|Date of judgement||1 December 2014|
|Judge(s)||Wright J (President)|
Deputy President Schyvens
Seiden SC (Principal Member)
|Court or Tribunal||NSW Civil and Administrative Tribunal – Appeal Panel|
TAXATION AND REVENUE - payroll tax - whether the Taxpayer should be excluded from a payroll tax group pursuant to s 79 of the Act, whether the Taxpayer had a legitimate expectation
Bellinz Pty Ltd v Federal Commissioner of Taxation (1998) 84 FCR 154
John French Pty Ltd v Commissioner of Pay-Roll Tax (Qld)  1 Qd R 125
The Chief Commissioner of State Revenue (“Chief Commissioner”), appealed the decision of Senior Member Verick in Seovic Civil Engineering v Chief Commissioner of State Revenue (2014) NSWCATAD 52. SM Verick had remitted the matter to the Commissioner to exercise his discretion to exclude Exell Management Pty Ltd (“Exell”) from a group with Seovic Civil Engineering Pty Ltd (“Civil”) and Seovic Engineering Pty Ltd (“Engineering”) pursuant to s.79 of the Payroll Tax Act 2007 (PT Act 2007).
The Appeal Panel found SM Verick made an error of law by failing to consider whether the supply of contract workers by Exell to Civil and Engineering amounted to a relevant connection between the carrying on of the businesses. The Appeal Panel found that the supply of contract workers was a real or meaningful connection, in a commercial sense and not an immaterial, inconsequential or passing connection between the carrying on of the businesses. The Appeal Panel upheld the Appeal and confirmed the Chief Commissioner’s decision not to exclude Exell from the grouping with Seovic and Engineering.
It was common ground, at first instance and at the hearing before the Appeal Panel, that pursuant to s 71 of the PT Act 2007, Civil was correctly grouped with Exell, and Exell was correctly grouped with Engineering. Further, it was agreed by the parties that as a result of these two groups and s 74 of the PT Act (as to the combining of smaller groups), Exell, Civil and Engineering constituted a group.
During the relevant years, Exell’s only business activity was as a provider of contract workers to Civil and Engineering. The workers provided by Exell constituted between 12% and 26% of the workforce of Civil and Engineering, and included substantially all of their management and administration staff.
SM Verick concluded that, pursuant to s.79(2) of the PT Act 2007, the business carried on by Exell was carried on independently and was not connected with the carrying on of the business carried on by Civil and Engineering because:
The Commissioner contended that SM Verick at first instance made an error of Law, because on the facts as found the Tribunal could not have been satisfied the statutory tests for exclusion were met.
The Taxpayers contended that no error of law arose, and that the Chief Commissioner’s notice of appeal disclosed questions of fact only. Alternatively, the Taxpayers contended that they had a "legitimate expectation" that Revenue Ruling PTA 017 (which applied in relation to grouping of professional practices serviced by the same administration business) would be followed, and that would lead to Civil and Engineering being excluded from grouping with Exell.
The Appeal Panel found that the Tribunal failed to consider whether the supply of contract workers by Exell to Civil and Engineering amounted, in a commercially material sense, to a connection between the carrying on of Exell's business on the one hand and the carrying on of the business of either Civil or Engineering on the other hand. Instead, the Tribunal had regard only to the fact that there was no evidence or suggestion of any contrivance to avoid payroll tax, no evidence of control in the management of Exell and the business arrangements between group members were commercial.
The Tribunal confirmed that the discretion under s.79 of the PT Act 2007 may only be exercised if the Commissioner is first satisfied that any connections that exist between the businesses do not lead to a conclusion that the businesses are not independent and not connected in a commercial sense. To be disentitled to exclusion from a group, there must be a real or meaningful connection, in a commercial sense and not an immaterial, inconsequential or passing connection between the carrying on of the businesses (Lombard Farms Pty Ltd v Chief Commissioner of State Revenue (2013) NSWADTAP 42). This test was not considered by the Tribunal. Thus, the Appeal Panel found that SM Verick erred at law by asking the wrong question.
The Appeal Panel then considered whether, in fact, the discretion should be exercised in the circumstances. It held that where all, or substantially all, of an entity's management and administration staff are provided by one other entity, it is apt to say that the entities are closely connected. This was the case with both Civil and Engineering whose management and administration staff were all, or substantially all, supplied by Exell.
Accordingly, the Appeal Panel held that the prerequisites for the exercise of the discretion under s 79 were not satisfied, and therefore there was no power to exclude Civil or Engineering from the group.
In relation to the issue of ‘legitimate expectation’ and the Revenue Ruling PTA 017, the Appeal Panel accepted that taxpayers are to be treated fairly and without discrimination, and that the Ruling is not an irrelevant consideration. However, the Ruling does not replace the statutory test in s.79 of the PT Act 2007, and there is no unfairness as between taxpayers where the statutory test is not met, as in this case. The Appeal Panel stated that quite apart from the fact that the Ruling was not expressed to apply to the Taxpayers’ circumstances, at least one of the conditions specified in the Ruling relating to control of the administrative services business (ie Exell) was not met, at least prior to March 2010. In addition, the connections between the businesses as to the administration and day to day management of Civil and Engineering were such that it could not be said that those businesses were independent of and not connected to the business of Exell.
The Appeal Panel allowed the Chief Commissioner’s appeal, set aside the decision at first instance, and in lieu the Taxpayer’s application for review of the Chief Commissioner’s decision not to exclude Exell was dismissed.