Hallin Holdings Pty Ltd & anor -v- Chief Commissioner of State Revenue [2004] NSWADT 209

CITATION: Hallin Holdings Pty Ltd & anor -v- Chief Commissioner of State Revenue [2004] NSWADT 209 DIVISION: Revenue Division APPLICANTS Hallin Holdings Pty Ltd PARTIES: Kari and Ghossayn Pty Ltd RESPONDENT Chief Commissioner of State Revenue FILE NUMBER: 046022 HEARING DATES: 15/09/2004 SUBMISSIONS CLOSED: 09/15/2004 DATE OF DECISION: 09/23/2004

BEFORE: Block J - ADCJ (Judicial Member) APPLICATION: Costs MATTER FOR DECISION: Principal matter LEGISLATION CITED : Administrative Decisions Tribunal Act 1997 Pay-roll Tax Act 1971 Commissioner of Taxation -v- Phillips 78 ATC 4361 CASES CITED: Baxter -v- Commissioner of Payroll Tax 86 ATC 4816 Sarip Investments Pty Ltd -v- Uno Uno Pty Ltd [2004] NSWADT 27 APPLICANT REPRESENTATION: P Glissan, barrister RESPONDENT I Young, barrister ORDERS: The applicants, jointly and severally, must pay the costs of the Respondent, either as agreed or failing agreement as calculated in accordance with the Legal Profession Act.

1 Following an investigation which commenced nearly two years ago, the Respondent, having determined that the Applicants formed a group for the purposes of the Pay-roll Tax Act 1971 (the "Act) issued (on 13 August 2003) pay-roll tax assessments against the Applicants in respect of the years ending June 2000 to June 2003 (both inclusive); the aggregate amount payable under the assessments exceeds $300,000. The exclusion of Hallin Pty Ltd ("Hallin") from the group, was sought, in accordance with a lengthy and detailed submission (the 'submission") dated 12 November 2003. The Respondent, notwithstanding the length of time involved, treated the submission as an objection against his decision to group Hallin and Kari and Ghossayn Pty Ltd ("Kari") and also his refusal to exercise his discretion under section 16H of the Act to exclude Hallin from the group. By letter dated 16 February 2004 the Respondent disallowed the objection in full and the Applicants' application for review of that decision was listed for hearing on 15 September 2004. At the hearing of the application the Applicants withdrew their application. The Respondent sought an order for costs under section 88 of the Administrative Decisions Tribunal Review Act 1997 (the "ADT Act") and it is that application (which was resisted by the Applicants) which is to be decided by the Tribunal. To decide that costs application requires a consideration of the events and circumstances which preceded the withdrawal of the application. 2 There are three companies which are relevant in this matter. They are the Applicants and Cheap and Quick Waste Bins Pty Ltd ("Cheap"). The term "Mr Kari" refers to the natural person referred to later in these reasons, and should not be confused with Kari, which refers to the company which is one of the Applicants. 3 The Tribunal had before it the documents and also supplementary documents lodged pursuant to section 58 of the ADT Act. The Tribunal also accepted into evidence, (Mr Glissan noting that he had no objection), a bundle of correspondence which is referred to as "the Bundle". Letters in the Bundle are dealt with in succeeding clauses of these reasons. 4 At a directions hearing held on 1 June 2004 at which the Applicants were represented by Mr Glissan, the Tribunal issued directions pursuant to which the Applicants were obliged to file (inter alia) submissions by 30 June 2004, the Respondent was obliged to file submissions by 21 July 2004, the Applicants were allowed a right of reply until 15 August 2004, and the matter was set down for hearing on 15 September 2004, and being a date selected as convenient for the parties and the Tribunal. 5 The Applicants did not comply with their obligation to file submissions by 30 June 2004. On 13 July 2004 the Crown Solicitor on behalf of the Respondent wrote to the Applicants' solicitor, Mr Vincent Lawrence Pelosi, ("Mr Pelosi") asking for certain documents. On the following day (14 July 2004) Mr Pelosi replied to the Crown Solicitor; the last four paragraphs of that letter read as follows: We had immediately after the last directions hearing, arranged for Counsel to prepare submissions and list of witnesses. Counsel has this week indicated that due to his involvement in a large Supreme Court matter, has not been and will not be able to undertake any work in this matter in the next six weeks. Consequently we will now undertake to prepare the submissions, the list of witnesses and to brief alternate Counsel. Unfortunately Mr Ghossayn has left for overseas at the beginning of this month and is not due back until mid August. As we had left the preparation of the documents to Counsel, we are now not in a position to prepare the same until we have had a conference with Mr Ghossayn. In the circumstances we will apply for an extension of time to comply with the directions, we would request you consent to such application. 6 On 21 July 2004 the Crown Solicitor confirmed a telephone conversation with Mr Pelosi pursuant to which the Respondent agreed to allow the Applicants an extension of time until 1 September 2004 within which to file their submissions. The Crown Solicitor noted that the Respondent's submissions would be filed immediately on receipt of the Applicants' submissions. (It may be noted that according to the letter referred to in the preceding clause Mr Ghossayn went overseas in early July 2004 and after the time within which the Applicants were to have filed submissions had already expired; that letter is significant for another reason and that is that Mr Pelosi undertook at that time to prepare the submissions and to brief alternate Counsel) 7 On 12 August 2004 the Crown Solicitor wrote to Mr Pelosi enclosing summonses to produce documents against the Applicants and also Cheap; that letter noted that the summonses were sent by way of service. 8 Mr Pelosi replied by letter dated 18 August 2004; the second and third paragraphs read as follows: We advise that we have no instructions to act for Cheap and Quick Waste Bins Pty Ltd and cannot accept service of the Summons. We advise that no money to cover the cost of complying with the subpoena was received with the Summonses, as is required by the rules. 9 By letter dated 19 August 2004 the Crown Solicitor noted that he had erroneously stated that the summonses were sent by way of service and that they had been sent for service in the ordinary way. As to the documents sought and in relation to the Applicants, the Respondent agreed to confine both the extent of the documents sought and also to limit his request to a specified time period. 10 On 7 September 2004 the Crown Solicitor wrote to Mr Pelosi noting that the Applicants had not filed their submissions either by 30 June 2004 or by the agreed extended date and being 1 September 2004, noting also that the application was listed for hearing on 15 September 2004, and asked that the Applicants provide their submissions as a matter of urgency. The Respondent thereafter (without waiting further for the Applicants' submissions) filed his own submissions. 11 On 14 September 2004 Mr Pelosi contacted the Crown Solicitor to ask for the hearing date to be postponed on the basis that his client was overseas, that he was having difficulty obtaining instructions and that he intended recommending withdrawal of the application. At 3:20 p.m. on the same day the Crown Solicitor indicated that, on the basis that it would be recommended to the Applicants that they withdraw, he would consent to a postponement. At 5 p.m. the Crown Solicitor was advised that the Applicants proposed to withdraw their application. (The content of this clause 11 formed part of the oral submission by Mr Young in support of the Respondent's application for costs; Mr Glissan did not dispute the correctness of any of it.) 12 When the hearing commenced at 10 a.m. on 15 September 2004 Mr Glissan confirmed that the Applicants withdrew the application. Having been informed that the Respondent intended to seek a costs order, Mr Glissan sought and obtained an adjournment of an hour to obtain instructions. 13 In clause 10 of the Respondent's written submissions ("RS") the Respondent noted in relation to the evidence that: "Accordingly the evidence before the Tribunal consists of: The section 58 documents furnished to the Tribunal; The witness statement of Mr Czaikowski; The admissions made by Mr Pierre Nohra recorded in attachments A and B to Mr Czaikowski's statement; The financial statements of Hallin for the 2001 (including comparable 2000 year) and 2002 years of income; Hallin's sales journal for the 2002 financial year; and Documents (including tax invoices) produced by Hallin, Kari and Cheap and Quick Waste Bins Pty Ltd." 14 The Respondent noted in clause 11 of RS that "The most crucial evidence consists of the admissions against own interest made by Mr Nohra in the presence of Mr Czaikowski and recorded by him in a contemporaneous document. Mr Nohra is the sole director and shareholder of Hallin." 15 RS contains in Part E (clauses 12 to 35) a recital of the relevant facts. Mr Young referred to them during his oral submissions; Mr Glissan, as I understood him, agreed that they were correct and at all events and in his reply, did not seek to contest the correctness of any of them. Those clauses read as follows: E. The relevant facts (a) Ownership and control of Hallin, Kari and Cheap & Quick 12. The directors and shareholders of Kari are Mr George Ghossayn and Mr Kari (ASIC company extract – supplementary documents No. 2). 13. The directors of Cheap & Quick are Mr George Ghossayn and Mr Pierre Nohra. The sole shareholder is Mr George Ghossayn: (ASIC company extract – supplementary documents No. 3). 14. Hallin was incorporated in 1989. As from April 1996 the sole director of Hallin is Mr Pierre Nohra (ASIC company extract – supplementary documents No. 3). Mr Nohra became a director of Hallin at the seemingly youthful age of 21 years 9 months. Mr Nohra has been the sole shareholder since 1999. According to the ASIC records Mr Nohra and Mr George Ghossayn have the same residential address and, seemingly, the same birthplace, "Hadeth Lebanon". 15. However Mr Nohra is not employed or remunerated by Hallin. Rather he is, and has been since 19 June 1996, employed by Cheap & Quick. His current salary is $82,000 per annum; he is the second most senior person in Cheap & Quick (only surpassed by, presumably, Mr George Ghossayn); and Mr Nohra supervises 3 other office staff employed by Cheap & Quick. (See supplementary documents No. 10). 16. Cheap & Quick does not charge a fee to Hallin in respect of Mr Nohra's services. (See supplementary documents No. 10). (b) The business of Kari 17. Kari was incorporated on 13 May 1981. At all relevant times Kari conducted a business of excavation and demolition and at 30/6/2003 employed twenty (20) permanent staff (no casuals). Its business address is 25-27 Governor Macquarie Drive, Chipping Norton. (See section 58 documents No. 3). 18. Kari hires workers (laborers) from Hallin to do excavation and demolition work. Hallin provides Kari with a tax invoice in respect of the labour provided by Hallin to Kari. Kari pays Hallin on those invoices. (See supplementary documents No. 10 – Attachments A and B). 19. Kari makes no payments to employees of Hallin (See section 58 documents No. 3). Hallin makes all payments to Hallin personnel. 20. The company secretary of Kari is Marion Wang. Kari also employs Ms. Wang as secretary and bookkeeper. 21. According to Mr Nohra, Ms Wang spends approximately 2 hours per week preparing Hallin's payroll. The procedure adopted was that Hallin's labourers phoned through their daily work hours to Mr Nohra. He recorded them on a timesheet, which he then gave to Ms Wang who prepared the pays based on the timesheets. Kari supervisors also recorded details of hours worked by Hallin's labourers. (See supplementary documents No. 10 – Attachments A and B). 22. Ms Marianne Wang receives no wages from Hallin for performing these duties. Kari does not charge Hallin a fee for the work carried out by Ms. Wang. (See supplementary documents No. 10 – Attachments A and B). (c) The business of Hallin 23. Hallin is in the business of hiring-out labourers almost exclusively to Kari. According to Mr Nohra, in 2000-2001 at least 85% of Hallin's income came from Kari. In 2002 Mr Nohra estimated that 95% Hallin's income came from Kari. (See supplementary documents No. 10 – Attachments A and B). 24. A comparison of the tax invoices issued by Hallin (produced on summons) against Hallin's sales journal (supplementary documents No. 6) and profit and loss statement for 2002 (supplementary documents No. 5) discloses that, in fact, for the period that can be matched, namely 1 April 2002 to 30 June 2002, 100% of Hallin's income came from Kari. 25. Hallin does not advertise its services and work is referred to it by and through Kari. Mr Nohra could only refer to one specific instance of work outside of Kari (St George Plumbing). (See supplementary documents No. 10 – Attachments A and B). 26. The labourers supplied to Kari by Hallin use machinery owned by Kari & Ghossayn. 27. Hallin does not employ office or administrative staff. Its sole director and shareholder, Mr Pierre Nohra, performs all administrative duties for Hallin. (See supplementary documents No. 10 – Attachments A and B). 28. Hallin's business is operated from the office of Cheap & Quick, but no rent or license fee is paid by Hallin for the use of the premises and no area of the office of Cheap and Quick is designated for the operation of Hallin's business. (See supplementary documents No. 10 Attachments A and B). (d) The 2002, 2001 and 2002 accounts of Hallin 29. Hallin's accounts show a company that is not viable as a stand-alone entity and has no financial existence other than a captive labour hire company for Kari. 30. Thus in the financial year ended 30 June 2000 (drawn from the 2001 year financials - comparable figures) Hallin made a loss of $28,843 (supplementary documents No. 4). Its income was $700,112 (labour hire fees) and a token $199 interest. According to Mr Nohra, at least 85% of its income, if not 100%, comes from Kari. Its principal expenses were wages ($618,155) superannuation contributions ($54,532) and insurance ($61,184 - presumably workers compensation). See supplementary documents No. 5. 31. Pausing at that point, Hallin is not even recovering the full cost of its labour service. Its combined wages, superannuation and workers compensation insurance expense ($733,871) exceeds its income. Most significantly, Hallin is not confronted with the full cost of its labour expense, because Cheap & Quick remunerates its director (Mr Nohra) and Ms. Wang (employed by Kari) administers its payroll. 32. Hallin's other expenses consist of accountancy ($100), bank fees ($2,327), depreciation ($1,944), filing fees ($200), interest ($602), and subscriptions ($110). Even then, either or both Kari and Cheap & Quick Hallin subsidize Hallin because it does not have to bear any other overhead expenses, in particular, the cost of office space by way of rent. See supplementary documents No. 5 and 6. 33. In 2001 Hallin made a profit of $1,654 and in 2002 Hallin made a loss of $49,162. 34. However, the observations concerning the 2000 financial accounts apply mutatis mutandis to 2001 and 2002. Hallin would be in a loss position in 2001, without more, if it had to pay for Ms. Wang's services at a rate exceeding $16 per hour. 35. Hallin has no financial existence independent of Kari and Cheap & Quick. It is not recovering a sufficient margin, or indeed any margin at all, on the labour it supplies to Kari. In 2000 and 2002 Hallin made a loss on direct labour costs alone (that is, wages, superannuation and workers compensation insurance). In all years Hallin did not remunerate Mr Nohra or Ms. Wang for their services or, incidentally, reimburse Kari or Cheap & Quick, and it did not pay its full overhead expenses. 16 I have previously referred to clause 11 of RS and admissions by Mr Nohra who is the sole director of and shareholder in Hallin. Those admissions are contained in notes of a meeting held on 11 June 2003 and reading as follows; "Hallin Holdings Pty Ltd ("HH") Notes of meeting held with Mr P Nohra 11 June 2003 Present: Pierre Nohra Adrian Buterin Stan Czaikowski Location: - 25-27 Governor Macquarie Drive, Chipping Norton 9.30am – 11/6/03 The following matters were discussed Nature of business PN stated that the company was a labour hire business. PN stated that HH commenced business in 1998. PN stated that HH began as a truck hire business but has operated solely as a labour hire business since 2000. HH hires labour to Khari and Ghossayn and a small amount to other companies such as St George Plumbing. In 2002 95% of income came from Khari and Ghossayn. In 2001-2000 at least 85% of income came from Khari and Ghossayn. Employees HH currently has 21 labourers and nine machine operators. HH does not use any contractors. PH states that Khari and Ghossayn [ unreadable] supplies [unreadable] but use other labour [unreadable]. Wage payment methods PN stated all employees are paid by direct credit to their bank accounts. No cash payments are made. PN stated that he does not receive a wage from HH. PH stated is an employee of Cheap and Quick Waste Bins Pty Ltd – his salary is $82,000 pa. PN said he is the second most senior employee of Cheap and Quick – the most senior is the director of the company. PN has been employed by Cheap and Quick since [unreadable]. PN is a supervisor of three other office staff employed by Cheap and Quick and scheduler of jobs for customers wanting to hire waste bins. HH Employees PN stated that the only employees of HH are its labourers/operators that it hires out. There are no office/administration staff. PN does all administration work except for payroll. Payroll duties are performed by a Mariane Wang. She is an employee of Khari and Ghossayn – she spends approximately two hours per week on the HH payroll. There is no administration fee or charge for this service. PN stated she did it for him as a favour. Office Services PN stated the office that he worked from for HH is [unreadable] Timesheets PN stated that his labourers phoned through their daily work hours and he recorded them on a timesheet which he then gives to Ms Wang who then prepares the pays based on the timesheets. PN stated that Khari and Ghossayn supervisors also record details of hours worked by labourers supplied by HH. They are recorded in their own record books. Incorporation of HH PN was asked if he paid for the incorporation of HH from his own personal funds. PN was not sure but thought that he did – he said his accountant will be able to confirm. Overdraft PN stated that HH has a $300,000 facility with the St George Bank. PN stated that he put up personal guarantees to secure the overdraft. PN stated that no one else has offered any security in relation to the overdraft". 17 It can thus be seen that there is a very close connection indeed between the Applicants and also between the Applicants and Cheap. In particular: (a) Hallin has no premises of its own; it uses the premises of Cheap but it does not make any payment at all for them. Nor is any part of the premises of Cheap designated as being allocated to Hallin. (b) Mr Nohra is the sole director of and the sole shareholder in Hallin. He received no remuneration from Hallin; his salary of $82000 per annum is paid by Cheap and Cheap does not seek to recoup any of it from Hallin. (c) Ms Marion Wang is the company secretary of Kari and is in fact its secretary and bookkeeper. She spends 2 hours per week preparing Hallin's payroll. (d) Hallin incurred losses in the 2000 and 2002 years but derived a profit in the 2001 year of $1564. If Ms Wang's services had been charged at $16.50 per hour (a very low rate indeed) there would have been a loss in that year also. This is of course apart from a charge for Mr Nohra's services not to speak of a charge for rent and other overhead expenses. (e) It is clear enough that Hallin depends for its very existence on the financial and other support of Kari and Cheap and that but for that support it could not possibly continue. It is also clear that Hallin employs labour which it subcontracts entirely or almost entirely to Kari. The function performed by Hallin could in all probability be performed by Kari. It is a reasonable inference that Hallin exists as a separate entity either solely or principally for purposes connected with pay-roll tax. 18 Prior to 1 July 2003 Section 16C of the Act read as follows: 16C Grouping where employees used in another business For the purposes of this Act, where: (a) an employee of an employer, or two or more employees of an employer, performs or perform duties solely or mainly for or in connection with a business carried on by that employer and another person or other persons or by another person or other persons, or (b) an employer has, in respect of the employment of, or the performance of duties by, one or more of his or her employees, an agreement, arrangement or undertaking (whether formal or informal, whether expressed or implied and whether or not the agreement, arrangement or undertaking includes provisions in respect of the supply of goods or services or goods and services) with another person or other persons relating to a business carried on by that other person or those other persons, whether alone or together with another person or other persons, that employer and: (c) each such other person, or (d) both or all of those other person, constitute a group." 19 The Respondent contends (correctly) that the Applicants constitute a group both within section 16C (a) because Hallin's employees perform their duties either exclusively or almost exclusively for Kari and within section 16C (b) because Kari has an arrangement with Hallin pursuant to which Ms. Wang performs services for Hallin. 20 Reference was made to the type of arrangement referred to in Phillips's case. (Commissioner of Taxation v Phillips 78 ATC 4361). A service trust arrangement was, (and presumably still is) permissible in relation to a professional firm where the trust charges a margin on its cost. Hallin charged no margin and did not even recover its full costs of its employees. 21 Reference was also made to the judgment of Yeldham J in Baxter v Chief Commissioner of Payroll Tax 86 ATC 4816 at 4821-2. That case concerned, amongst other issues, a solicitor's practice and its Phillips type service trust and also an accountant's practice and its Phillips type service trust. At page 4820 his Honour set out the provisions of, amongst others, section 16C and noted the Commissioner's contention that groups were constituted by "Valga Pty Ltd (employer) carrying on service trust business and Solicitor's partnership carrying on legal practice (Section 16C)" as well as by "Gemmi Pass Pty Ltd (service trust business) and accountancy partnership: certainly by reason of s 16C". At page 4821-2 his Honour concluded: "There is no doubt that by the operation of one or more of the sections which I have earlier set out, the firm W A Baxter & Co [solicitor's practice] and Valga Pty Ltd constituted one group; Paul Paroz [accountancy practice] and Gemmi Pass Pty Ltd constituted a second group … " 22 As set out previously in this decision the exclusion of Hallin from the group was sought in accordance with section 16H of the Act, which reads as follows: "16H Exclusion of persons from groups Where the Chief Commissioner is satisfied, having regard to the nature and degree of ownership or control of the businesses, the nature of the businesses and any other matters that the Chief Commissioner considers relevant, that businesses carried on by members of a group constituted under Section 16C are carried on substantially independently of, and are not substantially connected with, the carrying on of a business or businesses of another member or other members of the group, the Chief Commissioner may, by order in writing served on those first mentioned members, exclude them from that group." 23 In the interests of completeness I include the content of Ruling PT002 as follows: Substantial Independence and "No Substantial Connection" In considering whether or not there is substantial independence or no substantial connection, it is necessary for a member of a group to prove to the satisfaction of the Chief Commissioner that there does not exist a continuous course of active and substantial relationship, in a business or commercial sense, with any other member of the group, and that the connections which exist are no more than casual, irregular or occasional occurrences. In arriving at a decision the Chief Commissioner will consider the nature and extent of all relevant contracts and dealings taken as a whole, between the member and all other members of the group, including: the nature and extent of any commercial transactions or dealings, including the value and percentage of the member's total business which is conducted with other members of the group; the extent to which members share resources, facilities or services, including premises, staff, management and accounting services; the extent to which the member controls or is involved in managerial decisions and day to day administration of the other members, and the extent to which other members control or are involved in managerial decisions and day to day administration of the member; the extent to which there are financial interdependencies, including intra-group loans or guarantees and common banking facilities; the extent to which there is a relationship between customers of the member and customers of other members of the group, including such matters as sharing of customers' total business, and receiving or providing complementary goods or services in respect of particular customers; the degree to which there is a connection between a member and other members of the group in the purchase or sales of goods and services; the extent to which there is a connection between the natures of the businesses of the member and other members of the group; the extent to which there is a connection between the ultimate owners of the member and other members of the group; and any other relevant information. 24 The submission pursuant to which the exclusion of Hallin from the group was sought is included as follows: