|Date of judgement||28 July 2017|
|Judge(s)||Gleeson JA, Leeming JA and Sackville AJA|
|Court or Tribunal||Court of Appeal, Supreme Court of NSW|
TAXATION – payroll tax – operation of the “grouping of employees” provisions of the Payroll Tax Act 2007 (NSW) – whether trustee of a discretionary trust correctly grouped with another entity – whether object of the discretionary trust deemed to have a controlling interest in the business conducted by the trustee – whether a disclaimer executed by the object purporting to operate retrospectively could affect liability to payroll tax in a previous year – whether a discretionary object can disclaim retrospectively
Armitage v Nurse  Ch 241
Australian Securities and Investments Commission v Carey (No 6) (2006) 153 FCR 509;  FCA 814
Certain Lloyd’s Underwriters v Cross (2012) 248 CLR 387;  HCA 56
Chamberlin and Bennett (in their capacity as Trustees of the Estate of the late Robert Henry Spry) v Spry  VSC 562
Commissioner of Taxation v Ramsden  FCAFC 39;  ATC 4136
Coolibah Pastoral Co v The Commonwealth (1967) 11 FLR 173
Cronulla Sutherland Leagues Club Ltd v Commissioner of Taxation (1990) 23 FCR 82
Davis and Sirise Pty Ltd v Federal Commissioner of Taxation  FCA 44; 44 ATR 140
El Sayed v El Hawach (2015) 88 NSWLR 214;  NSWCA 26
Gilsan v Optus [No 2]  NSWSC 38
In re Gulbenkian’s Settlement Trusts (No 2)  Ch 408
Kennon v Spry (2008) 236 CLR 366;  HCA 56
Livingston v Commissioner of Stamp Duties (Qld) (1960) 107 CLR 411
Livingston v Commissioner of Stamp Duties (Qld)  AC 494
MSP Nominees Pty Ltd v Commissioner of Stamps (South Australia) (1999) 198 CLR 494;  HCA 51
National Employers Mutual General Insurance Association v Manufacturers Mutual Insurance Ltd (1989) 17 NSWLR 223
Perpetual Trustees Australia Ltd v Heperu Pty Ltd (2009) 76 NSWLR 195;  NSWCA 84
Polo Enterprises Australia Pty Ltd v Pinctada Hotels and Resorts Pty Ltd  NSWCA 397
Re Smith (Decd)  3 All ER 552
Robinson v Morrell Estate  NSCA 127
Rowe v Federal Commissioner of Taxation (1982) 13 ATR 110
South Sydney District Rugby League Football Club Ltd v News Ltd  FCA 1541; 177 ALR 611
Westpac Banking Corporation v Hughes  1 Qd R 581;  QCA 42
The proceedings arise out of the failure of the Second Respondent, Tri-City Trucks (NSW) Pty Ltd (In Liq) (“Tri-City Trucks”) to pay payroll tax over a seven year period (the 2005-2012 financial years). Smeaton Grange Holdings Pty Ltd (‘Smeaton”), the First Respondent, and Tri-City Trucks were grouped for the 2005 to 2012 financial years pursuant to s. 72(1) of the Payroll Tax Act on the basis that Michael Gerace had a controlling interest in each of the businesses.
Similarly, Smeaton and Tri-City Smash Repairs Pty Ltd (“Smash Repairs”), the Third Respondent, were grouped pursuant to s.72(1) of the Payroll Tax Act on the basis that Ralph Gerace was deemed to control each of the businesses. As Smeaton was a member of the two groups, all three entities were part of a single larger group in accordance with s.74 of the Payroll Tax Act.
On 27 June 2014, Michael Gerace executed a “Deed Poll of Disclaimer” and a “Deed Poll of Disclaimer 2004 Year” (“Disclaimers”) which purported to disclaim any right, entitlement or interest in respect of the Smeaton Trust or arising pursuant to the Smeaton Trust Deed.
At first instance, White J ordered that the following question be determined separately and in advance of other issues in the proceedings:
“Did the disclaimer signed by Michael Gerace dated 27 June 2014 in respect of the Smeaton Trust and the Gerace Family Trust mean that subs 106I(6) of the Taxation Administration Act 1996 and s 72(6) of the Payroll Tax Act 2007 have no application for the tax years in question?”
White J determined that the answer to this question was “Yes”, and considered that there was no reason as a matter of principle why a person should be compelled to accept a personal right against his or her wishes. White J held that the disclaimers executed by Michael Gerace were effective, notwithstanding that they were given without consideration.
The Court of Appeal firstly considered the preliminary issue of whether the appeal was incompetent, by virtue of the operation of s.102 of the Taxation Administration Act 1996 and whether leave to appeal should be granted. The Respondents submitted that s.102(2) set a strict 30 day period, during which the Chief Commissioner must make any appeal from the Court’s decision. The Court of Appeal determined at  that the section was confined to operate as imposing an obligation of the Chief Commissioner to give effect to the decision. For the purposes of s.102(2), if no appeal is brought within 30 days, then the decision will become final at the end of the 30 day period. However, the section does not affect the competence of any appeal by the Chief Commissioner and whether orders should be made pending the hearing of any appeal.
In relation to leave to appeal, the Respondents submitted that leave was required, since the Chief Commissioner was seeking to appeal from a decision of a question ordered to be tried separately. Sackville AJA at , relying on authority in National Employers Mutual General Insurance Association v Manufacturers Mutual Insurance Ltd (1989) 17 NSWLR 223, determined that since the primary judge made final orders, the Chief Commissioner was entitled to appeal as of right and did not require leave to appeal.
Sackville AJA, with whom Gleeson JA and Leeming JA agreed, considered that whether the Disclaimers were effective, was dependent upon the proper construction of the Payroll Tax Act and the Taxation Administration Act 1996 (“TA Act”).
Counsel for the Respondents accepted that s.9(1) of the PT Act obliged Tri-City Trucks to pay payroll tax within seven days after the end of each month in which it paid or was liable to pay taxable wages above the threshold. It was also accepted that s. 81 of the Payroll Tax Act made Smeaton liable to pay to the Chief Commissioner the amount of payroll tax Tri-City Trucks was required to pay in respect of any period but had failed to pay.
Sackville AJA considered the construction of Part 5 of the Payroll Tax Act and held the following:
Upon this construction, the Court found that the determination of group membership in accordance with s.72 of the Payroll Tax Act can only be undertaken by reference to the legal relationships as they existed between the relevant parties at the time that the employer’s liability to pay Payroll Tax arose. This determination is to be made on the basis of the facts as they existed at the relevant time. It is at that point that the Chief Commissioner can enforce the group members’ liability (see ).
The Court noted that the Disclaimers executed by Michael Gerace may have altered the rights of Smeaton and Michael Gerace as between themselves, or also affected the rights of other discretionary objects of the Smeaton Trust. However, on the proper construction of the legislation, the Court determined that Smeaton became liable by force of statute at the expiration of 7 days after the end of each of the first 11 months of each financial year, and at the expiration of 21 days after the end of each financial year. The Court concluded that Smeaton’s liability under the legislation was to be determined by reference to the legal relationships in existence on those dates (subject to an exclusion order made under s.79). The Court determined that a subsequent alteration of the rights of objects of the Smeaton Trust, by the unilateral act of a discretionary object, cannot change the operation of the legislation.
Accordingly, the Court of Appeal answered the separate question in the negative. That is, the grouping provisions in s.106I(6) of the TA Act and s.72(6) of the Payroll Tax Act are to be applied to the circumstances of the present case independently of and without regard to the Disclaimers signed by Michael Gerace.
Sackville J noted that the costs of an appeal ordinarily follow the event, but in this case he was not satisfied that the Court was given the assistance it was entitled to expect from the Chief Commissioner’s representatives on the critical question of statutory construction of the Payroll Tax Act and the Taxation Administration Act. Sackville J indicated that were it not for the respondents’ unsuccessful objection to the competency of the appeal, he would have proposed that each party bear its own costs. He decided that the Taxpayer should pay one-third of the Chief Commissioner’s costs.
The Court made the following orders:
The consequence of the orders is that the matter will be returned to the Equity Division so that outstanding issues can be addressed.