Supreme Court New South Wales Medium Neutral Citation: Elanor Operations Pty Ltd v Chief Commissioner of State Revenue [2022] NSWSC 104 Hearing dates: 7 and 9 June 2021 Date of orders: 16 February 2022 Decision date: 16 February 2022 Jurisdiction: Equity Before: Ward CJ in Eq Decision: 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. Order the defendant to pay the plaintiffs' costs. Catchwords: REVENUE LAW –– Payroll Tax Act –– discretion to "de-group" –– review of defendant's decision not to exercise discretion to de-group. Legislation Cited: Corporations Act 2001 (Cth), ss 46, 50, 601ED, 601EB, 601FA - 601FH, 912A, Pt 5C, 7.6, 76, Div 6 Payroll Tax Act 2007 (NSW), ss 72, 79, Div 2, Pt 5 Taxation Administration Act 1996 (NSW), s 97, 100 Cases Cited: B & L Linings Pty Ltd v Chief Commissioner of State Revenue [2008] NSWCA 187 Boston Sales and Marketing Pty Ltd v Chief Commissioner of State Revenue (2014) 99 ATR 323; [2014] NSWCATAD 139 Cessnock Tyres v CCSR [2017] NSWCATAD 368 Chief Commissioner of State Revenue v Paspaley [2008] NSWCA 184 Chief Commissioner of State Revenue v Seovic Civil Engineering [2014] NSWCATAP 94 Chief Commissioner of State Revenue v Tasty Chicks Pty Ltd (2012) 87 ATR 880; [2012] NSWCA 181 CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384; [1997] HCA 2 Commissioner of Stamps v Garrett F Hunter Pty Ltd (1997) 69 SASR 275 Conrad Linings v Chief Commissioner of State Revenue [2014] NSWSC 1020 Conte Mechanical and Electrical Services v Commissioner of State Revenue (2011) 85 ATR 120; [2011] VSC 104 Corrosion Control Engineer (NSW) Pty Ltd v Chief Commissioner [2017] NSWSCATAD 20 Headwear v Chief Commissioner of State Revenue [2015] NSWCATAD 166 Lombard Farms Pty Ltd v Chief Commissioner of State Revenue [2013] NSWADTAP 42; 96 ATR 315 Metricon Qld Pty Ltd v Chief Commissioner of State Revenue (2013) 92 ATR 169; [2013] NSWSC 982 Port Augusta Medical Centre Pty Ltd v Commissioner of State Taxation (2012) 112 SASR 203; [2012] SASCFC 7 Port Augusta Medical Centre v Commissioner of State Taxation (2011) 84 ATR 706; [2011] SASC 31 Regis Mutual Management v Chief Commissioner of State Revenue [2015] NSWCATAD 213 Seovic Engineering Pty Ltd v Chief Commissioner of State Revenue [2015] NSWCA 242 Tasty Chicks Pty Ltd v Chief Commissioner of State Revenue of the State of NSW (2011) 245 CLR 446; [2011] HCA 41 Category: Principal judgment Parties: Elanor Operations Pty Ltd (First Plaintiff) 193 Clarence Hotel Management Pty Ltd (Second Plaintiff) Albany Hotel Management Pty Ltd (Third Plaintiff) Bell City Accommodation Management Pty Ltd (Fourth Plaintiff) Bell City Hotel Management Pty Ltd (Fifth Plaintiff) Byron Bay Hotel Management Pty Ltd (Sixth Plaintiff) Cradle Mountain Lodge Management Pty Ltd (Seventh Plaintiff) Eaglehawk Hotel Management Pty Ltd (Eighth Plaintiff) Featherdale Management Pty Ltd (Ninth Plaintiff) JCF Management Pty Ltd (Tenth Plaintiff) Narrabundah Hotel Management Pty Ltd (Eleventh Plaintiff) Parklands Resort Hotel Management Pty Ltd (Twelfth Plaintiff) Pavilion Wagga Wagga Hotel Management Pty Ltd (Thirteenth Plaintiff) Port Macquarie Hotel Management Pty Ltd (Fourteenth Plaintiff) Tall Trees Hotel Management Pty Ltd (Fifteenth Plaintiff) Wollongong Hotel Management Pty Ltd (Sixteenth Plaintiff) Chief Commissioner of State Revenue (Defendant) Representation: Counsel: C Harris SC with J Stuckey-Clarke (Plaintiffs) S Balafoutis SC with A Byrne and R McMahon (Defendant) Solicitors: Kennedys (Australia) (Plaintiffs) Crown Solicitor's Office (Defendant) File Number(s): 2018/00332881 Publication restriction: Nil Judgment 1. HER HONOUR: This is an application by the plaintiffs for review under s 97 of the Taxation Administration Act 1996 (NSW) (Taxation Administration Act) of a decision by the defendant (the Chief Commissioner) not to exercise the discretion under s 79 of the Payroll Tax Act 2007 (NSW) (Payroll Tax Act) to exclude the plaintiff companies from a single payroll tax group (Payroll Tax Group) for the purposes of assessment of payroll tax under Part 5 of the Payroll Tax Act. The plaintiffs are all companies of which Mr Glenn Norman Willis is a director (indeed, in all but one of which he is the sole director). 2. There are two payroll tax assessments in issue, both being notices issued on 26 May 2017 by the Chief Commissioner to the second plaintiff, 193 Clarence Hotel Management Pty Ltd (to which I will refer as 193 Clarence Hotel Management): one for the period between 10 October 2014 and 30 June 2015, assessing payroll tax at $23,776.40 and interest (as at the date of the notice) at $4,272.54; and the other for the year ended 30 June 2016, assessing payroll tax at $35,088.81 and interest (as at the date of the notice) at $2,720.27. Accordingly, the relevant period is from 10 October 2014 to 30 June 2016 (relevant period). 3. The plaintiffs have identified five groups of companies within the overall corporate structure of the group (which I explain further below). There is no challenge to the Chief Commissioner's decision that the plaintiff companies properly form a single "group" for payroll tax purposes. Further, it is accepted that, because Mr Willis is a director of the first plaintiff (Elanor Operations Pty Ltd, to which I will refer as Elanor Operations), and the sole director of each of the other plaintiffs, the provisions of s 72 of the Payroll Tax Act would otherwise apply to constitute each of those five groups of companies as itself a "group". 4. However, the plaintiffs maintain that they are entitled to an exemption under s 79 of the Payroll Tax Act, from the operation of Part 5 (the grouping provisions); in effect, to separate each of the five groups from the single Payroll Tax Group as assessed by the Chief Commissioner. 5. Accordingly, the plaintiffs made an exclusion application to the Chief Commissioner to exercise the discretion to exclude, from membership of the single discrete group (for the purposes of Div 2, Part 5 of the Payroll Tax Act), the separate "groups" of companies in question. The Chief Commissioner, by letter dated 31 August 2018, rejected that application. It is in that context that the plaintiffs now seek review of the Chief Commissioner's decision to decline their exclusion application. It appears to be accepted that this is a unique situation (see the Chief Commissioner's 31 August 2018 letter which referred to an unique set of facts). On the plaintiffs' submissions this is so, given the size of the businesses in question. 6. Although a "review" of the Chief Commissioner's decision, it is accepted that this is an exercise of original not appellate jurisdiction (see Tasty Chicks Pty Ltd v Chief Commissioner of State Revenue of the State of NSW (2011) 245 CLR 446; [2011] HCA 41 (Tasty Chicks) at [5]). The subject of the review is the assessments, as opposed to the decision on the objection to the assessments (Chief Commissioner of State Revenue v Paspaley [2008] NSWCA 184 at [28] and [53]). It is not disputed that, in an application for review, the plaintiff has the onus of proving its case (s 100(3) of the Taxation Administration Act); that the requisite standard of proof is the balance of probabilities (B & L Linings Pty Ltd v Chief Commissioner of State Revenue [2008] NSWCA 187 at [104]); and that the court or tribunal reviewing the initial decision conducts a de novo review that is not limited to the materials before the Chief Commissioner (Metricon Qld Pty Ltd v Chief Commissioner of State Revenue (2013) 92 ATR 169; [2013] NSWSC 982 at [26]). The parties are not bound by the grounds of objection or the Chief Commissioner's reasons for disallowing the objection (s 100(2) of the Taxation Administration Act). 7. In their appeal statement dated 19 July 2019, the plaintiffs maintain their position that they are properly grouped into five groups of companies for payroll tax purposes. The Chief Commissioner, to the contrary, maintains that none of the entities in question should be de-grouped or excluded pursuant s 79(1) of the Payroll Tax Act. The Chief Commissioner's position is that various of those entities are related bodies corporate, and so cannot be excluded from a group containing each other (by reason of s 79(3) of the Payroll Tax Act); and that, for the other entities, the evidence makes plain that during the relevant period there were many material and meaningful (in a commercial sense) 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 Payroll Tax Group. 8. The Chief Commissioner says that each of the entities under the ultimate holding company (Elanor Investors Ltd, to which I refer as Elanor Investors) was connected to all the other entities in the Payroll Tax Group through a common board of directors, the same registered address and principal place of business (except for two companies which have a different principal place of business); and that each of the entities that operates a tourism business was also connected to each other because they all shared key personnel. It is said that those personnel (employed by Elanor Operations) 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; and signed off on contracts above a particular value. It is said that they also assisted in operating the bank accounts owned by those entities. Overall structure and operations of the plaintiff companies 1. Elanor Investors (a public listed company) is the ultimate company of the plaintiff companies. It is not a party to these proceedings. 2. The Chief Financial Officer and Company Secretary of Elanor Investors, Mr Symon Simmons (who is also the company secretary of the plaintiff companies), has deposed in his affidavit sworn 12 February 2020 that Elanor Investors has investment interests, through the group, in a number of different portfolio types (including companies operating tourism and leisure businesses) (see Mr Simmons' first affidavit at [19]). Its business model includes: acquiring investment assets (such as a hotel business and its land); improving the assets; selling interests in those assets to a newly established fund which sells units to sophisticated third-party passive investors; retaining at least a minority interest in those assets; and managing those assets for an ongoing fee. 3. Elanor Investors uses a number of wholly owned companies for its own administrative or business development functions in undertaking this model, including Elanor Management, Elanor Investment Nominees Pty Limited (Elanor Investment Nominees), Elanor Investment Holdings Pty Limited (Elanor Investment Holdings), Elanor Operations and Elanor Asset Services Pty Limited (Elanor Asset Services) (see Mr Willis' first affidavit at [16]), each of those companies being in sub-group 1 – see below, referred to as the "Elanor-Style Companies".); as well as Elanor Funds Management Ltd (Elanor Funds Management), which is not a member of the Payroll Tax Group – see below. 4. As adverted to above, Elanor Investors acquires businesses (and associated real estate) that require investment before being sold to a fund. In those circumstances, Elanor Investors holds the business in a company and the land in a corresponding property trust, which are both ultimately owned by Elanor Investors. The shares in the company are stapled to the units in the property trust. Elanor Investors calls the companies that own those businesses "Incubator Companies". Those companies are also in sub-group 1 (see Schedule 1) (Mr Willis' first affidavit at [23]-[25]). 5. The plaintiffs accept that the Elanor-Style Companies and Incubator Companies should be grouped in one payroll tax group (Mr Willis' first affidavit at [25]). 6. When Elanor Investors is ready to sell the incubator company business and corresponding land, Elanor Investors creates a new managed fund. Each managed fund consists of one or more corporations which own a business or businesses and corresponding property trusts which own the land on which the relevant business operates. The trustee of all but one of those property trusts across all the different managed funds is the same company (Elanor Funds Management). (The exception is that the trustee of one of the funds is Elanor Investors Nominees.) Elanor Funds Management holds the relevant Australian Financial Securities Licence (AFSL) as required under the Corporations Act in relation to the management of a managed investment scheme (this being a matter to which the Chief Commissioner points in answer to the submissions here made by the plaintiffs as to the significance of all of the plaintiffs operating under the structure of separate managed investment schemes, to which I will turn in due course). 7. During the relevant period, there were four members of the Elanor Investors Fund, each of which was itself an unregistered managed investment scheme. Elanor Hospitality and Accommodation Fund (EHAF Fund) (corresponding with sub-group 2); Bell City Fund (corresponding with sub-group 3); 193 Clarence Hotel Fund (corresponding with sub-group 4); and Elanor Metro and Prime Regional Hotel Fund (EMPR Fund) (corresponding with sub-group 5). Those managed funds held hotels, tourism and leisure assets (Mr Simmons' first affidavit at [24]). 8. Third party investors in these funds purchase shares in the company that operates the business, together with "stapled" units in the trust that owns the land. In other words, the investor shareholders of the respective companies own the same proportionate number of units in the associated unit trust; and the shares and units cannot be sold separately. With respect to EHAF Fund and EMPR Fund, which both hold multiple assets, investors purchase shares in a holding company stapled to units in a holding trust. The holding company owns all of the shares in the companies that operate the businesses. In all cases, Elanor Investors retains at least a minority interest in both the businesses and the land held by the managed fund (Mr Willis' first affidavit at [26]). 9. The first plaintiff, Elanor Operations, is one of Elanor Investors' wholly owned subsidiaries. Mr Simmons has deposed that Elanor Operations has a team of employees (Mr Simmons' first affidavit at [33]) managing each of the businesses operated by the companies in sub-groups 2-5 as well as the Incubator Companies. (The Chief Commissioner notes that Elanor Operations manages these companies notwithstanding that Elanor Investors may not have a majority interest in them.) Elanor Operations' employees manage the businesses by: identifying suitable third-party hotel operators to operate hotel assets pursuant to hotel management agreements; negotiating contractual terms with third-party hotel operators; reviewing and analysing annual business plans submitted by the contracted third-party hotel operators, to ensure alignment with investor expectations; reviewing monthly financial reports submitted by the hotel operator, to ensure accountability to and compliance with the annual budget; and evaluating and responding to third-party hotel operator communications regarding hotel assets such as capital works proposals and the proposed appointment or dismissal of a general manager of an asset. 10. The Chief Commissioner notes that Elanor Investors emphasises in its Product Disclosure Statement the skill of its employees in managing tourism assets. The Product Disclosure Statement relevantly states (Ex 1): Elanor's business strategy will be implemented by a management team with experience in the identification of attractive investment assets and funds management opportunities. . . Elanor aims to use its management expertise to enhance the performance of the existing assets and to opportunistically expand the portfolio. . . This division will aim to realise value for Securityholders by improving the underlying business operations. . . 1. The remaining, second to sixteenth, plaintiff companies operate discrete businesses (the majority being hotel or tourist-related businesses) within the context of a managed investment scheme. The one exception to this is the tenth plaintiff (JCF Management Pty Ltd, to which I will refer as JCF Management), which owns a furniture business. Usually, the day-to-day operation of the hotel businesses is sub-contracted to a specialist third party commercial hotel operator (as adverted to above). 2. All of the companies in the Payroll Tax Group (other than the ASX listed Elanor Investors) are governed by the same sole director and company secretary. The managing director of Elanor Investors (Mr Willis) is the sole director of all of the companies wholly owned by Elanor Investors (sub-group 1) as well as all the companies within the managed funds (sub-groups 2-5). Mr Willis is also the sole director of Elanor Funds Management, which has legal title to the various properties on which the corresponding businesses operate (Mr Willis' first affidavit at [1], [2], [5]). As noted above, Mr Simmons is the company secretary of the same companies, and Chief Financial Officer and company secretary of Elanor Investors (Mr Simmons' first affidavit at [1], [2], [6]). 3. The shareholders of each of the second to sixteenth plaintiffs (or of its holding company) are (or were) different groups of what are said to be sophisticated or experienced investors. 4. In early to mid-2014, Elanor Investors and its subsidiaries were restructured and reorganised, in anticipation of the company being floated on the ASX in July 2014. In preparation for the listing, at a general meeting on 30 May 2014, Elanor Investors adopted a new company constitution and, at a meeting of directors on 6 June 2014, Elanor Investors resolved to acquire an entity, Elanor Funds Management , which it appointed as the trustee of most of the relevant trusts (described in due course). 5. As noted, Elanor Funds Management is not included as a member of the Payroll Tax Group. It is the responsible entity of the Elanor Investors Fund (the units of that fund being "stapled" to the shares of Elanor Investors, as I explain below) and the holder of the requisite AFSL. 6. Elanor Funds Management receives management and performance fees from each of the managed funds (Mr Willis' first affidavit at [59]-[67]). Mr Willis has deposed that the managed funds pay Elanor Funds Management three types of fees (as set out in the relevant fund's constitution) (see, for example, the Bell City Accommodation syndicate constitution – Ex 2, at cll 19.1-19.11). First, a one-off acquisition fee equivalent to 1% of the purchase price of the assets. Second, an ongoing management fee of 1% per annum of the gross asset value of the fund (comprising, in aggregate, the value of the property-owning trust and the value of the stapled entity which owns and manages the relevant hotel or other business or businesses – see T 30.39-46, T 32.41-48). Third, a performance fee of up to 20-25% of total fund returns upon the end of the managed fund, subject to total fund returns exceeding 10-15% of internal rate of return (Mr Willis' affidavit [63]). In addition, Elanor Funds Management pays for common expenses across all of the funds (often, the Chief Commissioner notes, of significant aggregate value over a year; for example see T 34.8-30; and including audit and valuation fees – see T 33.05-18). The work performed by Elanor Funds Management for the funds, in exchange for those fees, is undertaken by the employees of Elanor Operations. 7. It is noted by the Chief Commissioner that Elanor Funds Management earned over $5 million in revenue from those fees in the financial year ended June 2015; and almost $7 million in revenue the following year from these fees (Ex 2). In its Product Disclosure Statement, Elanor Investors stated that "A key objective of Elanor will be to increase the proportion of Elanor's income that is generated from investment management fees". 8. On 11 July 2014, Elanor Investors became listed (along with the Elanor Investors Fund, with Elanor Funds Management as its responsible entity) on the ASX Official List. Elanor Investors prepared and issued a Product Disclosure Statement and Prospectus (the Product Disclosure Statement to which I have referred above) providing information to prospective investors (Ex 1). (It is noted by the Chief Commissioner that in various public documents Elanor Investors refers to itself, together with its controlled entities, as the "Elanor Investors Group".) 9. The various businesses and unit trusts operate under the umbrella of a similarly "stapled" public structure to that in relation to Elanor Investors; constituting a registered managed investment scheme under Part 5C of the Corporations Act 2001 (Cth) (Corporations Act). 10. The first company/unit trust structure established by Elanor Investors (the 193 Clarence Hotel Fund) owned just one hotel. However, subsequent structures have since been formed and "floated" with the ownership of two or more hotels (or tourism-related) businesses, such that the investors own shares and units in each or the holding company of each. As adverted to above, the plaintiffs accept that, where this occurs, the companies in such structures together constitute a Payroll Tax Group, but they argue that the structures themselves should not be grouped together for payroll tax purposes. 11. As adverted to above, the plaintiffs attach significance to the fact that managed investment schemes are regulated by the provisions of Part 5C of the Corporations Act and must be registered (s 601ED and s 601EB of the Corporations Act); and holders of AFSLs are regulated by Part 7.6 of the Corporations Act. Relevantly, Elanor Funds Management, as the responsible entity and manager of the registered management scheme is subject to a range of fiduciary and statutory duties in the operation of the scheme and the carriage of the functions conferred upon it by the Constitution of the relevant fund (s 601FC(1)). 12. In particular, ss 601FC and 912A impose strict fiduciary responsibilities and duties on the management and operation of managed investment schemes and the exercise of rights under AFSLs. Those obligations require the strict separation of interests between the responsible entity and the investors in the scheme. The responsible entity (here, Elanor Funds Management) owes a fiduciary duty to each "member" of the scheme, which incorporates an obligation to ensure that the interests of the responsible entity and members, and the interests of different members (i.e., between different members) do not conflict. 13. The plaintiffs' evidence is that, once a company/unit trust structure is sold off to a syndicate of investors, it operates independently of other such structures developed by Elanor Investors and its subsidiary companies (including Elanor Operations). It is said that the companies do not supply each other, or buy from each other; the companies pay no fees, commissions or other payments to each other; the companies have no common employees; the companies are located in different geographic areas; decisions made by one company have no effect on others; and the success or failure of one company has no influence on, or dependency on, the success or failure of another. Each company pays a commercial arms' length rent to the unit trust that owns the land on which its business operates, the terms of which it is said are negotiated and agreed independently of the terms of the leases between the other companies and their unit trusts. 14. The companies are owned by different groups of investors (albeit that some investors might have interests in more than one such structure) and all profits are distributed to those particular investors. In some cases Elanor Investors (or what is described as an "Elanor-style" subsidiary of Elanor Investors) is one of the investors but the plaintiffs say that its interest is never greater than 49% and is usually much smaller. For example, in the case of 193 Clarence Hotel Management (the second plaintiff), the interest of Elanor Investment Nominees (a wholly owned subsidiary of Elanor Investors) in 193 Clarence Hotel Management is 10%; and, in the case of Bell City Hotel Management Pty Limited (Bell City Hotel Management) and Bell City Accommodation Management Pty Limited (Bell City Accommodation Management) (the fourth and fifth plaintiffs), the interest of Elanor Investment Nominees is 17.47%. 15. The structure of the five sub-groups in question is as follows. Sub-group 1 – Elanor Investors sub-group 1. The plaintiffs accept that the entities in this sub-group (which comprises Elanor Investors and its wholly owned subsidiaries – the Elanor Style Companies - and "Incubator Companies") are properly grouped together. The entities in sub-group 1 are bodies corporate that are related to other bodies corporate in the Payroll Tax Group within the meaning of s 50 of the Corporations Act, and so none can be excluded from being grouped together by reason of s 79(3). This sub-group is the one in which various companies are acquired and "incubated" for sale to syndicates of investors in due course. 2. The following entities in sub-group 1 are wholly owned subsidiaries of Elanor Investors (another member of sub-group 1): Elanor Investment Holdings; Elanor Operations; Elanor Investment Nominees; Elanor Asset Services; and Elanor Management. The remaining entities in sub-group 1 are wholly owned subsidiaries of Elanor Management: Albany Hotel Management Pty Ltd; Eaglehawk Hotel Management Pty Ltd (Eaglehawk Hotel Manager) (albeit only until late 2017 when it was sold – from which time it has been part of sub-group 5); Featherdale Management Pty Ltd (Featherdale Management); JCF Management; and Wiltex Wholesale Pty Ltdn (Wiltex Wholesale). 3. Insofar as the plaintiffs contend that the entities in the other four sub-groups (sub-groups 2-5 set out below) ought to be excluded from the Payroll Tax Group of which the entities in sub-group 1 form part; this requires an evaluation of the connection between the entities in this sub-group and the entities in the other sub-groups as well as the connection between the entities in each of those other sub-groups. Sub-group 2 – Elanor Hospitality and Accommodation Fund companies 1. The entities in sub-group 2 were incorporated (or, in the case of Cradle Mountain Lodge Management Pty Ltd (Cradle Mountain Lodge Management) and Wollongong Hotel Management Pty Ltd, restructured) in connection with the establishment of the EHAF Fund in March 2016. EHAF Management Pty Ltd (EHAF Management) (the shares in which are held as to 42.73% as at 31 August 2018 by Elanor Investment Holdings – itself a wholly owned subsidiary of Elanor Investors) holds all the shares in each of the companies within this sub-group. 2. Pausing here, there was some dispute between the parties as to the identity of the unitholders in the EHAF Fund. At [74] of his submissions the Chief Commissioner points to the ASIC search of EHAF Management (subsequently renamed as EMPR II Management Pty Ltd) as identifying Elanor Investors as its ultimate holding company. Insofar as the Chief Commissioner asserts (see at [74] of his submissions) that the list of unitholders in the EHAF Fund Trust shows that Elanor Investors is the ultimate holding company of the EHAF Fund, the plaintiffs say that the list of unitholders shows 42.73% of units being held by "the Trust Company as custodian for Elanor Funds Management Ltd as trustee for Elanor Investment Fund" (rather than Elanor Investors). Notwithstanding this, the plaintiffs say that even if Elanor Investors was the owner of 42.73% of the shares in the EHAF Fund it would not make EHAF Fund a subsidiary of Elanor Investors. 3. The entities in sub-group 2 are bodies corporate that are related to other bodies corporate in the Payroll Tax Group within the meaning of s 50 of the Corporations Act, and so none can be excluded from being grouped together by reason of s 79(3). 4. However, again, the plaintiffs contend that these companies ought not be grouped with the other entities in the Payroll Tax Group. The Chief Commissioner, to the contrary, submits that the businesses operated by the entities in sub-group 2 are connected with other businesses operated by companies in the Payroll Tax Group (see below). 5. There are six companies in this sub-group (connected to the EHAF Fund), each owning and operating different hotel businesses and each being a wholly owned subsidiary of EHAF Management. The plaintiffs explain that the EHAF Fund (as does the EMPR Fund – see below) owns a number of businesses and was effectively an "umbrella organisation" in relation to those businesses. The land on which those businesses operate is owned by Elanor Funds Management as the trustee of a special purpose trust. Each of the companies leases the land on which its hotel business operates from Elanor Funds Management as trustee of that special purpose trust. Elanor Funds Management and EHAF Management have entered into a stapling deed, stapling units in the EHAF Fund trust to shares in EHAF Management. Investors in the EHAF Fund thus own shares in EHAF Management and corresponding units in the EHAF Fund trust. Sub-group 3 – Bell City Fund companies 1. Sub-group 3 is associated with the Bell City Fund, and consists of two companies, Bell City Accommodation Management Pty Ltd (Bell City Accommodation Management) and Bell City Hotel Management Pty Ltd (Bell City Hotel Management), and their stapled property trusts and some additional property assets, with no businesses attached (see Mr Willis' first affidavit at [27]). The Bell City Fund (the second of the relevant funds to be established) was established to hold two adjacent hotel businesses. 2. About 17% of the shares in each of the two Bell City companies are owned by Elanor Investment Nominees (as noted, a wholly owned subsidiary of Elanor Investors (see Mr Willis' first affidavit at [93]; [100])). Each property trust (or Bell City Syndicate) is governed by a constitution (Ex 2), under which Elanor Funds Management is the trustee of the syndicate. Elanor Funds Management, as trustee of each syndicate, and each of Bell City Accommodation Management and Bell City Hotel Management has entered into a stapling deed (Ex 2), stapling shares in the relevant company to units in the corresponding syndicate. Sub-group 4 – 193 Clarence Hotel Fund 1. The 193 Clarence Hotel Fund consists of a single company, 193 Clarence Hotel Management, and a stapled property trust (Mr Willis' first affidavit at [27]; Ex 2). It was the first of the property trust funds established by Elanor Investors. 2. About 10% of the shares in 193 Clarence Hotel Management are owned by Elanor Investment Nominees, another entity in the Payroll Tax Group (Mr Willis' first affidavit at [74]) and, as noted above, a wholly owned subsidiary of Elanor Investors. The property trust (193 Clarence Hotel Fund) is governed by a constitution, under which Elanor Funds Management is the trustee of the syndicate. Elanor Funds Management (as trustee of 193 Clarence Hotel Fund) and 193 Clarence Hotel Management have entered into a stapling deed (Ex 2), stapling shares in 193 Clarence Hotel Management to units in the 193 Clarence Hotel Fund. Sub-group 5 – Elanor Metro and Prime Regional Hotel Fund companies 1. The entities in sub-group 5 were incorporated (or, in the case of Eaglehawk Hotel Management, restructured) by Elanor Investors in connection with its establishment of the EMPR Fund in November 2017. The Chief Commissioner points out that the EMPR Fund was established after the relevant period the subject of the payroll tax assessment notices (Mr Willis' first affidavit at [185]). Accordingly, any finding that these companies are not part of the Payroll Tax Group will not change the tax assessment notices the subject of this proceeding. 2. From the time of inception of the EMPR Fund, each of the 3 companies has been a wholly owned subsidiary of Elanor Metro and Prime Regional Management Pty Ltd (EMPR Management). Accordingly, it is said that the entities in sub-group 5 are bodies corporate that are related to other bodies corporate in the Payroll Tax Group within the meaning of s 50 of the Corporations Act, and so none can be excluded from being grouped together by reason of s 79(3). 3. The EMPR Fund (Ex F) consists of 3 companies that own and operate different hotel businesses and the trusts owning the land on which those businesses operate. Each of those companies is a wholly owned subsidiary of EMPR Management. Each of the companies leases land from Elanor Funds Management as trustee of a special purpose trust. The shares in EMPR Management are stapled to the units in the trust. Investors in the EMPR Fund own shares in EMPR Management and corresponding units in the EMPR Fund trust. 4. One of the companies in this sub-group (Eaglehawk Hotel Management), was until November 2017, a wholly owned subsidiary of Elanor Management and an entity in sub-group 1. Another company in this sub-group (Byron Bay Hotel Management) was not operating any business at any time up to 31 August 2018. (Accordingly, it is not the subject of the Chief Commissioner's submissions.) The third company in this sub-group is Narrabundah Hotel Management Pty Ltd. 5. Again, there is some dispute as to the ultimate holding company of EMPR Management. At [77] of his submissions the Chief Commissioner points to the ASIC search of EMPR Management as identifying Elanor Investors as its ultimate holding company. The plaintiffs accept that page 1 of the ASIC search does show this but they say that the list of shareholders on the following pages of the search show that there could be no holding company of EMPR Management (still less some ultimate holding company). It is said that, since EMPR Management owns the shares in each of the corporations in sub-group 5, the same applies to each of them. It appears that as at 31 August 2018 the Trust Company (Australia) Ltd as custodian for Elanor Funds Management as trustee for Elanor Investment Fund held 44.04% in the EMPR Fund. Relevant provisions 1. Section 79 of the Payroll Tax Act provides that: (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). 1. Section 74 of the Payroll Tax Act provides that: (1) If a person is a member of 2 or more groups, the members of all the groups together constitute a group. (2) If 2 or more members of a group have together a controlling interest in a business (within the meaning of section 72), all the members of the group and the person or persons who carry on the business together constitute a group. 1. Thus, s 79(1) provides the Chief Commissioner with a discretion to exclude a person (whether a company or natural person) from a group but that discretion only becomes enlivened subject to sub-ss (2) and (3). By reason of s 79(3), the discretion in sub-s (1) cannot be applied to exclude from a group a company in the group that, applying s 50 of the Corporations Act, is a related body corporate of any other company in the group. 2. Section 50 of the Corporations Act provides that: Where a body corporate is: (a) a holding company of another body corporate; or (b) a subsidiary of another body corporate; or (c) a subsidiary of a holding company of another body corporate, the first-mentioned body and the other body are related to each other. 1. Section 9 defines "holding company", in relation to a body corporate, as being a "body corporate of which the first body corporate is a subsidiary"; and "subsidiary", in relation to a body corporate, as "a subsidiary of the first-mentioned body by virtue of Division 6". In Division 6 of the Corporations Act, s 46 provides, relevantly: 46. A body corporate (in this section called the first body) is a subsidiary of another body corporate if, and only if: (a) the other body: (i) controls the composition of the first body's board; or (ii) is in a position to cast, or control the casting of, more than one-half of the maximum number of votes that might be cast at a general meeting of the first body; or (iii) holds more than one-half of the issued share capital of the first body (excluding any part of that issued share capital that carries no right to participate beyond a specified amount in a distribution of either profits or capital); or (b) the first body is a subsidiary of a subsidiary of the other body. 1. It is relevant to note that the purpose of the grouping provisions in the Payroll Tax Act (which informs the evaluative exercise here required to be carried out – see CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384; [1997] HCA 2 at 408) was identified by the High Court in Tasty Chicks (at [8]) as follows: The 'grouping' provisions were designed 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. 1. The question is whether, objectively determined having regard to the nature of connections between group businesses, it can be said that the businesses are independent and not connected; that question being one of fact and degree (see Lombard Farms Pty Ltd v Chief Commissioner of State Revenue [2013] NSWADTAP 42; 96 ATR 315 (Lombard Farms) at [50]-[51]); no single factor being determinative. In Lombard Farms, (at [50]) it was said that "[i]t is not the case that any connection between businesses will disentitle an applicant from de-grouping"; rather, the connection must be material "and not insignificant or inconsequential" and the connection must affect the business "in some real or practical sense". At [51], it was there said that: 51. To say that there can be absolutely no connection between the businesses sets the bar too high. The question is one of fact and degree…..To disentitle an applicant to de-grouping, the connection must be meaningful in a commercial sense and not immaterial or inconsequential to the carrying on of the businesses….[T]here must be a finding of substantial absence of connection and substantial independence between the businesses, to warrant the exercise of the discretion. 1. Thus the relevant question in the present case is as to whether, and to what extent, the business carried on by each plaintiff is carried on independently of, and not in a way that is connected with the carrying on of, of a business carried on by another plaintiff. That issue is to be determined having regard to matters such as the nature and degree of ownership and control of the businesses; and the nature of the relevant businesses. Plaintiffs' submissions 1. The main circumstances which the plaintiffs contend call for the application of the Grouping exemption in s 79 of the Payroll Tax Act (i.e., for de-grouping) are that (while the businesses may have some common features) the nature of those businesses, the nature and degree of their ownership and control, and the structures in which they are established and operate, demonstrate that they are carried on independently of each other and that there is no relevant connection between the way they carry on their businesses. 2. The plaintiffs submit that any connections between the carrying on of each business do not satisfy the tests of materiality or substantiality in any real or practical sense; and say that there are particular features of the manner in which the businesses operate which are not found in the usual "grouped" combinations. In particular, they contend as follows. 3. As to Elanor Operations, its business is said to be that of fund creation, management and investment; whereas the other plaintiffs conduct a variety of businesses in the leisure and accommodation sectors. 4. While (as noted above) the plaintiffs accept that the fact that Mr Willis is the sole director of all the plaintiffs renders the plaintiffs "grouped" under Part 5 of the Payroll Tax Act, this is said to be significantly constrained by the fiduciary duties owed by Mr Willis to each plaintiff. It is submitted that, unlike situations where grouped businesses are essentially separate parts of associated enterprises operated for the benefit of the same persons, families or partnerships (and so directors of one member of the group might act in a way that benefits another member or benefits the group as a whole without being "too concerned" about fiduciary duties), Mr Willis must act strictly for the benefit of each specific company, without consideration of the benefits (or detriments) that might result to others. 5. Further, it is noted that, while control of the day to day operations resides with the third party operator or general manager of each business, the beneficiaries of each fund are the ultimate owners and, although under the Trust Deeds they do not have any day to day control of the businesses, as beneficiaries they have all of the general law powers of beneficiaries to remove a trustee. In particular, it is noted that Mr Willis, in his capacity as director of the trustee, could be removed for misconduct or fraud at any time and replaced with investor shareholders' own nominee or nominees (and the fund wound) up by the members according to the general law and the provisions of Chapter 5C of the Corporations Act. In that critical sense, it is said that ultimate control and ownership of the businesses rests in the members of each fund. Thus it is said that the fact that the plaintiff companies are prima facie grouped together because they have the same director does not provide a reason not to de-group the companies. 6. The plaintiffs assert that the consideration of the factors listed in s 79(2) of the Payroll Tax Act must be in the context that the businesses, although having each been originally "promoted" by Elanor Investors and its subsidiaries, are owned by separate, discrete and diverse groups of independent investors (i.e., investors unknown to each other who are brought together solely for the purpose of the specific investment). It is noted that, while some of the investors are investment banks in their own right, most are self-managed superannuation funds and other corporate investors. 7. The plaintiffs say that most (if not all) of the decided cases where de-grouping was rejected involve businesses owned by different members of a family, or by persons who were otherwise involved as business partners, and sometimes by family members who were also involved in business partnerships; the plaintiffs contrasting the present case where the businesses are owned by entities which have no pre-existing family or business affiliation between them. 8. The plaintiffs say that the way in which each business is operated is also significantly different from the operations of the more usual kind of grouped businesses (which are owned and controlled by family members or business partners). It is noted that each business is conducted at a different site owned by a stapled trust in the same fund. While Elanor Operations conducts its funds management business at its city site, the other plaintiff businesses are conducted at the individual properties owned by each individual fund for which a commercial arms' length rent is paid by the business. The plaintiffs emphasise that each business is owned by a discrete group of different investors in each fund; each business has a different group of customers and suppliers; each business has a discrete group of employees and there are no common employees; no business supplies to, or buys from, any other, or pays fees or commissions or any other payments to any other; no business is dependent on, or influenced by, any other so that the success or failure of one business is completely irrelevant to the success of failure of any other; and there are no financial connections between the operating businesses, i.e., the operating accounts for each business are run discretely for the purposes of the particular business (and it is submitted that the fund manager's oversight of those operations ensures this). It is noted that there are no loans made from one business to another or from Elanor Operations to any of the other plaintiffs. 9. The plaintiffs say that each hotel business is run by a third-party manager who operates the business in the relevant sense: hiring, managing and supervising employees, running the operating account for the business and directing day to day operations; while Elanor Operations in its capacity as fund manager has only oversight of the overall profitability of the business. In addition, the plaintiffs say that each third-party operator of the hotel business or other business manager supervises the marketing for each business. It is said that, where the third-party operator is part of a larger marketing group, marketing may be done under its banner (for example, Ibis Styles or Mantra). 10. Insofar as the Chief Commissioner relies upon material from the Elanor Group website to suggest a connection between the businesses, the plaintiffs say that that material contains information about current and prospective investment in funds managed or to be managed by Elanor Investors but that none of that material contains advertisements or marketing of any kind targeting the disparate groups of customers of each of the other plaintiff businesses. It is said that the website is directed to current or potential investors in funds managed or to be managed by Elanor Operations. 11. Although the plaintiffs at one stage suggested that Elanor Investors was the entity holding the AFSL, it was ultimately accepted that it is Elanor Funds Management which holds the AFSL and is the responsible entity of the Elanor Investors Fund (an Australian registered managed investment scheme) and hence subject to the requirements set out in Part 5C (and particularly ss 601FA – 601FH) and Part 7.6 (and particularly s 912A) of the Corporations Act, which codify the usual fiduciary duties and impose strict qualifications for, and statutory obligations on, parties operating such schemes. It is noted that these statutory provisions emphasise the need for protection of the investments made by members of the scheme. 12. The plaintiffs submit that to group the respective businesses would make one syndicate of investors liable for the payroll tax payable by another completely separate and independent syndicate. They say that the effect of the Chief Commissioner's ruling would be, for example, to make the investors in 193 Clarence Hotel Management, which operates a hotel in Sydney, liable for payroll tax payable by Cradle Mountain Lodge Management, which operates a hotel in Tasmania, in which they have no financial or commercial interest or right of control; or to make the investors in the Byron Bay Hotel liable for the payroll tax payable by the Featherdale Wildlife Park in Sydney (where there is no common financial or commercial interest). The plaintiffs say that this is something that would be inconsistent with the policy behind the managed investment scheme legislation; and it is submitted that the grouping provisions should not be applied where they introduce a degree of incoherence into the law. 13. The plaintiffs further say that, while all of the second to sixteenth plaintiffs are businesses owned by funds managed by Elanor Operations, it is not the case that Elanor Operations was dependent for its existence on the existence or continued operation of any of the other plaintiffs. In this regard it is said that, if any one (or indeed all) of those other businesses or funds were to be dissolved, the business of Elanor Operations would still have a business raison d'etre because Elanor Operations was at the relevant time "incubating" further businesses to be sold into new funds for it to manage as part of its ongoing funds management business. Reference is made to what was said by Sackville JA in Chief Commissioner of State Revenue v Tasty Chicks Pty Ltd (2012) 87 ATR 880; [2012] NSWCA 181 (Commissioner v Tasty Chicks) at [56], namely that "[t]he ordinary meaning of independent includes not depending on the existence or actions of others and not being influenced by others in matters of conduct" and that "[a] business may not be carried on independently of another business if its existence or continued operation depends upon the existence or custom of that other business". 14. The plaintiffs say that it is this fact that distinguishes the present case from cases concerning "administration trusts" (such as Commissioner of Stamps v Garrett F Hunter Pty Ltd (1997) 69 SASR 275 (Garrett F Hunter) and Port Augusta Medical Centre Pty Ltd v Commissioner of State Taxation (2012) 112 SASR 203; [2012] SASCFC 7 (Port Augusta Medical Centre), to which I refer in due course). 15. The plaintiffs maintain that the above factors demonstrate that Mr Willis' common directorship and the oversight/auditing of the profitability of the businesses by Elanor Operations, in performing its business role as Fund Manager, are explicable as formal connections inherent in the managed fund structure but demonstrate no real or practical connection with or between the plaintiffs' varied businesses (just as is the case, it is submitted, with certain franchise operations and public trustee companies; referring to the plaintiffs' appeal statement at [35]). 16. It is submitted that, if Elanor Operations and the various incubator companies (i.e., the companies in sub-group 1) are not de-grouped from the other plaintiffs (as sought by the plaintiffs), then Elanor Funds Management (as the responsible entity of the funds) would be placed in a position of conflict inasmuch as each of the other plaintiffs would be liable for the payroll tax payable by a related entity (Elanor Operations); and the plaintiffs say that this outcome is not contemplated by Chapter 5C of the Corporations Act under which the Elanor Investors Group is registered and has been invested in by the general public. 17. In the circumstances, it is submitted that the Chief Commissioner's refusal to "de-group" the plaintiffs in the manner sought by the plaintiffs did not further the central policy of s 79(1) of the Payroll Tax Act. It is said that the plaintiffs are not engaged in any scheme to take unlawful advantage of the payroll tax threshold; and that the discretion should be exercised in the plaintiffs' favour. 18. As noted above, emphasis is placed on the extent to which the statutory provisions in Part 5C (and to a lesser extent Part 7.6) of the Corporations Act impose obligations on and confine and control the way in which Mr Willis (the common director) can act while he remains the director of the plaintiff corporations involved in the management of the relevant managed investment schemes. 19. The plaintiffs say that much of the cross-examination, particularly of Mr Willis, related to incubator companies rather than corporations in sub-groups 2 to 5 and is therefore not relevant (referring by way of example to the cross-examination at T 24.45ff which addressed documents signed even before Elanor Investors was listed on the ASX). The plaintiffs prepared an attachment listing other parts of the cross-examination which also deal with incubator companies (which the plaintiffs accept are wholly-owned subsidiaries under the total control of Elanor Investors at the time they remain in sub-group 1; i.e., in the period when they are being developed by Elanor Operations for sale to private investors). 20. The plaintiffs say that certain of the connections here relied upon by the Chief Commissioner are not relevant. So, for example it is submitted that (cf [71] of the Chief Commissioner's submissions), the fact that accounting conventions (such as AASB 10) require the financial accounts of corporations to be consolidated, or deem certain corporations to be labelled as "subsidiaries" or "controlled entities" of others, does not create "connections" relevant in any way to the matters referred to in s 79(2) of the Payroll Tax Act. 21. The plaintiffs emphasise that the focus of examination for the purpose of the payroll grouping provisions is the existence, nature and extent of connections between the carrying on of businesses. It is said that matters such as accounting conventions (which mandate the form of financial accounts of a business) have little relevance to the carrying on of the business. Further, it is said that the accounts which were the subject of cross-examination by the Chief Commissioner were not accounts of the corporations which carry on the relevant businesses. 22. Similarly (cf [82] of the Chief Commissioner's submissions), the plaintiffs say that the fact that Deloittes is the auditor for all businesses is not a relevant connection. It is said that the case on which the Chief Commissioner relies for this submission (Corrosion Control Engineer (NSW) Pty Ltd v Chief Commissioner [2017] NSWSCATAD 20 at [112]; see at [51] of the Chief Commissioner's submissions), where a common accountant was found to be a relevant connection for s 79(2) purposes, involved a situation where the accountant set the rate of interest to be paid on inter-corporate loans. It is said that there are no such loans between corporations in this case, and no inter-company financial transactions. 23. Finally, the plaintiffs emphasise the purpose of the grouping provisions as recognised in Tasty Chicks (as extracted above). Pausing here, it is acknowledged that in Seovic Engineering Pty Ltd v Chief Commissioner of State Revenue [2015] NSWCA 242, the Court of Appeal did not accept that the test for de-grouping was one based on whether it would be unreasonable to apply the 'grouping' provisions (see below). There, Meagher JA (with whom Beazley P, as Her Excellency then was, and Macfarlan JA agreed), said at [22]: 22. It may readily be accepted that the broad purpose of the power to exclude is to enable the Chief Commissioner to relieve against the unreasonable operation of the grouping provisions. However the circumstances in which the power to do so is engaged are described in s 79(2). Whilst that description should be construed having regard to that purpose, it nevertheless remains the position that the Commissioner must in terms be satisfied that the business sought to be excluded is not connected with the carrying on of a relevant business. 1. The plaintiffs emphasise that the relevant focus here is on the business of the corporations to whom payroll tax assessments have been issued (not the businesses of the stapled trusts, which own and lease the land on which the plaintiff companies carry on their respective businesses). Similarly, it is said that the business of Elanor Investors (as a public company promoter of investment vehicles) is also not relevant. Thus, the plaintiff submits that it is important to eliminate any aspects of Elanor Investors' business from consideration of the businesses of the plaintiff corporations (for example, as indicated above, it is said that Elanor Investors' website, which provides information about and promotes Elanor Investors rather than the businesses of the corporations, is irrelevant). The plaintiffs criticise the Chief Commissioner's submissions in this regard as conflating the businesses of the plaintiff corporations, the trusts and Elanor Investors. 2. The plaintiffs note that, with the exception of a wildlife park business (Featherdale Management) and a furniture retail business (JCF Management), both of which were incubator businesses and therefore said not to be independently of relevance, the businesses are either hotel businesses or (in the case of EHAF Fund and EMPR Fund) investments in hotel businesses or (in the case of Elanor Operations) the business of providing funds management oversight responsibilities to the businesses merely as "a service provider to a client". Pausing here, the Chief Commissioner cavils with the submissions that the business of Elanor Investors is not relevant to the evaluation here to be carried out. 3. The plaintiffs also emphasise that the connection which must here be examined is the connection between the "carrying on" of businesses. It is said that this mandates an examination of the way in which the business is operated in its dealings with those persons with whom it does business (its customers and clients); and that this cannot be done without a consideration of the day-to-day operations of the business (citing Commissioner v Tasty Chicks at [36]-[40]; Port Augusta Medical Centre at [46]; [67]). 4. So, it is said that the perspective from which the issue must be approached is as to the practical manner in which each company carries on its business. It is said that the Chief Commissioner argues from a much higher level of abstraction (focussing on connections which are not directly, or in some cases even indirectly, related to the actual manner in which the businesses of the corporations are "carried on"). 5. As to the "connection" which must exist between the businesses, this must be "material, and must affect the business in some real or practical sense"; and it must be "meaningful in a commercial sense and not immaterial or inconsequential to the carrying on of the business" (see Lombard Farms at [50]; [51]). Thus, the plaintiffs say that the connection between the respective businesses must be something more than just the existence of something in common between them (saying, by way of example, that the fact that each of the businesses might have the same telephone and internet service provider would not provide a "connection" between them in the sense intended in s 79(2) of the Payroll Tax Act). Similarly, it is said that some of the hotel businesses might have the same guests (at different times, presumably) but that this would not create a connection of the sort here required. 6. The plaintiffs submit that the connection must be more than some element that each putative group member has in common. They say that there must also be an element of reliance or influence between the things connected. It is submitted that the connection must involve some element of intended association between the things connected for the purposes or benefit of one or more of the businesses (though the Chief Commissioner says that there is no authority for such an 'intended association" test). It is submitted that it is only where this additional factor is present that a s 79(2) connection becomes more than merely a common factor (either coincidental or intentional) between the carrying on of one business and the carrying on of another. The plaintiffs say that this is the point of differentiation between the cases where de-grouping is rejected. 7. The plaintiffs further say that in all of the cases in which de-grouping has been rejected there was an association or affiliation of some type between the owners of the businesses (i.e., that they were family members or business partners or associates) and their businesses were being carried on in that context, with an element of mutuality about them (in Tasty Chicks, this being the processing, sale and transport of chicken meat; in Corrosion Control Engineering, it being an interstate network of corrosion prevention sales and services). 8. In that regard, the plaintiffs say that in the present case there is no association or affiliation between the shareholder/investors of one corporation and the shareholder/investors of another. The plaintiffs accept that some shareholders own interests in more than one fund but say that this is serendipitous, not a connection of significance. The Chief Commissioner, to the contrary, attaches significance to the fact that all are investors in funds managed within the Elanor Investors Group. 9. The plaintiffs say that some of the "connections" which are asserted by the Chief Commissioner fall into the category of a fact in common but one which does not involve a connection in the sense of an intended association for business benefit. It is said, for example, that (c.f., [78] of the Chief Commissioner's submissions) the fact that corporations might have the same registered office is something which they have in common, but that this does not create any association or connection between the way they carry on their respective businesses. 10. Similarly, the plaintiffs further say that the addresses of the "Principal Place of Business" according to the ASIC searches appear in most cases to be wrong (as it is said were those parts of the searches stating that the corporations had ultimate holding companies) but in any event that this is irrelevant. For example, it is said that the Cradle Mountain Hotel business and the Port Macquarie Hotel businesses are carried on without reference to each other in completely different physical locations as their names indicate (neither of which is the Sydney CBD address noted as their principal place of business in the ASIC searches); and it is said that the fact that they have the same registered offices is irrelevant to the way they carry on business. 11. As to the question of ownership, the plaintiffs accept that this is important but they say that it is not properly described in the Chief Commissioner's submissions. The plaintiffs say that the entities in sub-group 1 are wholly owned by Elanor Investors; whereas the companies in the other sub-groups are owned as to part only (and in each case less than 50%) by Elanor Investors. The plaintiffs say that there is therefore some common ownership but that in each of the other four sub-groups it is only a minority interest that is held by Elanor Investors or its subsidiaries. The plaintiffs emphasise that this (i.e., minority ownership) is the relevant "degree" of ownership in the present case. 12. As noted earlier, the plaintiffs place emphasis on the statutory obligations under Part 5C of the Corporations Act, which require the interests of the unit-holders to be given priority over the interests of the responsible entity (here, of course, not Elanor Investors but Elanor Funds Management). 13. The plaintiffs submit that the nature and degree of ownerships of the various businesses in the five sub-groups are consistent with the businesses being carried on "independently of, and ... not connected with" the carrying on of businesses by other putative members of the Payroll Tax Group. 14. As to the question of control, it is said that, while Mr Willis is the sole director of each corporation, he owes fiduciary duties to each separate group of investor/shareholders (and reference is made to Mr Willis' evidence in cross-examination in this regard – see for example at T 24). 15. The plaintiffs say that the involvement of Mr Simmons, Ms Ossovani (Fund Manager and head of the Hotel, Tourism and Leisure Division), and the other members of the Hotel Tourism Leisure Team in the control of the corporations is circumscribed in the same way; namely, that they must act for the benefit of the investor/shareholders of the corporations, even at the cost of Elanor Investors or Elanor Funds Management. Moreover, it is said that those persons are not involved in the day-to-day work involved in carrying on the businesses; that their work is mainly high-level oversight of the third-party managers of the hotel businesses, and that this is again for the benefit of the owners of the individual corporations. So, for example, it is said that their work in overseeing the performance of the manager of one hotel does not in any way affect the way in which the business of another hotel is carried on. 16. The plaintiffs submit that the control of the businesses exercised by Mr Willis and/or the Hotel Tourism Leisure Team is significantly different from the nature of the control exercised in other cases which have considered this aspect; in that in all other cases control of one business could and would be used for the benefit of another because of the association or affiliation between the owners of the businesses. It is again noted that the asserted group members in other cases were businesses owned by persons who were members of the same family, or business partners, or with some relationship which had the effect that a decision by the controller of one business might be made to benefit the owner of another. The plaintiffs emphasise that this is not the case here; and that the director and Hotel Tourism Leisure Team cannot make decisions except for the benefit of the individual groups of shareholders in the corporations. 17. Additionally, it is said that, as the owners of the corporations are independent of one another, there is no reason why one group would make a decision (in the exercise of their rights to control as shareholders) which would benefit another group of shareholders. It is said that there is no reason, for example, why the owners of the 193 Clarence Hotel would take a decision which would benefit the owners of the Port Macquarie Hotel since the groups of owners are completely different. 18. The plaintiffs maintain that the "nature" and "degree" of control of the businesses are matters that are very much influenced by the facts that: the day-to-day control of the businesses is in the hands of third-party management corporations, each of which operates its hotel independently of, and uninfluenced by, the third-party managers of the other hotels; and, second, that the high-level control undertaken by Mr Willis as director and/or the members of the Hotel Tourism Leisure Team is significantly restrained in that it must at all times be exercised consistently with the relevant statutory or fiduciary obligations, requiring strict protection of the respective interests of the individual groups of investor/shareholders. 19. Pausing here, I note that the obligations imposed by Part 5C of the Corporations Act apply only to Elanor Funds Management (as the responsible entity of the registered scheme and holder of the AFSL), its officers and employees; without more, these obligations have no relevance to the management of the plaintiff companies in the Payroll Tax Group as assessed (of which Elanor Funds Management does not form part). However, the responsible entity has the power to appoint an agent, or otherwise engage a person, to do anything that is authorised to do in connection with the scheme by operation of s 601FB of the Corporations Act. In light of the plaintiffs' evidence that the responsibilities of Elanor Funds Management are carried out by the employees of Elanor Operations (see Mr Willis' affidavit at [55]), it would appear that such an appointment or engagement was made by Elanor Funds Management. Accordingly, the obligations imposed by Part 5C operate to inform and constrain Mr Willis' directorship of Elanor Operations, as well as the actions of the Senior Executive Team employed by Elanor Operations, insofar as they both perform functions for Elanor Funds Management. 20. In these circumstances, the plaintiffs say that each of the businesses of sub-groups 1 to 5 is being carried on independently from, and unconnected with, the carrying on of the businesses of any other sub-group, and that the discretion in s 79(2) ought therefore be applied to de-group those five sub-groups. Chief Commissioner's Submissions 1. The Chief Commissioner says that Elanor Investors and its controlled entities are characterised by the following features: a business model involving asset acquisition, sale and then ongoing management of the sold asset (i.e., the incubation process referred to above); a small governance team; the provision of centralised management services to the controlled entities; and the payment of management fees by the controlled entities to Elanor Funds Management. 2. The Chief Commissioner emphasises that the discretion to de-group is only enlivened if the Chief Commissioner is satisfied that the entity which a taxpayer seeks to be excluded from the group is independent of, and not connected to, "every other member" of the group, such that if a business has a connection to only one other member of a multi-person group, that business must not be excluded (referring to Port Augusta Medical Centre v Commissioner of State Taxation (2011) 84 ATR 706; [2011] SASC 31 (Port Augusta) at [33]-[34]). 3. As to the test under s 79(2) of the Payroll Tax Act (which it is accepted involves a question of judgment), it is noted that a real and material connection is required between the two businesses and that the following matters have been considered to be relevant to determining whether a business is carried on independently, and not in connection, with another business: the degree of control exercise over the two businesses; the commonality of ownership over the two businesses; the extent and importance of services and goods provided between the businesses; the extent of group marketing and branding between the businesses; whether the businesses were being conducted on an arms length basis; whether one business provided financial support or the like to the other; whether the businesses share premises; and whether businesses share common employees or use the services of one set of employees. 4. Considering the application of those factors in the present case, the Chief Commissioner submits as follows. 5. First, as to the degree of control exercised over the two businesses, it is noted that control of a corporation is to be determined by shareholdings in the corporation and control at directorial level (Boston Sales and Marketing Pty Ltd v Chief Commissioner of State Revenue (2014) 99 ATR 323; [2014] NSWCATAD 139 (Boston) at [26]); that the enquiry into control includes examining the direct and indirect interest of the owners of the business (Conte Mechanical and Electrical Services v Commissioner of State Revenue (2011) 85 ATR 120; [2011] VSC 104 at [12]); and that the focus is on the control of the businesses, not the day-to-day management of them. The Chief Commissioner says that the primary issue is the capacity to control a business, even if de facto control of day-to-day management is vested elsewhere (referring to Port Augusta at [63]-[65]). It is noted that in Lombard Farms, the Tribunal stated at [75]: I observe that the payroll tax legislation refers to control of businesses, not management of day to day business operations. The legislation does not discount the legal control by the board of the company which owns the business and delegates day to day powers to company employees. I am not satisfied that control of a business in the context of s 79(2) of the Act means control by employed managers rather than control by the directors of the company which owns the business. I also have regard to the overriding control by the directors of the holding company of the company which owns the business. 1. The Chief Commissioner notes that it has been said to be relevant that the nominees of one business had, by virtue of its shareholding in another business, an effective veto in respect of decisions of the board of that other business (Regis Mutual Management v Chief Commissioner of State Revenue [2015] NSWCATAD 213 at [93] (Regis)); that it is recognised that a director and shareholder of a trustee company is in a position to exercise influence over that company (Garrett F Hunter at 285) and that in Commissioner v Tasty Chicks, it was relevant that the extent of the services provided by one business depended on the outcome of the budgetary and other decisions made by another business (Commissioner v Tasty Chicks at [59]). 2. The Chief Commissioner here argues that each of the entities in sub-groups 2-5 was connected to the other entities in the Payroll Tax Group, in that all the entities were controlled though a common board of directors: pointing to Mr Willis' position as the sole director of each of the entities in the sub-group, and all of the remaining entities (other than Elanor Investors) in the Payroll Tax Group and Mr Simmons' position as the company secretary for each of those entities. It is noted that Mr Willis' evidence is that he is the sole director of each of those companies on the advice of external advisers, including lawyers and accountants "as to the appropriate structure of our business to enable us to administer our funds management duties" (T 22.23-23.08). Mr Willis said that "we" had engaged those advisers in his capacity as a "funds manager", in relation to the funds management business of which he is Chief Executive Officer. 3. The Chief Commissioner points to the fact that Elanor Investors' financial reports state that the entities in sub-group 2 and 5 are controlled by another member of the Payroll Tax Group (i.e., Elanor Investors). The Chief Commissioner notes that Elanor Investors reported in its preliminary final report for FY2016 that it had control over each of the entities in sub-group 2, and gained that control in March 2016 (when the EHAF Fund was established) (see Ex 2) and that Elanor Investors classified each of the entities in sub-group 2, in its financial reports, as one of its "subsidiaries and controlled entities" (see Ex 2). It is noted that the FY2016 Financial Report stated, on the question of control of EHAF Fund, that (Ex 2): EHAF comprises stapled securities in Elanor Hospitality and Accommodation Fund and EHAF Management Pty Limited. The Group holds 41.66% of the equity in EHAF. The Group's 41.66% ownership interest in EHAF gives the Group the same percentage of the voting rights in EHAF. EHAF is an unregistered trust for which Elanor Funds Management Limited acts as the Manager of the asset and Trustee of the trust. The responsible entity is owned wholly by the Group and governed by the licencing [sic] and legal obligations of a professional asset manager. The powers of the Trustee are governed by the EHAF constitution, which sets out the basis of fees that the Trustee can receive. These fees include management fees, performance fees, and acquisition fees. Excluding any performance fee, but including management and acquisition fees the Group is expected to receive approximately 50% of EHAF's EBITDA. Based on the assessment above, at the current level of equity investment in EHAF, the AASB 10 definition of control for this associate is met, and therefore will be consolidated into Elanor Investors Group Financial Statements. 1. The 2020 consolidated Financial Report stated that Elanor Investors is deemed to have a controlling interest in the EMPR Fund giving its level of ownership and role as manager of the funds (Ex 3, p 46). 2. The Chief Commissioner also notes that Elanor Investors' financial report states that the entities in sub-groups 3 and 4 are "significantly influenced" by another member of the Payroll Tax Group (Elanor Investors). The FY2016 Financial Report stated (as to Elanor Investor Group's influence over the Bell City Syndicates) (Ex 2) that: The Group holds a 17.64% interest in the Bell City Fund (Bell City) which has been classified as a material associated entity. Management of the Group reviewed and assessed the classification of the Group's investment in the associated entity in accordance with AASB 128 on the basis that the Group has significant influence over the financial and operating policy decisions of the investee. [Emphasis as per submissions] 1. The same reasoning is said to apply to the 193 Clarence Hotel Fund which is also listed at Ex 2 as an Associated Entity. 2. It is noted that Mr Willis accepted in cross-examination, that each of the entities in the group was controlled or significantly influenced by Elanor Investors for the purposes of Australian Accounting Standard AASB10 (see extract at Ex 3, 8-20) and Australian Accounting Standard AASB128 (see T 27.07 - T 31.26); and that Mr Willis explained that was necessary to "execute our strategy for the funds for the benefit of security holders in the funds" (T 31.22 - T 31.26). 3. As to the second factor (the commonality of ownership) the Chief Commissioner notes that substantial commonality of ownership in the period in question is relevant to determining the existence of independence and connection (citing Conrad Linings v Chief Commissioner of State Revenue [2014] NSWSC 1020 (Conrad) at [53]). It has been said to be relevant that one trust was the major equity owner in the grouped businesses (Headwear v Chief Commissioner of State Revenue [2015] NSWCATAD 166 (Headwear) at [32]; [34]; [105]). 4. The Chief Commissioner says that the entities across the different sub-groups are all connected with each other in that they are all (at least partly) ultimately owned by Elanor Investors. It is noted that Mr Willis considered that to be an important feature of the entire group because it gave investors confidence to invest, saying in cross-examination that "Elanor holds a cornerstone position because investors take satisfaction that we are also aligned with their interests" (T 24.20-24). (Pausing here, I consider this to be an expression of alignment of interest within the particular sub-groups, not necessarily as between sub-groups.) 5. The Chief Commissioner says that all the entities in sub-group 2 are connected with each other, in that each is wholly owned by EHAF Management. It is noted that Elanor Investment Holdings was the largest shareholder in EHAF Management and owned around 42% of its shares (Ex A; Ex 2). EHAF Management had recorded, in the ASIC register, Elanor Investors as its ultimate holding company (Ex E). 6. The Chief Commissioner notes that all of the entities in sub-group 3 are partially owned by Elanor Investment Nominees, which company owns over 17% of the shares in the companies that operate both the businesses (Mr Willis's first affidavit at [93]; [100]). As noted above, Elanor Investment Nominees is wholly owned by Elanor Investors. 7. It is noted that the entity in sub-group 4 (Clarence Hotel Management) is also partially owned by Elanor Investment Nominees. That company owns about 10% of the shares in 193 Clarence Hotel Management (Mr Willis's first affidavit at [74]). 8. Finally, it is said that all the entities in sub-group 5 are connected with each other in that each is wholly owned by EMPR Management. Elanor Investors' subsidiary (Elanor Funds Management) was the largest shareholder in EMPR Management and owned over 44% of its shares (Ex A). The businesses had recorded, in the ASIC register, Elanor Investors as their ultimate holding company (Ex E; Ex 2). 9. As to the third factor (the extent and importance of services or goods provided between the business); it is noted that the provision of services, including administrative services, from one business to another is a factor to be taken into account in establishing a connection between businesses (Commissioner v Tasty Chicks at [59]; Regis at [93]; Lombard Farms at [115]-[117]; Headwear at [91]). It is said that a valid commercial reason to share costs for services does not demonstrate independence and the absence of a connection (Headwear at [92]). It is noted that one relevant matter is whether persons carrying on one business were in a position to influence the conduct of another business; and that influence may exist because of the nature of the services provided by one business to the other (Commissioner v Tasty Chicks at [59]; Garrett F Hunter at 285); and that the statutory test does not require that one business be critical to the operation of the other business (Headwear at [100]). In the present case, the provision of employee services is discussed below. 10. As to the fourth factor (the extent of group marketing and branding between the businesses), it is noted that a common brand and one website shared amongst the businesses is a relevant factor. In Headwear, potential customers were dealt with by one business operating the website before being passed onto another business (Headwear at [77], [105]). In Cessnock Tyres v CCSR [2017] NSWCATAD 368 at [57], the Tribunal held that it was important that a group was holding itself out to the public via the website and advertising as being a "group". As to this factor, the Chief Commissioner refers to the fact that the hotels owned and managed by entities in sub-group 2 were promoted on the website of Elanor Investors Group together with the other hotels and tourism assets operated by the other entities in the Payroll Tax Group (with links from the group's website to the hotel websites) (see Exhibit 1). It is noted that Elanor Operations managed other group marketing initiatives involving the hotels, including, for example, social media marketing initiatives (Ex 2) and the "Elanor Cares" promotional package (Ex 2); and that Elanor Operations' group marketing managers oversaw the marketing for all the entities in the Payroll Tax Group. 11. As to the fifth factor (whether the businesses were being conducted on an arms-length basis), it is noted that where one business provides services to another, it is relevant that the business acquiring those services has failed to investigate alternative sources (Regis at [93]; Headwear at [56]); and that the businesses' failure to document the arrangement between themselves, or delay in doing so, is a relevant factor (Regis at [93]). 12. The Chief Commissioner says that it is indicative of a connection between the businesses operated by the companies in sub-groups 2-5 and the business operated by Elanor Operations that the relationship between the businesses does not appear to be on an arms' length basis. It is noted in this context that there is no evidence of any written agreement between Elanor Operations and each of the businesses it manages, that governs the terms of the services provided by Elanor Operations and that Mr Willis was unaware of there being any such document for any of the entities (T 55.20-35). The absence of a written agreement is said to be unexplained and a sign of informality that one would expect between connected entities. 13. In cross-examination, when questioned as to the absence of any such document (recording the role or responsibilities of Elanor Operations or any of its employees), Mr Willis' evidence was as follows (T 55.20-35): Q. Well, what I want to say is the reason why you've never asked for such a document to be prepared is because you're the sole director of all of these entities, right? You're the sole director of the hotel companies which manage the hotel businesses. You're the sole director of Elanor Operations which provides the services to the hotel companies. You're the CEO of Elanor Funds Management Limited which is the responsible entity and given the close relationship between all of these companies and your role, as the director of them, there's no need to document the arrangement at all. A. Well, our investors expect me to be the ultimate steward of their funds. Q. Yes. So because you control all of the funds in this way, there's no need for a form of documentation to occur? A. I don't believe so because as the ultimate steward of their funds, my role is to ensure that we have the right structure and the right people to, firstly, comply by the law and secondly, execute our funds management and fiduciary responsibilities. 1. The Chief Commissioner says that, in this way, aside from admitting an informality in arrangements between Elanor Operations, Elanor Funds Management (as the trustee for the property-owning funds) and the plaintiff hotel-owning entities (of which he is, in each case, the sole director), Mr Willis also highlighted that, on his understanding, investors in each of the Elanor funds expect that he, Mr Willis, will be the "ultimate steward" of their investments. It is said that this understanding is consistent with the resolution, passed by Mr Willis as sole director of various of the plaintiff entities (Cradle Mountain Lodge Management, Eaglehawk Hotel Management, Wollongong Hotel Management, Featherdale, JCF Management, Elanor Management and Elanor Operations) on 9 July 2014 (Ex 2), in the following terms: It was then resolved: (a) that the terms of each Document to which the Company is a party, the transactions contemplated by that Document and the performance by the Company of its obligations under that Document (and any documents or instruments required under or incidental or related to that Document or the transactions contemplated by that Document (Incidental Documents)) are approved; (b) that each Document and each Incidental Document to which the Company is a party, as each may be amended or added to as the sole director thinks fit (as conclusively evidenced by the execution of that document), be executed and delivered in accordance with the Corporations Act; (c) that the Company's entry into each Document to which it is as a party is for the commercial benefit of, and in the best interests of; the Company because, as applicable: (i) the facilities will be used to give the Company access to funding for working capital requirements; and (ii) since mutual reliance and financial dependence exists between members of the Elanor Investors Group including the Company, the success of any or all of members of the Elanor Investors Group is dependent in part on the success of other members of the Elanor Investors Group; ... [Emphasis per submissions] 1. It is noted that Mr Willis denied the accuracy of the above statement but it is noted that he could not explain why he had passed a resolution (for numerous plaintiff entities of which he was the sole director) in those terms (T 25.13-43). It is further noted that Mr Willis then agreed that "the success of the hotels, depends, in part, on the capabilities of [y]our fund management team" (T 26.12-15). (Pausing here, the plaintiffs point out that this resolution was before the listing of Elanor Investors and the establishment of the funds.) 2. Further, it is noted that Elanor Operations is not paid for the services that it provides. Instead, Elanor Funds Management is paid for the services provided by Elanor Operations. It is said that there is no evidence that those fees are calculated on an arms-length basis; nor is there any evidence that any of the companies in sub-groups 2-5 investigated alternative sources for those services. It is said that it appears that the companies are required to pay those fees even if Elanor Operations does not provide services. 3. Relevantly, the Chief Commissioner points to the facts that the EHAF Fund paid to Elanor Funds Management, in the period from 3 November 2015 to 30 June 2016 the following amounts: $699,500 in acquisition fees, $382,990 for reimbursement of acquisition costs and $275,702 in base fees (Ex 2); but in the same period, the EHAF Fund made a loss of about $4.6 million (Ex 2); that the Bell City Fund paid to Elanor Funds Management the following fees: in the financial year ended June 2015, $1,785,938 in acquisition fees and costs and $899,267 in base fees to Elanor Funds Management (Ex 2), though making a net loss of $784,000; in the financial year ended June 2016, paid base fees of $1,750,216 and reimbursement of costs of $514,346 (Ex 2), making in that year a net profit of $1,511,000 (Ex 2); and that the 193 Clarence Hotel Fund paid to Elanor Funds Management the following fees: in the financial year ended June 2015, $210,000 in acquisition fees and $177,392 in base fees (Ex 2), the Fund making a net profit of $96,000 (Ex 2); and in the financial year ended June 2016, base fees of $239,099 and "cost recoveries" of $151,788, in that year, making a net profit of $10,000 (Ex 2). 4. It is noted that Mr Willis in cross-examination admitted that Elanor Funds Management (as the responsible entity for each of the relevant funds), and he (as the sole director of the hotel-owning entities) had not considered hiring an alternative entity (to Elanor Operations) to provide any of the services in fact provided by Elanor Operations (and its management team) in respect of the hotels (T 52.23-46). 5. As to the sixth factor (whether one business provided financial support to the other business), it is noted that the provision of equity or guarantees from one business to another is a relevant matter (Regis at [93]) as is the provision of a loan from one business to another is also relevant (Conrad Linings at [54]; Boston at [51]; Lombard Farms at [105]-[107]; Cessnock Tyres at [59]-[61], [65]). The Chief Commissioner made no submissions on this factor. 6. As to the seventh factor (whether businesses share premises) it has been seen as relevant if businesses share premises and share rent (Conrad Linings at [55]; Boston at [35]; Tasty Chicks at [59]). The Chief Commissioner says that a further connecting factor between all the companies in the Payroll Tax Group in the present case is that almost all the entities have the same registered address and same principal place of business (except JCF Management's and Wiltex Wholseale's principal places of business). It is noted that, in each case, the entities record with ASIC that the registered address and (other than the two mentioned) the principal place of business is the office address of Elanor Investors or Elanor Operations in the Sydney CBD. 7. As to the eighth factor (whether businesses share common employees or use the services of one set of employees) it has been said that the presence of common employees indicates a connection between businesses (Conrad Linings at [56]); and that where all, or substantially all, of an entity's management and administration staff are provided by one other entity, it is apt to say that the entities are closely connected (Chief Commissioner of State Revenue v Seovic Civil Engineering [2014] NSWCATAP 94 at [55]; Tasty Chicks at [59]). The Chief Commissioner notes that in Corrosion Control Engineering at [112] the use of the same external accountants was found to be one indicator of a material connection between two companies. 8. The Chief Commissioner submits that each of the entities in sub-groups 2-5 (and the entities operating tourism and furniture businesses in sub-group 1) is connected with Elanor Operations and each other because they all shared key personnel (employed by Elanor Operations) who actively managed each of the entities. 9. It is noted that these personnel were led by the same people, namely the four directors of Elanor Funds Management, including Mr Willis, Mr Simmons (the Chief Financial Officer), Ms Marianne Ossovani (the Fund Manager) and Mr Paul Siviour (the Chief Operating Officer) (see T 35.25-T 37.14; Ex 2). In that regard, it is noted that Ms Ossavani, as "head of the hotels, tourism and leisure division for the group", had oversight over all of the funds in the group (T 35.36-39) whereas Mr Simmons' role was concerned with regulatory oversight and financial control, and Mr Savior was "focused on operations of the group" and assisting Mr Simmons with financing and financial control (T 36.20-36). 10. The Chief Commissioner points to the Information Memorandum for the EMPR Fund (in relation to sub-group 5) which emphasises the skill and value added by the staff of Elanor Operations and states that a characteristic of the fund is that it possesses "highly capable and experienced asset management team with a track record of delivering outstanding investment performance" (Ex F) and that the strategy of the fund is to "add value through highly capable assets and fund management teams" (Ex F). 11. It is noted that in addition to employing Mr Simmons, Ms Ossovani and Mr Siviour, Elanor Operations also employed other individuals, together comprising a small management team which managed the performance of the hotels (and other businesses) held by the plaintiff entities (T 26.03-15), as well as the "policy making process" for each of the funds (T 30.48-50). 12. It is also noted that the Elanor Operations management team (which had built up expertise, by reason of its working on all of the hotels owned or managed by entities in the group, that was able to be applied across all of the group's hotel assets – see T 44.7-11) is said to have taken a "highly active approach" in overseeing the hotels and other businesses and assets held by the plaintiff entities, and to have been "diligent and vigilant and demanding" (with "constant oversight") of hotel operators (T 37.28-40). 13. The Chief Commissioner points out that Elanor Operations also recruited people with specialist skills or knowledge, including, for example: a Head of Food and Beverage (see employment contract for Doren Waite at Ex 2) able to oversee and opine on food and beverage services provided by the hotels (T 41.04-29); a Group Sales and Marketing Manager (see employment contract for David Lowe at Ex 2), whose role included coordinating marketing across Elanor Investors Group (between different hotel operators and for all of the funds), building the "Elanor" brand and assisting hotel operators to improve the marketing of the hotels (T 45.05-44.13); a Group Marketing Manager (see employment contract and position description for Georgia South at Ex 2), responsible, among other things, for "[o]verseeing, managing and co-ordinating marketing initiatives" across the Elanor Investors Group, "working with hotel operators, managers and staff at property level" to develop marketing plans and initiatives (Ex 2), and overseeing marketing by hotel operators to ensure they were being marketed correctly (T 40.40-49); and experts in maintenance issues, who visit the sites of the various hotels owned by entities within the group to identify and provide opinions concerning maintenance requirements of the hotels (T 50.17-31). 14. It is noted that certain employees of Elanor Operations also held dual roles (i.e., one role as part of Elanor Operations' management team, and the other role with a particular hotel), including, for example, Leigh Reid (manager of Cradle Mountain Lodge and a regional manager with Elanor Operations – see Ex 2; T 41.31-42.13) and Michael Sheridan (the general manager of the Bell City Hotels and also a regional general manager with Elanor Operations – see Ex 2; T 42.15-33). 15. As to the tasks performed by Elanor Operations' employees, it is said that the entities in subgroups 2-5 are connected with the other entities in sub-groups 3-2 and each other by reference to the tasks performed by the shared key personnel, including by way of example: (a) hiring and terminating key staff (sub-group 2: see Mr Willis' first affidavit at [126], [139], [147], [160], [173], [182]; sub-group 3: see Mr Willis' first affidavit at [105(c)]; sub-group 4: see Mr Willis' first affidavit at [81(c)]; sub-group 5: see Mr Willis' first affidavit at [200], [267]); (T 48.40-49-15; see also Ex 2); (b) assisting in the development of, and approving, hotel operating budgets, noting that Mr Willis explained that the management team also worked with hotel operators to develop annual budgets (and actively check and question the assumptions upon which budgets are prepared) (T 43.28-43); (T 43.23-44.07; see also Ex 2); (c) receiving daily and monthly financial reports from the hotel operator and reviewing the monthly financial reports (and if necessary, the daily reports), to ensure accountability and compliance with the annual budget – the hotel operator may be consulted if performance was poor (see Mr Simmons' first affidavit at [33], [49]-[55]); T 37.39-46, 38.11-26; see also Ex 2); (d) overseeing the hotel operator's marketing to ensure there was sufficient advertising and marketing, including by requiring the provision by hotel operators of reports on their marketing efforts (see Ex 2); Elanor Operations employed a Group Marketing Manager and a Group Sales and Marketing Manager for this purpose until 2 June 2017, when it stopped providing this service (see Mr Simmons' first affidavit at [56]); T 39.39 – 40.21; Ex 2; (e) evaluating and responding to hotel operator requests such as capital works proposals or the dismissal of senior staff (Mr Simmons' first affidavit at [33], [60]; T 48.40-48, 47.25-30. 16. It is noted that in some instances, Elanor Operations' staff also propose or manage initiatives requiring or otherwise concerned with capital works (for example, signage, stalls or capital asset reviews (see, for example Ex 3, pp 67, 69, 70 & 71; T 47.10-48.05). Other tasks to which the Chief Commissioner refers are: reviewing, updating and approving business plans (Mr Simmons' first affidavit at [33], [45]-[48]; sub-group 2: Mr Willis' first affidavit at [126], [139], [147], [160], [173], [182]; sub-group 3: Mr Willis' first affidavit at [105] (b); sub-group 4: Mr Willis' first affidavit at [81(b)]; sub-group 5: Mr Willis' first affidavit at [200], [267]); (T 43.45-44.06); approving actions outside the approved business plan, such as undertaking capital works (noting that in those circumstances one of Elanor Operations' staff may visit the hotel premises) (Mr Simmons' first affidavit at [58]; sub-group 2: Mr Willis' first affidavit at [126], [139], [147], [160], [173], [182]; sub-group 3: Mr Willis' first affidavit at [105(b)]; sub-group 4: Mr Willis' first affidavit at [81(b)]; sub-group 5: Mr Willis' first affidavit at [200], [267]); T 50.09-31); entering into certain contracts and matters otherwise falling outside delegated authority of the entities (Mr Simmons' first affidavit at [59]; sub-group 2: Mr Willis' first affidavit at [126], [139], [147], [160], [173], [182]; sub-group 3: Mr Willis' first affidavit at [105(a)]; sub-group 4: Mr Willis' first affidavit at [81(a)]; sub-group 5: Mr Willis' first affidavit at [200], [267]); changing the third party hotel operator if the business was performing below expectations (Mr Simmons' first affidavit at [57]). 17. Also part of the employees' role, to which the Chief Commissioner here refers, are the following: first, managing the bank accounts (noting that each of the companies had three bank accounts comprising an operating account, a reserve account and the owner's account; Elanor Operations' employees were responsible for ensuring that there were sufficient funds in the operating account to operate the hotel business; if excess funds were in the operating account, the employees would contact the hotel operator and ask that the funds be transferred into the Owner's account for distribution to the managed fund investors; and the reserve account was used to pay for capital works) (see Mr Simmons' first affidavit at [63]-[69]); regularly reviewing, and taking responsive measures in respect of, complaints made by hotel patrons (posted online on review websites) (T 47.05-08, T 51.05-38; Ex 3, p 68); and arranging workers compensation insurance arrangements for hotels (Ex 2 (C7002-03); T 44.13-24) (emphasis being placed by the Chief Commissioner on the fact that work health and safety issues affecting, and initiatives being undertaken in respect of, each of the hotels were reported to the board of Elanor Investors – see Ex 2; T 56.22-49). 18. The Chief Commissioner says that, in the above way, the management team interacts with, and investigates the performance of, the third party hotel operators on a consistent basis (to ensure, for example, that the operator is meetings targets, and to require that it explain any areas of underperformance) (T 38.11-33). 19. The Chief Commissioner says that the importance of Elanor Operations' employees to the management of these companies is disclosed in their financial reports referring to the financial reports for the entities in sub-groups 2, 3 and 4 which describe their key personnel as the same people being the directors of Elanor Investors and three other employees of Elanor Operations; and referring also to the Information Memorandum for the EMPR Fund (sub-group 5) emphasises the skill and value added by the staff of Elanor Operations. 20. Another connection between the entities in the Payroll Tax Group is said to be that all the entities use the same external accountant (Deloitte). Elanor Investors' formal engagement with Deloitte expressly identified that Deloitte was to undertake work for all the entities in sub-group 2, 3 and 4 (Ex 2). It is noted that the Information Memorandum for sub-group 5 identified that Deloitte was its auditor (Ex F). 21. Thus, it is submitted that the discretion under s 79(2) of the Payroll Tax Act should not be exercised because the entities in each of the sub-groups are connected to (and not independent of) the other entities in the Payroll Tax Group. 22. At the outset, the Chief Commissioner contends that each of the plaintiff companies (except for Elanor Investors) is properly grouped because each has a common sole director; and that Elanor Investors is properly grouped as the ultimate holding company of many of the other plaintiffs. The Chief Commissioner contends that the discretion to de-group should not be exercised: in relation to related by reason of s 79(3); and, for the other entities, on the basis that the material and meaningful (in a commercial sense) connections between the businesses carried on by the entities are such that one could not be satisfied that the businesses are carried on independently of, and are not connected with the carrying on of, any other business of any entity in the Payroll Tax Group. Determination 1. I have set out above the relevant provision (s 79 of the Payroll Tax Act) and the principles that are applicable to a determination as to whether the discretion to de-group one or more companies from a Payroll Tax Group is enlivened and should be exercised. The test, as framed in s 79, is not one of reasonableness; nor is it expressed by reference to whether there is an intentional association or limited to groups of companies within a family or small business context. 2. The test, by comparison between the respective businesses of the companies in the Payroll Tax Group that are seeking exclusion (the plaintiffs) and each of the other companies in the Payroll Tax Group, is as to whether (and to what extent), the business carried on by each plaintiff is carried on independently of, and not in a way that is connected with the carrying on of, of a business carried on by another plaintiff. As noted earlier, this is a question of fact and degree and has to be determined having regard (among other relevant matters) to the nature of the ownership and control of the respective businesses and the nature of those businesses. The fact that there are connections between the businesses is not determinative; the connections must be material connections; and the assessment must be made against the background that the grouping provisions were designed to counter tax avoidance through the splitting of business activities by the use of additional entities each attracting a threshold. 3. As noted, the plaintiffs emphasise the context in which the various businesses operate – namely, that of separate managed investment funds. 4. It is noted that managed investment funds operate under a strict regulatory scheme, under legislation which requires that priority be given to the interests of the members of those funds and where it would be inconsistent with the legislation for control to be exercised in one business that would be to the detriment of another business outside that managed investment fund. It is noted that the funds are managed as discrete funds and that the fund manager cannot permissibly influence control over one to the benefit of another. This is reinforced by the weight placed by Mr Willis, for example, in his evidence in cross-examination on the duties imposed on fund managers under the relevant legislation. 5. The plaintiffs contend that it makes no difference that it is Elanor Funds Management (which is not a member of the Payroll Tax Group), rather than (as had been thought to be the case at one stage) Elanor Investors, which holds the AFSL because the plaintiffs say that Part C of the Corporations Act constrains the way in which directors of the companies (including Elanor Operations) and the employees are able to exercise control over the businesses of the relevant companies. 6. The Chief Commissioner accepts in the present case that it is not relevant to consider the position of the landholding entities (i.e., the relevant funds) although (as noted earlier) he maintains that the position of Elanor Investors is relevant. The Chief Commissioner also accepts that there are different groups of owners, though he emphasises that there is some common ownership and that all are governed by the one person. Emphasis is placed by the Chief Commissioner on the fact that the Elanor group attracts investors based on the group's management of the underlying businesses; that the Elanor group earns revenue from its management of the businesses; and that, as to control, it is not day to day management that is relevant but the capacity to control (and points to the consolidated financial reports as reflecting the control exercised or capacity to control that is exercised). In the 31 August 2018 Letter, the Chief Commissioner stated that "all group entities rely on each other's financial strength to benefit the general investors investing through the public listed company". 7. The Chief Commissioner says that in Garrett F Hunter, a "vertical connection", (to use the Chief Commissioner's description) as between a medical practice company and a service provider was sufficient even though there was no "horizontal connection"; that is to say, decisions about the business of the service provider were closely connected with the needs of the medical practice company, whereas the latter made decisions about its business independently of the former (see Garrett F Hunter at [53], [56]; Port Augusta Medical Centre at [64]). 8. Having regard to the factors of which account must be taken (and which in the present case point in various directions), I am of the following view. As to the degree of control, there is certainly common directorship of the various entities but, ultimately, there is not a majority shareholding of Elanor Investors in any of the entities in the underlying funds. I accept that there is a capacity to influence (through the common directorship of the relevant companies) and that capacity to control is relevant. However, it is significant in my view that the capacity legitimately to control the businesses of other companies in the Payroll Tax Group is much constrained. This case can in my view be distinguished from the position in Port Augusta Medical Centre. There, two doctors were found to have capacity to control the taxpayer entity (a medical practice) by reason of their sole directorship and sole shareholding of the taxpayer, and the fact that "all employees, both legally and practically, were subject to the directions of [the said doctors] in relation to matters of importance to the long-term interests of [the said doctors]" (Port Augusta at [63]; Port Augusta Medical Centre at [68]). The same cannot be said, in my opinion, in the present case. Mr Willis is constrained in his ability lawfully to control the direction or conduct of the businesses of incubator companies once they are sold off the investor syndicates; and those businesses are required to be run in the interests of members of the particular discrete fund. 9. As to the commonality of ownership it is 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. 10. Of the other factors that have been raised, I place little weight on the fact that the registered office addresses are the same, since the day to day operation of the respective businesses is at various different locations (and the commonality of the principal place of business on ASIC records is even less relevant not least because it is abundantly clear that the hotel and tourism businesses operate from very different locations). 11. As to the key personnel supplied by Elanor Operations, I accept that their function is restricted largely to oversight (and I do not take into account the direct involvement in the "incubation" of companies, as this is conducted within the sub-group 1 companies or Elanor-Style Companies). Further, they perform this limited function for various separate clients (each being a discrete managed investment fund), each of whom would expect individual consideration. In this respect, this case may be contrasted to the position in Garrett F Hunter, in which a business that provided services to a medical practice was held to be substantially connected to that practice, by reason of the nature and scope of the services provided, and its limited client base. There, Doyle CJ said at 285 that: … the business of Meldrick, while conducted for the benefit of its shareholders, is to a substantial degree the provision of premises and services to Geoffrey S Vercoe Pty Ltd … The practice company is one of only two or three clients that it has, and the business of Meldrick is, because of the range of services that it provides to the practice company, closely connected with the business of the practice company. 1. There is not the same level of connection between the businesses of the respective companies in the present case. As to the suggestion that the arrangements for the charging of fees are not on an arms-length basis (being not documented in any written agreement and arguably arbitrarily levied), I accept that this is a factor that tends towards a finding of connection. I accept that no written agreement existed between Elanor Operations and the plaintiff companies with respect to the management services provided on behalf of Elanor Funds Management, and that Mr Willis' evidence suggests that the plaintiff companies may not have investigated alternative providers for these services, but I note that the fees for the services are rendered by Elanor Operations to the trustee (in most cases Elanor Funds Management) under separate arrangements (unwritten as they may be) not by Elanor Operations direct to the companies in question. Further, I note that there remains power for the members of each fund to remove Elanor Funds Management as trustee if they are dissatisfied with its performance or the fees it charges as trustees. I therefore place relatively little weight on the factors that the Chief Commissioner points to as evidence that the businesses did not operate at arm's length. 2. To my mind, the businesses of the plaintiff companies within each of sub-groups 2-5 respectively, are 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. 3. Therefore I have concluded that the discretion to de-group should be exercised. I do not consider it necessary to make the declaration sought by the plaintiffs. I consider it sufficient to revoke the decision not to exercise the discretion to exclude the plaintiff companies from the Payroll Tax Group and to remit the matter to the defendant for determination. As to costs, they should follow the event. Orders 1. For the above reasons I make 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. Order the defendant to pay the plaintiffs' costs. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 16 February 2022