Cessnock Tyres Pty Ltd v Chief Commissioner of State Revenue [2017] NSWCATAD 368

Background

The entities Cessnock Tyres Pty Ltd (“Cessnock Tyres”), Cessnock Truck Tyre Centre Pty Ltd (“CTTC”), O’Neill Tyres Gateshead Pty Ltd (“Gateshead”) and Bayrond Pty Ltd (“Bayrond”), are each run by 1 of 3 sons (Mark, Bernard and Stephen) of the founder of the businesses. Each of the entities is in the business of tyre retail sales, each for different types of vehicles, each is controlled by a separate trust and together they form a group entitled “O’Neills Tyres”. The directors of Cessnock Tyres during the relevant period were Mark and Bernard. Mark is also a director of Bayrond and CTTC.

The entities appeared to be linked in various respects including trading arrangements, shared services, and control and direction. The businesses purchased stock in bulk and received subsequent rebates and discounts, made intra-group stock transfers and were listed together on one “O’Neills Tyres” website, although stating they are independently run. The businesses shared accounting services, although financial data was maintained separately along with banking and telecommunications arrangements. They also made significant loans to one another in excess of $50,000 but shared no common employees. In relation to control and direction, each brother submitted that decision making and conducting of each business was done only with consideration of the interests of each individual entity and its owners and had no regard to the other entities.

The Issues

The Tribunal considered two issues:

• Whether to grant leave to lodge the review application late; and
• whether the decision of the Chief Commissioner to degroup was correct and whether.

Leave to appeal

The Tribunal determined that, as the application to seek leave for late lodgement was not opposed, leave was granted pursuant to s. 41 of the Civil and Administrative Tribunal Act 2013.

Discretion to exclusion

The Applicant submitted that there was an intention that each business would operate separately from the other businesses following a family disagreement, evidenced in a previous Application for Exclusion from Grouping in 2012 which was not pursued. A Rectification Deed entered into by the brothers was an attempt to renounce their interests in the other brothers’ respective trusts.

The Applicant proposed that, pursuant to s. 79 of the PTA, the Chief Commissioner should exercise the discretion and degroup Cessnock Tyres from the O’Neills Tyres group, on the basis of change in directorships of the entities within the group and the lack of common employees.

The Chief Commissioner argued that there were three smaller groups within O’Neills Tyres. The Applicant was grouped with Bayrond under s. 72 of the PTA, as Mark was a director of both and held a 50% share, indicating a level of common control (Group 1). CTTC and Gateshead are grouped under s. 70 as related corporations (Group 2). CTTC and Bayrond are grouped under s. 73, as brothers Mark and Bernard are related persons with controlling interests (Group 3). Under s. 74, these three smaller sub-groups form one large group with common, controlling interests.

In relation to the Rectification Deed, the Chief Commissioner argued that this was ineffective to degroup the entities pursuant to s. 72 of the PTA for the following reasons:

• the beneficiaries rectified rather than disclaimed their interests under the Deed and this was ineffective as the Deed was only executed by one beneficiary;
• there was no authority for the Deed to operate retrospectively;
• the variation would only be effective from the date of the Rectification Deed, being 9 July 2015;
• even if the Deed did remove the General Beneficiaries, this would not have affected the grouping during the relevant period as they remained the specified beneficiaries and taker in default;
• the case relied upon by the applicant, Commissioner of Taxation v Ramsden [2015] FCAFC 39 was not relevant, as it concerned disclaimers of trust interests;
• the removal of the General Beneficiaries does not affect either Group 2, because the entities remain related under the s. 70 definition, or Group 3, because Mark and Bernard continued to have a controlling interest pursuant to s. 73.

Tribunal decision on discretion to exclude

InLombard Farms v Chief Commissioner of State Revenue [2013] NSWADTAP 42 the Appeal Panel determined that, in exercising discretion to degroup a taxpayer under section 79 of the Act, it must be established that the business was carried on independently of and not connected with the business of any other member of the group. Section 79 provides that the decision maker must have regard to the nature and degree of ownership and control of the businesses and any other relevant matters.

Decision

The Tribunal upheld the Chief Commissioner’s decision to refuse the degrouping application. Whilst it was accepted that there was an attempt to distance Cessnock Tyres from the other entities within the group, there were still links suggesting they remained connected and were not independent within the meaning of the Payroll Tax Act. The Tribunal noted that:

• the entities conducted similar businesses under a common name and marketing arrangements and a common website, influencing public recognition of the entities as one large, interrelated group;
• they maintained a connection to attain group discounts and rebates when purchasing stock, although the intra-group sourcing of products when one store was out of stock was not considered a relevant factor;
• the size of the intra-group loans was considered a substantial connecting factor particularly given the absence of formal documentation. However, the use of a common accountant was not considered important;
• Mark’s position of authority and potential to control the businesses of the other entities, regardless of the fact that he did not exercise this control, was a significant factor evidencing that the entities within the group were connected and interdependent.

Orders

1. The Chief Commissioner’s refusal to degroup the Applicant was correct and the decision is confirmed.
2. Leave to lodge out of time is granted.

Link to decision

Cessnock Tyres Pty Ltd v Chief Commissioner of State Revenue [2017] NSWCATAD 368