|Date of judgement||1 March 2013|
|Judge(s)||GD Walker, Judicial Member|
|Court or Tribunal||Administrative Decisions Tribunal, Revenue Division|
Payroll tax – grouping – constitution of corporation – shareholder agreement
Simon v HPM Industries Pty Ltd (1989) 15 ACLR 427
Pastel Pines International Pty Ltd (“Pastel Pines”) sought a review of a decision of the Chief Commissioner of State Revenue (“the Chief Commissioner”) to apply the grouping provisions under section 106I of the Taxation Administration Act 1996 (“the TAA”) and section 72 of the Payroll Tax Act 2007 (“the PT Act”) to group for payroll tax purposes Pastel Pines with JPS Nominees Pty Ltd (“JPS Nominees") as trustee for the Petjo Trust for the years ending 30 June 2007 and 30 June 2008 (“the relevant tax years”).
Judicial Member Walker determined that Mr and Mrs Sterelny together had a controlling interest in Pastel Pines because of their ownership of 60% of the issued shares in that company. This gave Mr and Mrs Sterelny control of 60% of the voting rights attached to the shares. Judicial Member Walker determined that the voting rights were not affected by a shareholders agreement that reduced their control over the running of the business as directors to 50%. Pastel Pines conceded that Mr and Mrs Sterelny also had a controlling interest in the business carried on by JPS Nominees because they were beneficiaries of the Petjo Trust, which was a discretionary trust. Therefore the two companies were grouped for payroll tax purposes.
In November 1995, Mr and Mrs Sterelny purchased 50% of the total issued shares in Pastel Pines. Mr Edwards, through his family company Eighteenth SRJ Pty Limited (“Eighteenth”) acquired the other 50% of the shares in Pastel Pines. On 30 November 1995, Mr Sterelny and Mr Edwards became the only two directors of Pastel Pines.
In 1999 a decision was made that the businesses of Pastel Pines and JPS Agencies Pty Limited (“JPS Agencies”), which was wholly owned by Mr and Mrs Sterelny, would be amalgamated. This decision was made for the purpose of providing enhanced administrative and marketing efficiencies.
Mr Edwards transferred 10% of his shares in Pastel Pines to Mr and Mrs Sterelny by way of consideration for the transfer of the JPS Agencies business to Pastel Pines to effect the amalgamation. Subsequent to this transfer, Mr and Mrs Sterelny jointly held 60% of the shares in Pastel Pines and Eighteenth held the remaining 40% of the shares. Therefore, from 1999 Mr and Mrs Sterelny were a set of persons who had a controlling interest in Pastel Pines.
JPS Nominees was registered on 7 September 1999 with Mr Sterelny as its sole director. Mr and Mrs Sterelny were the sole shareholders, holding 1 share each. JPS Nominees is the trustee of the Petjo Trust, the family trust of Mr and Mrs Sterelny. During the relevant tax years both Mr and Mrs Sterelny were, under the trust deed, persons who may benefit from a discretionary trust as a result of the trustee exercising or failing to exercise a power or discretion. They were therefore each taken to be a beneficiary of more than 50% of the value of the interests in Petjo Trust, and consequently they were a set of persons who had a controlling interest in the business of JPS Nominees.
The Chief Commissioner undertook a payroll tax audit of Pastel Pines in 2011 and determined that Mr and Mrs Sterelny, during the relevant tax years, were a set of persons that had a controlling interest for payroll tax purposes in both Pastel Pines and JPS Nominees. It followed that the two companies should be grouped for payroll tax purposes during the relevant tax years. Therefore, on 23 September 2011, the Chief Commissioner issued notices of assessment to Pastel Pines and JPS Nominees for the relevant tax years to give effect to this grouping decision.
The Applicant objected to the assessments by letter dated 24 November 2011. By letter dated 2 May 2012, the Chief Commissioner disallowed the objection.
The issue for the ADT’s determination was whether Mr and Mrs Sterelny were a set of persons who had a controlling interest in Pastel Pines within the meaning of s.106I(2)(d) of the TAA for the financial year ended 30 June 2007 and within the meaning of s.72(2)(e) of the PT Act for the financial year ended 30 June 2008.
Pastel Pines submitted that despite the change in share ownership in 1999, the Pastel Pines’ business continued to be operated as if Mr and Mrs Sterelny and Eighteenth respectively owned 50% of the shares in Pastel Pines. Both Mr Sterelny and Mr Edwards submitted that a “shareholders’ agreement” was entered into around August 2004 that provided for the management and operation of the business as if the shareholdings were 50% each. That agreement was never signed nor lodged with ASIC, but both Mr Sterelny and Mr Edwards considered the unsigned agreement embodied the terms of an understanding between them.
Judicial Member Walker determined that the voting power attached to the shares in Pastel Pines was determined by the ownership of the shares and the voting power of Mr and Mrs Sterelny was not affected by the shareholders’ agreement. Therefore, Mr and Mrs Sterelny had controlling interests in Pastel Pines as well as JPS Nominees and the two companies were grouped.
Judicial Member Walker determined that the considerable amount of evidence dealing with the 50-50 running of the business of Pastel Pines was irrelevant because it related only to the board of directors of the company. The Chief Commissioner did not rely on the powers of directors for the purposes of determining that Mr and Mrs Sterelny had a controlling interest in Pastel Pines. On that basis, the Chief Commissioner’s decision to group the Applicant and JPS Nominees for the financial years ending 30 June 2007 and 30 June 2008 was affirmed.