing property if, and only if, the goods are dealt with in such a way in constructing or repairing the property that the goods, or some essential element of the goods, become an integral part of the property." The SECV's claim 17 The SECV's primary contention was that all five classes of transformers referred to in paragraphs seven and eight of the amended statement of claim were exempt pursuant to Item 18(1)(a) of Schedule 1 of the Exemptions Act. The transformers were said to be goods for use by United mainly in carrying out a manufacture-related activity carried out by United in the course of a business. It was submitted in the alternative that the transformers were exempt items pursuant to Item 18(1)(b) as goods used mainly in an activity that was ancillary to a manufacture-related activity or that they were exempt items pursuant to Item 18(1)(c) in that they were goods used in an activity that was ancillary to an ancillary activity pursuant to Item 18(1)(b). 18 The other principal contention advanced on behalf of the SECV was that the transformers were exempt items pursuant to Item18(3)(d)(i) of the Exemptions Act being goods for use mainly in producing electric current where the production was for the purposes of sale by the producer. 19 Finally, Counsel for the SECV made additional submissions in relation to transformers referred to in these terms in paragraph 11 of the amended statement of claim: "Some or all of the Transformers are and were at all material times used by United under a contract with an always exempt person, so that they are and were an integral part of property other than goods owned by the always exempt person." 20 Submissions on behalf of the SECV were also directed to a limited number of transformers supplied by United, to one of which evidence was directed by way of example. That transformer, located at Mount Waverley College ("the College"), was said to be exempt pursuant to Item 192 of Schedule 1 of the Exemptions Act. 21 Item 192 was in the following terms: "192(1) Goods for use by a person so that the goods become an integral part of property (not being goods) where: (a) the use is under a contract with an always-exempt person or with the government of a foreign country, or under a sub-contract under such a contract; and (b) either: (i) the property is owned by or leased to the always exempt-person or the government of the foreign country; or (ii) the use is in the construction, improvement, or other preparation, of the property for ownership by the always exempt-person or the government of the foreign country. 192(2) Goods for use by a person so that the goods become an integral part of property (not being goods) where: (a) the property is leased to an always exempt-person or the government of a foreign country; and (b) the use of the goods by the person is under a contract with the lessor, or under a sub-contract under such a contract; and (c) the lessor entered into the contract for the purpose of complying with the requirements of the lease. 192(3) This Item does not apply if the property is or will be used by: (a) the foreign country's diplomatic mission in Australia; or (b) a consular post in Australia of the foreign country; or (c) a Trade Commissioner in Australia of the foreign country." 22 Counsel for the SECV contended that the College, a school conducted by the State of Victoria, was an exempt person for the purposes of Item 192. Counsel further submitted that the transformer supplied to the College by United had become "an integral part of property (not being goods)" and therefore qualified, pursuant to Item 192, for an exemption from sales tax. 23 It appears to have been common ground between the parties that all five types of transformers referred to in paragraphs 7 and 8 of the amended statement of claim were within the definition of "goods", as that term was defined in s 5 of the Assessment Act. However, Counsel for the SECV submitted that electricity or electrical power was also comprehended by the definition of "goods" used in s 5 of the Assessment Act. Counsel focused on the general definition "'goods' means any form of tangible personal property" in support of his contention that electricity or electrical power was a form of tangible personal property. Counsel accepted that "property" was not defined in either the Assessment Act nor the Exemptions Act but referred the Court to the definition of property contained in Stroud's Judicial Dictionary of Words and Phrases (5th Edn 1986) which includes: "(1) 'Property' is the generic term for all that a person has dominion over. Its two leading divisions are (1) real, and (2) personal." 24 Counsel submitted that electricity or electrical power was something capable of being quantified for the purposes of purchase, sale and delivery. It was, therefore, Counsel submitted, something over which a person could have dominion. Counsel further submitted that, unlike intangible forms of personal property, such as a chose in action, electricity or electrical power was something physical. It was, Counsel submitted, "tangible personal property" and was therefore comprehended by the definition of "goods" in s 5 of the Assessment Act. 25 In support of that contention, Counsel also referred to Item 56 of Schedule 1 of the Exemptions Act which exempted "hydraulic power and electric current" from sales tax. The presence of that exemption implied, so the argument went, that the legislature had regarded hydraulic power and electric current as falling within the definition of "goods" used in s 5 of the Assessment Act. That implication was said to be consistent with the scheme of the Exemptions Act whereby a wide definition was given to "goods" followed by exemptions for certain "goods" which would otherwise have been liable to sales tax. 26 By way of developing that argument, reference was made, first, to s 10(1)(d)(vii) of the Exemptions Act which defined an ancillary activity for the purposes of Item 18(1) as including "producing, supplying or regulating power (including electricity... )". Secondly, Counsel sought to rely upon the provision in Item18(3)(d) where no exemption from sales tax was conferred upon property used mainly in producing electric current "except where the production is for the purposes of … sale by the producer". Counsel submitted that these two provisions evinced a legislative acceptance that electricity or electrical power was something capable of being produced, supplied, regulated and sold, which, in turn, entailed an acceptance that electricity was something comprehended by the definition of "goods" contained in s 5 of the Assessment Act. 27 Counsel for the SECV further submitted that the modification of electrical current by transformers from a voltage of what was accepted to be around 66,000 volts to a supply at 240 and 415 volts capable of use by domestic and commercial customers respectively, involved the application of a process or treatment by a transformer to the "in-coming higher voltage" electricity or electrical power in order to render it safe for use at a much lower voltage. It was submitted that the lower voltage electricity or electrical power was modified in such a manner and to such an extent as to render it different "goods" for the purposes of Item 18(1)(a) of Schedule 1 to the Exemptions Act. It was contended that the "goods" received by United (the high-voltage input electricity or electrical power) were not suitable for use by domestic or business customers and were, in fact, different "goods" from the modified output electrical power supplied to customers. 28 Counsel for the SECV submitted that, to the extent that each of the transformers referred to in paragraphs 7 and 8 of the amended statement of claim modified the input electrical power to create a lower output power, it was involved in a process or treatment applied to the input electrical power and, therefore, in a manufacture-related activity for the purposes of Item 18(1) of Schedule 1 to the Exemptions Act. 29 It was then submitted, in the alternative, that voltage and current transformers, to the extent that each measured and monitored the input electrical power, contributed to an activity which was ancillary to a "higher level activity" for the purposes of Item 18(1)(b). On this argument, voltage and current transformers were involved, as contemplated by s 10(1)(a) of the Exemptions Act, in "scheduling, sequencing, monitoring, controlling or costing the higher level activities", being the manufacture-related activity carried out by the other three classes of transformers. 30 A further alternative contention was that the voltage and current transformers were involved, as contemplated by s 10(1)(d)(vii) of the Exemptions Act, in an activity that was ancillary to a "higher level activity", being the manufacture-related activity, of the other three classes of transformers. On that argument, voltage and current transformers were used in an activity that was undertaken mainly for the purpose of producing, supply or regulating electrical power for use in carrying out the higher level activity. Counsel for the SECV accepted, however, that for either a voltage or current transformer to be regarded as goods used in an activity that was ancillary to a manufacture-related activity, it was necessary to establish that some or all of the transformers referred to in paragraphs 7 and 8 of the amended statement of claim were used by United in an activity that was a manufacture-related activity for the purposes of Item 18(1)(a) of Schedule 1 of the Exemptions Act. 31 Counsel for the SECV next submitted that the definition of "manufacture-related activity" contained in Item 18(5)(b) of Schedule 1 to the Exemptions Act could be called in aid of the present application. The five classes of transformers were said to apply a process or treatment to electrical power, the effect of which was that the input electrical power, or an essential element of it, became "an integral part" of the modified output electrical power which United was manufacturing and distributing to commercial and private customers. Counsel contended that, whether one characterised the "goods" of input electrical power as the "raw material" of the "goods" of modified output electrical power (pursuant to Item 18(5)(a)), or whether one characterised the "goods" of input electrical power as an integral part of the "goods" of output electrical power (pursuant to Item 18(5)(b)) the effect was that all five classes of transformers, to the extent that they modified and monitored electrical power, were goods used in a manufacture-related activity for the purposes of Item 18(1)(a) of Schedule 1 and were therefore exempt from wholesale sales tax. 32 Counsel also appeared to rely upon the exemption contained in Item 18(3)(d)(i) by contending that United used transformers, which were not expressly identified, mainly in producing electric current where the purpose of production was sale by United to consumers. Moreover, reliance was placed on the exemption in Item 18(3)(d)(ii) in support of the contention that property used mainly in producing electric current was exempt to the extent that the property was used by United mainly in carrying out one or more activities covered by sub-item (1). This exemption, however, was accepted as predicated upon a finding that a transformer was within the category of "goods" used in a manufacture-related activity for the purposes of Item 18(1). 33 The submissions of Counsel for the SECV give rise to three questions: 1. Were any of the transformers referred to in paragraphs 7 and 8 of the amended statement of claim exempt items pursuant to Item 18(1) of Schedule 1 of the Exemption Act? 2. Were any of the transformers referred to in paragraphs 7 and 8 of the amended statement of claim exempt items pursuant to Item 18(3)(d) of Schedule 1 of the Exemptions Act? 3. Were any of the transformers referred to in paragraph 11 of the amended statement of claim exempt items pursuant to Item 192(1) of Schedule 1 of the Exemptions Act? 1. Were any of the transformers referred to in paragraphs 7 and 8 of the amended statement of claim exempt items pursuant to Item 18(1) of Schedule 1 of the Exemptions Act? 34 Counsel for the SECV accepted that the exemptions conferred pursuant to Item 18(1)(b) and Item 18(1)(c) could not apply to any of the classes of transformers referred to in paragraphs 7 and 8 of the amended statement of claim unless the exemption conferred by Item 18(1)(a) applied to at least one of those classes of transformers. Accordingly, it is necessary to determine, first, whether any of the transformers were exempt items pursuant to Item 18(1)(a) of Schedule 1 of the Exemptions Act. It was not disputed that the answer to this question requires a finding as to whether any of the transformers were used mainly in carrying out a manufacture-related activity as that term was defined in Item 18(5)(a) and (b). Paragraphs (a) and (b) of Item 18(5) were: "18(5) In this Item: 'goods/equipment' means goods, or machinery, implements or apparatus; 'manufacture-related activity' means: (a) applying a process or treatment to goods that are to be used as raw materials for other goods to be manufactured by the exemption user or anyone else; [For example, purifying chemicals that are to be used in manufacturing cosmetics] (b) applying a process or treatment to goods so that the goods, or an essential element of the goods, become an integral part of other goods that are being manufactured by the exemption user or anyone else; [For example, applying a moulding process to plastic in order to make plastic door knobs]." 35 To determine whether any of the transformers referred to in paragraphs 7 and 8 of the amended statement of claim were used in carrying out a manufacture-related activity, the definitions set out above make it necessary to answer the following questions: (a) Is electricity or electrical power within the definition of "goods" in s 5 of the Assessment Act? If "yes" to (a), then: (b) Do the transformers apply a process or treatment to electricity or electrical power? If yes to (b) then either: (i) Is electricity or electrical power used as raw material for other goods to be manufactured by United? or (ii) Does electricity or electrical power, or an essential element of electricity or electrical power, become an integral part of other goods that are being manufactured by United? (a) Is electricity or electrical power within the definition of "goods" in s 5 of the Assessment Act? 36 It was not disputed that all five types of transformers referred to in paragraphs 7 and 8 of the amended statement of claim were "goods", as defined in s 5 of the Assessment Act. However, Counsel for the SECV submitted that electricity or electrical power (to which I shall hereafter refer as "electricity") was also within the definition of "goods" in s 5 of the Assessment Act. Counsel focused on the general definition "'goods means any form of tangible personal property" in contending that electricity was a form of tangible personal property. It was accepted that "property" was not defined in either the Assessment Act or the Exemptions Act but reference was made to this definition of "property" in Stroud's Judicial Dictionary of Words and Phrases (5th Edn) where it is defined as: "(1) 'Property' is the generic term for all that a person has dominion over. Its two leading divisions are (1) real, and (2) personal." 37 In this context electricity was said to be something capable of being quantified for the purposes of purchase, sale and delivery. Counsel sought to contrast electricity with a debt in submitting that electricity, unlike a chose in action, is something physical and thus comprehended by the definition "tangible personal property". 38 Counsel also referred to Item 56 of Schedule 1 to the Exemptions Act which exempted "hydraulic power and electric current" from sales tax. That exemption was said to imply that hydraulic power and electric current were within the definition of "goods" since, if electric current had not been regarded as falling within that definition there would have been no need to make it the subject of a specific exemption. It was sought to justify this construction as being consistent with the scheme of the Exemptions Act which was to give a wide definition to "goods" and carve out specific exemptions from the widely defined "goods" otherwise liable to sales tax. 39 Further support for the contention that electricity was comprehended within the definition of "goods" in s 5 of the Assessment Act was sought to be derived, first, from s 10(1)(d)(vii) of the Exemptions Act which defined an ancillary activity for the purposes of Item 18(1) to include "producing, supplying or regulating power … including electricity". Secondly, Counsel drew attention in Item18(3)(d) which conferred no exemption from sales tax on property used mainly in producing electric current "except where the production is for the purposes of…sale by the producer". These two provisions were said to evince a legislative acceptance and recognition that electricity was something capable of being produced, supplied, regulated and sold. That acceptance and recognition entailed, so the argument went, that electricity was comprehended within the definition of "goods" in s 5 of the Assessment Act. 40 Counsel for the respondent did not make specific submissions on whether electricity was contemplated within the definition of "tangible, personal property" in s 5 of the Assessment Act. 41 The Oxford English Dictionary (2nd Edn) defines "property" to include: "1. The condition of being owned by or belonging to some person or persons; hence, the fact of owning a thing; the holding of something as one's own." 42 Similarly, the Macquarie Dictionary (revised edition) defines "property" as, amongst other things: "1. that which one owns; the possession or possessions of a particular owner." 43 In my view, both dictionary definitions suggest that "property" denotes concepts of ownership or belonging. Whilst I accept the contention advanced on behalf of the SECV that electricity is something capable of quantification, I do not regard that capability as enabling it to be regarded as "tangible personal property". 44 In an affidavit sworn 25 September 1997 Professor Bonwick furnished this description of the nature of electricity at paragraph 7: "Electricity consists of an electric current which passes through conductors in a transmission or distribution system under the pressure of a voltage. The amount of electrical power which can be transmitted (carried) depends upon the voltage and the current. Voltage is the term used for electrical pressure and can be compared with pressure under which water flows through a pipe. Current is the term used for the rate of the flow of electricity in a conductor and, in the above analogy, corresponds to the rate of flow of water in a pipe. Electric current consists of moving electrons." 45 In paragraph 29 of the same affidavit occurs this description of the operation of a transformer: "The two windings of a standard transformer are linked by a magnetic core, and this creates the interface between the two different voltage circuit systems. The transformer core therefore links the two independent electrical circuits connected to the two transformer windings. The current in one winding is independent of the current in the second winding even though the magnitudes of the currents are related." 46 When cross-examined, Professor Bonwick expanded upon this analysis by accepting that, in a transformer, the electrical current in one circuit is completely independent of the electrical current in the secondary circuit. 47 That part of the professor's evidence included this passage: "What I'm saying…is that the electrons flowing in the primary circuit are different than the electrons flowing in the secondary circuit, and in between there is a core which doesn't carry any current at all. It carries magnetic flux." 48 Professor Bonwick also agreed with the suggestion in cross-examination that the electricity in one circuit "induces" electricity in the other. 49 It is consistent with this evidence that, while electrical power or electricity (to which I continue to refer as "electricity") is capable of being transferred along an electrical circuit, it is not possible to isolate a given "piece" of electricity and attach rights of ownership to it. Similarly it cannot be said that a producer of electricity makes an identifiable "piece" of electricity. What is produced is power. 50 An inability to characterise electricity as property has been recognised in the context of the criminal law by Lord Widgery CJ and Milmo and Wien JJ in Low v Blease [1975] Crim LR 513 where it is noted that their Lordships held that: "…electricity was not appropriated by switching on a current and could not be described as "property" within the meaning of section 4 of the Theft Act 1968." 51 That view has been echoed in Halsbury's Laws of England (4th Ed) Vol 19(2) at para 927 where it is noted that "Electricity is not 'property' and so cannot be the subject of theft under the general law." A similar observation to this effect can be found in Halsbury's Laws of Australia [170-6295]: "As electricity is not property capable of being stolen, all the States and the Northern Territory have enacted provisions relating to the malicious or fraudulent use of electricity. In Victoria and Queensland, such use is deemed to amount to stealing electricity, and criminal law generally relating to theft applies. The other jurisdictions have created a separate offence of malicious or fraudulent use of electricity." 52 In Victoria the relevant statutory provision in s 51 of the Electric Light and Power Act 1958 which stipulates that: "Every person who wilfully without lawful excuse or who fraudulently abstracts causes to be wasted or diverted consumes or uses electricity shall be guilty of simple larceny and punishable accordingly." 53 In Queensland the corresponding enactment is s 235 of the Electricity Act 1994 which, so far as is relevant, provides: "(1) A person must not unlawfully take electricity. Maximum penalty – 1 000 penalty units or 6 months imprisonment. … (3) In a prosecution for an offence against this or another Act in which it is claimed electricity has been unlawfully taken, the electricity is taken to belong to any person through whose transmission grid, supply network or works the electricity was supplied." 54 These illustrations indicate that the criminal law in Australia has attempted to overcome the difficulty of predicating property in an identifiable "piece" of electricity by creating specific offences of taking or of fraudulently abstracting electricity, and, to that extent, by modifying the concept of "property". (See, eg, the comments in Bourke, Criminal Law Victoria at 3672). However, I find no support from those legislative extensions of the concept of property in electricity for holding that electricity is comprehended by the definition "tangible personal property" in s 5 of the Assessment Act. 55 It is true that hydraulic power and electric current have been exempted from sales tax pursuant to Item 56 of Schedule 1 of the Exemptions Act. It is also true that the legislative scheme specifically contemplates the production, supply, regulation and sale of electrical power (as, for example, in s 10(1)(d)(vii) and Item 18(3)(d) of the Exemptions Act). However, I do not infer from those provisions that Parliament intended to characterise electricity as "tangible personal property" for the purposes of the legislative scheme. 56 In coming to this conclusion I have not been unmindful of the observations of Heerey J in Corporation Limited v Commissioner of Taxation (1996) 68 FCR 566 where his Honour observed at 569: "In the area of sales tax legislation, the general rules as to the construction of revenue statutes (see D C Pearce and R S Geddes, Statutory Interpretation in Australia (4th ed, 1996), pp 235-236) have given rise to the more specific canon that classifications of goods attracting exemptions or beneficial rates should be liberally construed unless the text or context requires a narrow construction: Diethelm Manufacturing Pty Ltd v Commissioner of Taxation (1993) 44 FCR 450 at 464 per French J, followed by Foster J in GKN Australia Ltd v Commissioner of Taxation (Cth) (1994) 28 ATR 321 at 323." 57 However, the principle stated by his Honour that "classifications of goods attracting exemptions should be liberally construed" depends for its application on a prior finding that material to be exempted is within a classification of "goods". For reason already given, I am unable to conclude that electricity is comprehended by the expression "tangible personal property" within the definition of "goods" in s 5 of the Assessment Act. 58 Accordingly, in my view, none of the transformers referred to in paragraphs 7 and 8 of the amended statement of claim was used by United in carrying out a manufacture-related activity. Nor can any of those transformers be said to have been used mainly in carrying out an activity that was ancillary to a manufacture-related activity, or ancillary to an ancillary activity pursuant to Items 18(1)(b) and 18(1)(c) respectively. 2. Were any of the transformers referred to in paragraphs 7 and 8 of the amended statement of claim exempt items pursuant to Item 18(3)(d) of Schedule 1 of the Exemptions Act? 59 Item 18(3)(d) of Schedule 1 of the Exemptions Act was in the following terms: "18(3) This Item does not cover: ... (d) property for use mainly in producing electric current, gases, steam, compressed air or hydraulic power, except where the production is for purposes of: (i) sale by the producer; or (ii) use by the producer mainly in carrying out one or more activities covered by subitem (1);" 60 It follows from my conclusion that none of the transformers referred to in paragraphs 7 and 8 of the amended statement of claim was used by United mainly in carrying out a manufacture-related activity, that the exemption referred to in sub-item (ii) above does not apply. 61 However, Dr Emmerson also contended that the SECV could rely upon the exemption contained in sub-para (i) of Item 18(3)(d). It was submitted that transformers for use by United in producing electric current were exempt items pursuant to sub-item (i) above to the extent that they were used in producing electric current where the production of electric current was for the purpose of sale by United. 62 This submission was not developed and no attempt was made to identify which of the transformers referred to in paragraphs 7 and 8 of the amended statement of claim were covered by the exemption in sub-para (i). 63 However, it appears to have been common ground that United sold electricity directly to private and commercial consumers of electricity. The issue therefore is whether United used transformers in producing electric current for the purposes of sale by it to consumers. I note, in this context, that, while Item 18(3)(d) refers to "producing electric current, gases, steam, compressed air or hydraulic power", s 10 of the Exemptions Act defines an "ancillary activity" to include an activity undertaken for "producing, supplying or regulating power (including electricity, gas, compressed air or hydraulic power)". Although the Court had the advantage of expert evidence as to the meaning of "electric current", "electrical power" and "electricity", it is clear that any exemption contained in Item 18(3)(d) is only available if United was a producer of electric current. 64 "Produce", "production" and "producer" are not defined in the sales tax legislation scheme although the definition of "manufacture" in s 5 of the Assessment Act includes "(a) production". 65 The Macquarie Dictionary (revised edition) defines "produce" to include: "1. to bring into existence; give rise to; cause…2. To bring into being by mental or physical labour;" 66 The Oxford English Dictionary (2nd Edn) defines "produce" to include: "To bring forth, bring into being or existence. To bring (a thing) into existence from its raw materials or elements, or as the result of a process;" 67 Stroud's Judicial Dictionary of Words and Phrases (5th Edn) includes this discussion of "produced": "(1) 'Produced' is a word 'which has not got any exact legal meaning, but which requires to have an interpretation placed upon it in the statute in which it is used' (per Rigby L.J., Hansfstaengl v American Tobacco Co. [1895] 1 Q.B. 347)." 68 It is clear from the respective definitions in s 5 of the Assessment Act that "manufacture" has a wider meaning for the purposes of the sales tax regime than "production". Furthermore, as already noted, Counsel for the SECV contended at some length that the transformers referred to in paragraphs 7 and 8 of the amended statement of claim were involved in a manufacture-related activity to the extent that, in modifying or monitoring electricity or electrical power, the transformers applied a process or treatment to electricity or electrical power and were therefore exempt items pursuant to Item 18(1). For reasons already explained, I have found it unnecessary to decide that issue. 69 In my view, however, "production" connotes something more than the "application of a process or treatment". As illustrated by the dictionary definitions it imports notions of bringing into existence or creating. In the absence of direct submissions on this point, it seems that, at its highest, the SECV's case was that power transformers, auto transformers, and isolating transformers reduced the voltage of electrical power or electricity to render it useable by consumers. I do not consider that the modification of the voltage of electricity in that way amounts to production of electric current. I am reinforced in this conclusion by the evidence of Professor Bonwick, an expert witness called by the SECV who was asked in cross-examination by Mr Shaw QC for the respondent: "And is it right to say that no electrical energy is produced in a transformer?" 70 The professor replied: "Yes, you're right to say that. No, there isn't any energy produced in a transformer. There's energy dissipated unfortunately, because of losses, but there's no intrinsic energy produced within the transformer." 71 Accordingly, the transformers referred to in paragraphs 7 and 8 of the statement of claim are not exempted by Item 18(3)(d)(i) of Schedule 1 of the Exemptions Act. 3. Were any of the transformers referred to in paragraph 11 of the amended statement of claim exempt items pursuant to Item 192(1) of Schedule 1 of the Exemptions Act? 72 Paragraph 11 of the amended statement of claim was in these terms: "Some or all of the Transformers are and were at all material times used by United under a contract with an always exempt person, so that they are and were an integral part of property other than goods owned by the always exempt person." 73 Counsel for the SECV made submissions in relation to a limited number of transformers supplied by United only one of which was the subject of direct evidence. It was submitted that this transformer located at the College was an exempt item pursuant to Item 192 of Schedule 1 of the Exemptions Act. 74 Item 192 was in the following terms: "(1) Goods for use by a person so that the goods become an integral part of property (not being goods) where: (a) the use is under a contract with an always-exempt person or with the government of a foreign country, or under a sub-contract under such a contract; and (b) either: (i) the property is owned by or leased to the always exempt-person or the government of the foreign country; or (ii) the use is in the construction, improvement, or other preparation, of the property for ownership by the always exempt-person or the government of the foreign country. (2) Goods for use by a person so that the goods become an integral part of property (not being goods) where: (a) the property is leased to an always exempt-person or the government of a foreign country; and (b) the use of the goods by the person is under a contract with the lessor, or under a sub-contract under such a contract; and (c) the lessor entered into the contract for the purpose of complying with the requirements of the lease. (3) This Item does not apply if the property is or will be used by: (a) the foreign country's diplomatic mission in Australia; or (b) a consular post in Australia of the foreign country; or (c) a Trade Commissioner in Australia of the foreign country." 75 Counsel for the SECV contended that the College, a school conducted by the State of Victoria, was an exempt person for the purposes of Item 192. Counsel further submitted that the transformer supplied to the College by United had become "an integral part of property (not being goods)" and therefore attracted the exemption from sales tax contained in Item 192. 76 Counsel submitted, first, that the transformer located at the College had become an integral part of the property in the physical sense of being attached to the College premises by a series of wires and cables. Counsel submitted, secondly, that the transformer was an integral part of the property in a functional sense, that it supplied electricity for the College and that any attempt to remove the transformer would require the electricity supply to the College to be disconnected. 77 In his affidavit sworn 17 March 1998, Dr Densem deposed: "The sub-station at Mount Waverley is a step down power transformer, converting input voltage of 22,000.00 volts to an out-put distribution voltage of 415 volts. The transformer is necessary to transform electricity supplied to Mount Waverley Secondary College [by] United to a safe and useable voltage level." The transformer at Mount Waverley Secondary College is located within the school property adjacent to the school buildings. The kiosk was selected by the school and in preference to an indoor type sub-station as the school did not have the space available to provide a brick room to enclose the transformer. The kiosk comes as an all inclusive totally enclosed free standing unit. It sits on a reinforced concrete slab under its own weight, within an 8 metre by 4.2 metre easement. An Hv earth wire is installed around the perimeter of the substation but within the easement area. Physically, the sub-station weighs approximately 3.5 tonnes and is about the size of a small sedan (1.5 metres wide x 3.0 metres long x 1.5 metres high). The sub-station is installed by the excavation of a trench, the casting of an in-situ reinforced concrete slab, the laying of cables, installation of the transformer and finally, assembly of the kiosk cabinet. The kiosk is held in place by its weight and the cable and earthing wires. The cables are laid through support ducts which come from the ground and are attached and bolted to the transformer. Due to the kiosk's significant weight, rendering it immoveable, no other means of attachment to the concrete slab is required. Installation of the kiosk substation takes approximately one full day and requires the use of a crane. The kiosk sub-station would ordinarily be in service for approximately 25 years before the transformer or kiosk cabinet needed to be changed. When major servicing of this nature is required the power is turned off, cables disconnected and the transformer or kiosk cabinet changed. Routine inspection and maintenance would occur far more frequently, but this would not likely require any change to the installed equipment. Removal of the sub-station, should this occur, would similarly take approximately one full day and would require the use of a crane and considerable technical expense." 78 Dr Densem, in cross-examination, likened the kiosk to a removable shell which housed the equipment inside. It could be assembled either by putting in the equipment first on its subframe and lowering the shell around it or, alternatively, it could be put in place prefabricated. 79 Counsel for the respondent referred to an agreement between United and the College dated 25 June 1997 ("the agreement") whereby United undertook to install a kiosk-type substation at the College for the supply of electricity together with the necessary cable connections. It was common ground that the agreement provided, amongst other things, that United would design and install a substation and that the College would grant a lease to United over an area of land necessary for the erection and continued operation of the substation. The agreement also provided that the substation was to remain the property of United and that United could, if it chose, use the substation to supply electricity to other customers. 80 In support of his contention that the kiosk substation was not an integral part of the College property, Counsel for the respondent pointed to the fact that the substation was to remain at all times the property of United. This was said, first, to be clear from the terms of the agreement itself. Secondly it was contended that the creation by the agreement of a leasehold interest in favour of United in the land on which the substation was erected, in the absence of evidence to the contrary, created a reversionary interest in that land in the College as the lessor. That was said to attract the operation of s 28(2) of the Landlord and Tenant Act 1958 (Vic) which provides: "If any tenant holding lands by virtue of any lease or agreement executed or made after the twenty-fourth day of September One thousand nine hundred and seven at his own costs and expense erects any building either detached or otherwise or erects or puts in any building fence engine machinery or fixtures for any purposes whatever (which are not erected or put in pursuance of some obligation in that behalf) then, unless there is a provision to the contrary in the lease or agreement constituting the tenancy, all such buildings fences engines machinery or fixtures shall be the property of the tenant and shall be removable by him during his tenancy or during such further period of possession by him as he holds the premises but not afterwards; notwithstanding the same consist of separate buildings or that the same or any part thereof may be built in or permanently fixed to the soil; so as the tenant making any such removal does not in anywise injure the land or buildings belonging to the landlord or otherwise puts the same in like plight and condition or in as good plight and condition as the same were in before the erection of anything so removed." 81 Counsel for the respondent did not make any direct submissions on whether the kiosk substation was, pursuant to Item 192(1)(a), otherwise than for use under a contract with an always exempt person. Rather it was argued that by force of the agreement or because of its character as a tenant's fixture, the kiosk substation could not be said to have become an "integral part of property (not being goods)". Although the kiosk substation was attached to the College's land by a series of wires, cables and bolts, this in my view did not render it an integral part of the College property. Indeed Dr Densem acknowledged under cross-examination that the primary purpose of the cables and earthing wires attached to the kiosk was not structural but was rather to connect electricity to the transformer. He also accepted that both the cables and the earthing wires were attached to the kiosk by a series of detachable bolts. 82 Counsel for the SECV further submitted that the kiosk was an integral part of the College in a functional sense. It was contended that any attempt to remove the kiosk would necessitate disconnecting the electricity supply to the College. However, I do not read Item 192(1)(a) as comprehending as an exempt item goods which, while not physically an integral part of the College property of an always exempt-person, could nevertheless be said to be functionally integral to property answering that description. 83 In my view, therefore, the kiosk substation was not an exempt item for the purposes of Item 192 of Schedule 1 of the Exemptions Act. 84 For these reasons, the application must be dismissed with costs. I certify that the preceding eighty-four (84) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Ryan. Associate: Dated: 10 March 1999 Counsel for the Applicant: Dr J Emmerson, QC with Mr T Murphy Solicitors for the Applicant: Freehill Hollingdale & Page Counsel for the Respondent: Mr B Shaw, QC with Mrs A Richards Solicitors for the Respondent: Australian Government Solicitor Date of Hearing: 8 and 9 April 1998 Date of Judgment: 10 March 1999