Edgely Pty Ltd v Chief Commissioner of State Revenue  NSWCATAD 16
Edgely Pty Ltd (“the taxpayer”) purchased land at Arndell Park in 2000 and by 2003 had constructed a warehouse with offices, where Nitestar Express Pty Ltd (“Nitestar”) carried on its trucking business and Transtar Express Pty Ltd (“Transtar”) conducted its trucking hire business. The taxpayer, Transtar and Nitestar had common directors and shareholders, being Ronald Wesley Searle (“RWS”), John Weslyn Searle (“JWS”) and Elizabeth Mary Searle (“EMS”). One hundred shares in the taxpayer were held by Kagua Pty Ltd (“Kagua”) on trust for the beneficiaries of the R W Searle Family Trust, RWS, JWS and EMS. RWS also held one E share which gave a right to be paid dividends.
Following an audit/ investigation which commenced in 2006, the Chief Commissioner grouped the taxpayer with Transtar, Nitestar and Kagua for payroll tax purposes. Payroll tax assessments were issued for the period 1 July 2002 to 30 June 2007 (“the relevant assessments”).
The grouping provisions relied upon were: s.16D of the Pay-roll Tax Act 1971 (“PTA”) from 1 July 2002 to 30 June 2003 and s.106I of the Taxation Administration Act 1996 (“TAA”) from 1 July 2003 to 30 June 2007.
The taxpayer sought a review of the relevant assessments the basis that it should not have been grouped with the other companies as it paid no “taxable wages” or carried on any business activity during the relevant period.
The following issues were considered in these proceedings:
whether a company without employees and paying no wages can be subject to a pay-roll tax liability (issue 1);
whether the taxpayer was correctly grouped (issue 2);
whether the taxpayer was jointly and severally liable for pay-roll tax in circumstances where a member of the group failed to pay the tax due under an assessment issued to the member (issue 3); whether the Chief Commissioner ought to have exercised his power to de-group the taxpayer (issue 4).
Issue 1: Whether a company without employees and paying no wages can be subject to a pay-roll tax liability?
The taxpayer argued that although the Chief Commissioner could “group persons who do not employ people but who are carrying on a business with other persons who do employ people”, he could not do so in the present circumstances as the taxpayer was not a business but “simply [derived] rental income … plainly a passive conduct.”
The Chief Commissioner submitted that the taxpayer carried on a business as it purchased land, constructed a warehouse and then rented out the warehouse to the other members of the group.
The Tribunal considered that the definitions of “business” in s.16A of the PTA and in s.106E of the TAA, were similar and were broader than the common law definition as the definitions included “any other activity carried on for fee or reward.”
At paragraph 38 of the decision, the Tribunal referred to Federal Commissioner of Taxation v Radnor Pty Ltd 91 ATC 4689, noting that Hill J usefully set out the basic criteria that can assist in determining whether an activity constitutes a business as follows:
There is no single factor that can be isolated as determinative of the question whether a taxpayer is carrying on a business. Rather, as Jessel M.R. said in Erichen v Last (1881) 8 QBD 414 at 416:
“There are a multitude of things which together make up the carrying on of trade.”
Two factors assist, however, in making out activities as a business: repetition and the existence of making a profit; Hope v The Council of the City of Bathurst 80 ATC 4386 at 4389-4390; (1980) 144 CLR 1 at 8-9. The significance of these factors was pointed out in the joint judgment of Bowen C.J. and Franki J in Ferguson v FC of T 79 ATC 426 at 4264; (1979) 37 FLR 310 at 314, where their Honours said:
“There are many elements to be considered. The nature of the activities, particularly whether they have the purpose of profit-making, may be important. However, an immediate purpose of profit-making in a particular income year does not appear to be essential. Certainly it may be held a person carrying on business notwithstanding his profit is small or even where he is making a loss. Repetition and regularity of the activities is also important. However, every business has to begin and even isolated activities may in the circumstances be held to be the commencement of carrying on business. Again, organization of activities in a business-like manner, the keeping of books, records and use of system may all serve to indicate that a business is being carried on.”
Volume and scale of the activity may be significant, as the passage quoted earlier from the judgment of Jacobs J. in London Australia suggests, as may the amount of capital employed. While intention to carry on a business must exist, this does not mean that the question is subjective. As Lord Buckmaster said in J & R O’Kane v Inland Revenue Commissioners (1919-1920) 12 TC 303 at 347:
“… the intention of a man cannot be considered as determining what (it) is that his acts amount to.”
The Tribunal also referred to London Australia Investment Company Limited v FC of T 77 ATC 4396, where Gibbs J at ATC4404 “considered ‘whether a sale was a business operation carried out in the course of the business of profit-making, rather than a mere realisation of a capital asset’. In finding that the company was carrying on a business, his Honour made the rather important observation that:
“The position of an investment company is materially different from that (of) an individual managing his own portfolio of shares.””
The development of the property by the taxpayer and the subsequent leasing of the property to the related companies earning regular income, in the Tribunal’s view, satisfied the profit making and regularity criteria to establish that a business activity was conducted by the taxpayer.
Issue 2: Whether the taxpayer was correctly grouped?
During the two periods at issue, two or more businesses could have been grouped if the same person had, or the same persons had together, a controlling interest in the businesses.
Having found that the taxpayer did carry on a business, the only issue that remained in relation to grouping was whether there was a common controlling interest in the businesses (paragraphs 62 and 63). The Tribunal noted that whilst the provisions of the TAA and the PTA “…were differently worded, they nevertheless applied in similar circumstances. Under both provisions, the test was satisfied if a director or set of directors were able to make decisions by exercising their voting power” (paragraph 68).
As there was “serious challenge” to the factual matters (common directors and shareholders), the Tribunal found the Chief Commissioner correctly grouped the taxpayer for pay-roll tax purposes.
Issue 3: Whether the taxpayer was jointly and severally liable for pay-roll tax in circumstances where a member of the group failed to pay pay-roll tax due under an assessment issued to the member?
On 31 December 2010, pursuant to s.16LA of the PTA and s.45 of the TAA which provided for joint and several liability for pay-roll tax, the Chief Commissioner issued assessments to the taxpayer in respect of the outstanding pay-roll tax liabilities previously assessed to Transtar and Nitestar for the whole of the relevant period.
The Tribunal found that these provisions clearly entitled the Chief Commissioner to issue the assessments to the taxpayer.
Issue 4: If the taxpayer was correctly grouped, whether the Chief Commissioner ought to have exercised his power to de-group the taxpayer?
From 1 July 2002 to 30 June 2003, the Chief Commissioner had a power to exclude the taxpayer from the group if he was satisfied that the business carried on by the taxpayer was carried on substantially independently of, and was not substantially connected with, the carrying on of the business of Transtar and Nitestar, having regard to the nature and degree of ownership or control of the businesses and any other matters that the Chief Commissioner considered relevant (paras 95).
The Tribunal concluded that “the businesses of the taxpayer, Transtar and Nitestar were interconnected and interdependent” (paras 99 to 105), noting that:
Transtar used the taxpayer’s property for its trucking business. The arrangements for its use were informal without any written lease. Nitestar was a subcontractor to Transtar and supplied truck drivers for Transtar’s trucking business. Nitestar and Kagua also had offices at the taxpayer’s property. RWS managed the business of Transtar and Nitestar from the taxpayer’s property;
The taxpayer borrowed large sums of money from Transtar without any formal agreements in place.
RWS was the sole director of the taxpayer, Transtar and Kagua from 1 July 2002 to 18 January 2005 and the sole director of Nitestar from 12 December 2002 to 18 January 2005. JWS was sole director of Transtar, Nitestar, Kagua and the taxpayer from 7 March 2005 to 23 February 2006. RWS and JWS were directors of Transtar, Nitestar, Kagua and the taxpayer from 23 February 2006 to 30 June 2007.
The same accountant maintained the bookkeeping accounts, and attended to resolutions and board meetings of the taxpayer, Transtar, Nitestar and Kagua.
From 1 July 2003 to 30 June 2007, pursuant to s.16C of the PTA, the Chief Commissioner could only de-group a person who was a member of a group arising from the use of common employees or carried on a business as trustee of a trust or from 1 July 2015 only, was a member of a group arising from tracing of interests in corporations.
As the taxpayer did not fall into any of the categories set out in s.16C of the PTA, the Tribunal found that the Chief Commissioner correctly refused to exclude the taxpayer from the group.
The Tribunal confirmed the decision under review, namely, the pay-roll tax assessments issued for the period 1 July 2002 to 30 June 2007.
The pay-roll tax assessments for the period 1 July 2002 to 30 June 2007 are confirmed.