Civil and Administrative Tribunal New South Wales Medium Neutral Citation: Regis Mutual Management Pty Ltd v Chief Commissioner of State Revenue [2015] NSWCATAD 213 Hearing dates: 17 July 2015Last submissions received 21 August 2015 Decision date: 19 October 2015 Jurisdiction: Administrative and Equal Opportunity Division Before: NS Isenberg Senior Member Decision: The decisions of the Chief Commissioner under review are affirmed. Catchwords: PAYROLL TAX - grouping; discretion to exclude a member from a group. Legislation Cited: Administrative Decisions Review Act 1997 Civil and Administrative Tribunal Act 2013 Payroll Tax Act 2007 (NSW) Payroll Tax Act 2007 (Vic) Taxation Administration Act 1996 Cases Cited: B & L Linings Pty Ltd & anor v Chief Commissioner of State Revenue [2008] NSWCA 187 Bank of Queensland Limited v Commissioner of State Revenue |2013] VCAT 1966 Boston Sales and Marketing Pty Limited v Chief Commissioner of State Revenue [2014] NSWCATAD 139 Chief Commissioner of State Revenue v Tasty Chicks Pty Ltd [2012] NSWCA 181 Conrad Linings Pty Ltd v Chief Commissioner of State Revenue [2014] NSWSC 1020 Commissioner of Stamps v Garrett F Hunter (1997) 69 SASR 275 Commissioner of State Revenue v Liquid Rock Constructions Pty Ltd [2012] VSC 329 GTS Industries Pty Limited v Commissioner of State Revenue [2004] VCAT 21 Lombard Farms Pty Ltd v Chief Commissioner of State Revenue [2013] NSWADTAP 42 Lombard Farms Pty Ltd v Chief Commissioner of State Revenue [2014] NSWCATAD 132 Toveety Maintenance Services Pty Ltd v Chief Commissioner of State Revenue [2015] NSWCATAD 137 Tasty Chicks Pty Ltd v Chief Commissioner of State Revenue [2009] NSWSC 1007 Category: Principal judgment Parties: Regis Mutual Management Pty Ltd (Applicant) Chief Commissioner of State Revenue (Respondent) Representation: Counsel: S Lees (Applicant) A Rider (Respondent) Solicitors: Sparke Helmore Lawyers (Applicant) Crown Solicitor's Office (Respondent) File Number(s): 1410335, 1410336, 1510188 and 1510189 Reasons for decision The dispute 1. Payroll tax is a tax on employers in respect of New South Wales wages paid to employees during each financial year. The words "employer", "wages" and "employee" are defined in the Act and are not in dispute. 2. If total wages paid by an employer during a financial year are below the statutory payroll tax threshold for that year then no payroll tax is payable by that employer. However if employers are part of a group for payroll tax purposes, then only a single threshold deduction applies to the whole group rather than each member of the group benefiting from a separate threshold deduction. The Respondent has a limited discretion to exclude a person who would otherwise be a member of a group, from membership of that group, in order to avoid any unduly harsh effect of the application of technical rules grouping persons as employers. 3. The Respondent issued payroll tax assessment notices (the Assessments) to the Applicant in respect of the period 1 June 2008 to 31 December 2011(the relevant period) on the basis that the Applicant was grouped with Capricorn Society Ltd (CSL) and Regis Mutual Management Australia Pty Ltd (Regis Australia). The Respondent declined to exercise his power to exclude the Applicant from the group. 4. The Applicant has applied to the Tribunal to review both the Assessments and the decision of the Respondent not to exercise the power to exclude the Applicant from the group. Background 1. The Applicant was established in April 2008 as a special purpose vehicle for a joint venture between Regis Mutual Management Ltd (Regis Ltd) and Capricorn Society Ltd (CSL). Trading by the joint venture commenced on or about 1 June 2008 and the joint venture was terminated on 31 December 2011. 2. On 19 January 2012 CSL wrote to the Respondent and advised that from 1 January 2012 CSL, Capricorn Mutual Management and the Applicant should no longer be grouped for payroll tax purposes. After correspondence between the Respondent and CSL the Applicant formally applied for exclusion from grouping (the degrouping application) in June 2012 in respect of the period 1 June 2008 to 31 December 2011. The degrouping application stated that from 11 August 2008 to 31 December 2011 50% of the shares in the Applicant were owned by Regis Mutual Management Australia Pty Ltd (Regis Australia), a subsidiary of Regis Ltd and the remaining 50% of the shares were owned by Capricorn Society Financial Services Pty Ltd (CSFS) a subsidiary of CSL. 3. By letter of 11 December 2012 the Respondent informed the lawyers who had lodged the degrouping application for the Applicant that the application to make a determination to exclude the Applicant, CSL and Regis Australia was disallowed. The letter stated that the businesses constituted a group under the provisions of s 72 of the Payroll Tax Act 2007 (the Act), and that the Respondent was not satisfied that the businesses were carried on independently of each other and were not connected with each other. 4. By letter dated 8 January 2013 (the degrouping decision) the Respondent informed the Applicant in almost identical terms to the letter of 11 December 2012 that the degrouping application was disallowed. A substantive change from the 11 December 2012 letter was that the degrouping decision stated that the businesses constituted a group under the provisions of section 71 of the Act (rather than section 72). 5. On 6 February 2013 the Respondent issued payroll tax assessment notices to the Applicant for the periods 1 July 2011 to 31 December 2011 and 1 January 2012 to 30 June 2012. On 8 February 2013 the Respondent issued payroll tax assessment notices to the Applicant for the relevant period (the Assessments). The assessment notices issued on both 6 and 8 February 2013 in respect of the period 1 July 2011 to 31 December 2011 are materially identical. 6. By several written communications to the Respondent, the Applicant objected to both the Assessments and the degrouping decision 7. By letter dated 30 April 2014 the Respondent informed the solicitors for the Applicant that the objections had been wholly disallowed. 8. The Applicant applied to the Tribunal on four occasions, two in June 2014 and two in April 2015. When read together those applications seek a review of the disallowance of the objections to the Assessments and the degrouping decision. Material before the Tribunal 1. The Applicant relied on affidavits sworn by Gerald Joseph Ewing on 28 October 2014, 17 April 2015 and 2 June 2015 (Mr Ewing's first, second and third affidavits); a tabbed and paginated but unindexed bundle of documents marked Exhibit GE1 exhibited to Mr Ewing's first affidavit; the Applicant's outline of submissions dated 21 April 2015 (AS), the Applicant's outline of submissions in reply dated 2 June 2015 (ASR) and the Applicant's Supplementary Submissions dated 7 August 2015 (ASS). Mr Ewing gave oral evidence before the Tribunal and Mr Lees made oral submissions. In these reasons references by paragraph number to submissions on behalf of the Applicant are to paragraphs in AS unless otherwise stated. 2. The Respondent relied on documents filed with the Tribunal on 20 August 2014 pursuant to s 58 of the Administrative Decisions Review Act 1997 (the ADR Act), a second bundle of documents filed with the tribunal on 22 May 2015 pursuant to s 58 of the ADR act; an affidavit sworn by Ms Ewa Pardy on 25 May 2015 to which were exhibited a bundle of documents marked EP1; a letter from the Crown Solicitor's Office to the Applicant dated 12 November 2014; a letter from the Applicant's lawyers dated 2 March 2015 in response to the letter dated 12 November 2014. Mr Ryder made oral submissions to the Tribunal. In these reasons references by paragraph number to submissions on behalf of the Respondent are to paragraphs in RS unless otherwise stated. 3. A document headed "BOARD PAPER RAP OPERATING BUDGET AND CAPITAL EXPENDITURE REQUIREMENTS Fiscal 2009 October 2008 meeting" being a copy of the document appearing at Tab five in EP1 was marked for identification. Issues 1. Section 96 of the Taxation Administration Act 1996 (TA Act) provides that a taxpayer may apply to the Tribunal for an administrative review under the ADR Act of a decision of the Respondent that has been the subject of a relevant objection if the taxpayer is dissatisfied with the Respondent's determination of the objection or 90 days not including any relevant period of suspension have passed since the objection was served on the Respondent and the Respondent has not determined the objection. The Tribunal does not have power to review a determination by the Respondent as to an objection. The legislation enables the Tribunal to review an administrative decision which has been the subject of a relevant objection. 2. Notwithstanding the wording of the applications to the Tribunal and the documents which accompanied those applications and the Applicant's submission at [2] that the decisions under review were the decisions to disallow objections, the parties do not dispute that the decisions the subject of these proceedings are the Assessments and the degrouping decision. 3. The issues to be determined by the Tribunal in order to review the decisions in dispute are, in respect of each payroll tax year from 1 June 2008 to 31 December 2011: 1. was the Applicant a member of a payroll tax group which included CSL; (the grouping issue) and 2. if the Applicant was a member of such a group, should the Tribunal, standing in the place of the Respondent, exercise the discretion pursuant to s 79 of the Act to exclude the Applicant as a member of the group (the degrouping issue). Powers of Tribunal on review 1. On a review the Tribunal may affirm vary or set aside a relevant decision and make orders as to costs or otherwise, s 101(1) of the TA Act, s 63(3) of the ADR Act and s 60 of the Civil and Administrative Tribunal Act 2013 (CAT Act). Onus 1. The onus in this matter lies on the Applicant (s 100(3) of the TA Act). The onus is to be satisfied on the balance of probabilities B & L Linings Pty Ltd & anor v Chief Commissioner of State Revenue [2008] NSWCA 187 at [104]. The grouping issue 1. The Respondent informed the Applicant by letter dated 8 January 2013 that the businesses of the Applicant, CSL and Regis Australia constituted a group under the provisions of s 71 of the Act. 2. Section 71 provides: 71 Groups arising from the use of common employees (1) If one or more employees of an employer perform duties for or in connection with one or more businesses carried on by the employer and one or more other persons, the employer and each of those other persons constitute a group. (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. (3) If one or more employees of an employer perform duties for or in connection with one or more businesses carried on by one or more other persons, being duties performed in connection with, or in fulfilment of the employer's obligation under, an agreement, arrangement or undertaking for the provision of services to any one or more of those other persons in connection with that business or those businesses, the employer and each of those other persons constitute a group. (4) Subsection (3) applies to an agreement, arrangement or undertaking: (a) whether the agreement, arrangement or undertaking is formal or informal, express or implied, and (b) whether or not the agreement, arrangement or undertaking provides for duties to be performed by the employees or specifies the duties to be performed by them. Note. Section 79 (Exclusion of persons from groups) allows the Chief Commissioner, for payroll tax purposes, to exclude persons from a group constituted under this section in certain circumstances The Applicant's case 1. The Applicant submitted at [4] that the Tribunal needs to consider whether the Applicant and CSL are grouped by operation of s 71(3) of the Act, and submitted at [26]: the CSL employees were not performing duties in connection with the business of Regis: instead, they were performing duties in connection with CSL's business, and providing services to Regis. As such, Regis and CSL are not grouped by the operation of s 71 of the Act 1. The Respondent's case is that the Applicant has not discharged its onus of proof in relation to the grouping issue. 2. The Applicant referred at [18] to the decision of Pagone J at [7] in Commissioner of State Revenue v Liquid Rock Constructions Pty Ltd [2012] VSC 329 (Liquid Rock) where his honour referred to the difficulties in the application of s 71 of the Victorian Payroll Tax Act 2007 which is in identical terms to s 71 of the Act. His Honour said: …The application of s 71 can be difficult because its terms are apt to cover more than the policy of the legislation would suggest. The mere provision of a service to someone by a person employed by another who is otherwise wholly independent could come within the literal application of the section although that could not be thought to be the purpose, intention or reach of the provision. It is, perhaps, for that reason that the facts must be carefully scrutinised when the provision is in issue… 1. The Applicant continued at [19]: His Honour described the approach taken by the tribunal below to the application of s 71(3) which he accepted as correct, as being "that the task required by the section involves an inquiry into factual behaviour indicating that the shared "employee" was performing tasks in a way and manner like that expected of an employee albeit that there was no employee relationship" (at [8]). 1. The Applicant submitted at [21] that the use of the different phrases "performance of duties" and "provision of services" in s 71 (3) was significant and that the phrases invoked the distinction between an employer/employee relationship and a principal / independent contractor relationship. The Applicant submitted: …the traditional test in distinguishing between the two relationships focussed on control; in undertaking the work, could the servant be directed '"not only as to what he shall do but how he shall do it" {Humbersfone v Aorthem Timber Mill (1949) 79 CLR 389 at 404)? Whilst the test has evolved and control is no longer the only relevant factor (see Holds v Vabu Ply Ltd (2001) 207 CLR 21 at [43J-[45]). it remains an important consideration, and it is a useful tool here in considering whether employees are performing duties or providing services. 1. The Applicant submitted at [22] and [23] It should be noted though that in considering power of control or direction for the purposes of s71, it does not depend on there being "a legal relationship akin to employment, but the practical ability of direction in the performance of tasks"": Liquid Rock Supreme Court Decision at [8]. So, in the Liquid Rock VCAT Decision, the tribunal held that the employee who performed typing and data entry was providing services and not performing duties for or in connection with the other business, because it was up to the discretion of the employer as to whether, how and when the work would be done (at [62]). In Bank of Queensland Limited v Commissioner of State Revenue |2013] VCAT 1966 (Bank of Queensland), the focus was not on whether the relevant employees of franchisee bank branches performed duties, but whether those duties were performed for or in connection with a business carried on by the franchisor bank (see [50]). Judge MacNamara held that, despite the franchisor bank having a high degree of control over the franchisee's employees…the employees of the franchisee bank branches performed dudes for or in connection the franchisee's business and not the franchisor's (at [56]). 1. The Applicant asserted that the CSL employees did not perform duties for the Applicant and that having regard to the description of the Services in clause 3, Schedule 3, clause 3.1.2, clause 3.8 and clause 11.2 in the Service Agreement, CSL was required to produce outcomes rather than to perform certain specified tasks. 2. The Applicant acknowledged that the Services were required to be provided in accordance with "instructions or directions" given by the Applicant but this should simply be understood as a method by which the Applicant informed CSL at a high level of the service outcomes it required. The use of "directions", in the Applicant's submission, did not indicate that the Applicant could control the way in which CSL employees performed their functions and this phrase was "consistent with both services and duties" ([24.d]) 3. Three categories of Services were provided by CSL for the Applicant. They related to information technology, finance and human resources (clause 3 and schedule 3.1 of the Services Agreement). 4. At [25] the Applicant referred to Mr Ewing's affidavits in respect of the nature of the functions performed by CSL for the Applicant and the manner in which they were provided. In relation to the finance services, which Mr Ewing described as accounting services, they were "primarily the production of monthly management accounts, managing completion of tax returns, management of the audit and payroll services… The CSL staff involved in providing accounting services frequently changed due to high staff turnover in the CSL accounting department." 5. The Applicant submitted at [26]: 1. the Applicant "did not and could not direct or control the manner in which CSL employees conducted their work for" the Applicant; 2. the ability to control the manner in which the CSL employees perform their duties is the critical indicia of whether the employees are performing duties in connection with the Applicant's business. The absence of control means they were supplying Services not performing tasks in a way and manner like that expected of an employee of the Applicant; 3. there were no dedicated or identifiable CSL employees who performed the work, unlike Commissioner of Stamps v Garrett F Hunter (1997) 69 SASR 275 or Liquid Rock where a specific person from one employer performed secretarial duties for another. At most there were a number of changing and interchangeable employees, each spending a small fraction of their time on work for the Applicant; and 4. the fact that CSL employees performed work remotely from CSL's Perth office and not on site at the Applicant's office, supported the conclusion that the Applicant did not have control or direction over the manner in which CSL employees undertook tasks for the Applicant. The Respondent's case 1. In response the Respondent submitted that the Applicant's submissions relied on Liquid Rock and Bank of Queensland. The Respondent was not aware of any New South Wales decisions having approved of the views expressed in these cases regarding the interpretation of s 71 (3). The Respondent further submitted at [46]: In any event, the Victorian decisions do not assist the Applicant. Here, regardless of whether the Applicant actually controlled or directed the CSL employees in providing the Services, the Applicant had the power to do so under cl.3.1.3 of the Services Agreement and the CSL employees were required to comply with those directions (cl.3.2.4). 1. The Respondent continued at [51] to [54] as follows: 51. …the Tribunal's observation in Bank of Queensland at [47] about the correct approach to interpreting s.71(3) is apposite: It was my reference in that determination, from which leave to appeal was denied, to an 'employee-like relationship' being required for the operation of Section 71(3), that led the parties in this case to an elaborate excursus on the distinction between employees and independent contractors. There is a vast jurisprudence on this subject. The parties placed a large number of judgments on this subject before me, indeed many more than were referred to in oral submission. I must resist the danger of being beguiled into focussing on that endlessly contentious issue to the exclusion of the words of the statutes which govern the outcome of this proceeding. As with the parties, I will focus upon the wording of the 2007 statute. 52. With respect, the Applicant's focus on an employee/contractor analysis to colour the meaning of "duties" in s.71(3) exemplifies the Tribunal's warning about the danger of being beguiled on that endlessly contentious issue to the exclusion of the words of thestatute. 53. Rather, properly construed in its statutory context, the word "duties" in s.71(3) merely refers to something being done by an employee in fulfilment of the employer's obligation under, an agreement, arrangement or undertaking for the provision of services to another person in connection with their business. Thus, the emphasis is on the provision of services and the fulfilment of an employer's obligation to provide those services, not how the recipient of those services directs or controls the employees in providing them with the services. 54. Here, the provision of the Services by the CSL employees in fulfillment of CSL's obligations to the Applicant under the Services Agreement was necessary and sufficient to satisfy the requirements of s.71(3). Thus, the Applicant and CSL were properly grouped under s.71(3). The Tribunal may confirm the Assessments on this basis. Consideration 1. The words used in s 71(3) do not require that any employees of CSL be employed by the Applicant nor does the section require that the employees be subject to the control of the Applicant. The section expressly applies if "one or more employees of (CSL) perform duties for in connection with one or more businesses carried on by some other person", in this case the Applicant. The duties must be performed in connection with or in fulfilment of CSL's obligation under an agreement arrangement or undertaking for the provision of Services to the Applicant in connection with the business of the Applicant. 2. There is no dispute between the parties that in carrying out work involved in the provision of Services several employees of CSL were performing duties. The statutory question is whether or not the duties being performed were for or in connection with the Applicant's business. 3. At [6] in ASR the Applicant stated: The critical question which the words of s71(3) of the Act require the Tribunal to decide in this case is: a. whether the CSL employees performed duties "for or in connection with" the Applicant's business; or b. whether the CSL employees were performing duties for CSL's business in the course of it providing services to the Applicant. 1. The Applicant answered its own question at [10] in ASR by stating: …the Applicant did not control which of the CSL staff undertook the work for the Applicant, the manner in which they conducted the work, or the priority which they gave to the work. The Tribunal should find that the CSL employees were performing duties for or in connection CSL's business, and providing services to the Applicant; but they were not performing duties for or in connection with the Applicant's business. As such, the Applicant and CSL should not be grouped by operation of s71(3) of the Act. 1. In relation to the specific issues referred to in the preceding paragraph: 1. it is correct to state that the Service Agreement did not authorise the Applicant to nominate which employees of CSL would perform work for the Applicant. However clause 4.7 provided that the Applicant could on reasonable grounds require CSL to withdraw any of its employees from providing any part of the Services. CSL was required to replace the person with a person of suitable ability, experience and qualifications within a reasonable time period specified by the Applicant. 2. In relation to the manner in which work was conducted, CSL was required by clause 5.3 to provide the Applicant with information concerning any aspect of this Services which the Applicant may require within five business days of any relevant request. 3. In relation to the priority which was given to the work, Mr Ewing's evidence at [11] in his second affidavit and the Applicant's submission at [25.f] were that the Applicant "could not control the priority with which the CSL employees performed work for" the Applicant. 4. However the Service Agreement provides at 3.1.1 the Services must be provided promptly; at 3.1.3 in accordance with the reasonable instructions or directions by the Applicant; at 3.8 CSL must immediately notify the Applicant in writing if it believes that any time that it is unlikely to be able to deliver any part of the Services by the date specified for delivery and such notification will not relieve CSL from any of its obligations under the Agreement; and in relation to the provision of finance services that those Services are to be provided in accordance with Procedures Manual or other service specification; in relation to IT Services a List of Key Procedures and in accordance with Quarterly Compliance Checklists all of which will be updated by the Applicant from time to time. Further the Services are to be provided in accordance with the reasonable written instructions or directions of the Applicant and in accordance with clauses 3.4 to 3.6 inclusive. Those clauses referred to compliance by CSL with the Applicant's standards, policies and procedures and reasonable directions. 5. I observe that no IT Services procedures manual was produced to the Tribunal during the hearing nor were any relevant Quarterly Compliance Checklists. However at tab 11 in EP1 is a list of key operations/procedures provided by 'Finance Controller' in relation to the provision of the Services. That document is divided into payroll, payment of all Applicant's creditors, cheque signatories, management accounts and statutory accounts categories. As an example of the details of the manner in which work is to be performed, in relation to payroll it provides 13 specific key operations/procedures and that CSL may demonstrate compliance where applicable with 12 separate types of work which are to be carried out at intervals ranging from ad hoc through annual and monthly to fortnightly. 1. Having regard to the above terms of the Agreement I do not accept that the evidence is that the Applicant had no say in the priority with which work was carried out by CSL, and indirectly by its employees. 2. I accept the submission of the Applicant that I should find that the CSL employees were performing duties for or in connection with CSL's business and that Services were being provided to the Applicant. However I do not accept the Applicant's submission that the duties being performed by CSL's employees were not for or in connection with the Applicant's business. The Applicant has provided no evidence as to why the Applicant required the provision of the Services or was willing to pay $200,000 yearly for those Services other than in connection with its business. The evidence is that once the provision of Services by CSL ceased on 31 December 2011 the Applicant continued to have a requirement for the Services and obtained them from another provider. 3. The Applicant submitted at [26.d], and I accept other than in respect of nominated key personnel, that there may have been no dedicated or identifiable CSL employees who performed the work … At most there were a number of changing and interchangeable employees, each spending a small fraction of their time on work for the Applicant. I also accept that time spent by CSL employees providing the Services may well have been a very small percentage of the time actually worked by CSL employees overall. However I find that this is does not necessarily preclude the application of s 71(3). The issue of employees of CSL being employed solely or mainly to perform duties for or in connection with the business of the Applicant would be relevant to grouping CSL and the Applicant pursuant to s 71(2). This is not necessarily relevant to the application of s 71(3). 4. I am not satisfied that there is any evidence that in carrying out their duties for CSL's business, by providing the Services, the employees of CSL were not also performing duties for or in connection with the Applicant's business. I am aware of no evidence or authority to the effect that carrying out duties in connection with one business precludes those duties also being carried out in connection with another business. Accordingly I am not satisfied on the balance of probability that the Applicant and CSL are not grouped for the purpose of s 71(3). Degrouping The law 1. Section 79 of the Act empowers the Respondent under certain circumstances to exclude the Respondent from a tax group which includes CSL. The section relevantly provides: 79 Exclusion of persons from groups (l) 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. … … (5) A determination can be expressed to take effect on a date that is earlier than the date of the determination. … (7) The revocation of a determination can be expressed to take effect on a date that is earlier than the date of the determination. Issue 1. The degrouping issue is whether the Tribunal, standing in place of the Respondent, should exercise the discretion in s 79 to exclude the Applicant as a member of the group. The Applicant's case 1. The Applicant relied on the decision of the Appeal Panel of the former Administrative Decisions Tribunal in Lombard Farms Pty Ltd v Chief Commissioner of State Revenue [2013] NSWADTAP 42 (Lombard Farms) at [50] and [52]: 50 Section 79(2) requires the trier of fact to determine whether, having regard to the nature of the connections between group businesses, it can nevertheless be said that the businesses are independent and not connected. Ultimately, this will be a question of judgment based on facts objectively determined. It is not the case that any connection between businesses will disentitle an applicant from de­grouping. The connection must be material and not insignificant or inconsequential. This is the approach that was adopted in the Victorian authorities referred to above: see Triline at [19], [22] and [30] and GTS Industries at [38]. We agree with this approach because it directs the focus to the "carrying on" of the business: to be relevant, the connection must affect the business in some real or practical sense. 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: Network Clothing Company v Commissioner of State Revenue [2007] VCAT 2492 at [34]. To disentitle an applicant to de­grouping, 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. 1. The Applicant referred to the reasons given by the Respondent in his letter of 11 December 2012 for disallowing the application for exclusion. The reasons, as summarised by the Applicant at [31] were: 1. The outsourcing of administration services to CSL means that it provides "the majority of services which are integral to the business of" Regis, and Regis "relies heavily on CSL running its business". 2. CSL provided a $200,000 bank guarantee to Regis' lessor, and CSL has lease arrangements in place for Regis motor vehicles. 3. CSL and Regis have a group Workcover insurance policy. 1. The Applicant then provided submissions from [32] to [50] in AS and in ASR from [12] to [21] the Applicant replied to the Respondent's written submissions To the extent that they are relevant to this decision I deal below with the substantive submissions of the Applicant including the oral submissions by Mr Lees. The Respondent's case 1. The reasons given by the Respondent in the Degrouping Decision to disallow an exclusion from grouping were not identical to the wording used above by the Applicant. They were: The outsourcing of administration functions is not being done by (the Applicant) independently from CSL because it relies heavily on CSL running its business. It is clear CSL provides the majority of services which are integral to the business of (the Applicant). (The Applicant) has stated they do not have access to information from CSL, but have estimated at 1%, this is not a verified percentage of time. There is a business connection and association between the two entities, CSL has stated in the 2010 financial statement notes, CSL have provided a rental security of $200,000 in the form of a bank guarantee to the lessor in the event of (the Applicant) being unable to meet its rental obligations. Although this appears to be a commercial arrangement there are no lease agreements in place. CSL has lease arrangements in place for motor vehicles for (the Applicant). The businesses share the resources in the form of a group Insurance work cover policy. Based on the information provided, it is considered that the two businesses were substantially connected with each other during the period covered in the audit. Each of these matters considered in conjunction with one another illustrates a substantial business connection and dependence between each group member. 1. At [56] the Respondent, like the Applicant, referred to the decision of the Appeal Panel in Lombard Farms at [50] in that decision. The Respondent also referred to in the decision of the former Administrative Decisions Tribunal (the ADT) in Boston Sales and Marketing Pty Limited v Chief Commissioner of State Revenue [2014] NSWCATAD 139 (Boston Sales) where Block SM said at [20]: It is important to note that the only statutory question which requires an answer is as to whether 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, the Chief Commissioner (or, Tribunal in this instance) is to have regard to: (1) to the nature and degree of ownership and control; (2) the nature of the businesses; and (3) any other matter considered relevant. 1. The Respondent dealt at [59] to [66] with the first two issues in the preceding paragraph together with certain other matters. The substantive written submissions and the oral submissions of Mr Rider which are relevant to this decision are dealt with below. Consideration 1. The matters to which the Tribunal is to have regard, in respect of the requested determination that the Applicant be excluded from the payroll tax group which includes CSL, are the nature and degree of ownership and control of the businesses, the nature of the businesses and any other matters the Tribunal considers relevant. Nature and degree of ownership and control of the businesses 1. There is no dispute that CSL through its subsidiary CSFS owned 50% of the issued capital of the Applicant throughout the relevant period and was entitled to exercise 50% of the votes at meetings of members of the Applicant. The Applicant submitted at [34] that CSL appointed a minority of the directors on the Applicant's board, 2 out of 5, while a majority of the directors were appointed by Regis Ltd. 2. During the course of the hearing it became apparent from a consideration of the joint venture agreement made between CSFS, Regis Australia and the Applicant, at Tab 5 in GE1, that there were four voting directors of the Applicant. Two directors were appointed by CSFS and two by Regis Australia. Mr Ewing the Chief Operating Officer (COO) of the Applicant had been appointed to the board as a non-voting director. The joint venture agreement provided at clause 6.2.3 that at any time and from time to time the COO "shall be eligible to be nominated and appointed as a Director by unanimous approval of the Board". The joint venture agreement also provided that the chairman would not have a second or casting vote on any matter considered by either the board or any matter considered by the shareholders at a general meeting of shareholders (clauses 7.4 and 7.5). 3. Accordingly, although CSL, through its subsidiary, did not hold a majority interest which enabled it to fully control either general meetings or board meetings of the Applicant, it effectively had a veto at such meetings. 4. The Applicant submitted at [33] that CSL exercised no control over the day-to-day management of the Applicant. The Applicant was managed by its own dedicated senior management team. The Respondent submitted at [61] that having regard to the significant degree of CSL's ownership and control of the Applicant's business the Tribunal could not be satisfied that the Applicant's business was carried on independently of and was not connected with the carrying on of CSL's business. 5. In Lombard Farms Pty Ltd v Chief Commissioner of State Revenue [2014] NSWCATAD 132, on remittal from the Appeal Panel, (Lombard Farms on remittal) when considering the issue of ownership and control in relation to an application to degroup under s 79 of the Act, I observed at [75]: …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. 1. The substance of that observation was referred to at [59] in RS. I note that the Applicant did not provide any authority to dispute the observation although the Applicant submitted at [15] in ASR: Whilst the theoretical ability of CSL to control the applicant's business is not an irrelevant consideration …This must be weighed against the more important factor of the actual extent of CSL's control. It is clear … that as a practical commercial matter, CSL, with its minority of directors, did not have substantial control over the Applicant's business. 1. I accept that CSL did not have a majority vote on the Board of Directors as it did not control the exercise of more than one half of the votes. However, as CSL did not control less than one half of the votes, I do not accept that CSL had a "minority of directors". CSL held a veto at both board meetings and shareholder meetings. 2. Mr Ewing gave evidence that the Applicant kept minutes of relevant meetings. I observe that the Applicant's board minutes were not produced to the Tribunal other than two minutes of meetings of directors of the Applicant produced in response to a summons issued on behalf of the Respondent. One of the minutes dated 4 November 2008, at Tab six in EP1, was not signed, appeared to comprise less than one quarter of the number of pages of the complete minutes and one of the pages contains material blank spaces. The other minute dated 6 December 2011 which appears at tab 12 in EP1 contains only one item together with the repeated statement "REDACTED AS NOT RELEVANT TO SUMMONS". Some documents were produced at tab 12 of GE1 which are stated to be minutes of four compliance committee meetings, one set of draft minutes of a compliance committee meeting and some agenda items for a client compliance committee paper. These are not minutes of meetings of the Board of Directors of the Applicant and I note that none of the minutes of compliance committee meetings which were produced had been signed. 3. In the circumstances, and as the Applicant bears the onus of establishing its case on the balance of probability, I am inclined to agree with the statement at (62) in RS to the effect that: …the Applicant's lack of evidence concerning the manner in which strategic decisions affecting its business were made does not assist the Applicant in satisfying its onus that its business was carried on independently of and was not connected with the carrying on of CSL's business4 1. I observe that at [32] the Applicant submitted "Evaluating substantial independence and lack of substantial connection is a question of degree. CSL's level of ownership in (the Applicant) must be weighed against all of the other factors, and on its own is not sufficient for degrouping to be denied." I agree with the Applicant to the extent that ownership is not to be considered by itself. However it is one of the factors which the statute requires be taken into consideration, and it cannot be disregarded. Nature of the businesses 1. The Applicant referred to CSL's annual report for 2010-2011 appearing at page 226 in GE1 which is said to relate to CSL and its controlled entities and submitted at [36] and [37] that the principal activity of the Group was the operation of an automotive parts and accessories buying company operating along cooperative principles. Other entities provide travel, risk protection management, financial services and technology services. 2. The submission is that the focus of the analysis for the purposes of s 79 should be on CSL's principal business. It is then stated at [38] that the nature of the Applicant's business "is the specialist development of discretionary mutuals and other alternative risk transfer mechanisms, and their management." The Applicant submitted at [39] that the nature of the Applicant's and CSL's businesses are fundamentally different. CSL provides collective buying services whereas the Applicant provides development and management services to mutuals, which in turn provide to their members the service of transferring the risk of losses. 3. However the Applicant conceded at [22] in ASR "Throughout 2011, it became increasingly evident that the Joint Venture and business objectives of Regis Australia and CSFS were no longer aligned, and that CSL was actively competing against the Applicant for mutual management business." It is unclear from the evidence as to when in the relevant period the active competition between CSL and the Applicant commenced. The evidence as to active competition by CSL lessens the strength of the Applicant's submissions that the nature of the two businesses are fundamentally different. 4. I observe that in Toveety Maintenance Services Pty Ltd v Chief Commissioner of State Revenue [2015] NSWCATAD 137, a decision of the Tribunal in respect of the application of s 79 of the Act, handed down shortly before the hearing in this matter, Deutsch SM observed at [49] that the issue as to the nature of relevant businesses "may not be as critical an issue as the Applicant suggests - the legislation does not say that there is to be no grouping if the businesses are different in nature". Other matters the Respondent / Tribunal considers relevant 1. The Respondent referred at [64] to Conrad Linings Pty Ltd v Chief Commissioner of State Revenue [2014] NSWSC 1020 in which the court held at [51]-[57] that the following matters were relevant to whether the business of group members were independent and not connected: 1. substantial commonality of ownership; 2. intra-group loans; 3. same place of business; 4. intra-group provision of administrative services; and 5. the nature of the business. 1. The Respondent submitted that the following matters were relevant in relation to whether the Tribunal could make a determination in accordance with s 79 (1). Provision of Services by CSL to the Applicant 1. The 2011 annual report of CSL at tab 11 of GE1 states that controlled entities of CSL provide, amongst other services, financial services and technology services (page 226 of GE1). 2. The evidence before the Tribunal from the Services Agreement, Mr Ewing's first and second affidavits and tab 11 of EP1 is to the effect that the Services provided to the Applicant included: 1. in relation to human resource Services: employee and recruitment administration and employee contract management, provision of contract templates, advice and recruitment processes and access to an online program for managing various applications by employees; 2. in relation to finance or accounting Services: the production of monthly management accounts, managing completion of tax returns, managing the audit services, payment of the Applicant's creditors through the Applicant's bank accounts using online banking and providing the Applicant's Sydney office with payment reports, cheque signatories, managing payroll services including maintaining HR hard copy files and electronic records, employee leave records, fortnightly payroll payments, superannuation monthly payments, PAYG monthly payments, payment and reconciliation of monthly payroll tax, reconciliation of yearly workers' compensation and making adjustments to premiums, preparing yearly payment summaries for employees and annual payment summary reconciliation to the ATO; and 3. in relation to IT Services, Mr Ewing's evidence in his second affidavit at [13] was to the effect that CSL primarily provided services by way of remote management support for the Applicant's servers and hardware and if information technology support was required the Applicant would make a request to the CSL IT department or through a CSL IT Desk Helpline. Schedule three of the Services Agreement states that IT Services mean "services as detailed in the document titled "Regis Office IT Systems Configuration and Service Descriptions" dated November 2010. I observe that that document providing the detail of the Services, and possibly details of scheduling, key performance indicators and priority allocation, was not brought to the attention of the Tribunal and is a matter of conjecture. 1. The Applicant submitted at [37] that the focus of the analysis in relation to the nature of the businesses for the purposes of s 79 should be on CSL's principal business. Mr Ewing's evidence was to the effect that Services provided to the Applicant by CSL employees equated to approximately 0.24% of total CSL employee days and that the amount CSL charged the Applicant for the Services was $200,000 per annum or, in the 2011 financial year approximately 0.34% of CSL's revenue. 2. The Respondent submitted at [65.b] that the Services were essential to the Applicant's application for the maintenance of its AFS Licence, without which it could not carry on its business of promoting mutual products and providing advice to retail clients. In response the Applicant submitted at [19] in ASR that it is putting it too highly to say that CSL services were "essential" to the Applicant applying for and maintaining an AFS Licence as "CSL's services were replaceable, and indeed the Applicant did replace CSL as a service provider in December 2011." 3. The statutory test is not whether the Applicant's business could not be carried on without Services provided by CSL. Nor is it whether those Services were replaceable. The relevant statutory test is whether the Applicant's business was carried on independently of and not connected with the carrying on of CSL's business. The fact that the provision of the Services by CSL may have occupied a minimal amount of the working time of CSL's employees is less relevant than the importance to the Applicant's business of the provision of those Services. 4. The evidence is that the Applicant paid an annual $200,000 fee to CSL for the Services. This fee may well have been minimal in relation to the total revenue of CSL or the CSL group. However the special purpose financial statements of the Applicant (at tab 4.b in the s 58 documents) for the 13 months ending 30 June 2009 and the 2010 and 2011 financial years show that the annual $200,000 fee represented between 5.6% and 6% of the total annual non-depreciation expenses of the Applicant and between 13% and 14.9% of what is described in the financial statements as annual 'personnel expense'. 5. It is of interest that although the Service Agreement states in Schedule 1 that the Services shall be provided from 1 June 2008 the Agreement itself was not signed for over three years, on 18 July 2011. No satisfactory explanation has been provided to the Tribunal as to the reason for the failure to document in a timely manner, the terms for the provision of Services to the Applicant. 6. A further issue concerning the possible non arms-length nature of the relationship in the manner in which the two businesses were carried on is that there is no evidence that during the relevant period the Applicant considered obtaining the Services from providers other than CSL, which it did immediately after the joint venture was terminated, nor that any cost benefit analysis was undertaken by the Applicant. Provision of $300,000 start-up capital by CSL to the Applicant 1. There is undisputed evidence that CSL had invested $300,000 capital in the Applicant (EP1 at page 57) which was repaid when the joint venture was dissolved. This amount may well have been insignificant to CSL. However given that the total shareholders' equity in the Applicant on 30 June 2009, 2010 and 2011 was $112,000, $128,000 and $166,000 respectively the amount of $300,000 is not necessarily insignificant to the Applicant and its capacity to carry on its business. Guarantees provided by CSL for the benefit of the Applicant's business A Provision of a bank guarantee in the sum of $200,000 by CSL as rental security 1. The Applicant submitted at [45] that this guarantee was of a relatively modest size for CSL constituting only 4.4% of the bank guarantees that CSL provided. The Applicant observed that CSL had provided a $4,300,000 guarantee for the benefit of another of its associated companies. B CSL guaranteed the Applicant's obligations under two leases of motor vehicles 1. The evidence is that the vehicle lease payments secured by the guarantees totalled approximately $74,000. 2. The Applicant submitted that the provision of the three guarantees should be understood as being a mere matter of convenience and at the time both of the joint venturers, CSL and Regis Ltd were supporting and contributing resources to the joint venture. The Applicant submitted, and it may well be correct, that Regis Ltd as the other parent company could also have provided the guarantees. However that is not what occurred. 3. The Applicant submitted at [44] and [46]: The fact that there is a loan between grouped companies "will not necessitate the conclusion that there is no entitlement to degrouping" (Lombard Farms at [71]), and the same principle should apply to guarantees. Guarantees are contingent liabilities which might never crystallise as a loss. The 3 guarantees that CSL provided for the benefit of (the Applicant) are also less significant as evidence of connectedness and dependence than the cross-covenants and guarantees provided by both grouped companies in relation to loans obtained by both companies in GTS Industries Pty Limited v Commissioner of State Revenue [2004] VCAT 21 (GTS Industries). There the tribunal held at [35] that "I am not persuaded that the insistence by a bank of cross guarantees as a term of its advances should be used as a determinative indicium of connection between companies for the purposes of this legislation". The guarantees, and the services provided by CSL should be understood as being mere "matters of convenience", to adopt the description used by Gzell J in Tasty Chicks [2009] NSWSC 1007 at [132]. "Limited weight should be placed on these factors for the purposes of s79 of the Act." 1. I have considered the reference in the preceding paragraph to part of a sentence from Lombard Farms at [71]. It is necessary to consider the context in which those words were used. Paragraph 71 in Lombard Farms is part of the consideration by the Appeal Panel in respect of the application of the conditions in s 79 (2) to a determination by the Chief Commissioner. 2. The consideration relates to Ground 5 of the notice of appeal which is to the effect that the Tribunal at first instance erred when it concluded that the substantial connection of Alpine [and the Appellant in the form of a loan] alone prevented a finding necessary for both limbs of s 79 (2). 3. In the course of that consideration the Appeal Panel said at [71] and [73]: The Appellant's contention in relation to ground 5 raises two issues: first, whether the loan from Alpine was an irrelevant consideration; and second, if it was not an irrelevant consideration, whether by placing undue weight on it, an error of law is nonetheless disclosed. As to the first issue, the fact that an entity is provided a loan from a group member is not an irrelevant consideration: see for instance, Triline at [25] that the role of one entity as an internal banker precluded the exercise of the discretion to de­group; see too Network Clothing at [39]. However, the mere fact that there is an inter­group loan will not necessitate the conclusion that there is no entitlement to de­grouping: see for instance, GTS Industries at [32] and [38]. Whether the loan was sufficient to disentitle the Appellant from de­grouping, is a factor to be weighed up in the balancing exercise. We have already expressed our view that the Tribunal set the bar too high. Whether the loan from Alpine is sufficient to disentitle the Appellant from de­grouping is a matter to be weighed by the Tribunal employing the test outlined in …. It is a matter for the Tribunal on the remittal. In the event, the Tribunal held in Lombard Farms on remittal that the financial assistance provided by Alpine to the applicant in that matter was a factor in affirming the decision of the Chief Commissioner under review. 1. I have had regard to the decision in GTS Industries. I observe that in that matter there were cross guarantees securing the liabilities of companies which were held to be grouped. I have also had regard to the three guarantees in this matter, which do not involve cross guarantees, and the lack of evidence as to any consideration provided by the Applicant to CSL in respect of the provision of its guarantees, and the 2011 annual report of CSL which indicated that the provision of guarantees and other financial support for associated entities was not uncommon. 2. The reference to the description used by Gzell J in Tasty Chicks Pty Ltd v Chief Commissioner of State Revenue [2009] NSWSC 1007 at [132] of 'matters of convenience' related to the use of the same premises by certain employers. This was but one of several factors taken into account by His Honour in his determination that the evidence in that matter established a substantial independence of the parties or the businesses they conducted. I observe that even though the Court of Appeal held that His Honour had applied the test of independence of the grouped businesses too narrowly the Applicant submitted in a footnote to [46] that the descriptor remained apposite. 3. In the circumstances I regard the guarantees provided by CSL as matters to be relevantly considered in determining whether or not the business carried on by the Applicant was carried on independently of and was not connected with the carrying on of the business by CSL. Grouped workers' compensation insurance 1. The Applicant and CSL had grouped workers' compensation insurance for two years of the 3 ½ year relevant period. The Applicant submitted that once the Applicant knew of the group insurance it terminated the arrangement. However no evidence was provided to the Tribunal that the nominee directors of CSFS on the board of the Applicant, who were until about May 2011 the Chief Executive Officer and the Chief Financial Officer of CSL, were unaware of the group insurance from the time it was put in place. Both the Applicant and CSL banked with the ANZ bank in Perth 1. I regard this factor as of minimal relevance. Both the Applicant and CSL use the same accountants from the same office and had the same engagement partner. 1. By itself and without some additional nexus I would not regard the use of the same engagement partner and same firm of accountants as particularly relevant in being satisfied that the businesses of the Applicant and CSL were carried on independently of each other and not connected with each other. Decision 1. I have regard to the decision of the Court of Appeal in Chief Commissioner of State Revenue v Tasty Chicks Pty Ltd [2012] NSWCA 181 in which Meagher JA, with whom Barrett JA and Sackville AJA agreed, said at [59] that one of the relevant matters to be considered in determining whether two businesses, which were separately owned and controlled, were being carried on substantially independently of each other was that the persons carrying on one business were in a position to influence the ongoing conduct of the other business. 2. Having regard to the evidence that: 1. the nominees of CSFS (a subsidiary of CSL) to the board of directors of the Applicant until about May 2011 were the Chief Executive Officer and Chief Financial Officer of CSL and, by virtue of the 50% shareholding of CSFS in the Applicant CSL, held an effective veto in respect of decisions of that board; 2. the extent of the Services provided by CSL to the Applicant throughout the relevant period and the importance of those Services to the existing and proposed business activities of the Applicant; 3. the fees paid by the Applicant for the provision of Services without any evidence as to the Applicant considering obtaining those Services from a different provider; 4. the lengthy delay in documenting the Services Agreement; 5. the group workers' compensation insurance effected for much of the relevant period; 6. the provision by CSL of guarantees for the benefit of the Applicant without any consideration from the Applicant to CSL and without any evidence being brought to the attention of the Tribunal as to any indemnity or other protection being offered or provided by the Applicant to CSL in respect of the provision of the guarantees; and 7. $300,000 capital was provided by CSL to the Applicant, the importance of that money to the Applicant in being able to maintain its solvency and continue to carry on its business, and the apparently not uncommon procedure for CSL to provide financial support to its controlled entities, I am not satisfied on the balance of probability that the business carried on by the Applicant was carried on independently of and was not connected with the carrying on of one or more businesses carried on by CSL throughout each payroll tax year during the relevant period. 1. The correct and preferable decision of this Tribunal is that the decisions of the Chief Commissioner under review are affirmed. 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: 19 October 2015