|Date of judgement||10 September 2014|
|Judge(s)||NS lsenberg, Senior Member|
|Court or Tribunal||NSW Civil and Administrative Tribunal|
Payroll tax – whether the plaintiff should be excluded from group pursuant to s 79 of the Payroll Tax Act 2007
The Taxpayer applied under s96 of the Taxation Administration Act 1996 for a review of the decision of the Chief Commissioner of State Revenue (“Chief Commissioner”) not to exercise the discretion to exclude the Taxpayer from a group for payroll tax purposes pursuant to s79(2) of the Payroll Tax Act 2007.
The key factors taken into account by the Tribunal were a large loan of up to $10.8m and crop finance provided by another group member to the Taxpayer, an agreement to capitalise the interest on the loan rather than require payment, and arrangements under which administrative support was provided by employees of another group member. The Tribunal had regard to a principle endorsed by the Court of Appeal in the Tasty Chicks case, that one of the relevant matters is whether the persons carrying on the businesses conducted by other group members were in a position to influence the ongoing conduct of the Taxpayer’s business.
The Tribunal was not satisfied that it was more likely than not that the business carried on by the Taxpayer was carried on independently of the business(es) carried on by each other Group Member, and it was not satisfied that there was no connection in the requisite sense. The Tribunal upheld the Chief Commissioner’s decision.
The Taxpayer operated a range of farming interests. It was related (within the meaning of the Corporations Act 2001) to a number of other entities that were involved, for the most part, in the construction industry.
In 2010, the Taxpayer requested that the Chief Commissioner exclude it from a payroll tax group which included the other entities. After considering material provided in support of that request, the Chief Commissioner was not satisfied that the Taxpayer’s business was being carried on independently of the other group members.
The Taxpayer first sought review of that decision in the Administrative Decisions Tribunal in 2012. At first instance Judicial Member Verick determined that s79(2) of the Payroll Tax Act 2007 is only enlivened where there is no connection between group members and concluded that the requirements for exclusion were not met in this case.
That Taxpayer appealed to the ADT Appeal Panel. The Appeal Panel determined that Judicial Member Verick had set the bar for de-grouping too high. The Appeal Panel observed that in order to disentitle a taxpayer for de-grouping, a connection between businesses must be meaningful in a commercial sense and not inconsequential to the conduct of the business.
The Appeal Panel’s decision was limited to a consideration of the law. Having decided that Judicial Member Verick had erred, it remitted the matter to the Tribunal for determination in accordance with its decision.
The issue to be determined by the Tribunal was characterised by Senior Member Isenberg (“the Tribunal”) as:
“Whether the Taxpayer’s business was carried on independently of and not connected with the carrying on of a business carried on by any other Group Member during each of the [relevant] years”.
The Taxpayer’s businesses, being principally in the farming sphere, were different from those of all of the other group members.
The Taxpayer acknowledged that it is directly owned by another group member and that each of the group members are owned by a combination of family members and family trusts.
The affidavit evidence suggested that meetings of the group companies were conducted on a fairly informal basis with no minutes recorded, no board papers circulated and no decisions made. The management of the companies was said to be largely independent of each other.
In oral evidence Mr Panizza, the sole director of the Taxpayer, acknowledged that if group members voted together, certain companies within the group would “theoretically” be able to control others. Mr Panizza was shown a range of documents that purported to be minutes of meetings prepared by an accounting firm. Mr Panizza suggested that those meetings would not necessarily have taken place.
A range of evidence was also given in relation to a large loan and crop finance provided by another group member (Alpine Pty Ltd) to the Taxpayer. At its peak, that finance amounted to approximately $10.8 million. The Taxpayer acknowledged that it was not capable of repaying the loan without selling a range of its assets and further conceded that interest in relation to the loan was capitalised rather than being repaid for a significant period of time.
The evidence also suggested that the Taxpayer received approximately 40 to 45 hours a week in administrative support from employees of another group member. Fees were said to be payable for these services but in oral evidence it emerged that, until recently, the fees (which amounted to only $15,000 - $16,000 per annum) were “being paid by the wrong entity”.
The Tribunal observed that:
“the payroll tax legislation refers to control of businesses, not management of day to day business operations. The legislation does not discount the legal control by the board of the company which owns the business and delegates day to day powers to company employees.”
The Tribunal then noted that the fact that the businesses operated in different spheres did not preclude a sufficient connection arising between them such that exclusion should not be granted.
The Tribunal put significant weight on the nature of the loan arrangements between the Taxpayer and Alpine Pty Ltd in rejecting the submission that the Taxpayer was not financially dependent on Alpine Pty Ltd. The Tribunal observed that Mr Panizza had effectively acknowledged the commercial and material interdependence of the businesses by noting that it would have made no commercial sense for Alpine Pty Ltd (which was making a profit and therefore liable to pay tax) to charge interest to the loss-making Taxpayer.
The Tribunal indicated that, in light of the amounts paid for administrative support provided by employees of another group member, and the nature of the work performed, it was not satisfied that the administrative services were provided on an ‘arms-length’ basis.
Ultimately, the Tribunal was not satisfied that the Taxpayer’s business was carried on sufficiently independently of the other businesses in the group to warrant exclusion. In reaching this conclusion, the Tribunal made reference to the decision of the NSW Court of Appeal in Chief Commissioner of State Revenue v Tasty Chicks Pty Ltd  NSWCA 181, in which the court observed that one of the relevant matters to be considered in determining whether two businesses were being carried on substantially independently of each other was whether the persons carrying on one business were in a position to influence the ongoing conduct of the other business.
Accordingly, the Tribunal determined that the Chief Commissioner was correct to not exercise the discretion to exclude the Taxpayer from being grouped with the other entities.
The decision of the Chief Commissioner under review was affirmed.