Elanor Operations Pty Ltd v Chief Commissioner of State Revenue [2022] NSWSC 104

Background

The plaintiffs sought review of a decision by the Chief Commissioner not to exercise the discretion under s. 79 of the Payroll Tax Act to exclude the plaintiff companies from a single payroll tax group for the purposes of assessment of payroll tax.

The plaintiffs had identified five groups of companies within its overall corporate structure, and did not challenge the Chief Commissioner’s decision that the plaintiff companies properly formed a single “group” for payroll tax purposes.  However, the plaintiffs maintained that they were entitled to exclusion from grouping under s. 79 with the effect of separating that single payroll tax group into five separate groups.

The Statutory Framework

The relevant provision of the Payroll Tax Act under consideration was s. 79, which included:

1. The Chief Commissioner may, by order in writing, determine that a person who would, but for the determination, be a member of a group is not a member of the group.
2. The Chief Commissioner may only make such a determination if satisfied, having regard to the nature and degree of ownership and control of the businesses, the nature of the businesses and any other matters the Chief Commissioner considers relevant, that a business carried on by the person, is carried on independently of, and is not connected with the carrying on of, a business carried on by any other member of that group.
3. The Chief Commissioner cannot exclude a person from a group if the person is a body corporate that, by reason of section 50 of the Corporations Act 2001 of the Commonwealth, is related to another body corporate that is a member of that group.
4. This section extends to a group constituted by reason of section 74 (Smaller groups subsumed by larger groups).

Submissions

The plaintiff’s primary submission was that a determination of exclusion from grouping under  s. 79 should apply because the nature of those businesses, the nature and degree of their ownership and control, and the structures in which they were established and operate, demonstrate that they were carried on independently of each other, and that there was no relevant connection between the way they carry on their businesses.

The plaintiffs submitted:

1. the business of Elanor Operations Pty Ltd was fund creation, management and investment; whereas the other plaintiffs conducted a variety of businesses in the leisure and accommodation sectors;
2. while they accepted that Mr Willis was the sole director of all the plaintiffs, that was significantly constrained by the fiduciary duties owed by Mr Willis to each plaintiff;
3. the businesses, although having each been originally “promoted” by Elanor Investors Ltd and its subsidiaries, were owned by separate, discrete and diverse groups of independent investors, and the ultimate control and ownership of the businesses rested in the members of each fund;
4. each business was conducted at a different site, had a different group of customers and suppliers, and had a discrete group of employees;
5. there were no financial connections (eg loans) between the operating businesses;
6. each hotel business was run by a third-party manager who operated the business by directing day to day operations, while Elanor Operations Pty Limited in its capacity as fund manager had only oversight of the overall profitability of the business; and
7. the effect of the Chief Commissioner’s decision not to de-group the businesses would be, for example, to make the investors in a Byron Bay Hotel business liable for the payroll tax payable by the Featherdale Wildlife Park business in Sydney.

The Chief Commissioner submitted that none of the entities in question should be de-grouped pursuant to s. 79 of the Payroll Tax Act for the following reasons:

1. various of the entities were related bodies corporate, and so could not be excluded from a group containing each other by reason of s. 79(3);
2. for the other entities, during the Relevant Period there were many material and meaningful commercial connections between the businesses carried on by the entities, such that the businesses could not be said to have been carried on independently of, and not connected with the carrying on of, any other business of any entity in the group;
3. the focus is on the control of the businesses particularly the capacity to control a business, and not the day-to-day management of the businesses;
4. the financial reports of Elanor Investors Ltd stated that the entities in the sub-groups were controlled by Elanor Investors Ltd;
5. each of the entities under the ultimate holding company (Elanor Investors Ltd) were connected to all the other entities in the group through a common board of directors and the same registered address;
6. all of the entities that operated a tourism business shared key personnel who managed each of these entities, made decisions about hiring and terminating key staff, reviewed and approved budgets and business plans, ensured compliance with those plans, oversaw marketing, approved capital works proposals, signed off on contracts above a particular value, and operated the bank accounts of those entities; and
7. the relationship between Elanor Operations Pty Ltd and each of the businesses was not on an arms-length basis, as there was no written agreement between Elanor Operations Pty Ltd and each of the businesses it managed, that governed the terms of the services provided by Elanor Operations Pty Ltd to those businesses.

Decision

Ward CJ noted (at [56]) that the purpose of the grouping provisions in the Payroll Tax Act, which informs the evaluative exercise required to be carried out under s. 79 in this case, was identified by the High Court in Tasty Chicks Pty Ltd v Chief Commissioner of State Revenue (2011) 245 CLR 446; [2011] HCA 41 (at [8]) as being:

“…to counter tax avoidance through the splitting of business activities by the use of additional entities, each attracting a threshold. The ‘de-grouping’ provisions were available for application by the Chief Commissioner upon determination, in broad terms, that it would be unreasonable to apply the ‘grouping’ provisions.”

Ward CJ emphasised that, in considering the application of s. 79, the connections between the businesses “must be material connections” (at [149]).

Her Honour had particular regard to the fact that the various businesses operated as separate managed investment funds under a strict regulatory scheme, which required that priority be given to the interests of the members of those funds, and that it would be inconsistent with that regulatory scheme for control to be exercised in respect of one business that would be to the detriment of another business outside that managed investment fund (at [151]).

Her Honour noted that the factors in this case pointed “in various directions” (at [155]), but formed the following views:

1. in relation to the degree of control:
   1. despite common directorship, there is ultimately not a majority shareholding of Elanor Investors Ltd in any of the entities in the underlying funds; and
   2. whilst there is a capacity to influence and control (which is relevant), the capacity legitimately to control the businesses of other companies in the group was constrained, as the businesses were required to be run in the interests of members of the particular discrete fund;
2. in relation to the commonality of ownership, it was significant that the respective funds largely have discrete groups of investors, and

“there is much force in the submission that investors in one managed investment scheme would not expect to be liable for payroll tax liabilities of discrete managed investment scheme entities” (at [156]);

3. the key personnel supplied by Elanor Operations Pty Ltd have a function that is restricted largely to oversight (at [158]), and it was performed for various separate clients, each of whom would expect individual consideration; and
4. the fact the arrangements for the charging of fees between entities are not on an arms-length basis (eg no written agreements were in place) was a factor that tends towards a finding of connection (at [159]), but ultimately little weight should be placed on this factor because the fees for the services were charged by Elanor Operations Pty Ltd to the trustee and not directly to the plaintiff companies.

Balancing all of these factors, Ward CJ concluded that the businesses of the plaintiff companies within each of sub-groups 2-5 were relevantly carried on independently of, and not connected sufficiently in a material sense with, the businesses carried on by any other sub-group or by the companies in sub-group 1.  Accordingly, Ward CJ found that the s. 79 discretion to de-group should be exercised.

Orders

The Court made the following orders:

1. Revoke the decision of the defendant, made 31 August 2018 and confirmed 20 May 2019, not to exercise the discretion under s 79 of the Payroll Tax Act to exclude each of Groups 1 – 5 from membership of a single and discrete group under Division 5 Part 2 of the Payroll Tax Act.
2. Order that the assessment of payroll tax payable by 193 Clarence Hotel Management Ltd for the periods 10 October 2014 to 30 June 2015 and 1 July 2015 to 30 June 2016 be remitted to the defendant and be determined on the basis that Groups 1 to 5 in the defendant’s letter of 31 August 2018 do not constitute a “group” under Division 5 Part 2 of the Payroll Tax Act.
3. Direct the Chief Commissioner to put on any brief written submissions in relation to costs within seven days, and for the plaintiff to put on any submissions in reply within a further seven days.

https://www.caselaw.nsw.gov.au/decision/17ef5785e7af08173adcf7e1