Civil and Administrative Tribunal New South Wales Medium Neutral Citation: Seovic Civil Engineering Pty Ltd & Ors v Chief Commissioner of State Revenue [2014] NSWCATAD 52 Hearing dates: 6 March 2014 Decision date: 30 April 2014 Jurisdiction: Administrative and Equal Opportunity Division Before: A Verick, Senior Member Decision: The matter is remitted to the respondent to exercise his discretion under s.79 as directed. Catchwords: Taxes and Duties - Payroll Tax - Liability - Grouping Provisions - whether respondent should exercise discretion to de-group- s.79 Payroll Tax Act 2007 Legislation Cited: Civil and Administrative Tribunal 2013 Administrative Decisions Tribunal Act 1997 Administrative Decisions Review Act 1997 Payroll Tax Act 2007 Taxation Administration Act 1996 Pay-roll Tax Act 1971(SA) Payroll Tax Act 2009 (SA) Corporations Act 2001 (Cth.) Cases Cited: Lombard Farms Pty Ltd v Chief Commissioner of State Revenue [2013] NSWADTAP 42 Lombard Farms Pty Ltd v Chief Commissioner of State Revenue [2013] NSWADT 17 GTS Industries Pty Limited v Commissioner of State Revenue [2004] VCAT 21 Triline Home Pty Ltd v Commissioner of State Revenue (Victoria) (Unreported AAT(VIC) 3.3.95) Mead Packaging (Aust) Pty Ltd v Commissioner of Pay-roll Tax (NSW) (1978) 78 ATC 4164 Port Augusta Medical Centre Pty Ltd v Commissioner of State Taxation [2012] SASCFC 7 Plummers Border Valley Orchards Pty Ltd v Commissioner of Taxes 2002 ATC 4530 Tasty Chicks Pty Ltd v Chief Commissioner of State Revenue [2011] 245 CLR 355; [2011] HCA 41 Category: Principal judgment Parties: Seovic Civil Engineering Pty Ltd Seovic Engineering Pty Ltd Excell Management Pty Ltd Representation: A Korakis (Applicants) B L Jones (Respondent) I V Knight, Crown Solicitor (Respondent) File Number(s): 136035 reasons for decision 1This is an application under s 96 of the Taxation Administration Act 1996 for a review of the Respondent's decision to issue payroll tax assessments to the Applicants for the financial years 2008 to 2012. 2This application was instituted in the Revenue Division of the Administrative Decisions Tribunal ('the ADT') pursuant to the Administrative Decisions Tribunal Act 1997 ('the ADT Act'). On 1 January 2014, the ADT with a number of other Tribunals in New South Wales, were abolished and their jurisdiction and functions integrated into the Civil and Administrative Tribunal of New South Wales ('the NCAT') established under the Civil and Administrative Tribunal Act 2013 ('the NCAT Act'). Because the proceedings in this matter were 'unheard proceedings' on 1 January 2014 as defined in clause 6(1) of Schedule 1 to the NCAT Act, they 'are taken to have duly commenced in NCAT and heard and determined instead by NCAT' (Clause 7(1)). This decision is accordingly a decision of NCAT. 3During the relevant years, Excell Management Pty Ltd's ('Excell') only business activity was as a provider of contract workers to Seovic Civil Engineering Pty Ltd ('Civil') and Seovic Engineering Pty Ltd ('Engineering'). 4It is common ground that during the relevant period Civil and Excell constituted a 'group' and Engineering and Excell constituted a 'group' pursuant to s 71 of the Payroll Tax Act 2007 ('the Act'). Section 71(2) provides for the grouping of employers: (2) If one or more employees of an employer are employed solely or mainly to perform duties for or in connection with one or more businesses carried on by one or more other persons, the employer and each of those other persons constitute a group. 5There is also no dispute that, in the relevant period, Seovic Civil Engineering Pty Ltd, Seovic Engineering Pty Ltd and Excell Management Pty Ltd were a group by virtue of the provisions found in s 74 of the Act. Under s 74(1) smaller groups are subsumed by larger groups in the following circumstances: (1) If a person is a member of 2 or more groups, the members of all the groups together constitute a group. 6The only issue is whether the respondent should have exercised his discretion found in s 79 of the Act to de-group the applicants. Section 79 provides that the Chief Commissioner may exclude a person from being a member of a group if the relevant criteria are met. It relevantly provides: (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 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. 7During the relevant period, Engineering carried on a mechanical engineering business specialising in the repair and maintenance of mining equipment and Civil carried on a civil engineering business specialising in concrete slip forming. 8The directors and shareholders of the three applicants during the relevant period 'were members of the Seovic Family, namely the family of John and Merveen Seovic and their sons John Seovic Jr, Quentin Seovic and Joshua Seovic'. 9John Seovic Jr ceased to be the sole director and shareholder of Engineering on 30 March 2010 and was replaced by Quentin Seovic as the sole director and shareholder of Engineering on 30 March 2010. 10John Seovic Sr was, during the relevant period, the sole director of Civil and he and Merveen Seovic were the shareholders of the company. 11In the case of Excell, Quentin Seovic was the sole director until 26 March 2010 when he was replaced by John Seovic Jr. The sole shareholder during the period was Joshua Seovic. 12The following factual background pertaining to the 'connections between the Applicants' was provided by the respondent and was not disputed by the applicants - 8. The registered office of all three Applicants was 35 Church Street, Dubbo, being the address of their mutual accountant, G M Henderson & Co. 9. The principal place of business of both Engineering and Excell was 2A Graham Hill Rd, Narellan. While the principal place of business of Civil is 36 Turner Road Smeaton Grange, some administrative functions are performed at 2A Graham Hill Road Narellan. 10. Civil and Engineering share computer servers (including for email) and the domain name "seovic.com.au". Civil and Engineering share telecommunication costs. 11. Civil is a guarantor in respect of loans to Engineering from the National Australia Bank and Engineering is a guarantor in respect of loans to Civil from the National Australia Bank. 12. Finally, Excell only provided services to Civil and Engineering. Excell's employees did not provide services to any other person. 13 In addition to the documents produced by the respondent under s 58 of the Administrative Decisions Tribunal Act 1997 (now the Administrative Decisions Review Act 1997) the only evidence before the Tribunal were three affidavits. For the applicants, John Seovic Sr and Quentin Seovic each swore an affidavit each. The respondent's solicitor, Adam Jollyon Musgrave, also filed an affidavit. 14According to John Seovic Sr, Excell was established with the intention that his son Joshua Seovic 'be given a business to run for himself'. Excell, he said was established to 'hire our personnel' to Seovic companies and other non-Seovic companies. But because of the decision made by Joshua 'to live in New Zealand, the intention to expand the business to provide services to other companies never materialised'. 15Quentin Seovic stated that 'from 16 November 2011 the business conducted by Excell has ceased' and 'that as at 16 November 2011 Excell no longer employed any staff'. He further stated that the respondent had on 1 December 2011 informed him that - ... from 1 December 2011 both Civil and Engineering are each entitled to claim the relevant threshold under the Act as they did until June 2007, whereas between 1 July 2007 and 30 November 2011 they were not each entitled to the threshold because they formed part of larger group by operation of the "subsuming" provisions of the Act. 16He regarded this as an 'absurdity' because if he had 'been aware that Engineering would not be allowed to continue claiming the threshold under the Act, I simply would have ceased utilising the services of employees from Excell'. 17Mr Jones, counsel for the respondent in his written submissions submitted that 'an applicant for de-grouping has the burden of establishing there was substantial absence of connection and substantial independence between the businesses, to warrant the exercise of the discretion: Lombard Farms Pty Ltd v Chief Commissioner [2013] NSWADTAP 42 at [51]. 18That clearly raises the important question as to the correct test that a decision maker is required to apply when making a determination under s 79 of the Act to exclude a member from a group otherwise established under either s 71 or s 74. 19In Lombard in the first instance I accepted the Chief Commissioner's submission that 'the cases dealing with earlier statutory provisions may not be directly on point' and considered this question - 30. In my view having regard to the plain wording of s 79(2) of the Act this submission is correct insofar as it relates to the degree of independence or connection the business seeking de-grouping is required to have with the business conducted by the other members of the group. 31. A great deal of reliance was placed by the Applicant on the decision of the Victorian Civil Administrative Tribunal in GTS Industries Limited v Commissioner of State Revenue. The Tribunal in that case had in turn sought to argue the outcome on the basis of what was said by its predecessor, Administrative Appeals Tribunal of Victoria in Triline Home Pty Ltd and Others v Commissioner of State Revenue (Victoria) (1994) (unreported) (AAT (VIC) 3.3.95). 32. In Triline Homes and GTS Industries Pty Limited the de-grouping provision under consideration was similar to s 79(2) of the Act. But in reaching its conclusion in Triline Homes, the Presiding Member relied on what had been said by Rath J in Mead Packaging (Aust) Pty Ltd v Commissioner of Pay-roll Tax (NSW) [1978] 78 ATC 4164 in relation to the then de-grouping provision in the Pay-roll tax legislation, s 16H(1), which provided as follows:- (1) Where the 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 he considers relevant, that a business carried on by a member of a group is carried on substantially independently of, and is not substantially connected with the carrying on of, a business carried on by any other member of that group, the Commissioner may, by order in writing served on the first mentioned member, exclude him from that group. (emphasis added) 33. His Honour provided the following construction to the provision - Section 16H requires two findings to be made, namely (1) that a business carried on by the plaintiff (as a member of a group) is carried on substantially independently of a business carried on by any other member of that group; and (2) that the business is not substantially connected with the carrying on of the business carried on by the other member of the group. The first limb appears to relate to the independence of the business, and requires an examination of the connection between the business activities. The second limb appears to relate to connection in management. At all events the composite expression used in the subsection requires a consideration of the business and their control, and a finding of substantial independence and substantial absence of connection. 34. His Honour when using the term "substantial" to describe the required degree of independence or connection was, of course, merely relying on the precise language used in the legislation. His Honour was not suggesting that it was necessary for the independence or connection to be substantial in the absence of the use of the term substantial in the legislation. 35. The reason for the absence of the substantial "quantitative" requirement in the current de-grouping provision was not explained in the Explanatory Note. The provision has also not been considered in its present form by the Tribunal or the courts. In my view, the absence of the additional requirement is quite significant because the discretion in its present form can only be exercised where there is complete independence of, and complete absence of any connection between the person seeking de-grouping and the member or members of the group. The additional question of determining whether the independence or connection is substantial is not, therefore, an issue in its current application. The exercise will, of course, depend on all the relevant matters on an objective basis. 20On appeal, the Appeal Panel in Lombard took a different approach. 21The Panel first observed that - As demonstrated by GTS Industries at [37] and Triline at [20] and [25] the Victorian provision had been interpreted consistently with earlier New South Wales provision which posed a test of "substantial independence", despite the fact that the Victorian counterpart did not contain the word "substantial" was, in those circumstances, otiose and omitted for that reason. Even if this is not correct, there is much force to the submission that the Victorian provision and the current New South Wales provisions are to be interpreted harmoniously and this means the Appeal Panel would follow GTS Industries and Triline unless we were of the view they were clearly wrong. For the reasons we explain below, we agree with the Victorian authorities. 22The Panel accepted the submission that the interpretation suggested by the Tribunal 'led to an absurd result' because - When one focuses on the fact that the test in s 79(2) directs an enquiry to the carrying on of the businesses and not simply any connection between group members, one can see that there may be work for s 79(2) to do. However, if the most casual connection in the carrying on of businesses is sufficient to disentitle an applicant from de-grouping, then the scope of s 79 is extremely narrow. 23The Panel further argued that - 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: Network Clothing Company v Commissioner of State Revenue [2007] VCAT 2492 at [34]. 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. Adopting the words of GT Pagone, Presiding Member (as his Honour then was) in Triline at [25] there must be a finding of substantial absence of connection and substantial independence between the businesses, to warrant the exercise of the discretion. ... This is not a case where the omission of the words "substantial" effected a change to the discretion to de-group entities. So much may be seen from the fact that the legislative change was to harmonise the Act with Victorian legislation, which had been interpreted consistently with the NSW provision even though it did not employ the word substantial. 24Historically, when Triline was considered, some ten years before the harmonisation of the payroll tax laws, both Victoria and New South Wales had their own pay-roll tax acts. In Triline, the Tribunal merely proceeded to rely on what had been said by his Honour in Mead Packaging without considering the differences in the then New South Wales provision. The Tribunal, in citing and adopting his Honour's observations, merely stated that they were in respect of 'similar requirements in the corresponding provision of the New South Wales legislation'. 25Harmonisation of payroll tax law only occurred in 2007 when both Victoria and New South Wales introduced the current identical acts. South Australia introduced an identical act more recently in 2009. 26At the hearing of this matter my attention was drawn by the applicants to Port Augusta Medical Centre Pty Ltd v Commissioner of State Taxation [2012] SASCFC, where the Full Court of the Supreme Court of South Australia (Anderson, Kelly, and Kourakis JJ), considered s 18I, the de-grouping provision in the old South Australian Act (Pay-roll Tax Act 1971 (SA)). Although the new de-grouping provision was not in issue, his Honour Anderson J made the following very helpful observation in relation to the new de-grouping provision - That Act has now been replaced by the Payroll Tax Act 2009 (SA) ("the current Act"). The wording of the section giving the Commissioner power to exclude persons from groups has been significantly changed in the current Act. The whole scheme for the grouping of employees has been significantly revised. The equivalent of s 18I of the old Act is s 79(1) and (2) in the current Act. There are subtle but significant changes in the criteria for exclusion, the most obvious being that the word "substantially" no longer prefaces the words "independently" or "connected". The other significant change is that in s 79 of the current Act, in relation to the control of the business, the words used are "having regard to the nature and degree of ownership and control" compared with "ownership or control" in the old Act. (My underlining.) 27I do not think reliance can be placed entirely on what has been said in the past in relation to the old de-grouping provision. The significant changes highlighted by his Honour clearly require a de novo consideration of the new de-grouping provision. 28In the Explanatory Note to the Payroll Tax Bill 2007 which introduced the current Act, the role of s 79 was explained as follows; Clause 79 provides the Chief Commissioner with a discretion to exclude a member from a group if satisfied that the business conducted by that member is independent of, and not connected with, the business conducted by any other member of the group. In considering the application of this discretion, the Chief Commissioner will have regard to the nature and degree of ownership and control of the businesses, the nature of the businesses, and any other relevant matters. The discretion is not available for corporations that are related bodies corporate under section 50 of the Corporations Act 2001 of the Commonwealth. 29No explanation was given in the Explanatory Note for omitting the term 'substantially' from the test to determine the degree of independence and connection. However, it is I think quite easy to discern the reasoning for the absence of the prefix 'substantially' in the new provision. 30As noted by his Honour Riley J in Plummers Border Valley Orchards Pty Ltd v Commissioner of Taxes 2002 ATC 4520 at paragraph [18] - The word "substantially" does not have a fixed meaning. What is required to demonstrate that a business is " not substantially connected" with another business is a matter of fact and degree to be considered in all of the circumstances. It must not be minimal yet need not be total. 31The use of the 'substantially' test must have posed some real difficulties to the Chief Commissioner to determine the 'quantum' of independence or connection necessary to satisfy the old test. The absence of the term in the new provision makes the task much easier for the decision maker when exercising the discretionary power given in s 79. 32It is also important to understand the policy reason for grouping of employers in the payroll tax law in certain circumstances. This was succinctly explained by the High Court in Tasty Chicks Pty Limited and Others v Chief Commissioner of State Revenue of the State of New South Wales [2011] HCA 41; (2011) 245 CLR 446 at 451 - 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 "degrouping" provisions were available for application by the Chief Commissioner upon determination, in broad terms, that it would be unreasonable to apply the "grouping provisions". 33As noted by the High Court, the grouping provisions act to prevent avoidance of payroll tax, the de-grouping provision in that context provides a narrow relief to cases where it would be unreasonable to group a person or persons. 34In order to exercise the discretion under s 79, the Chief Commissioner is required to have regard to - (1) the nature and degree of ownership and control of the businesses; (2) the nature of the businesses; and (3) any other matters the Chief Commissioner considers relevant. 35Having regard to these matters, the Chief Commissioner can proceed to determine that a person is not a member of a group if satisfied that the business carried on by that person is independent of, and is not connected with, the business conducted by any other member of the group. 36In Port Augusta Medical Centre Pty Ltd v Commissioner of State Taxation, the Full Court considered the old de-grouping but the statements made by Kourakis J (as his Honour then was) in relation to the old provision equally apply to the new provision. The clause 'is carried on independently of, and is not connected with' in the new provision should, as suggested by his Honour, 'be applied as a compound expression describing the nature of the business relationship between the entities'. His Honour went on to make the following important observation (at paragraph 110) - Insofar as the two limbs of the clause focus on different aspects of the relationship between the entities, in my view, the former focuses on control of the management of the businesses and the latter on the relationship between the business activities themselves. 37As part of the harmonisation of payroll tax laws, revenue authorities have also issued a common revenue ruling 'to explain the exclusion under section 79, including the matters the Chief Commissioner takes into account in exercising the discretion'. The respondent issued his ruling (Revenue Ruling No PTA0331 - Commissioner's discretion to exclude from a group) on 30 June 2008. 38The respondent has ruled that - The Chief Commissioner must be satisfied that: · there is not a continuous course of active and significant relationship, in a business or commercial sense, between the carrying on of the applicant's business and the carrying on of businesses conducted by every other member of the group, and · the connections which do exist are no more than casual, irregular or occasional occurrences. 39I agree with the approach suggested by the Chief Commissioner in his ruling. The Chief Commissioner has correctly not relied on the old 'substantially' test. The grouping provisions are essentially anti-avoidance provisions. In order to avoid the provisions, under the new relieving provision an applicant has to establish independence of the business and an absence of any connection. In a commercial sense, the business must be an independent business and without any real connection with any member of the group. In the case of any very 'minimal' connection, the de-minimis rule would be available to the decision maker under the discretion given in s 79. 40The application of the de-grouping provision is best understood with a fairly simple example: A supplies contract workers to B, C, and D. By the operation of the provisions in s 72(2), three groups, A+B, A+C and A+D would arise from the use of common employees. And by operation of s 74 all these groups would together constitute a larger group, A+B+C+D. This would happen without regard to the kind of business each party is involved in or ownership or connection between the parties. Without the discretion in s 79, the Chief Commissioner would have to determine the groups under s 72(2) and the larger group under s 74. And only one party would be entitled to the threshold in respect of the larger group. The discretion, on the other hand would allow the Chief Commissioner to de-group A from each of the first three groups created by s 72(2) subject, of course, to the objective matters set out in s 79(2). In this example, the discretion would apply if A's business is carried on independently of the business carried on by the other member of each group and there must be an absence of any connection with the other person. 41In the present matter, the respondent accepts that Civil and Engineering each carry on a business independently and without any connection with each other. They were only grouped under s 72(2) during the relevant period because the provisions applied when contract workers were supplied by Excell to Civil and to Engineering. The larger group was created by the automatic operation of the provisions of s 74. And, as soon as Excell ceased its business to supply contract workers to Civil and Engineering, both Civil and Engineering were again entitled to their respective threshold. 42Against that background, the Applicants' submission was that it was an absurd outcome and one that respondent should exercise his power under s 79. 43In this matter, Excell was conducting quite an independent business in the relevant period, being the supply of contract workers. Although Excell was owned by a member of the Seovic family, there was no evidence of any control by either Civil or Engineering in the management of Excell. There was also no evidence or any suggestion of any contrivance by Excell or any other applicant to split or de-aggregate a conglomerate to reduce payroll tax otherwise payable. Excell's business arrangements were commercial. There are, therefore, ample grounds in this matter for the exercise of the discretion under s 79 of the Act to avoid of what can be best described as a harsh and unreasonable outcome on the technical application of the grouping provisions. 44I will, accordingly, remit this matter to the respondent to exercise his discretion under s 79 of the Act to de-group Excell from Civil + Excell and Engineering + Excell groups, grouped under s 72(2). It follows that the de-grouping will also de-group the larger group that arose from the automatic operation of s 74. I hereby certify that this is a true and accurate record of the reasons for decision of the Civil and Administrative Tribunal of New South Wales. Registrar 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: 30 April 2014