Lombard Farms Pty Ltd v Chief Commissioner of State Revenue [2013] NSWADT 17

Summary

The taxpayer sought a review of a decision by the Chief Commissioner not to exclude it from being grouped with its holding company and 3 other companies for the 2007-08 to 2009-10 tax years. The shareholders and directors of the companies were all members of the Panizza family. However, the taxpayer conducted businesses in the agricultural sector, whereas the other group members operated mainly in the building industry.

The Tribunal upheld the Chief Commissioner’s decision not to exclude the taxpayer on the basis that ultimate ownership and control of all group members was capable of being exercised by the Panizza family, and there were significant business connections between the companies. The business connections included a substantial intercompany loan to the taxpayer; the leasing of property between members of the company group and the taxpayer; a company group member conducting all administrative, treasury and banking services for the taxpayer as well as other group members, the absence of formal meetings of directors of the companies; and the ability of Panizza family members to control the taxpayer as shareholders and directors of the Taxpayer’s holding company.

Background

This appeal relates to payroll tax assessments issued to Lombard Farms Pty Ltd (“the taxpayer”) and four other companies - Con-Tec Pty Ltd, Albem Operations Pty Ltd, Albem Pty Ltd and Alpine Pty Ltd (“the company group”) - which were not parties to these proceedings. These assessments were issued on the basis that the taxpayer and the company group were a group for payroll tax purposes.

The issue for determination was whether the Chief Commissioner should exercise the discretion under s 79 of the PTA to exclude the taxpayer from the company group. Section 79 gives the Chief Commissioner a power to exclude a person from a group if satisfied, “having regard to the nature and degree of ownership and control of the businesses … that a business carried on by the person, is carried on independently of, and is not connected with the carrying on of, a business carried on by any other member of that group”.

Taxpayer’s submissions

The taxpayer argued that it should be excluded from the company group on the basis that it carried on its business independently of the business carried on by other entities in the company group, despite the fact that most of the directors and shareholders in the taxpayer and the company group were closely connected members of the Panizza family.

The taxpayer contended that the Chief Commissioner should have exercised the discretion given that:

1. The taxpayer’s business is conducted in the Agricultural sector, whereas the company group businesses are essentially in the building industry;
2. The taxpayer has separate business premises in a separate jurisdiction to the other grouped companies;
3. The single director of the taxpayer, Albert Panizza, made all of the taxpayer’s business decisions;
4. While other members of the Panizza family could theoretically control the taxpayer’s decisions through their interests in the taxpayer’s holding company, they did not do so, and had no day-to-day role in the management of the business of the taxpayer;
5. The company group structure was devised for asset protection purposes only, and although the Panizza family members became directors of the various companies, their controlling roles are theoretical only;
6. The existence of a substantial loan between the taxpayer and Alpine Pty Ltd is not an unusual feature of family company arrangements.

The taxpayer contended that s 79 of the PTA requires consideration of the actual position of the management of a company, and not the theoretical position.

Chief Commissioner’s submissions

The Chief Commissioner contended that s 79(2) of the Act applies broadly. It was submitted that the word ‘independence’ is a word of broad meaning (see Court of Appeal decision in Chief Commissioner of State Revenue v Tasty Chicks Pty Ltd [2012] NSWCA 181 at [51]) and so too is the word ‘connected’ (see Burswood Management Limited v The Attorney-General of the Commonwealth of Australia 23 FCR 144 at 146.7).

The Chief Commissioner submitted that ‘independence’ is disproven because, inter alia, there was an inter-relation of activities of the businesses evidenced by a substantial loan between the Taxpayer and Alpine Pty Ltd. In terms of whether a connection exists, this was satisfied by the fact that the companies are largely owned by the Panizza family, and that administratively, they operate as a group.

Tribunal Decision

The Tribunal held that the relevant enquiry in the exercise of the exclusion power given to the Chief Commissioner under s 79(2) of the PTA requires two factual findings:

1. independence of the business seeking degrouping; and
2. absence of a relevant connection between the business and the other group members.

The Tribunal noted that the different business conducted by the taxpayer compared to the company group, the business location of the taxpayer, and the fact that Albert Panizza was the sole decision maker in relation to the taxpayer were all strong factors to persuade the decision maker to exercise the discretion to exclude the taxpayer from the company group.

However, the Tribunal considered that the existence of the substantial loan, which possibly avoided the liquidation of the taxpayer; the leasing of property between members of the company group and the taxpayer; a company group member conducting all administrative, treasury and banking services to the taxpayer and the company group; the absence of formal meetings of directors for the company group; and the ability of the closely connected Panizza family members to make decisions in relation to the taxpayer through their control of the taxpayer’s holding company (see para 44), were more persuasive factual considerations.

The Tribunal considered that the role of Alpine Pty Ltd in not enforcing a substantial debt owed by the taxpayer was significant and critical to the continued existence of the taxpayer’s business. The financial arrangements between this company and the taxpayer had “created a very strong link between the two”. The Tribunal stated that this substantial connection alone “…prevents a finding necessary for both limbs of s 79(2)…., (n)amely, a finding of independence and a finding of absence of any connection with the other companies in the group (see paragraph 50 of the decision).

The Tribunal also noted that, in the context of family ownership of all the companies, the taxpayer’s application to be excluded from the group under s 79(2) of the PTA must fail due to the ability of the other siblings to exercise their powers as shareholders and directors of the taxpayer’s holding company combined with the taxpayer’s significant dependence on Alpine Pty Ltd and Albem Pty Ltd (see paragraph 54 of the decision).

Accordingly, the Tribunal affirmed the payroll tax assessments for the 2008-2010 tax years on the basis that the taxpayer should not be excluded from the company group.

Link to decision

Lombard Farms Pty Ltd v The Chief Commissioner of State Revenue [2013] NSWADT 17