FEDERAL COURT OF AUSTRALIA Bob Jane T-Marts Pty Ltd v Commissioner of Taxation [1999] FCA 1366 SALES TAX – indirect marketing sales – computation of sale value and taxable value by reference to the price for which the taxpayer could reasonably have been expected to sell certain tyres by wholesale under an arm's length taxation– need to take into account costs of the taxpayer in acquiring title to the goods including freight and insurance – inappropriateness of declaratory proceedings. Sales Tax Assessment Act 1992 Amway of Australia Pty Ltd v Federal Commissioner of Taxation (1999) 99 ATC 4359 followed Commonwealth Quarries (Footscray) Pty Ltd v Federal Commissioner of Taxation (1938) 59 CLR 111 cited Amway of Australia Pty Ltd v Federal Commissioner of Taxation (1998) 158 ALR 652 distinguished Federal Commissioner of Taxation v Pacific Dunlop Ltd (1999) 99 ATC 4294 cited Optus Mobile Pty Ltd v Federal Commissioner of Taxation (1999) 99 ATC 4492 approved Copperart Pty Ltd v Federal Commissioner of Taxation (1993) 26 ATR 327 cited BOB JANE T-MARTS PTY LTD (ACN 005 870 431) v THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA V 207 of 1999 HILL, SUNDBERG AND MANSFIELD JJ 27 OCTOBER 1999 MELBOURNE IN THE FEDERAL COURT OF AUSTRALIA VICTORIA V 207 OF 1999 ON APPEAL FROM A JUDGE OF THE FEDERAL COURT BETWEEN: BOB JANE T-MARTS PTY LTD (ACN 005 870 431) Appellant AND: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Cross-Appellant BOB JANE T-MARTS PTY LTD (ACN 005 870 431) Cross-Respondent JUDGES: HILL, SUNDBERG AND MANSFIELD JJ DATE OF ORDER: 27 OCTOBER 1999 WHERE MADE: MELBOURNE THE COURT ORDERS THAT: 1. The appeal be dismissed. 2. The respondent's cross appeal is dismissed. 3. No order as to costs of the appeal or cross appeal. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA VICTORIA V 207 OF 1999 ON APPEAL FROM A JUDGE OF THE FEDERAL COURT BETWEEN: BOB JANE T-MARTS PTY LTD (ACN 005 870 431) Appellant AND: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Cross-Appellant BOB JANE T-MARTS PTY LTD (ACN 005 870 431) Cross-Respondent JUDGES: HILL, SUNDBERG AND MANSFIELD JJ DATE: 27 OCTOBER 1999 PLACE: MELBOURNE REASONS FOR JUDGMENT THE COURT: 1 The Appellant, Bob Jane T-Marts Pty Ltd ("Bob Jane") appeals from so much of the judgment of a judge of this Court as dismissed its claim for a declaration. The Respondent Commissioner of Taxation cross appeals from so much of that judgment as dismissed its claim for an alternative declaration. The declarations sought 2 The present proceedings were commenced by Bob Jane in the High Court of Australia and remitted to this Court. The relief claimed consisted of a number of declarations. The declarations sought may be summarised as follows: 1. that the sale value of tyres sold by it before 1 January 1993 was the price for which identical goods were from time to time sold by it to Marquay Pty Ltd ("Marquay") pursuant to a dealership agreement entered into between Bob Jane and Marquay on or about 1 January 1991. 2. that the taxable value of tyres sold by it on or after 1 January 1993 was the price for which identical goods were from time to time sold by it to Marquay. 3 The Commissioner cross claimed for alternative declarations. These may be summarised as follows: 1. that the sale value of tyres sold by Bob Jane by retail between 1 January 1991 and 1 January 1993 was the cost of getting the tyres to their point of sale plus the expenses that would have been associated with selling them if they were sold by wholesale plus a fair wholesale margin. 2. that in the alternative the sale value of those tyres was the price at which Bob Jane Corporation Pty Ltd sold them by wholesale at or through the Bob Jane retail outlets, franchised agents or other agents. 3. that in the alternative the sale value of those tyres was the retail selling price of the tyres less commission paid by Bob Jane in respect of sales of the tyres (inclusive of sales tax). 4. that the taxable value of the tyres sold by Bob Jane by retail on or after 1 January 1993 was the cost of getting the tyres to their point of sale plus the expenses that would have been associated with selling them if they were sold by wholesale plus a fair wholesale margin. 5. that in the alternative the taxable value of the tyres sold by Bob Jane by retail on or after 1 January 1993 was the price at which Bob Jane Corporation Pty Ltd sold them by wholesale at or through the retail outlets of Bob Jane, franchised agents and other agents. 6. that in the alternative the taxable value of those tyres was the retail selling price of the tyres less commission paid by Bob Jane in respect of sales of the tyres (inclusive of sales tax). 4 The judgment appealed from demonstrates the inappropriateness of declaratory proceedings to establish either "sale value" (an expression used in the sales tax legislation in force until 31 December 1992) or "taxable value" (an expression used in the sales tax legislation which commenced on 1 January 1993). Had the proceedings commenced in the more orthodox way of an objection and appeal against an assessment or assessments of sales tax (whether ordinary or special ) there would, at least, have been an outcome binding upon the parties. As it is, the orders made by the learned trial judge left the parties in the position that there was no order binding them. Indeed some of the declarations sought by the Commissioner, even if granted, might well have left the parties in the position that sale value or taxable value could not be established without further litigation. The background facts 5 There is no real dispute between the parties as to the facts. Bob Jane was at all relevant times a member of a group of related companies which are here referred to as "the Bob Jane Group." It principally sold tyres by retail. Those tyres were either imported into Australia or manufactured here. It purchased the tyres from Bob Jane Corporation Limited ("Bob Jane Corporation") another member of the Bob Jane Group which made no profit on that transaction. These purchases were made on terms that Bob Jane would bear the freight payable from the factory of the wholesaler/importer from which Bob Jane Corporation purchased them to the premises at which Bob Jane sold them to members of the public. Bob Jane Corporation purchased locally manufactured tyres either from the manufacturer of those tyres or in the case of Bridgestone tyres from Mainline Transport Pty Ltd, another company in the Bob Jane group. Tyres manufactured overseas were purchased by Bob Jane Corporation generally from an importer. 6 Bob Jane principally sold the tyres it purchased by retail through franchisees, who acted as agents on the sale to the public. In terms of the relevant sales tax legislation those sales are called "indirect marketing sales". It also sold tyres by wholesale. Some wholesale sales (the amounts involved are inconsequential) were made by it to other tyre retailers who had run short of stock. Most of the wholesale sales it made were made to Marquay Pty Ltd ("Marquay") which company was what is referred to as "a franchise dealer" under an arrangement which will be explained in more detail later. 7 Bob Jane Corporation likewise made wholesale sales outside the Bob Jane group. Relevantly during 1991 and 1995 it sold tyres to Exuma Pty Limited, which company operated ten retail outlets in Western Australia. The Bob Jane Group held 30% of the capital of Exuma until 1995 when it sold its shares to the majority shareholder. The terms of the franchise agreements between Bob Jane and its agents 8 The principal features of the franchise agreements under which Bob Jane sold by retail and effected the indirect marketing sales with which the proceedings are concerned were summarised by the learned primary judge as follows: "The franchisee agrees to make a payment, called a premium, to Bob Jane. The premium can be as high as $500,000. In consideration for the payment of the premium the franchisee is granted the right to 'own and operate the franchise business under the T-Mart system' for a term which is typically ten years with an option to extend the term for two further periods of five years each. The 'T-Mart system' is the 'national system for the identification, layout, operation, management and sale of tyres, wheels and certain ancillary services': the definition appears in a recital. Bob Jane undertakes to provide the franchisee with premises at which the franchise business is to be conducted. The premises may be owned or leased by Bob Jane. The franchisee is required to pay a rental for the use and occupation of the premises in an amount to be agreed. Usually that amount is the market rental for the premises but sometimes the rent is agreed at a lower rate. The franchisee agrees to act as Bob Jane's agent for the sale of goods by retail: the goods include tyres, wheels and accessories. The franchisee also agrees to provide certain services to the public such as wheel alignments, wheel balancing, puncture repairs and tyre and wheel fitting. As regards the price at which the goods are to be sold, the franchisee undertakes that he will not charge more than Bob Jane's recommended retail price. The franchisee is required to remit to Bob Jane each day the full price of the goods sold during the previous day less any agreed commission. The commission to which the franchisee is entitled is in accordance with a rate published from time to time by Bob Jane. There is an established procedure for the ordering and delivery of tyres sold by the franchisee. The procedure is not recorded in the franchise agreement but it appears to be an aspect of the T-Mart system. In the case of locally manufactured tyres the franchisee places an order with the manufacturer and for imported tyres the order is placed with South Pacific Tyre Group. That organisation warehouses imported tyres on behalf of Bob Jane Corporation. The company on whom the order is placed arranges for the delivery of the tyres to the franchisee, except in Victoria where Bob Jane delivers the tyres using its own transport. The tyres are then invoiced to Bob Jane Corporation, except in the case of tyres purchased from Bridgestone, which are invoiced to Mainline Transport Pty Ltd who in turn invoices the tyres to Bob Jane Corporation. The tyres are then invoiced to Bob Jane at cost: the cost being the price paid for the tyres. Bob Jane produces a 'product file listing' each month and a copy is provided to all franchisees. The product file listing sets out, among other information, the recommended retail price of each tyre to be sold on behalf of Bob Jane and the amount that the franchisee must remit to Bob Jane in respect of that tyre. The difference between the amount to be remitted and the price at which the tyre is sold (which cannot be more than the recommended retail price) is the commission to which the franchisee is entitled. The rate of commission varies from tyre model to tyre model. … It is to be noted that in addition to the payment of the premium and the rent for the franchise premises, a franchisee will incur expenditure that is typical of that incurred by many small businesses. For example, the franchise agreement requires the franchisee, at the franchisee's expense, to paint and identify the franchise premises in such a format as may be required by Bob Jane, to maintain appropriate insurance, to advertise and promote the goods offered for sale and to install and utilise computer equipment that has been recommended by Bob Jane. In addition there will be the cost of staff and those other direct and indirect costs (e.g. gas, electricity, cleaning) that are commonly incurred in maintaining a retail outlet. Accordingly, the commission that is set by Bob Jane is designed to provide each franchisee with sufficient income to cover his operating expenses and to provide him with a reasonable profit. … Bob Jane provides financial support to its franchise agents in a variety of ways. Each franchisee is guaranteed a minimum commission of .5C per cent on the retail price of goods sold. This percentage is one half of the commission that an average franchisee must earn in order to recover his direct and indirect costs of selling tyres; that is to say the franchisee's 'break even' point to adopt the terminology of Mr Ryding. So, if a franchisee is required to offer tyres for sale at a price significantly below the recommended retail price in order to meet competition the guarantee will come into operation. In addition, if a particular agency is experiencing financial difficulties, Bob Jane will often agree to a reduction in the rent payable for the franchise premises. However, because the franchise operation has been very successful, the cost to Bob Jane of providing financial support is minimal." 9 Bob Jane performed a variety of services for its franchisees. Some of these services were performed as part of its contractual obligation; others were, apparently voluntarily undertaken. The cost of performing these services was not, it would seem, inconsiderable. The learned primary judge listed the activities which Bob Jane undertook for its franchisees as follow: "• Design and adaptation of store layout · Selection of Franchisees · Cadet Franchisee Program · Educational Program · Telephone Training Program · Sales Techniques Program · Retail Market Research · Advertising Strategy · Computer Software Development · Merchandising · Setting Recommended Retail Pricing · Arranging and Implementing Uniform Design · Stocking and Subsiding (sic) Uniforms · Property Management · Arranging for Bulk Purchase of: Merchandising Stands, Advertising, Business Cards, Various other stationery such as Computer Invoices, Insurance, Finance Facilities, Computer Hardware, Fitting and Alignment Machines. · Provision of Back Up and Training in respect of Equipment · Subsidy of Computer Hardware Maintenance · Subsidy of Computer Software Maintenance · Subsidy of Preparation of Monthly Accounts · Support for the Generation of Fleet Business · Guarantee Minimum Gross Commission · Assist in Staff Recruitment – Assessment and System of Recruitment · Development of Procedure Manuals · Rental Assistance to certain stores · Provision of additional commission to struggling Stores · Bulk buy of signage and provision of signage to stores · Provision of Market Information to stores by publishing and distributing monthly magazine 'The Communicator' · Policy adjustment and customer opportunity support · Provision of salary to incoming Franchisees while they are in training · Road hazard and warranty supported by BJTM · Contribution to credit sales '12 months interest free' · Carry the cost of credit on the National Fleet Deal · Provision of State Managers to assist with Management of Outlets · Convening of monthly Franchise Meetings · Provision of Leasehold improvements · Computer communication system linkage between outlets · Pay for and organise freight · Developed the 'Virtual Wheel System' – A retail selling system for wheels which is computerised · Annual Bob Jane T-Marts Convention (National and State) · Assist in industrial and staff management problems · ADS provides local marketing consulting (ADS Pty Ltd wholly owned company) · Advice and consultation on legal aspects · Development of Australian workplace agreements for introduction into all outlets · Internet site for retail customers" The terms of the dealership agreement between Bob Jane and Marquay 10 The dealership agreement between Bob Jane and Marquay was entered into in January 1991. In consideration of the payment of a fee of $500,000 (referred to in the agreement as an "appointment fee" ) Marquay was appointed a dealer. The appointment initially related to a business in the Australian Capital Territory and was to operate for ten years. However later Marquay relocated to Haberfield in New South Wales and a new agreement was entered into with a term of five years and an option to extend the term for another five years. Instead of providing for an appointment fee the new agreement provided for an annual license fee. 11 The principal difference between the agreement with Marquay on the one hand and the agreements with franchisees who effected the indirect marketing sales on the other lay in the fact that Marquay was to purchase its requirements for tyres from Bob Jane. Franchisees, by contrast, never obtained title to the tyres. Under the dealership agreement with Marquay tyres were purchased ex store. As a result Marquay was to bear the cost of freight. The price of the tyres was calculated at the cost to Bob Jane together with a percentage. For reasons of confidentiality we shall refer to this percentage as A%. Payment was made at the time of purchase. 12 On many occasions Marquay in fact purchased tyres from other suppliers at prices less than those at which it purchased tyres from Bob Jane. The prices charged by these other suppliers was free into store. When the cost of freight was taken into account the difference was even greater. The statutory background 13 Prior to the commencement of the Sales Tax Assessment Act 1992 ("the 1992 Act") and related Acts, which dealt with the administration and imposition of what is commonly referred to as the "streamlined sales tax", which Act applies to transactions entered into as and from 1 January 1993, the sales tax scheme was the subject of some 25 Acts as well as a number of sets of Regulations, albeit that in totality they gave rise to the one legislative scheme. That scheme, for constitutional or perceived constitutional reasons, however, differentiated legislatively between the tax imposed upon goods which were imported into Australia and those which were manufactured in Australia as well as differentiating between assessment Acts and Acts imposing taxation in the usual way. In addition separate Acts dealt with the case where the taxpayer was the manufacturer, a person who purchased from the manufacturer or a person who purchased from a person who purchased from the manufacturer as well as where the taxpayer imported the goods or was a person who sold imported goods but was not the importer. These distinctions have, however, little relevance to the present dispute save that they have the result that the liability of Bob Jane to sales tax would arise to be assessed under different Acts depending upon the origin of the tyres. 14 The 1992 legislation somewhat simplified the legislative scheme, if for no other reason than that the number of Acts was reduced for relevant purposes to a single assessment act, the 1992 Act and four separate imposition acts, imposing the tax as a duty of excise, a duty of customs, a tax being neither a duty of customs or a duty of excise and a special tax relevant to in situ swimming pools. For present purposes it is only the 1992 Act with which the appeal is concerned for the period after 1 January 1993. In the period from 1 January 1991 to 1 January 1993, the liability of Bob Jane for sales tax depended upon the Sales Tax Assessment Act (No 3) 1930 where the tyres sold by retail were manufactured in Australia and the Sales Tax Assessment Act (No 7) 1930 where the tyres sold by retail were imported into Australia. 15 For present purposes there is no difference in principle between the legislation operating before 1 January 1993 and that operating thereafter nor the legislative scheme enshrined in it. In Amway of Australia Pty Ltd v Federal Commissioner of Taxation (1999) 99 ATC 4359, a case which also concerned sales which were indirect marketing sales, a Full Court of this Court (Hill, Lehane and Hely JJ) wrote of the legislative scheme at 4367 (referring to the pre January 1993 legislation): " … the tax is, in the usual case, levied both in respect of goods manufactured in Australia and goods imported into this country on the last wholesale sale of those goods and by reference to the amount for which the goods are sold in that last wholesale sale. Although the tax is not designed to be a tax levied on a retail sale, the policy of taxing all goods prior to their going into use and consumption in Australia would be frustrated if some retail sales were not taxed. A person might manufacture goods in Australia or import them but sell them not by wholesale but by retail. In such a case the legislation operates to impose tax at the time of the retail sale, but by reference to a sale value which, as far as possible, equates with a wholesale sale." What is there said is equally applicable to the legislation post January 1993 save that the reference to sale value should be replaced with a reference to "taxable value", the term used in the 1992 Act. 16 A person who sold goods by retail under an indirect marketing scheme (for present purposes that may be equated to a sale through agents) became liable to sales tax at the time of making the retail sale. Pre January 1993 the liability was based upon what the legislation referred to as the "sale value" prescribed by the appropriate Act. That sale value was relevantly expressed to be: "the fair market value of those goods if sold by [the taxpayer] by wholesale" 17 Under the post January 1993 scheme, sales tax was payable by reference to a "taxable value". For relevant purposes this was, in the case of indirect marketing schemes, defined as the "notional wholesale selling price". That latter phrase is defined in the notes to Table 1 to the 1992 Act to be : "the price (excluding sales tax) for which the taxpayer could reasonably have been expected to sell the goods by wholesale under an arm's length transaction." 18 It is common ground that in the present case no different principle is to be applied in calculating the sale value applicable under the pre 1 January legislation to that to be applied in calculating the taxable value applicable to sales on or after 1 January 1993. Accordingly we will confine our remarks to the calculation of taxable value as defined in the 1992 Act. 19 There is little assistance to be gleaned from the history of the taxation of indirect marketing sales. Provisions directed at such sales were first inserted into the 1930 legislation by the Sales Tax Laws Amendment Act 1985 and the history is set out in Amway at 4361-2. The use of agents to effect retail sales was sometimes, although not always, dictated by a desire to reduce sales tax. The advantage which was sought is illustrated in an article: "What is a 'Wholesale Sale' for Sales Tax Purposes?" by Mr H R Irving, 11 Taxation in Australia 182, particularly at 206-7. The legislation which was introduced did not distinguish in its application between those seeking to avoid sales tax and those who did not. It applied, and in its 1992 form continues to apply, to those who sell goods by retail through agents even where the use of agents has been adopted solely for commercial reasons. 20 The legislative policy underlying the amendments is not difficult to discern. Parliament has sought to delay the taxing point at which sales tax is levied to the point of time at which the indirect marketing sale takes place. However, since that sale is a retail sale, and because the scheme of the legislation is to impose tax upon a wholesale, rather than a retail sale, the taxable value upon which sales tax is payable has to be equated to the price which would be achieved in a wholesale sale. Because there has not been a wholesale sale it is necessary that one be hypothesised. The taxable value calculation therefore assumes that the taxpayer has, contrary to the fact, made a wholesale sale and the task is then to calculate what the outcome of that hypothetical wholesale sale would be. The judgment appealed from 21 The declarations sought by the Applicant depended, to a large degree, on the sales to Marquay being accepted as an appropriate reference point for calculating the price at which Bob Jane would sell tyres in a wholesale sale. However, his Honour was not prepared so to accept them for three reasons. First, his Honour found that the price at which Bob Jane sold tyres to Marquay was not arrived at in the ordinary course of negotiations but was determined "for the purpose of establishing a new aspect of its business, namely a network of franchise dealers". In his Honour's view it was likely that that price had been struck without any regard to the wholesale market price for like goods. Secondly, his Honour was of the view that because there had been an ongoing dispute for some years with the Commissioner on the proper method of calculating the fair wholesale market price, that price had not been varied. It may be remarked that because the price charged was cost plus profit margin, the actual price varied. What did not vary was the percentage mark up. Thirdly, his Honour rejected the Marquay prices because his Honour was of the view that an expanded dealership would result in a higher price and that this expansion had been put on hold because of the dispute with the Commissioner. For this reason alone it would have been necessary to refuse the declaration sought by Bob Jane. 22 His Honour refused also the grant of a declaration in any of the alternative forms proposed by the Commissioner. His Honour postulated various alternative ways in which the taxable value might be determined, including what might be referred to as the comparable sales method, the cost plus mark up method or the net back method, that is to say working backwards from the retail price to arrive at a hypothetical wholesale price. The difficulties with the Marquay comparison referred to above ruled out, in his Honour's view, the first approach. The second method of cost plus mark up was likewise difficult because the market in tyres was competitive and this competition would affect the price at which goods would be sold if sold by wholesale. The other problem was, in his Honour's view, the determination of what figures should be taken into account in determining cost. It was his Honour's view that cost would need to include the costs of Bob Jane in maintaining its franchise network and probably (his Honour did not express a final view on this) all the costs incurred by Bob Jane in providing services to franchisees. Freight and insurance were also matters to take into account. The third approach, the so called "net back method" had the support of neither of the parties. 23 His Honour ultimately refused to grant a declaration because to do so would not resolve all matters in controversy. In particular the question of the proper cost base and proper mark up would need to be determined by reference to evidence not before the Court. 24 In concluding that freight and insurance formed part of the ultimate figure to be arrived at his Honour relied upon Commonwealth Quarries (Footscray) Pty Ltd v Federal Commissioner of Taxation (1938) 59 CLR 111 and the discussion of that case in Amway of Australia Pty Ltd v Federal Commissioner of Taxation (1998) 158 ALR 652 per Foster J. In the meantime the judgment of Foster J in Amway has been reversed on appeal. In particular it is now clear that the judgment in Commonwealth Quarries does not require the conclusion that in determining the taxable value for present purposes each actual retail sale must be considered and a calculation made of the wholesale price charged on the basis that the sale is one by wholesale. To this extent the judgment is in error. Whether that error requires a different conclusion to that reached by his Honour is the substantial issue in the appeal. The submissions 25 For Bob Jane it was submitted: 1. The learned primary judge erred in rejecting the Marquay sales as providing an appropriate bench mark for the hypothetical wholesale sale which the calculation of the taxable value required. It was submitted that the figure arrived at was supported by an analysis of the sales which Bob Jane Corporation had made to Exuma and expert evidence of sales made by other wholesalers. 2. His Honour erred in concluding that freight and insurance as well as the cost of other franchise services should be taken into account in the calculation of a hypothetical wholesale price having regard to what had been held by a Full Court of this Court in Amway, another Full Court in Federal Commissioner of Taxation v Pacific Dunlop Ltd (1999) 99 ATC 4294 and the decision of Sackville J in Optus Mobile Pty Ltd v Federal Commissioner of Taxation (1999) 99 ATC 4492. Emphasis was placed upon the fact that the tax was a tax imposed upon transactions with goods, not services. 26 For the Commissioner it was submitted: 1. The time at which the taxable value fell to be calculated was the time of the actual retail sale made by Bob Jane. 2. All costs which Bob Jane incurred up to that time, including freight, insurance, franchise fees, and indeed every retail cost, must be recovered in the wholesale price which Bob Jane would charge. Put another way all of these costs were costs which Bob Jane incurred to obtain title to the goods and for the purposes of making the sale. 3. In the alternative, the cost of freight and insurance had to be taken into account in calculating the taxable value, not because that was required as a result of Commonwealth Quarries, but because these amount were amounts which Bob Jane was clearly required to pay to obtain title to the tyres which it purchased from Bob Jane Corporation. 4. The Marquay sale was not comparable because, as his Honour had found, it was structured to establish a group of dealers. The Commissioner no longer relied upon the fact that there had been disputes with the Commissioner which had led to the price not being reviewed. Before us it was not contended that the dealings with Marquay were not at arm's length. 5. The sales to Exuma were not comparable, because they were not sales of tyres acquired for the purpose of making sales to franchisees. The theoretical basis for computation of taxable value 27 The statutory formulation is not difficult to understand with or without recourse to authority. What is required is to determine what the taxpayer would sell the relevant goods for if those goods were sold by the taxpayer by wholesale. There are actual goods which are the subject of the hypothetical wholesale sale. In the present case these are the tyres which Bob Jane actually sold to members of the public. There is an actual time at which this hypothetical sale is taken to have occurred, that is to say the time the actual retail sale which gives rise to tax was made to a member of the public. Finally there is to be hypothesised a wholesale sale, the parties to which are the taxpayer and a hypothetical willing but not too anxious buyer. In Amway speaking of the pre 1991 legislation the Full Court said at 4369-70: "It is necessary to hypothesise that there is a wholesale sale (that is to say a sale to a person who will on sell by retail) and that the taxpayer is a party to that sale. The identity of the purchaser is unknown for the purposes of this hypothetical wholesale sale. It is then necessary to determine what price the vendor would reach in an arm's length wholesale transaction in those circumstances. No doubt it is relevant in arriving at this figure that hypothetical purchasers could purchase from the same outlets as the taxpayer did in respect of goods which it purchased in Australia. This is not a matter relevant to goods which Amway itself imported. But it is the price which Amway would realise in a hypothetical wholesale sale which is important – prices which large retailers may pay a wholesaler can be assumed to be less than a smaller retailer may be required to pay. Likewise Amway could not be hypothesised to sell by wholesale at a price lower than the price at which it purchased, or for that matter at the same price at which it did purchase. Clearly it would look for a profit, and indeed a profit which would include a reimbursement of the costs of its wholesale activity. The precise figure which would be arrived at in the hypothetical sale is a question of fact to be determined upon the evidence. This is not to suggest that the question admits of an easy answer." 28 The difficulty of giving effect to the ordinary meaning of the words used in the statutory formula stems from the decision in Commonwealth Quarries and a failure to understand that what is said in that case was necessitated by the statutory provisions then under consideration and the facts of the case. Starke J in that case at 119, in a passage cited by the learned primary judge said: "[T]he sub-section [18(1)(b)] takes the particular sale and substitutes for the amount for which the goods were sold by retail the amount for which they would have been sold wholesale upon the same terms and conditions." 29 In the same case in another passage cited by the learned primary judge, Dixon and McTiernan JJ said at 122: "If in such a case [a manufacturer selling by retail] the goods are of a class which he usually sells by wholesale, the sale value is to be the amount for which the goods would be sold by the manufacturer if sold by wholesale … In the context we should interpret the paragraph [s 18(1)] as requiring that a sale by wholesale should be supposed with the same terms and conditions as the actual retail sale made, except in respect of the price and any other term or condition which would be absent or modified in a sale by wholesale." These passages led the learned primary judge to the following conclusion: "What is required therefore is to consider each retail sale and ascertain, in respect of that sale, what would have been the wholesale price charged if the transaction had been a wholesale sale. The only term or condition of the actual sale which can be ignored for the purpose of determining the fair wholesale market price is a term or condition that would not be found in a retail sale." 30 However, when the issue which arose in Commonwealth Quarries is examined it is evident that it does not require this conclusion at all. This was explained by the Full Court in Federal Commissioner of Taxation v Pacific Dunlop at 4310-11. The matter is discussed as well in Amway at 4367-8. In Commonwealth Quarries the taxpayer sold goods by wholesale and retail. In respect of its retail sales the sale value was required to be determined by asking what the price would be if the taxpayer had sold the goods by wholesale. Since the taxpayer sold the same goods and on the same terms and conditions both by wholesale and retail the conclusion was obvious that all that was required for the purposes of calculating a sale value was to assume that the actual retail sale was in fact a wholesale sale. The terms upon which the taxpayer would sell by wholesale were known. The case left open what would be the case if the taxpayer had not sold goods by wholesale. So, Latham CJ was moved to say at 116-7: "It is possible to speculate upon the meaning of the words 'the amount for which the goods would be sold if sold by wholesale', and to raise questions as to the conditions upon which it is to be assumed that the goods which in fact were sold by retail would be sold if they were sold by wholesale. In this case it is unnecessary to explore any of these questions, because the facts are that the conditions in all respects were exactly the same in the case of sales by retail as in the case of sales by wholesale, There is no room for a contention in this case that the conditions of the actual retail sales were different in any particular from what they would have been if the sales in question had fallen within the category of sales by wholesale within the meaning of the Act." 31 Where, as in the present case, the retail sale is made to a member of the public in association with the fitting of tyres, it would lead to an absurdity to postulate that the terms of the wholesale sale were to be precisely the same as those applicable to the retail sale. The absurdity was made evident by Sackville J in Optus. In that case the applicant made retail sales of mobile phones to customers by means of what are termed "bundled sale contracts", where the customer purchased the phone at considerably below its market price and took a contract which provided for connection and usage of the Optus phone network. Optus sought a declaration that the wholesale value was no more than the reduced retail price. Its argument was that the wholesale customer would be required, as the retail customer was, to enter into the connection/usage arrangement. The declaration was refused. The notional wholesale price had to be calculated by reference to a hypothetical sale of the phone sets in an arm's length transaction. After referring to what was said in Amway his Honour said at 4499, in a passage with which we agree: "As far as the hypothetical transaction is concerned, it is the expectations of the taxpayer that must be considered (not those of a hypothetical third party). It is therefore necessary to consider the price for which the taxpayer itself could reasonably have been expected to sell the goods under an arm's length wholesale sale. I think it is clear enough that the question posed by the definition is one of fact, to be determined on the evidence in a particular case. This is consistent with the approach taken in Amway." 32 His Honour pointed out that the factual inquiry could present difficulties and involve complex evidentiary issues, particularly where the particular taxpayer did not make wholesale sales. The judgment suggests that in some cases it would be a convenient course to take the terms and conditions of the retail sale, eliminating such factors as might be inconsistent with the notional wholesale sale. Of course, where the taxpayer actually makes wholesale sales these difficulties do not arise and the best evidence would be the price at which actual wholesale sales of comparable goods are made. That was the case with Optus. It actually made arm's length wholesale sales. In his Honour's view, and with respect we agree, these sales formed the proper basis on the evidence adduced in that case for the computation of the notional wholesale price. 33 It follows, similarly, but subject to the question what the cost basis of the tyres was to Bob Jane, that in the present case where Bob Jane actually sold tyres by wholesale to Marquay, evidence of these sales, if arm's length, would provide the best answer, both as to the terms at which Bob Jane would sell tyres by wholesale and the price at which those sales would be made. The relevance of franchise fees 34 One of the difficulties in the present case lies in the fact that the retail sales made by Bob Jane were made in the context of franchise arrangements which it entered into with its agents. 35 It will be recalled that the learned primary judge was of the view that the cost of providing these services should be taken into account in the computation of the notional wholesale value. With respect we disagree. Sales tax is a tax on goods. It is not, as such, a tax on services. It is true, as Commonwealth Quarries indicates, that if a sale by wholesale takes place on terms that the vendor will charge the cost of freight to the purchaser, the price of those goods will include the cost of freight. This will be an amount included in the cost which the purchaser will incur to obtain title to the goods. To that extent, then, it may be said that sales tax may be imposed upon delivery as a service. But that can not be taken too far. Absent specific anti-avoidance provisions, a taxpayer could purchase goods for one price and services for another, yet the taxable value upon which sales tax would be calculated would be determined by reference to the price of the goods, not the price of the services cf Copperart Pty Ltd v Federal Commissioner of Taxation (1993) 26 ATR 327 at 346. The subsequent appeal in that case did not affect the passage cited. 36 The fact that Bob Jane contracted for and did provide services to its franchisees is a matter which has no relevance to the determination of the taxable value in the present case. Nor is it to be assumed that the notional wholesale sales which Bob Jane has to be hypothesised to make would be to purchasers upon terms that those purchasers would be franchisees or would as part of the cost of the tyres pay for franchise services. Nor is there any reason to hypothesise that the hypothetical purchaser in the wholesale transaction would be required to pay for freight or insurance as part of the cost to it of the tyres the subject of the hypothetical wholesale sale. 37 That having been said, however, it does not mean that the cost of freight and insurance to Bob Jane when it purchased the tyres it sold by retail did not form part of its costs of tyres which it would seek to recover in a notional wholesale sale of tyres. 38 We have no difficulty with a submission that a vendor in a hypothetical sale would seek to recover at the least the costs it is obliged to pay in order to acquire title to the goods the subject of the hypothetical sale. It is for this reason that the computation of the notional wholesale value will proceed on the basis that both freight and insurance which Bob Jane was required to pay in obtaining title to the tyres which were the subject of the hypothetical wholesale sale form part of its costs. There is considerable difficulty in the more adventurous submission of the Commissioner that the whole of the costs of the franchise/retail operation of Bob Jane should be taken as making up those costs. No doubt it was necessary for Bob Jane to outlay considerable funds to provide services to its retailers. But it is not correct to say that the cost of these services was the cost to Bob Jane of obtaining title to the goods. Nor is it correct, as the learned primary judge held, to say that the notional wholesale sale price is to be calculated by taking into account the cost of maintaining the franchise network. Those costs are, no doubt, relevant to Bob Jane's retail sales, but they have no relevance to the notional wholesale sales which the statutory hypothesis assumes. The Relevance of the Marquay wholesale sales 39 As we have already indicated, the best evidence of what ordinarily could be expected to be the price arrived at in a hypothetical wholesale sale is the price arrived at in actual wholesale sales entered into at arm's length involving comparable goods. Prima facie that evidence is to be found in the Marquay sales. It is not suggested that these sales were other than arm's length. Nor is it suggested that the goods the subject of those tyres were other than comparable with those the subject of the hypothetical wholesale sales. 40 With respect to the learned primary judge, there seems no reason why the evidence of the wholesale sales to Marquay should be rejected as providing a reliable guide to a notional wholesale price. It is true, as his Honour observed, that initially the basis of setting the price to Marquay of cost plus A% was the desire to establish a network of franchise dealers and increase the share Bob Jane had of the tyre market. However, while it is true that there was an overall long term strategy to increase market share, the evidence did not suggest that there was an initial short term arrangement for loss leading which explained the pricing of tyres sold to Marquay. In fact the arrangement with Marquay continued for many years, a time not explicable by loss leading. The evidence was that the profit margin was pitched at and determined by reference to the tyre market. Expert evidence from a Mr Lonergan, an accountant, made it clear that, once terms of sale were taken into account, the price charged was consistent with that charged by other wholesalers and that there was no price subsidy in the calculation. The suggestion that the price had been kept artificially low because of disputes with the Commissioner has now been withdrawn. 41 However, there remains the difficulty that the cost to Bob Jane of the tyres it onsold to Marquay included no freight or insurance component. Also, it did not include any component for any credit terms provided, as payment was made by Marquay upon collection of the tyres. That cost was solely the amount which Bob Jane was required to pay to Bob Jane Corporation, which sale price was in essence that company's cost price. By contrast Bob Jane had, prior to making the wholesale sale, already been required to pay the cost of freight and insurance to the premises at which the retail sales were actually made. Unless it in fact made a loss on the hypothetical wholesale sales it would need to recover these costs in the hypothetical wholesale sale price. Whether a purchaser could be found which would pay in a wholesale sale the cost of the tyres, the cost of insurance and freight already borne and a profit margin, is a matter for evidence. It may, on the evidence adduced in the case, not be possible at all, given that a hypothetical purchaser could purchase by wholesale the identical tyres from wholesalers at a price which was considerably less than this figure. 42 It may well be that a full investigation of the circumstances could lead to the conclusion that the profit mark up on the hypothetical wholesale sale by Bob Jane would have to be substantially less than that adopted in the Marquay transactions, or that there would be no mark up at all, or that the sale would have to be hypothesised to be made at a loss. While a hypothetical purchaser must, consistent with ordinary valuation theory, be assumed, it is not to be assumed that that hypothetical purchaser would pay other than a real arm's length price for the tyres. What that price would be is not a matter upon which we are able to comment and indeed the parties agree that if we did not accept either the declarations sought by Bob Jane or those sought by the Commissioner, we should merely dismiss the appeal. 43 Accordingly we are of the view that neither the declarations sought by Bob Jane, nor those sought by the Commissioner can be made. The ultimate resolution of the issue will need to be the subject of further evidentiary consideration before the taxable value can be computed. We would accordingly dismiss both the appeals and the cross appeals. There will be no order as to costs. I certify that the preceding forty-three (43) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Court. Associate: Dated: 27 October 1999 Counsel for the Appellant and J de Wijn QC, J Batrouney Cross-Respondent: Solicitor for the Appellant and Mallesons Stephen Jaques Cross-Respondent: Counsel for the Respondent and G Davies QC, H Symon Cross-Appellant: Solicitor for the Respondent and Australian Government Solicitor Cross-Appellant: Date of Hearing: 2 and 3 September 1999 Date of Judgment: 27 October 1999