B & B Stevenson Pty Ltd v Chief Commissioner of State Revenue [2018] NSWCATAD 103

Background

These proceedings concern a review of the Chief Commissioner’s decision to assess B & B Stevenson Pty Ltd (the “Company Company”) for payments made to Bryan and Belinda Stevenson in the 2007-08 to 2011-12 financial years (“the Relevant Period”) as wages under the third party payment provisions of the Payroll Tax Act 2007 (“the Act”).

By way of summary of the key facts:

1. In 2003, Bryan and Belinda Stevenson (“the Stevensons”) purchased the management rights to the “Quest” branded serviced apartments in Newcastle by way of a franchise agreement. According to the Stevensons, their franchisee’s rights were held in their capacity as partners of the Bryan and Belinda Stevenson Partnership (“the Partnership”).
2. Following the franchise agreement, the Stevensons arranged for the Partnership and the Company to enter into an agreement whereby the Company would operate or “rent” the Quest business from the Partnership akin to a type of licence agreement. The Stevensons were the only directors and shareholders of the Company, and were substantially involved in the day-to-day running of the business from 2003 to 2007.
3. From 2007, and throughout the Relevant Period, the Stevensons purportedly transitioned to retirement and engaged additional staff to undertake the key, day-to-day operations of “Quest Newcastle” that they had previously performed.
4. In 2010, the Stevensons invested in a further “Quest” business in Singleton. The Company claimed that the “Quest” businesses in Singleton and Newcastle were merely passive investments and the Stevensons had no active involvement in the management of these businesses throughout the Relevant Period; however, as owners, they continued to exercise decision-making powers.
5. In the 2008 financial year, the Company paid the Partnership approximately $267,000. In the 2009 financial year, it paid an amount of about $297,000. In the 2010 to 2012 financial years, it paid $147,600 annually to the Partnership. These payments were originally recorded as “Management Expenses” in the Company’s financial accounts. Prior to the hearing, they were reclassified as “Sub licence Expenses”.
6. The Chief Commissioner assessed the payments made by the Company to the Partnership as wages under the Act.

The Statutory Framework

The key issue in dispute was whether payments made by the Company to the Partnership during the Relevant Period constituted “wages” for the purposes of assessment under:

1. s. 46(2)(b) of the Act, which covers wages paid or payable by a company, by way of remuneration for the services of a company director, to a person other than the director; or in the alternative,
2. s. 13(1)(c) of the Act, which deals with wages paid or payable by a company by way of remuneration “to or in relation to” a director of that company.

Submissions

The Company’s key submission was that the payments made to the Partnership were, in effect, sub-licence fees for the right to manage and operate the “Quest” business in Newcastle.

The Chief Commissioner submitted that the payments were to be taken as “wages” pursuant to s. 46(2)(b) of the Act, or alternatively, as wages under s. 13(1)(c) of the Act, on the basis that they were payments for the appointment or services of the Stevensons to the Company, despite being paid to the Partnership, throughout the Relevant Period.

Decision

The Tribunal determined that the Company had failed to discharge its onus of proving that the payments made by the Company to the Partnership were in the nature of “sub-licence fees”.

In reaching this decision, the Tribunal had regard to a number of factors, including:

1. The absence of any documentary evidence to show whether there was, in fact, a sub-licence agreement between the Partnership and the Company, which the Tribunal described as being “nearly fatal” to the Company’s case (at [29]);
2. The lack of evidence, such as individual tax returns of Mr and Mrs Stevenson, to substantiate the Company’s claims that the Stevensons had “stepped back” from the “Quest” business since 2007 (at [17]);
3. The amounts annually paid to the Partnership throughout the Relevant Period had been originally described as “Management Expenses” in the Company’s financial accounts, and no other directors’ fees or salaries had been recorded in respect of the Stevensons’ services (at [19]); and
4. Whilst there was evidence to show that from 2010, the Stevensons spent more time at leisure and gradually handed over greater responsibility of the day-to-day functions of “Quest Newcastle” to other staff, they appeared to “keep a close eye” on the financial performance of the business throughout the Relevant Period (at [25]-[26]).

The Tribunal considered at [23] that the characterisation of the payment by the taxpayer company to the partnership as a ‘sub-licence fee’ was conceived as a line of argument when the Chief Commissioner’s officers were investigating.

Accordingly, the Tribunal determined that the most likely explanation for the payments made by the Company to the Partnership was that they were directors’ fees ([31]).

The Tribunal also upheld the market and premium rates of interest imposed on the Company as the Company had not submitted any particular reasons as to why they should be remitted ([34]-[36]).

The Tribunal determined that the Chief Commissioner was correct to rely on s. 46(2)(b) of the Act for the assessment of the Company. Notably, at [32], it agreed that for the purposes of s. 46(2)(b) of the Act, the meaning of “person” included a partnership.

Orders

The Chief Commissioner’s assessments were confirmed.

Link to decision

B & B Stevenson Pty Ltd v Chief Commissioner of State Revenue [2018] NSWCATAD 103