FEDERAL COURT OF AUSTRALIA Commissioner of Taxation v McDonald's Australia Ltd [1999] FCA 1744 TAXATION – SALES TAX – exemptions – whether various items used in making hamburgers exempt from sales tax. Whether collar and wrap integral part of the goods manufactured – whether hamburgers are take-away foodstuffs – whether collar and wrap used by McDonald's in marketing or delivering take-away beverages and foodstuffs WORDS AND PHRASES "manufacture" – "raw materials" – "for use by" – "take-away beverages or foodstuffs" Sales Tax Assessment Act 1992 (Cth) Sales Tax (Exemptions and Classifications) Act 1992 Cth Items 19 and 27 to Schedule 1 Deputy Commissioner of Taxation v Stewart (1984) 154 CLR 385 followed McNicol v Pinch [1906] 2 KB 352 cited Federal Commissioner of Taxation v Jack Zinader Pty Limited (1949) 78 CLR 336 cited Federal Commissioner of Taxation v Rochester (1934) 50 CLR 225 cited Federal Commissioner of Taxation v Jax Tyres Pty Ltd (1984) 58 ALR 138 followed WEA Records Pty Ltd v Federal Commissioner of Taxation (1990) 96 ALR 365 cited Cohns Industries Pty Ltd v Deputy Commissioner of Taxation (1979) 24 ALR 658 cited Woolworths Pty Ltd v Federal Commissioner of Taxation (1999) 99 ATC 4187 cited Case C80 (1953) 3 TBRD 452 cited Tanu Pty Ltd v Federal Commissioner of Taxation (1998) 154 ALR 102 cited Tanu Pty Ltd v Federal Commissioner of Taxation (1999) 160 ALR 227 cited State Electricity Commission of Victoria v Commissioner of Taxation [1999] FCA 1329 cited Deputy Federal Commissioner of Taxation v Lincoln Industrial Cleaners Pty Ltd (1975) ATC 4208 cited Pepsi Seven-Up Bottlers Perth Pty Ltd v Commissioner of Taxation (1995) 62 FCR 289 cited Commissioner of Taxation (Cth) v Kentucky Fried Chicken Pty Ltd (1988) 12 NSWLR 643 distinguished Pepsico v Federal Commissioner of Taxation (1997) 147 ALR 497 cited COMMISSIONER OF TAXATION v McDONALD'S AUSTRALIA LIMITED (ACN 000 697 780) N 847 OF 1999 HILL, CARR AND HELY JJ 17 DECEMBER 1999 SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N 847 OF 1999 ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA BETWEEN: COMMISSIONER OF TAXATION APPELLANT/CROSS-RESPONDENT AND: McDONALD'S AUSTRALIA LIMITED (ACN 000 697 780) RESPONDENT/CROSS-APPELLANT JUDGES: HILL, CARR AND HELY JJ DATE OF ORDER: 17 DECEMBER 1999 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The Commissioner's appeal be allowed. 2. Orders made by the primary judge be set aside and in lieu thereof it be ordered that: 1. The Court declares that the packaging materials referred to in the amended statement of claim are not exempt from sales tax by reason of either Item 19 or Item 27 of Schedule 1 to the Sales Tax (Exemptions and Classifications) Act 1992 as in force as at September and October 1998. 2. The Commissioner's costs of the application be paid by the applicant. 3. The respondent's cross-appeal be dismissed. 4. Respondent to the appeal pay the appellant's costs of the appeal and 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 NEW SOUTH WALES DISTRICT REGISTRY N 847 OF 1999 ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA BETWEEN: COMMISSIONER OF TAXATION APPELLANT/CROSS-RESPONDENT AND: McDONALD'S AUSTRALIA LIMITED (ACN 000 697 780) RESPONDENT/CROSS-APPELLANT JUDGES: HILL, CARR AND HELY JJ DATE: 17 DECEMBER 1999 PLACE: SYDNEY REASONS FOR JUDGMENT HILL AND HELY J: 1 The appellant, the Commissioner of Taxation, appeals against part of the judgment of a judge of this Court which held that certain items of packaging materials used by the respondent, McDonald's Australia Limited ("McDonald's") were exempt from sales tax because they fell within exemption Item 27 of Schedule 1 to the Sales Tax (Exemptions and Classifications) Act 1992 (Cth) ("the Act"). McDonald's for its part cross-appeals against that part of the judgment as held that the packaging materials did not qualify for exemption from sales tax by reason of Item 19 of Schedule 1 to the Act. The background to the appeal 2 The proceedings between the parties concerned packaging materials listed in McDonald's application to the Court under the following headings: "(a) collars (b) wraps (c) breakfast bases and lids (d) apple pie boxes (e) clamshells (f) fry bags (g) fry cartons (h) hashbrown bags (i) hashbrown cartons (j) McNugget boxes (k) happy meal boxes" 3 Each of the listed class of items was purchased by McDonald's from a manufacturer/importer or wholesaler. At the time of purchase McDonald's quoted its sales tax registration number and in consequence the purchase was not subject to sales tax. In the course of its business and in the circumstances described, McDonald's applied the relevant items to its own use. It is common ground that, unless the items fell within an exemption item in Schedule 1 to the Act, liability to sales tax would arise at the time of the application to own use: cf Deputy Commissioner of Taxation v Stewart (1984) 154 CLR 385 at 396 per Brennan J. 4 McDonald's in its amended application, which relied upon s 39B of the Judiciary Act 1903, sought injunctive relief. However the real substance of its relief was its application for declaratory relief. In essence two declarations were sought. These were: · A declaration that the items described in (a) to (e) above and (k) as purchased by McDonald's on 25 September 1998 from a nominated supplier were exempt from sales tax because they fell within Item 19 of Schedule 1 of the Act. · A declaration that all of the items listed as purchased on 25 September 1998 or, in the case of "Happy Meal" boxes as purchased on 3 October 1998 from a nominated supplier, fell within exemption Item 27 of Schedule 1 to the Act. 5 Although a number of different items thus fell for consideration, the case was largely argued by reference to two items; namely the collars used in preparing hamburgers marketed under the name "Big Mac" and, so it was said, "Quarter Pounder with Cheese" and wraps used to wrap those hamburgers. It is common ground that a decision on these two items would govern the outcome of the application with respect to the other items. We shall therefore confine our discussion of the facts to those two items and their use in the preparation of a "Big Mac" hamburger as indeed the learned primary judge did. 6 McDonald's and franchisees produce and sell foodstuffs for human consumption from many outlets throughout Australia which they describe as restaurants. Among the items they produce is the "Big Mac". That is a hamburger which consists of a bun, two patties having a weight of approximately 1.6 ounces each, sauce, onions, pickles, cheese and lettuce. In the production of a "Big Mac" a bun is first toasted. After the toasting has been done, a round cardboard collar of approximately 3 cms in height is placed directly around the bottom section of the bun referred to as "the heel". Unlike the traditional hamburger a "Big Mac" has three layers of bun: the heel, the top section which is referred to as "the crown" and a middle section which is referred to as "the club". Ingredients such as sauce, etc are placed on both the heel and the club. The meat patties are cooked: one is placed on the heel and one on the club. The club is then placed on the heel section inside the collar and the crown of the bun is placed on the club section, making a three tiered hamburger. 7 The three tiered hamburger arrives at what McDonald's refer to as a "wrapping station" with the crown side up. The wrapping paper or wraps are wax coated on one side. The outside has printed upon it a description of the product which the wrap encases. After the hamburger is wrapped it is placed in a holding bin to await sale. To ensure that the hamburger sold is fresh a time card is placed behind each individually wrapped "Big Mac" with the time shown upon it. It is McDonald's policy that, if "Big Macs" are not sold within a ten minute frame time they are to be disposed of. 8 The collar is necessary to keep the three tiered hamburger together and indeed to facilitate its making. The wrapping paper is designed to prevent heat loss, to facilitate hygienic handling, to operate as a fat, oil and moisture barrier and no doubt also in part to prevent the hamburger drying out while it is in the holding bin. It also aids the presentation of the product. 9 When a customer arrives at a McDonald's outlet the customer is asked what he or she would wish to order. After the customer has placed the order he or she is asked whether the order is "to eat in" or "take away". If the customer chooses to eat a "Big Mac", for example, in the store, the "Big Mac" as wrapped is placed on a tray with a tray liner. If the customer chooses to take the food away, the "Big Mac" is placed in an appropriately sized paper bag designed to allow it to be taken away. The system is such, as the primary judge observed, that the products are prepared for sale regardless of any precise order so that until the time the "Big Mac" is taken from the holding bin, it cannot be known whether it will be eaten out or consumed in the "restaurant". As indicated some at least of the "Big Macs" prepared may in fact not be eaten at all, but are destroyed. The two exemptions 10 Exemption Item 19 is in the following terms: "(1) Goods for use by a person exclusively as raw materials for goods to be manufactured by the person in Australia in the course of any business carried on by the person. (2) This item does not cover materials or mixes for use in manufacturing any of the following: (a) thick-shakes or similar goods; (b) biscuit goods; (c) ice-cream goods; in premises or vehicles in which the business of manufacturing those foods is carried on mainly for the purpose of retail sale directly from those premises or vehicles." 11 The expression "raw materials" is defined in s 5 of the Sales Tax Assessment Act 1992 (Cth) ("the Assessment Act") by reference to the meaning given by s 7 of that Act which is the following terms: "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." 12 Exemption Item 27 is in the following terms: "(1) Goods ('the main container') for use by a person ("the exemption user") as a container exclusively for contents consisting wholly of assessable goods (or of assessable goods and containers for those assessable goods). (2) In addition, the exemption user must intend or expect that: (a) the main container will be used as a container in relation to the contents at the time of an assessable dealing that consists of: (i) a sale of the contents; (ii) … (iii) …; and (b) possession or control of the main container will pass to the person who is the purchaser, customer or lessee, as the case requires, for that assessable dealing. (3) This Item does not cover goods that are for use by the exemption user in marketing or delivering: (a) ice-cream goods, or biscuit goods, that are manufactured in premises or vehicles in which the exemption user carries on a business of manufacturing goods of that kind mainly for the purpose of retail sale directly from those premises or vehicles; (b) take-away beverages or foodstuffs (whether for consumption on the premises from which they are sold or elsewhere)." The judgment appealed from 13 The learned primary judge was of the view that neither the collar nor the wraps fell within Item 19. According to his Honour, this was because neither could be said to be raw materials for goods to be "manufactured" within Item 19 because they were not used in manufacturing the "Big Mac". 14 The expression "manufacture" is defined in s 5 of the Assessment Act. The case was apparently argued by the parties below on the basis that the relevant part of that definition was "applying a treatment to foodstuffs as a process in preparing them for human consumption". On this basis his Honour held that what was done involving the collar and wrap could not be described as applying a treatment to foodstuffs. His Honour said: "It might, at a stretch, be seen as the treatment offoodstuffs as a process in preparing them for human consumption. Neither the wrap nor the collar do more then contain the foodstuffs and assist in maintaining the foodstuffs in a condition fit to be eaten." 15 It was, therefore not necessary for his Honour to consider the other question between the parties; namely whether either the collar or the wraps became an integral part of the goods. 16 However, his Honour was of the view that both items fell within exemption Item 27. Before his Honour, the Commissioner had argued that the question whether the goods referred to in exemption Item 27 were "for use ... as a container" required a consideration of the character of the goods rather than the actual use to which the goods were put. For the taxpayer however it was argued that the exemption item applied to so many of the collars or wraps as were used in relation to the "Big Macs" which were taken away from the premises although not to so many of the collars or wraps as were used in relation to "Big Macs" which eaten by customers in the McDonald's restaurants. On this basis it would be necessary for there to be a calculation, by reference to statistical experience, to determine what percentage of the collars and wraps were used in relation to "Big Macs" consumed in the restaurants or discarded and not sold and what percentage of the collars and wraps were used in relation to "Big Macs" which were taken away. 17 In the result, his Honour declared that exemption Item 19 did not apply to any of the packaging material but that exemption Item 27 covered the packaging material except so far as not excluded by Item 27(3) when used by the appellant or one of its franchisees as containers for foodstuffs to be eaten by customers at the restaurant. It is from this judgment that the Commissioner appeals and McDonald's cross-appeal. Exemption Item 19 18 For exemption Item 19 to apply the relevant goods covered by the exemption must be used exclusively as raw materials for goods which are manufactured by the person in the course of that person's business. It is necessary therefore, unless the item otherwise does not apply, to identify what the goods are which the person manufactures. 19 For this purpose it is necessary, as the learned primary Judge identified, to determine what the process of manufacture is for, generally speaking, the relevant goods will be the outcome of the manufacturing process. 20 The word "manufacture" is defined in s 5 of the Assessment Act in an inclusory definition. It thus includes manufacture in the ordinary sense of the word as well as activities which fall within the definition. The definition reads relevantly as follows: " '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; ..." 21 Manufacture in the ordinary sense of the word has as its essence the making of something which is a different thing from that out of which it is made: cf McNicol v Pinch [1906] 2 KB 352 at 361; Federal Commissioner of Taxation v Jack Zinader Pty Limited (1949) 78 CLR 336 at 343. 22 It was early held that cooking was not manufacture in the ordinary sense of the word: Federal Commissioner of Taxation v Rochester (1934) 50 CLR 225, presumably (the reasons given are brief) because no new item of goods resulted from the cooking process. The same case held also that the use of oil or grease and condiments in cooking fish could not be described as a combination of parts or ingredients producing an article or substance commercially distinct from those parts or ingredients within the definition then applicable in s 3 of the Sales Tax Assessment Act (No. 1) 1930 as amended. Although the reasons are not very specific, this was either because there was no combination of parts or ingredients in the relevant sense or there was no commercially distinct article produced. Certainly that part of the definition as concerned the combination of parts or ingredients was later held not to extend to something which was other than a "mere combination": Federal Commissioner of Taxation v Jax Tyres Pty Ltd (1984) 58 ALR 138. 23 Following upon the decision of the High Court in Rochester the application of treatment to foodstuff was added to the then definition, although the foodstuffs themselves continued to be exempt from sales tax. That addition to the definition found its way in substance in due course to the present Act when the sales tax legislation was rewritten in 1991-92. 24 As we have already noted, the case was argued before his Honour on the basis that the process of producing a "Big Mac" was manufacture because is fell within para (c) of the definition. However, we do not think this is a correct analysis. It is true of course that both the bun and the pattie are cooked and thus the subject of a process falling within para (c) of the definition. However the making of a hamburger comprises not merely the cooking of the bun and the pattie (which the Act may treat as the manufacture of a toasted bun and cooked pattie) but the other steps which include assembly of the toasted bun and filling the bun or buns with the appropriate ingredients. Whether the making of the hamburger is manufacture in the ordinary sense of the word or whether there is manufacture by virtue of a combination of both paras (b) and (c) of the definition is not one which it is necessary to decide. It is common ground between the parties that the "Big Mac" is in fact manufactured. Once it is realised that the manufacture arises not because of para (c) on its own, it is clear that the learned primary Judge was led into error by virtue of the way the case was argued. 25 It is obvious enough that neither the collar nor the wrap could be said to be used in applying heat to the foodstuffs but it is also clear enough that the collar is used in making the hamburger and, depending upon whether the relevant item of goods should be seen as the hamburger on its own or the hamburger as wrapped, so might the wrap. 26 It was submitted that the learned primary Judge had found as a fact that the goods which were manufactured were wrapped "Big Macs". Certainly his Honour, in the course of the judgment, described a "Big Mac" as being a "packaged hamburger". Whether this was intended to be a factual finding that the finished product of the manufacturing process was a wrapped hamburger is far from clear. 27 There has always been a difficulty, at least in borderline cases, in determining whether the subject of the manufacturing process includes the putting of the product in a container. So, for example, it was held by Davies J in WEA Records Pty Ltd v Federal Commissioner of Taxation (1990) 96 ALR 365 that the placing of a label on a video cassette was not a process of manufacture although the label assisted in identifying the movie title. The reasoning in that case would suggest that placing the cassette as labelled into a plastic container would likewise not have been manufacture since, in the view of Davies J, the process of manufacture ceased when the recording from the configured master to the video cassette in the "slave machine" was completed. 28 At the other extreme would generally lie the making of soft drinks. The making and bottling of aerated waters, at least in one operation, would be a process of manufacture which produced a bottled soft drink: Cohns Industries Pty Ltd v Deputy Federal Commissioner of Taxation (1979) 24 ALR 658 where the process was held to be manufacture in the ordinary sense of the word, although no consideration was given directly to whether it was just the process of mixing the soft drink which constituted manufacture or that process together with the bottling process. 29 The question is ultimately one of fact and matters such as whether the product and packaging are operations, performed by separate companies, could play a part in the factual decision. Despite a submission to the contrary, the decision of Hely J in Woolworths Pty Ltd v Federal Commissioner of Taxation (1999) ATC 4187 is not authority to the contrary. 30 In the present case it is certainly arguable that the process of manufacture of the hamburger was complete when the hamburger was formed and before it was wrapped so that the process of wrapping could be seen as separate from the manufacture process. After all a "Big Mac" is a hamburger and common sense suggests that it remains a "Big Mac" whether wrapped or on a plate unwrapped to be eaten. But it is unnecessary to pursue the matter further because, in our view, whether or not what was manufactured was an unwrapped hamburger or a wrapped hamburger, the result will be the same, Item 19 will not apply to it. 31 For Item 19 to apply to the wrap or the collar, it is necessary that each fall within the definition of "raw materials", that is to say it is necessary that each become an integral part of the goods manufactured. An item will become an integral part of some other goods only where it becomes a constituent or component of a whole. The word "integral" as defined in the Macquarie Dictionary (3rd ed.) means: "of or relating to a whole; belonging as a part of the whole; constituent or component: ... 2. necessary to the completeness of the whole." 32 In WEA Records to which reference has already been made, Davies J was of the view that the labels in question did not form an integral part of the video cassettes. His Honour's approach to that question is instructive. He said at 4786-7: "The cassettes could be played and their visual images produced whether the duplicate video cassettes were labelled or not. The label assists in identifying the movie title recorded on the video cassette and ... to facilitate the marketing of the manufactured goods ..." 33 The collar is no doubt a necessary, or at least a desirable part of the process of assembling a hamburger of the dimensions of a "Big Mac". In this sense, it is not unlike a cake form which is a necessary part of the process of baking a cake. But, like the cake form, it is discarded before consumption. The hamburger can be used and in fact only can be eaten without the collar. The same is true of the wrap. It may not be necessary to go as far as to say in the present context that it is necessary for an item to become an integral part of other goods that it be physically subsumed into those other goods: cf the negative discussed in Case C80 (1953) 3 TBRD 452 at 460-1 and the decision in Tanu Pty Ltd v Federal Commissioner of Taxation (1998) 154 ALR 102 at 116 (Hill J) approved on appeal, Tanu Pty Ltd v Federal Commissioner of Taxation (1999) 160 ALR 227 and see also State Electricity Commission of Victoria v Commissioner of Taxation [1999] FCA 1329 per Carr J at para 61. If suppliers have to say that a "Big Mac" can be consumed (the ultimate use of the product) and only consumed when both the collar and wrap are discarded, neither is in that sense an integral part of a "Big Mac". 34 As neither the collar nor the wrap can be seen to be an integral part of the "Big Mac" hamburger, the exemption Item 19 is not applicable to them. Exemption Item 27 35 McDonald's claim that Item 27 applies relates only to the wrap. The argument proceeds upon the assumption that the item manufactured is in fact the "Big Mac" and that the wrap is to be seen as a container for it. We are prepared to accept the assumption for this purpose. 36 It is important at the outset to note that a pre-condition of the item applying is that the goods are "for use" by a person, in this case McDonald's, as a container. The relevant use is by McDonald's not that of a person from whom McDonald's purchases the product. The exemption of goods from sales tax by reference to "use" has a long history. The Sales Tax (Exemptions and Classifications) Act 1935 ("the 1935 Act") contained numerous exemptions, some expressed as "goods for use by", others expressed in different ways such as "goods of a kind ordinarily used for", or "goods for use in". Where the formulation is "goods for use by" as in Item 81 of the 1935 Act considered in Stewart or "goods for use by a person ... for" as here it is necessary to determine whether the item is identifying some characteristic of the goods themselves or the use to which the relevant goods are put or even a combination of the two. 37 In Stewart Gibbs CJ said at 390: "The First Schedule to the Sales Tax (Exemptions and Classifications) Act describes exempted goods in two main ways – by reference to the nature of the goods themselves and by reference to the use to which it is intended to put them. In many cases of the second kind the words 'for use' indicate the purpose to which it is intended the goods shall be put, rather than the use for which the goods were designed. That this is so is evidence in the case of many items – e.g. anthropological specimens 'for use by research workers' (item 61), articles for use of the Governor-General (item 73(i)) and goods for use by a municipal council (item 789(i)). It is certainly true of item 81(1), since many goods used in a hospital or by a public benevolent institution might equally well be used by any person or any other organization. The word 'use' does not connote exclusive use." 38 The members of the High Court who formed the majority in Stewart had different views of the construction of Item 81. 39 Gibbs CJ with whom Dawson J agreed interpreted the item as looking to the use to which the goods there in question were put. Deane J while stating at 401 that the requirement that the goods be "for use by" referred to "projected actual use rather than the inherent quality or nature of the goods themselves" indicated that subjective intentions as to use were relevant and sometimes conclusive but nevertheless: " ... what is required is an objective characterization of the goods themselves in the light of all the relevant circumstances ... made with the benefit and in the context of knowledge of the actual use which was subsequently made of the goods." 40 Brennan J at 397 referred to the use to which the goods were put giving "a character to the goods" and indicated that the nature of the goods themselves was a relevant factor in this. 41 On the other hand an exemption worded "goods for use in" will usually look to some essential character of the goods themselves or, in other words, the inherent qualities exhibited by the goods: Deputy Federal Commissioner of Taxation v Lincoln Industrial Cleaners Pty Ltd (1975) 75 ATC 4208 at 4210. 42 The issue between the present parties is whether the wrap seen as a container is for use by McDonald's in marketing or delivering takeaway beverages or foodstuffs. The words in parenthesis in Item 27(3)(b) emphasise the fact that it is irrelevant whether the takeaway beverages or foodstuffs are in fact taken away or are consumed on the premises from which they are sold. It will be noted that the exemption item combines both the concepts of "for use by" and "for use in". Since however the words "for use by" relate to the word "person" rather than as in Stewart a specified type of body, the emphasis is rather on the fact that the item must be for use in a particular way and thus prima facie points to the nature of the goods as the relevant description as well as the actual use. 43 The expression "take-away beverages" was discussed in Pepsi Seven-Up Bottlers Perth Pty Ltd v Commissioner of Taxation (1995) 62 FCR 289 at 293-4, in the context of an argument that cans or bottles containing soft drink were take-away beverages. "The evidence makes it clear, and indeed it is conceded, that the expression 'take-away' used as an adjective to describe food or beverage in the item is not an expression having any technical or trade meaning. At least in the context of 'take-away food' it is an expression of general usage. It seems also to be common ground that it is not common usage to refer to a 'take-away beverage'. The expression 'take-away' is also commonly used for an establishment which sells take-away food. It was agreed, however, the expression 'take-away beverage', while not an expression in common usage, fell to be interpreted by analogy to the expression 'take-away food'." 44 By way of everyday usage, the judgment refers to a hamburger store as properly described as a "take-away" and a hamburger to be properly described as "take-away food". The judgment continues: "Thus the character of take-away food is not to be derived solely from the character of the establishment from which it is sold. The adjective 'take-away' in the context of food expresses something about the food itself as well as the fact that it is available to be taken away by the customer for consumption later." 45 We would add that the question whether a particular item was "take-away food" might well be affected by the manner in which the particular product is marketed or presented. 46 At page 294 the judgment continues: "In my view, when in ordinary parlance one speaks of 'take-away food' one refers to food which has been prepared for consumption away from the premises where it is sold, irrespective of the place where the food itself is prepared. ... When I use the expression 'freshly prepared' I intend to include cases where food may have been prepared some time before consumption but is heated up at the time of purchase." 47 We do not think that an item will fall to be considered as a take-away foodstuff merely because a purchaser may take it away rather than consume it on the premises. That this was not the intention is clear from the words in parenthesis to which reference has already been made. A question of degree is involved. A gourmet restaurant may sell a hamburger which it serves on a plate with appropriate dressings and/or salad. Such a hamburger might not, having regard to its character, be seen to be included within the expression take-away foodstuff. But such a case would not ordinarily fall to be considered under Item 27 for the starting point of the item is that there be a container into which the take-away food is placed. Hamburgers served in a restaurant are not likely to be in a container. No doubt difficult questions can arise with particular cases; for example a gourmet establishment which actually prepares meals to be taken away in a container. Whether such meals should be taken to be take-away foodstuffs is not a matter which is presently before us and the question distracts from the present issue. The nature of the "Big Mac" hamburger and the manner in which it is marketed lead in our view to the conclusion that a "Big Mac" is properly to be described as a take-away foodstuff in ordinary language. 48 We gain no assistance from the decision of the New South Wales Court of Appeal in Commissioner of Taxation (Cth) v Kentucky Fried Chicken Pty Ltd (1988) 12 NSWLR 643. That case concerned paper serviettes, refresher towels and plastic spoons packed with the containers in which the products of Kentucky Fried Chicken were marketed. Each of the items was held to fall within the definition of containers in the then Item 91(1) of the First Schedule to the Exemptions and Classifications Act because it was an accessory to the food products sold. The Court of Appeal decided that it was possible to determine the percentages of goods which were actually used in the particular way contemplated by the exemption item. This was so notwithstanding that it was impossible to say of any particular item in what way it would actually be used. The context in which the case was decided was totally different from that of the present case. And on the view that we take of the character of the goods, it becomes unnecessary to determine the percentage of "Big Macs" which are in fact taken away by customers or are consumed on McDonald's premises. 49 We are of the view that Item 27 does not apply to the wrap and as Item 19 applies to neither the collar nor the wrap it follows that the Commissioner's appeal should be allowed and McDonald's cross-appeal dismissed. I certify that the preceding forty-nine (49) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Hill and Hely. Associate: Dated: 17 December 1999 IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N 847 OF 1999 On appeal from a single Judge of the Federal Court of Australia BETWEEN: COMMISSIONER OF TAXATION Appellant AND: McDONALD'S AUSTRALIA LIMITED Respondent JUDGES: HILL, CARR & HELY JJ DATE: 17 DECEMBER 1999 PLACE: SYDNEY REASONS FOR JUDGMENT CARR J: Introduction 50 I have read, in draft form, the reasons for judgment of Hill and Hely JJ in this matter. Before doing so, I had written the reasons set out below. I agree with their Honours' reasons. If there is any inconsistency between my reasons and their reasons, that is not my intention. 51 This is an appeal and cross-appeal from a decision of a judge of this Court to make certain declarations concerning the application of Items 19 and 27(3) of Schedule 1 to the Sales Tax (Exemptions and Classifications) Act 1992 (Cth) ("the Exemption Act") in relation to goods purchased by the respondent. The appellant, the Commissioner of Taxation, claims that the learned trial judge was in error when he declared that certain packaging materials used by the respondent fell within exemption Item 27. The respondent cross-appeals on two bases. The first is that his Honour's declaration in relation to the exemption under Item 27 was too narrow. The second basis for the cross-appeal is that his Honour should have held that some of the packaging materials were also exempt under Item 19. Factual Background 52 The respondent, by itself and its franchisees, carries on the business of producing and selling packaged foodstuffs for human consumption from many stores throughout Australia. 53 For the purposes of the proceedings at first instance, and on appeal, the process by which the respondent produced its hamburgers was treated as an example applicable to all the relevant products. During that process a cardboard collar is placed around the heel section of the bun. The collar serves as a type of formwork into which the rest of the ingredients of the hamburger are placed. Once the hamburger has been assembled, it is wrapped. The wrapping paper used has been specially treated to prevent heat loss, to facilitate hygienic handling, to give an attractive presentation and to act as a fat, oil and moisture barrier. Both the collar and the wrapping paper help to hold the hamburger together, the collar serving that function during the course of production and also thereafter. 54 As applicant at first instance, the respondent asked the Court to determine whether the packaging in question, being, typically, the cardboard collar and the wrapping paper which I have just described, were exempt from sales tax either as: · raw materials for goods to be manufactured (Item 19); or · "containers for assessable goods" (Item 27) not being within the exception to that exemption in Item 27(3), an exception which excludes goods for use in marketing or delivering take-away foodstuffs from such exemption. Statutory Framework 55 Section 24 of the Sales Tax Assessment Act 1992 (Cth) ("the Assessment Act"), when read with s 4 of the Exemption Act, provides, in effect, that sales tax shall not be payable in respect of goods covered by any Item in the First Schedule to the Exemption Act, being an Item which is in force at the time of the assessable dealing. That section also provides that the requirements of the relevant Item must be met at or before the time of the dealing. 56 Exemption Item 19 of the First Schedule to the Exemption Act provides an exemption for goods for use by a person exclusively as raw materials for goods to be manufactured by the person in the course of any business carried on by the person. 57 Exemption Item 27 relevantly provides an exemption in respect of containers for use exclusively to contain assessable goods. It was common ground that the goods with which this appeal is concerned fall within this exemption unless excluded by the exception in Item 27(3) which provides: "(3) This Item does not cover goods that are for use by the exemption user in marketing or delivering: (a) ice-cream goods, or biscuit goods, that are manufactured in premises or vehicles in which the exemption user carries on a business of manufacturing goods of that kind mainly for the purpose of retail sale directly from those premises or vehicles; (b) take-away beverages or foodstuffs (whether for consumption on the premises from which they are sold or elsewhere)." 58 Neither the Assessment Act nor the Exemption Act define "take-away" or "take-away beverages or foodstuffs". THE DECISION AT FIRST INSTANCE 59 The following extracts from the primary judge's reasons (in relation to a product known as a "Big Mac") set the factual context for the issues to be decided: "7 The procedure for production of a Big Mac is that once the bun has been toasted, a cardboard collar is placed directly on the heel section of the bun. The sauce is placed on the heel and the club. The ingredients other than the meat patties are then placed on the heel of the bun inside the collar and on the club. Once the meat patties are cooked, they are then placed one on the heel and one on the club. The club is then placed on the heel section inside the collar. The crown of the bun is then placed on the club section. 8 At the wrapping station in the store the hamburger arrives with the crown side up. The hamburger is then wrapped in a paper wrap which has the description of "Big Mac" on it. The Big Mac is then placed in the holding bin to await sale. In order to ensure that the packaged hamburger when sold is fresh, a holding time card is placed behind the wrapped Big Mac with the time it is to be held in the bin on the card. When an order is received for a Big Mac, the crew person takes a Big Mac out of the holding bin and provides it to the customer. Big Macs which are not sold within a set period are disposed of. No Big Mac is ever sold except those packaged as described above. . . . 19 It is the policy of the applicant that staff follow certain procedures when serving customers in order to maintain consistent standards. The procedure for serving customers when they come into the applicant's stores is first ask customers what they would like to order. Once customers have placed their order, they are asked whether the food is to "eat in" or "take away", that is, to be eaten in the store or taken away. If the customer chooses to eat their food in the store, it is placed on a tray with a tray liner. If the customer chooses to take the food away, it is placed in an appropriate size paper bag designed for this purpose. Particular recommendations are given to staff regarding the appropriate number of burgers or other McDonald's products suitable to be placed in each of the different sized bags available. 20 All of the products are prepared and presented in precisely the same way, whether to be eaten in or taken away, save for the ultimate receptacle – in one case the tray, and in the other, the paper bag. The system is such that the products are prepared for sale regardless of any precise order, so when the packaging materials in question are utilised it cannot be known whether the goods will be eaten in or taken out. Of the "bank" of products which exist at any time, some will and some will not be taken away." Item 19 60 The primary judge held that the placement of the cardboard collar and the wrapping of the goods did not fall within the definition of "manufacture" in s 5 of the Assessment Act. The relevant subparagraph of that definition included within the meaning of "manufacture" the application of a treatment to foodstuffs as a process in preparing them for human consumption. His Honour said (at para 14): "I do not regard what is done involving the collar and wrap as applying a treatment to foodstuffs. It might, at a stretch, be seen as the treatment of foodstuffs as a process in preparing them for human consumption. Neither the wrap nor the collar do more than contain the foodstuffs and assist in maintaining the foodstuffs in a condition fit to be eaten." 61 Consequently his Honour held that the collar and wrap were not exempt by reason of Item 19. The same conclusion applied to all of the other packaging material which was the subject of the application. Item 27 62 The trial judge found that the exception in Item 27(3) (to the sales tax exemption provided by Item 27) applied to those containers used by the respondent in relation to goods which were taken away. Accordingly, the remainder of the containers, i.e. those which contained hamburgers which the respondent's customers ate in its restaurants, fell within the exemption provided by Item 27. 63 His Honour agreed with the respondent's submission that it was the communicated intention of the person placing the order which determined the characterisation of the hamburger as take-away food. His Honour held that: "The fact that an article of food might be adapted to being either eaten in the store or taken away does not seem to me to require the conclusion that all such food is take-away food regardless of the manner in which and the place where it is served. Put another way, in my opinion, there is no class of food which can be categorised as take-away food simply by reason of its physical form. It is a matter of common sense and common knowledge that, with modern packaging, most recently prepared meals can be either eaten on premises or taken away. Many establishments cater for both, but some are devoted to one or the other. … … there is an overwhelming common sense in endeavouring to construe the provisions to enable containers in fact used in take-away situations to lose the exemption but for containers used in an eat-in situation to receive the benefit of the exemption." THE APPEAL 64 The Commissioner appeals against the trial judge's decision to construe Item 27(3) as not applying to those of the respondent's products which its customers chose to eat in its restaurants. THE CROSS-APPEAL 65 The respondent cross-appeals on two grounds. The first ground is that the primary judge erred in failing to hold that the packaging materials (an expression which included the collars and the wraps) were exempt under Item 19 as raw materials used by the respondent in the manufacture of packaged foodstuffs. The second ground of the cross-appeal was that his Honour erred in failing to hold that the wraps were also exempt under Item 27 as containers for foodstuffs, whether or not the foodstuffs were to be eaten by customers at its restaurants. Item 19 My Reasoning 66 It was common ground before us that the procedures described in the extract from his Honour's reasons set out above fell within the definition of "manufacture". The issue was whether the collar and wrapping paper were "raw materials for goods to be manufactured" within the meaning of Item 19. 67 The expression "raw materials" is defined by reference in s 5 of the Assessment Act as having the meaning given by s 7(1) of that Act which provides: "Goods ("the materials") are taken to be used as raw materials in manufacturing other goods if, and only if, the materials are dealt with in such a way in manufacturing the other goods that the materials, or some essential element of the materials, become an integral part of the other goods." 68 The respondent's submission in relation to Item 19 was that the "other goods" in the above definition was a "packaged hamburger". The respondent submitted that the primary judge had so found, as a matter of fact. The respondent contended that the collar and wrapping paper had become an integral part of those goods, again as a matter of fact. Both physically and commercially, so it was put, the collar and wrapping paper formed part of a single integrated final product. The collar and wrapping paper were an "integral part of" the packaged food product. In oral submissions, Mr D H Bloom QC (who with Mr S J Gageler appeared for the respondent) drew the analogy of wheels and tyres becoming an integral part of a motor car during the manufacturing process. 69 The Commissioner of Taxation, as respondent to the cross-appeal, submitted that the relevant "other goods" were the hamburgers and not the packaged hamburgers. There was no physical subsuming of the collar and wrap in the hamburger. Alternatively, if the relevant end product was a packaged hamburger, the Commissioner submitted that there was still no physical subsuming of the collar and wrapping paper in the end product. 70 In my view, neither the collars nor the wrapping paper fall within the exemption provided in Item 19 of Schedule 1 to the Exemptions Act. That is because they are not, in my opinion, "raw materials" within the meaning of that expression in that Item. To reach that conclusion it is necessary to decide whether the collars and wrapping paper are dealt with in such a way in manufacturing other goods that they become an integral part of the other goods – see s 7(1) of the Assessment Act. That in turn makes it necessary to decide what are "the other goods" i.e. the goods which are manufactured. 71 In my view the "other goods" are the hamburgers. I do not read his Honour's reasons as containing the findings of fact claimed by the respondent and referred to above. In my opinion the goods which are the articles of commerce and which the respondent's customers wish to buy and consume are the hamburgers. I think that it is central to the characterisation of the goods to bear in mind the fact that they are foodstuffs i.e. they are going to be eaten. Mr Bloom's analogy to the tyres and wheels of a car breaks down because, as one member of the bench observed during the hearing of the appeal, before a hamburger can be enjoyed, the collar and paper wrapping must be removed. It is necessary to distinguish between the relevant foodstuff on the one hand and the piece of cardboard which props it up and the wrapping paper which wraps it on the other hand. 72 The authorities in this area show that for materials to become an integral part of other goods it is usually necessary for them to be physically subsumed into the other goods: Pepsico v Federal Commissioner of Taxation (1997) 147 ALR 497 at 504; Tanu v Federal Commissioner of Taxation (1998) 154 ALR 102 at 116 (Hill J) (1998) 160 ALR 227 at 238 (Full Court); State Electricity Commission of Victoria v Commissioner of Taxation [1999] FCA 1329 at para 61. As the collars and wrapping papers do not become physically subsumed into the goods (as identified above i.e. the hamburgers), and as there are no other reasons for regarding them as being an integral part of those goods, they are not raw materials within the statutory definition. 73 The result is that I agree with the primary judge's conclusion that the collars and wrapping paper did not fall within Item 19, but for a different reason. With due respect to the primary judge, I think that his conclusion was based on too narrow a view of s 5 of the Assessment Act. That was due, I think, to the manner in which the argument was put at first instance. I agree with his Honour that what was done with the collars and wrapping paper did not amount to "treatment to foodstuffs" within the meaning of subparagraph (c) of the definition of "manufacture" in s 5 of the Assessment Act. On appeal, the Commissioner conceded (rightly in my view) that the production of the hamburgers fell within the statutory definition of "manufacture". In my opinion, the right approach is to have regard to the whole of that process involving, as it does, toasting of buns, grilling of beef patties and combining those goods with opinions, pickle and tomato sauce to make the end product. To focus on the placement of the collars and application of the wrapping papers is, I think, too narrow a focus. Item 27 Respondent's Submissions 74 The respondent submitted that the "take-away containers" excluded from the exemption in Item 27(3)(b) were a particular sub-set of containers that had two distinct characteristics. They were containers that: 1. were used for the marketing or delivering of "take-away food", being freshly prepared food or beverages for consumption elsewhere; and 2. facilitate that food being "taken away" by the customer for consumption elsewhere. 75 The respondent contended that this second element was "critical" to the description of a container as "take-away". A cardboard box for a pizza was provided as an example of such a container which would be excluded from the exemption in Item 27. The respondent submitted that pizza was not inherently "take-away food" because it could be consumed on the premises where it was purchased. However, the cardboard box was a container that facilitated its transportation by the consumer. The use of this container had the effect of characterising the pizza as "take-away" food. Another example provided by the respondent was fried rice from a Chinese restaurant. Rice might be consumed on a plate in the restaurant or taken away from the premises in a plastic container. The respondent used these examples to emphasise the importance of the communicated intention of the person purchasing the food. Customers of the respondent who chose to consume their food at its restaurants would indicate this to the person serving them. They would receive their food on a tray. Customers who wanted to consume their food away from the premises would receive their food in a paper bag. The respondent submitted that this paper bag was a "good" within the meaning of Item 27(3)(b) because it was a container for the marketing or delivering of the food. The same contention was made in relation to the wrapping. 76 As to the meaning of the words "goods for use" in Item 27(3)(b), the respondent submitted that the question whether particular goods fell within that description of "goods for use" in a particular manner could be established by identifying "the relevant projected use" of the goods. This was the approach adopted in Deputy Commissioner of Taxation v Stewart (1984) 154 CLR 385at 402. The respondent contended that "the relevant projected use" was the projected use at the time when the respondent or its franchisee purchased the packaging from the wholesaler, in this case, F J Walker. It could be reasonably assumed that at the time when the respondent purchased its packaging, a proportion of it would be used on the premises and another proportion would be used away from the premises. Consequently, Item 27(3)(b) applied to the proportion of packaging purchased by the respondent that would be used to contain food taken away from its premises. 77 The respondent submitted that the question whether or not food was "take-away" was fixed at the time of its delivery to the customer. The words in parenthesis in Item 27(3)(b) simply indicated that if food could be characterised as "take-away" at the time of delivery then the place where the customer actually consumed the food was irrelevant. Appellant's Submissions 78 The appellant submitted that the question whether particular goods are "take-away foodstuffs" within the meaning of Item 27(3) depended on the character of the food. Reference was made to the approach adopted by Hill J in Pepsi Seven-Up Bottlers Perth Pty Ltd v Commissioner of Taxation (1995) 62 FCR 289 at 293-294 where take-away food was described as "freshly prepared" for virtually immediate consumption and "prepared for consumption away from the premises where it is sold." The appellant submitted that foodstuffs meeting this description did not cease to be "take-away foodstuffs" simply because the consumer intended at the time of purchase to consume them on the premises from which they were sold. The appellant contended that the subjective intention of a consumer had no relevance to the classification of the foodstuffs. 79 The appellant further contended that his Honour failed to give meaning and effect to the words in parenthesis in Item 27(3) i.e. "(whether for consumption on the premises from which they are sold or elsewhere)". It was submitted that these words made it clear that foodstuffs which met the same description in Pepsi Seven-Up Bottlers Perth Ltd did not cease to be "take-away foodstuffs" simply because they were consumed on the premises from which they were sold or otherwise. My Reasoning Item 27 80 The question is whether the wrapping papers are goods for use by the respondent in marketing or delivering take-away foodstuffs (whether for consumption on the premises from which they are sold or elsewhere). 81 Whether goods are "take-away foodstuffs" is obviously a matter of fact and degree. However, I derive considerable assistance from the observations of Hill J in Pepsi Seven-Up Bottlers Perth Pty Ltd at 293-294 where his Honour said: "The adjective "take-away" in the context of food expresses something about the food itself as well as the fact that it is available to be taken away by the customer for consumption later." 82 That passage discloses two aspects, namely the food itself together with the availability of that food to be taken away. I accept, as also being of assistance the submission made by Mr I Gzell QC (who with Mr S Gibb appeared for the appellant) that regard may also be made to the method of presentation of the goods. 83 There may well be difficulties, in particular cases (some of which we were taken to), in making the factual characterisation. For example, the customer walking into a Chinese restaurant who might choose to have his rice put in a plastic container for consumption at home or might sit down at a table and have the rice served on a plate for consumption in the restaurant. Those are different facts to the circumstances with which we have to deal in this matter. 84 In this case, a hamburger has traditionally been regarded as a foodstuff which is readily and customarily taken away for consumption. Secondly, in each of the respondent's restaurants it is available to be taken away. Thirdly the hamburgers are presented fully wrapped to all customers. 85 In my view, the wrapping paper was used by the respondent in marketing "take-away foodstuffs". I think that the words in parenthesis in Item 27(3)(b) simply emphasise that these containers fall within the exception to the exemption. Conclusion 86 I propose that the appeal be allowed, the orders made at first instance be set aside, the cross-appeal be dismissed and that the respondent pay the appellant's costs at first instance and in respect of the appeal and cross-appeal. I certify that the preceding thirty-seven (37) numbered paragraphs are a true copy of the Reasons for Judgment of Justice Carr. Associate: Dated: 17 December 1999 Counsel for the Applicant: Mr I Gzell QC with Mr S Gibb Solicitor for the Applicant: Australian Government Solicitor Counsel for the Respondent: Mr D H Bloom QC with Mr S J Gageler Solicitor for the Respondent: Messrs Baker & McKenzie Date of Hearing: 24 November 1999 Date of Judgment: 17 December 1999