|Date of judgement||30 April 2014|
|Judge(s)||A Verick, Senior Member|
|Court or Tribunal||NSW Civil and Administrative Tribunal|
Taxes and Duties - Payroll Tax - Liability - Grouping Provisions - whether respondent should exercise discretion to de-group - s.79 Payroll Tax Act 2007
Mead Packaging (Aust) Pty Ltd v Commissioner of Pay-roll Tax (NSW) (1978) 78 ATC 4164
Triline Home Pty Ltd v Commissioner of State Revenue (Victoria) (Unreported AAT(VIC) 3.3.95)
Exell sought a review of a decision of the Chief Commissioner not to exercise the discretion to exclude Seovic Civil Engineering Pty Limited from being grouped with Seovic Engineering Pty Limited and Exell Management Pty Limited for 2007-08 to 2011-12.
The Tribunal held that Exell operated an independent business supplying workers to the other two members of the group, and there was no evidence of contrivance between the companies to avoid payroll tax. Although Exell was owned by a member of the Seovic family, the Tribunal found no evidence or suggestion of a substantial connection between Exell and the other two companies’ businesses, nor that Exell was controlled by either of the other two companies.
The Chief Commissioner has appealed to the Appeals Division of NCAT.
The Applicants (Seovic Civil Engineering Pty Limited (“Civil”), Seovic Engineering Pty Limited (“Engineering”) and Exell Management Pty Limited (“Exell”)) applied pursuant to s 96 of the Taxation Administration Act 1996 (“the TAA”) for a review of the Respondent's decision to issue payroll tax assessments to the Applicants for the financial years 2008 to 2012 (“the Relevant Tax Years”).
During the Relevant Tax Years, Exell’s only business activity was as a provider of contract workers to Civil and Engineering. Exell ceased to carry on a business from 16 November 2011 and ceased employing any staff from that date.
Upon becoming aware that Exell had ceased its business operations, the Office of State Revenue (“the OSR”) accepted that from 1 December 2011 onwards Civil and Engineering were each entitled to claim the relevant payroll tax free threshold under the Payroll Tax Act 2007 (“the Act”).
Engineering carried on throughout the Relevant Tax Years a mechanical engineering business specialising in the repair and maintenance of mining equipment and Civil carried on a civil engineering business specialising in concrete slip forming.
The directors and shareholders of the three Applicants during the relevant period 'were members of the Seovic Family, namely the family of John and Merveen Seovic and their sons John Seovic Jr, Quentin Seovic and Joshua Seovic'.
John Seovic Jr ceased to be the sole director and shareholder of Engineering on 30 March 2010 and was replaced by Quentin Seovic as the sole director and shareholder of Engineering on 30 March 2010.
John Seovic Sr was, during the Relevant Tax Years, the sole director of Civil and he and Merveen Seovic were the shareholders of the company.
In the case of Exell, Quentin Seovic was the sole director until 26 March 2010 when he was replaced by John Seovic Jr. The sole shareholder during the period was Joshua Seovic.
It was common ground between the parties that during the Relevant Tax Years Civil and Exell constituted a 'group' and Engineering and Exell constituted a 'group' pursuant to s 71 of the Act. Section 71(2) provides for the grouping of employers:
It was also common ground between the parties that Engineering, Civil and Exell were a group by virtue of the provisions found in s 74 of the Act. Under s 74(1) smaller groups are subsumed by larger groups in the following circumstances:
The only issue for Verick SM's determination was whether the Chief Commissioner should have exercised his discretion found in s 79 of the Act to de-group the Applicants. Section 79 provides that the Chief Commissioner may exclude a person from being a member of a group if the relevant criteria are met. It relevantly provides:
In considering whether the s 79 de-grouping issue, Verick SM firstly examined the approach which he taken to this issue in his first instance decision in Lombard Farms Pty Ltd v Chief Commissioner of State Revenue  NSWADT 17.
Verick SM noted that his approach to the s 79 issue in the Lombard Farms case had been to conclude that the absence of the additional requirement of “substantial” in s 79 (the previous form of s 79 required the relevant businesses have no substantial connection and substantial independence) is quite significant because the discretion in its present form can only be exercised where there is complete independence of, and complete absence of any connection between the person seeking de-grouping and the member or members of the group.
He then turned to the Appeal Panel decision in Lombard Farms and observed that the Appeal Panel had taken a different approach to him regarding the absence of the word “substantial” in the present form of s 79. He observed that the Appeal Panel had accepted submissions made by the applicant in the appeal of Lombard Farms that the interpretation suggested by Verick SM in the first instance decision 'led to an absurd result' because:
When one focuses on the fact that the test in s 79(2) directs an enquiry to the carrying on of the businesses and not simply any connection between group members, one can see that there may be work for s 79(2) to do. However, if the most casual connection in the carrying on of businesses is sufficient to disentitle an applicant from de-grouping, then the scope of s 79 is extremely narrow.
Following that preliminary analysis, Verick SM then emphasised that it is important to understand the policy reason for grouping of employers in the payroll tax law in certain circumstances.
He noted the observation by the High Court, that the grouping provisions act to prevent avoidance of payroll tax, and the de-grouping provision in that context provides a narrow relief to cases where it would be unreasonable to group a person or persons.
In this matter Verick SM ultimately held after a consideration of the South Australian authority of Port Augusta Medical Centre Pty Ltd v Commissioner of State Taxation  SASCFC 7 that Exell was conducting quite an independent business in the relevant period, being the supply of contract workers. Although Exell was owned by a member of the Seovic family, he held that there was no evidence of any control by either Civil or Engineering in the management of Exell. There was also no evidence or any suggestion of any contrivance by Exell or any other applicant to split or de-aggregate a conglomerate to reduce payroll tax otherwise payable. Exell's business arrangements were commercial. There are, therefore, ample grounds in this matter for the exercise of the discretion under s 79 of the Act to avoid of what can be best described as a harsh and unreasonable outcome on the technical application of the grouping provisions