Chief Commissioner of State Revenue v Smeaton Grange Holdings Pty Ltd [2017] NSWCA 184

Date of judgement 28 July 2017 Proceeding No. 2014/366015
Judge(s) Gleeson JA, Leeming JA and Sackville AJA
Court or Tribunal Court of Appeal, Supreme Court of NSW
Legislation cited Family Law Act 1975 (Cth), s 79

Income Tax Assessment Act 1936 (Cth), s 23(g)(iii)

Pay-roll Tax Act 1971

Payroll Tax Act 2007, Pt 5

Succession Act 2006

Supreme Court Act 1970

Taxation Administration Act 1996, ss 57, 106I(6)

Finance Act 1940 (UK), s 43(1)
Catchwords TAXATION – payroll tax – operation of the “grouping of employees” provisions of the Payroll Tax Act 2007 (NSW) – whether trustee of a discretionary trust correctly grouped with another entity – whether object of the discretionary trust deemed to have a controlling interest in the business conducted by the trustee – whether a disclaimer executed by the object purporting to operate retrospectively could affect liability to payroll tax in a previous year – whether a discretionary object can disclaim retrospectively
Cases cited Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue (2009) 239 CLR 27; [2009] HCA 41

Armitage v Nurse [1998] Ch 241

Australian Securities and Investments Commission v Carey (No 6) (2006) 153 FCR 509; [2006] FCA 814

Certain Lloyd’s Underwriters v Cross (2012) 248 CLR 387; [2012] HCA 56

Chamberlin and Bennett (in their capacity as Trustees of the Estate of the late Robert Henry Spry) v Spry [2008] VSC 562

Chief Commissioner of Stamp Duties for New South Wales v Buckle (1998) 192 CLR 226; [1998] HCA 4

Chief Commissioner of State Revenue v Paspaley [2008] NSWCA 184

Citibank Ltd v Papandony [2002] NSWCA 375

Commissioner of Taxation v Ramsden [2005] FCAFC 39; [2005] ATC 4136

Coolibah Pastoral Co v The Commonwealth (1967) 11 FLR 173

Cronulla Sutherland Leagues Club Ltd v Commissioner of Taxation (1990) 23 FCR 82

Davis and Sirise Pty Ltd v Federal Commissioner of Taxation [2000] FCA 44; 44 ATR 140

El Sayed v El Hawach (2015) 88 NSWLR 214; [2015] NSWCA 26

Federal Commissioner of Taxation v Word Investments Ltd (2008) 236 CLR 204; [2008] HCA 55

Freelance Global Ltd v Chief Commissioner of State Revenue [2014] NSWSC 127

Gallo v Dawson (1990) 64 ALJR 458

Gartside v Inland Revenue Commissioners [1968] AC 553

Gilsan v Optus [No 2] [2005] NSWSC 38

In re Gulbenkian’s Settlement Trusts (No 2) [1970] Ch 408

Kennon v Spry (2008) 236 CLR 366; [2008] HCA 56

Livingston v Commissioner of Stamp Duties (Qld) (1960) 107 CLR 411

Livingston v Commissioner of Stamp Duties (Qld) [1965] AC 494

MSP Nominees Pty Ltd v Commissioner of Stamps (South Australia) (1999) 198 CLR 494; [1999] HCA 51

National Employers Mutual General Insurance Association v Manufacturers Mutual Insurance Ltd (1989) 17 NSWLR 223

Perpetual Trustees Australia Ltd v Heperu Pty Ltd (2009) 76 NSWLR 195; [2009] NSWCA 84

Polo Enterprises Australia Pty Ltd v Pinctada Hotels and Resorts Pty Ltd [2015] NSWCA 397

Re Smith (Decd) [2001] 3 All ER 552

Robinson v Morrell Estate [2009] NSCA 127

Rowe v Federal Commissioner of Taxation (1982) 13 ATR 110

Smeaton Grange Holdings Pty Ltd v Chief Commissioner of State Revenue [2016] NSWSC 1594

South Sydney District Rugby League Football Club Ltd v News Ltd [2000] FCA 1541; 177 ALR 611

Tasty Chicks Pty Ltd v Chief Commissioner of State Revenue (New South Wales) (2011) 245 CLR 446; [2011] HCA 41

Westpac Banking Corporation v Hughes [2012] 1 Qd R 581; [2011] QCA 42

Background

The proceedings arise out of the failure of the Second Respondent, Tri-City Trucks (NSW) Pty Ltd (In Liq) (“Tri-City Trucks”) to pay payroll tax over a seven year period (the 2005-2012 financial years). Smeaton Grange Holdings Pty Ltd (‘Smeaton”), the First Respondent, and Tri-City Trucks were grouped for the 2005 to 2012 financial years pursuant to s. 72(1) of the Payroll Tax Act on the basis that Michael Gerace had a controlling interest in each of the businesses.

Similarly, Smeaton and Tri-City Smash Repairs Pty Ltd (“Smash Repairs”), the Third Respondent, were grouped pursuant to s.72(1) of the Payroll Tax Act on the basis that Ralph Gerace was deemed to control each of the businesses. As Smeaton was a member of the two groups, all three entities were part of a single larger group in accordance with s.74 of the Payroll Tax Act.

On 27 June 2014, Michael Gerace executed a “Deed Poll of Disclaimer” and a “Deed Poll of Disclaimer 2004 Year” (“Disclaimers”) which purported to disclaim any right, entitlement or interest in respect of the Smeaton Trust or arising pursuant to the Smeaton Trust Deed.

At first instance, White J ordered that the following question be determined separately and in advance of other issues in the proceedings:

“Did the disclaimer signed by Michael Gerace dated 27 June 2014 in respect of the Smeaton Trust and the Gerace Family Trust mean that subs 106I(6) of the Taxation Administration Act 1996 and s 72(6) of the Payroll Tax Act 2007 have no application for the tax years in question?”

White J determined that the answer to this question was “Yes”, and considered that there was no reason as a matter of principle why a person should be compelled to accept a personal right against his or her wishes. White J held that the disclaimers executed by Michael Gerace were effective, notwithstanding that they were given without consideration.

Preliminary issues

The Court of Appeal firstly considered the preliminary issue of whether the appeal was incompetent, by virtue of the operation of s.102 of the Taxation Administration Act 1996 and whether leave to appeal should be granted. The Respondents submitted that s.102(2) set a strict 30 day period, during which the Chief Commissioner must make any appeal from the Court’s decision. The Court of Appeal determined at [86] that the section was confined to operate as imposing an obligation of the Chief Commissioner to give effect to the decision. For the purposes of s.102(2), if no appeal is brought within 30 days, then the decision will become final at the end of the 30 day period. However, the section does not affect the competence of any appeal by the Chief Commissioner and whether orders should be made pending the hearing of any appeal.

In relation to leave to appeal, the Respondents submitted that leave was required, since the Chief Commissioner was seeking to appeal from a decision of a question ordered to be tried separately. Sackville AJA at [92], relying on authority in National Employers Mutual General Insurance Association v Manufacturers Mutual Insurance Ltd (1989) 17 NSWLR 223, determined that since the primary judge made final orders, the Chief Commissioner was entitled to appeal as of right and did not require leave to appeal.

Separate question - effect of waiver

Sackville AJA, with whom Gleeson JA and Leeming JA agreed, considered that whether the Disclaimers were effective, was dependent upon the proper construction of the Payroll Tax Act and the Taxation Administration Act 1996 (“TA Act”).

Counsel for the Respondents accepted that s.9(1) of the PT Act obliged Tri-City Trucks to pay payroll tax within seven days after the end of each month in which it paid or was liable to pay taxable wages above the threshold. It was also accepted that s. 81 of the Payroll Tax Act made Smeaton liable to pay to the Chief Commissioner the amount of payroll tax Tri-City Trucks was required to pay in respect of any period but had failed to pay.

Sackville AJA considered the construction of Part 5 of the Payroll Tax Act and held the following:

  • The legislation clearly envisages that a group may come into existence and that it can also cease to exist (at [135]).

  • The legislation contemplates that the composition of a group can change from time to time (ss.82(3), 84(1), 86(1) and 86(4) Payroll Tax Act) (at [135]).

  • The grouping provisions of s. 72 of thePayroll Tax Actare expressed in the present tense.

  • The language of s. 72(1) of thePayroll Tax Actsuggests that it is directed to a period or periods when the existence and composition of a group has to be ascertained

  • The construction of the language of s.72 strongly implies that the existence and composition of a group must be determined according to the circumstances as they exist during the relevant period or periods (at [138]). This is consistent with the fundamental purpose of the Payroll Tax Act, which isto impose Payroll Tax at specified rates on employers by reference to “taxable wages”, together with its ancillary purpose to ensure that tax due is collected, by making members of a “group” jointly and severally liable for unpaid Payroll Tax due by an employer within the same group.

Upon this construction, the Court found that the determination of group membership in accordance with s.72 of the Payroll Tax Act can only be undertaken by reference to the legal relationships as they existed between the relevant parties at the time that the employer’s liability to pay Payroll Tax arose. This determination is to be made on the basis of the facts as they existed at the relevant time. It is at that point that the Chief Commissioner can enforce the group members’ liability (see [143]).

The Court noted that the Disclaimers executed by Michael Gerace may have altered the rights of Smeaton and Michael Gerace as between themselves, or also affected the rights of other discretionary objects of the Smeaton Trust. However, on the proper construction of the legislation, the Court determined that Smeaton became liable by force of statute at the expiration of 7 days after the end of each of the first 11 months of each financial year, and at the expiration of 21 days after the end of each financial year. The Court concluded that Smeaton’s liability under the legislation was to be determined by reference to the legal relationships in existence on those dates (subject to an exclusion order made under s.79). The Court determined that a subsequent alteration of the rights of objects of the Smeaton Trust, by the unilateral act of a discretionary object, cannot change the operation of the legislation.

Accordingly, the Court of Appeal answered the separate question in the negative. That is, the grouping provisions in s.106I(6) of the TA Act and s.72(6) of the Payroll Tax Act are to be applied to the circumstances of the present case independently of and without regard to the Disclaimers signed by Michael Gerace.

Costs

Sackville J noted that the costs of an appeal ordinarily follow the event, but in this case he was not satisfied that the Court was given the assistance it was entitled to expect from the Chief Commissioner’s representatives on the critical question of statutory construction of the Payroll Tax Act and the Taxation Administration Act. Sackville J indicated that were it not for the respondents’ unsuccessful objection to the competency of the appeal, he would have proposed that each party bear its own costs. He decided that the Taxpayer should pay one-third of the Chief Commissioner’s costs.

Orders

The Court made the following orders:

  1. Dismiss the Respondents’ Notice of Motion filed on 16 March 2017 objecting to the competency of the appeal.

  2. Appeal allowed.

  3. Set aside the answer to the separate question given by White J in [109] of the judgment delivered on 15 November 2016.

  4. Set aside Orders 1-7 and 9 made by White J on 5 December 2016.

  5. The Respondents pay one third of the Appellant’s costs of the appeal, including one third of the Appellant’s costs of the Respondents’ Notice of Motion and one third of the Appellant’s costs of the Summons Seeking Leave to Appeal.

The consequence of the orders is that the matter will be returned to the Equity Division so that outstanding issues can be addressed.

Link to decision

Chief Commissioner of State Revenue v Smeaton Grange Holdings Pty Ltd [2017] NSWCA 184

Last updated: 28 August 2017