Kincare Community Services Limited v Chief Commissioner of State Revenue [2019] NSWSC 182

Background

KinCare Community Services Limited (KinCare) is a company limited by guarantee which was incorporated in 1998. KinCare has since that time been a provider of home care services to aged people, people with disabilities and more recently Aboriginal and Torres Strait Islander people.

From 1 April 2014, KinCare was subject to a significant restructuring and ceased from that day to employ any staff or pay any taxable wages. Accordingly, no question of payroll tax, including the operation of any exemption, arises after 1 April 2014.

On 4 Nov 2015 the Chief Commissioner assessed Kincare for payroll tax for the period of 1 July 2009 to 30 June 2014.  Following disallowance of its objections, Kincare appealed against the assessment to the Supreme Court on the basis that it was entitled to the exemption under clause 12 of Schedule 2 of the Payroll Tax Act 2007 (“the current Act”).  This clause preserves an exemption previously available under the former Pay-roll Tax Act 1971 (the former Act) to an organisation in existence when the former Act was replaced by the new Act on 1 July 2007.  The exemption is available to a public benevolent institution and to a non-profit organisation having objects which include at least 1 charitable purpose.   Wages are exempt to the extent that a person is engaged in charitable, benevolent, philanthropic or patriotic work.

The Chief Commissioner of State Revenue accepted that one of Kincare’s objectives was charitable. The central issues to be determined were:

1. whether Kincare was a “non-profit organisation” and
2. the extent to which wages paid to Kincare’s administrative staff (who worked for Kincare and for related non-exempt entities) were wages paid to a person in respect time when the person is engaged in charitable work and therefore exempt from payroll tax within the meaning of Sch. 2 cl. 12(1)(c) of the current Act.

There were two subsidiary issues which arose if Kincare was not a non-profit organisation:

1. whether Kincare was a “public benevolent institution” during the relevant period; and
2. whether wages paid by Kincare were wages paid to a person in respect of time when the person is engaged in work of a public benevolent nature for Kincare and therefore exempt from payroll tax within the meaning of Sch. 2 cl. 12(1)(b) of the current Act.

Kincare's business

KinCare received the bulk of its income during the relevant period from Commonwealth Government contracts under which it provided services or support, predominantly in connection with the Commonwealth Home Support Programme and Home Care Packages. Towards the end of the relevant period KinCare also received funding under agreements with the NSW Department of Ageing, Disability and Home Care.

KinCare devised care plans for aged and disabled people. Related “for profit” entities provided most of the field staff that KinCare used to give effect to the home care plans it had devised.

Submissions

Was Kincare a non-profit organisation?

Kincare submitted that the mere fact of transacting with associated entities in the Kincare Group was insufficient to disturb the non-profit status of an organisation under Sch. 2 cl. 12(1)(c) of the PTA. Further, its engagement with associated entities was undertaken to the extent necessary to carry on its activities of providing care services. On this basis, Kincare argued that the wages of its field staff providing the services were exempt.

The Chief Commissioner submitted that Kincare was not a non-profit organisation because it had not discharged its onus of proving that its dealings with the associated entities were at arm’s length and on commercial terms. This included the provision of administrative services by Kincare to the related entities, inter-company loans, a guarantee over a large commercial loan and favourable terms on the payment of interest for loans advanced.

The Chief Commissioner argued that as a result, benefits were conferred upon the profit-seeking entities of the Kincare Group to the detriment of Kincare or which were above and beyond the type of benefits that may flow in the context of an arm’s length relationship. It followed that the Court could not be satisfied that Kincare had been operated in a manner that precluded any portion of its profits from flowing to the other Kincare Group entities.

Were wages of employees providing services to related entities exempt?

Kincare submitted that wages for administrative and other ancillary services provided by its employees for other Kincare entities were intrinsically related to its charitable purpose and was work of a public benevolent nature and, therefore, wages for those services were also exempt.

The Chief Commissioner submitted that Kincare had not discharged its onus of proving that the carrying out of work for other Kincare entities was for the charitable work and work of a public benevolent nature of Kincare where those other entities were profit making and engaged in work with other organisations.

Decision

His Honour decided that:

1. following the approach taken by his Honour Justice Black in Grain Growers v Chief Commissioner of State Revenue (2016) 93 NSWLR 415, Kincare was a non-profit organisation, based on his findings that:
   1. Kincare’s financial statements for 2009-2014 tax years constituted accurate and reliable evidence of Kincare being a non-profit organisation because:
      1. the financial statements were audited and there were no complaints by the Commonwealth regarding the accuracy of those financial statements and
      2. the financial statements demonstrated that Kincare did not pay any dividend during the relevant period;
   2. the management fee charged by Kincare for the provision of administrative services to the “for profit” entities was reasonable and was an allocation of administrative costs for the administrative services provided;
   3. the opinions of the expert relied upon by the Chief Commissioner are not entitled to the weight the Court would ordinarily accord an expert of his stature because of deficiencies in the questions he was asked to address;
   4. the timing of the allocation of the management fee did not confer a benefit on the “for profit” entities, the way in which interest was levied and paid on inter-company loans advanced by Kincare and the security and/or guarantee provided by Kincare in favour of Kincare (Holdings) Pty Limited did not confer a benefit upon the Kincare Group such that profits that otherwise would have flowed to Kincare flowed instead to the “for profit” entities;
   5. the only matters capable of being described as benefits conferred by Kincare upon related entities were incidental to the purpose of providing care to its clients;
2. Kincare was a public benevolent institution and was not being carried on for individual profit or gain; accordingly, the wages paid for its field staff were exempt;
3. Kincare had not discharged its onus of proving the work performed by its employees for other Kincare entities was of a charitable nature or of a public benevolent nature;  the amounts for which Kincare was not entitled to the exemption are to be calculated by the Chief Commissioner and new assessments issued in accordance with his Honour’s reasons.

Orders

1. Application allowed.
2. Objection decision revoked.
3. The assessments of payroll tax to Kincare Community Services Limited in the 2009, 2010, 2011, 2012, 2013 and 2014 years are revoked.
4. The Commissioner to issue assessments in accordance with these reasons.
5. The Commissioner to pay Kincare’s costs of the application.

Link to decision

Kincare Community Services Limited v Chief Commissioner of State Revenue [2019] NSWSC 182