TH
12 ANNUAL STATES’
TAXATION CONFERENCE
Payroll Tax Grouping
Written by:
Tony Ince
Thomson Reuters
Presented by:
Tony Ince
Thomson Reuters
National Division
26-27 July 2012
Burswood Entertainment Complex, Perth
© Tony Ince, Thomson Reuters 2012
Disclaimer: The material and opinions in this paper are those of the author and not those of The Tax Institute.
The Tax Institute did not review the contents of this paper and does not have any view as to its accuracy. The
material and opinions in the paper should not be used or treated as professional advice and readers should
rely on their own enquiries in making any decisions concerning their own interests.
Tony Ince
Payroll Tax Grouping
CONTENTS
1
INTRODUCTION.............................................................................................................................. 3
2
CASE UPDATE - GROUPING......................................................................................................... 4
2.1
Tasty Chicks Pty Limited........................................................................................................... 4
2.2
Liquid Rock Constructions Pty Ltd ............................................................................................ 4
2.2.1
Facts .................................................................................................................................. 5
2.2.2
Decision ............................................................................................................................. 5
2.3
2.3.1
Facts .................................................................................................................................. 6
2.3.2
Decision ............................................................................................................................. 6
2.4
3
Verra Pty Ltd ............................................................................................................................. 5
Port Augusta Medical Centre Pty Ltd ........................................................................................ 7
2.4.1
Facts .................................................................................................................................. 7
2.4.2
Decision ............................................................................................................................. 7
PROPOSITIONS .............................................................................................................................. 8
3.1
Proposition One ........................................................................................................................ 9
3.2
Proposition Two ...................................................................................................................... 11
3.3
Proposition Three .................................................................................................................... 12
3.4
Proposition Four ...................................................................................................................... 13
3.5
Proposition Five ...................................................................................................................... 15
3.6
Proposition Six ........................................................................................................................ 17
3.7
Proposition Seven ................................................................................................................... 18
4
FOOD FOR THOUGHT ................................................................................................................. 20
5
CONCLUSION ............................................................................................................................... 22
© Tony Ince, Thomson Reuters 2012
2
Tony Ince
Payroll Tax Grouping
1 INTRODUCTION
The session was conceived as a follow on from the issues raised by David Marks in his 2011
presentation from a more practical perspective.
In preparing for discussion on what is a topic which has received much coverage in the life of this
conference, it became clear that it would be difficult to present something with value to the attendees.
The paper presented by David was, as usual, very erudite and a difficult act to follow.
Having accepted the invitation to speak from Gary Matthews (perhaps I should have known better) it
became clear that this was no easy task. After much thought and many discarded ideas, I decided
that the most value would be the following.
1.
An update of recent grouping cases in the last 12 months.
2.
Some propositions arising from grouping cases.
3.
Some food for thought on the structure of the harmonised grouping legislation.
While the grouping provisions across the jurisdictions are largely the same, there are some
differences in wording and structure in some jurisdictions. I have, in most cases, used the
harmonised provisions where possible.
At the outset I should note that this paper was prepared using voice recognition software. Any
technical errors are mine while any typos I blame on it and my failure to properly edit the paper.
© Tony Ince, Thomson Reuters 2012
3
Tony Ince
Payroll Tax Grouping
2 CASE UPDATE - GROUPING
There are a few cases on grouping issues within the last 12 months which I think are worthy of a
review at the start of this paper. At the time of writing, I am not sure whether or not they will be dealt
with by James Petterson in his paper or, if they are, in what level of detail. Notwithstanding that, it is
worth noting them here in this paper on payroll tax grouping.
These cases all include references to the former grouping provisions in the appropriate jurisdiction.
While the legislation may have changed, much of the judicial support to come out of these cases is
still very relevant. Some of the issues arising in these cases will be discussed in the second part of
the paper.
2.1 Tasty Chicks Pty Limited
We will look firstly at the decision in the Tasty Chicks case. The facts of the case are hopefully well
known to you all. The decision of the High Court in Tasty Chicks Pty Limited & Ors v Chief
Commissioner of State Revenue [2011] HCA 41 (5 October 2011) is summarised in their final
paragraph:
“The Court of Appeal should not have allowed the Chief Commissioner's appeal by proceeding on the basis that the
jurisdiction and powers conferred upon the Supreme Court were such that before Gzell J it had been for the taxpayers
to show that the Chief Commissioner had erred on the materials before the Chief Commissioner and to show that the
exercise of discretion by the Chief Commissioner was vitiated by error of a kind referred to in Avon Downs. The
appeal to this Court should be allowed with costs, the orders of the Court of Appeal dated 4 January 2011 set aside,
and the matter be remitted to that Court for further hearing.”
The High Court went to lengths to examine the difference between an “appeal” and a “review”. On this
basis, they were able to distinguish the decision in Avon Downs Pty Ltd v Federal Commissioner of
Taxation. While this decision throws up some interesting issues with regards to the appropriate
jurisdiction of the courts and Tribunals, these are probably best left to the lawyers to dissect.
On a more practical basis from the point of view of the application of the grouping provisions, it will be
interesting to see the result of this case in the Court of Appeal. One gets the feeling from the original
decision in the Court of Appeal that the grouping decision of the Commissioner may be successful.
2.2 Liquid Rock Constructions Pty Ltd
In Liquid Rock Constructions Pty Ltd v Commissioner of State Revenue (Taxation) [2011] VCAT 2164,
the Victorian Civil and Administrative Tribunal (VCAT) has upheld the Commissioner of Taxation's
decision to group companies for payroll tax purposes on the basis of common shareholders but not
because of the use of one or more “common employees”.
© Tony Ince, Thomson Reuters 2012
4
Tony Ince
Payroll Tax Grouping
2.2.1 Facts
Following an audit of the taxpayer's concreting business, the Commissioner found that the taxpayer
should have been grouped together with three other companies under section 9A(1C)(b) of the
Payroll Tax Act 1971 (Vic) and section 72(2)(e) of the Payroll Tax Act 2007 (Vic) as the same
individuals held 50% of the shareholding in each of the companies. Alternatively, the Commissioner
considered that the companies should be grouped together because of the inter-use of employees
between members of the group under section 9A(1A)(d) of Payroll Tax Act 1971 and section 71(3) of
Payroll Tax Act 2007.
2.2.2 Decision
In relation to the common shareholding, the VCAT accepted the Commissioner's grouping from 2005
to 2007 considering that the same individuals owned 50% shareholdings in the relevant members of
the group as required by section 9A(1C)(b) of the Payroll Tax Act 1971. However, the VCAT rejected
the grouping from 2007 onwards as section 72(2)(e) of the 2007 Act required that the individuals hold
more than 50% of the shareholding.
Perhaps more interestingly, the VCAT rejected the Commissioner's grouping on the basis of the interuse of employees as section 9A(1A)(d) of Payroll Tax Act 1971 and section 71(3) of Payroll Tax Act
2007 required that an individual perform duties rather than services for the other members of the
group. To distinguish between duties and services, the VCAT applied the same tests used to
distinguish a relationship of employer/employee from a relationship of independent contractor. A key
factor of this was the control test. In considering the nature of the relationship, the VCAT held that
the employees of the taxpayer could not have been said to be performing duties in connection with
the other members of the group as it was entirely at the discretion of the taxpayer as to what work the
employees would undertake and how it would be done.
VCAT used an example to clarify the issue (for themselves, one suspects) and concluded that, in their
example, “one has moved from the mere supply of services to the rendering of duty” and hence there
was no use of “common employees” by the two businesses.
We will touch on this issue a bit later in the paper but it continues to give rise to difficulty in
interpretation for both practitioners and Commissioners. Rather than clarify matters, the
employee/contractor tests still cause much confusion.
The VCAT was not persuaded that it should de-group under section 9A(1J) of Payroll Tax Act 1971
considering the common shareholders, the sharing of premises and the sharing of web site between
the members of the group.
The VCAT reduced the penalty by 80% in accordance with the Taxation Administration Act 1997 (Vic)
as the taxpayers had provided voluntary disclosure before the Commissioner commenced an
investigation into a known or suspected tax default.
2.3 Verra Pty Ltd
© Tony Ince, Thomson Reuters 2012
5
Tony Ince
Payroll Tax Grouping
The Queensland Civil and Administrative Tribunal (QCAT) in Verra Pty Ltd as trustee for the
Pharmacies Services Trust and Ors v Commissioner of State Revenue [2012] QCAT 64 affirmed the
Commissioner's decision not to de-group the entities referred to as the "independent pharmacies" for
payroll tax purposes.
2.3.1 Facts
A number of pharmacies and their service companies were grouped together for payroll tax purposes
under section 69 of the Payroll Tax Act 1971 (Qld) (Act), which allows businesses to be grouped
together where the same persons have together a controlling interest in each of the businesses. The
taxpayers contended that three of the pharmacies, referred to as the "independent pharmacies"
should be de-grouped from the other members of the payroll tax group.
2.3.2 Decision
The QCAT affirmed the Commissioner's decision not to de-group the "independent pharmacies" from
the group under section 68(2), section 69(7) or section 71(3) of the Act. The QCAT considered that
the employers were properly grouped under section 68(1)(b) of the Act, which allows for grouping
where employees are used in another business. The QCAT considered that the employees of the
taxpayer, including the group retail manager, the general manager and three bookkeepers, provided
services to all members of the payroll tax group, including the "independent pharmacies”.
Further, the QCAT considered that taxpayer was properly grouped under section 69 of the Act. The
same persons had controlling interests in the "independent pharmacies" as the relevant individuals
had entitlements to 50% of the profits of each of the independent pharmacies under the various
partnership agreements.
The QCAT was not satisfied that the businesses of the independent pharmacies were carried out
substantially independently of any other members of the group. The QCAT took into account a
number of factors, including that the partnership agreements relating to each of the "independent
pharmacies" gave each partner a "substantial degree of ownership" of those pharmacies. It also took
into account the fact that the arrangement between the pharmacies enabled the taxpayer to monitor
the financial activities of all the pharmacies in which it had an interest. The QCAT also considered that
the same individual was the signatory to agreements and leases relating to the "independent
pharmacies".
In the case of at least one of the “independent pharmacies”, the partnership agreement gave effective
control to Ms McKerrell (one of the partners) as unanimity was required for the hire or dismissal of any
agent or employee. The QCAT concluded that “the presence of those provisions in the partnership
deeds is inconsistent with any suggestion that the businesses of the independent pharmacies could
be carried out independently of ... Ms McKerrell.”
Therefore, the QCAT affirmed Commissioner's decision not to de-group the entities.
© Tony Ince, Thomson Reuters 2012
6
Tony Ince
Payroll Tax Grouping
2.4 Port Augusta Medical Centre Pty Ltd
Finally, the decision in the Port Augusta Medical Centre case, Port Augusta Medical Centre Pty Ltd v
Commissioner of State Taxation [2012] SASCFC 7 (16 February 2012).
The Full Court of the Supreme Court of South Australia unanimously dismissed the taxpayer’s appeal
against the decision in Port Augusta Medical Centre Pty Ltd v Commissioner of State Taxation [2012]
SASC 31, in which Peek J upheld a decision of the Commissioner of State Taxation not to exclude
the taxpayer from a group for payroll tax purposes.
2.4.1 Facts
The group comprised the taxpayer, the Port Augusta Medical Centre (PAMC), and four other
companies. Two doctors (Dr Yeung and Dr Bhola) were the sole directors and shareholders of PAMC.
PAMC carried on the business of providing services to various medical practitioners including Dr
Yeung and Dr Bhola through either their incorporated medical practices or as individuals. The two
companies under which the two doctors operated their respective medical practices were grouped
with PAMC, along with two companies acting as trustee for the Yeung Family Trust and the Bhola
Family Trust, respectively.
2.4.2 Decision
The Full Court found that Peek J had properly considered the test in section 18I(1) of the Pay-Roll Tax
Act 1971 (SA), comprising a “substantial independence” test and a “not substantially connected” test,
although it said that these two limbs comprised just one test. Appropriate consideration had been
given to the nature and operation of the PAMC business, how the profits of PAMC were distributed,
the day-to-day running of PAMC and the level of control exercised by Drs Yeung and Bhola over the
direction of the PAMC business. The Full Court concluded that PAMC should not be de-grouped as
PAMC had not succeeded in showing that its business was substantially independent of, and was not
substantially connected with the carrying on of, the businesses of the two incorporated medical
practices and the two trustee companies.
© Tony Ince, Thomson Reuters 2012
7
Tony Ince
Payroll Tax Grouping
3 PROPOSITIONS
Because the payroll tax grouping provisions are intended to be broad based, grouping may manifest
itself in various ways. However, the scheme of the various state and territory Acts is not so broad as
to group all businesses without giving the Commissioner power to exclude from a group where he is
satisfied, having regard to a number of factors, that the businesses should be excluded from the
group. However the grouping provisions should be considered in context.
In regards to the payroll tax grouping provisions, Anderson J said in the Port Augusta Medical Centre
case:
“To properly construe the critical clause of s 18I of the Act, it is necessary to understand the grouping provisions which
provide the context in which the section operates. It is also helpful to consider the historical and fiscal context of the
Act.”
The High Court has considered the relevance of context both in a broad sense and in relation to the
text of specific provisions within an Act. The judgment of Brennan CJ, Dawson, Toohey and Gummow
JJ in CIC Insurance Ltd v. Bankstown Football Club Ltd indicates it is appropriate to consider the
context “...in its widest sense to include such things as the existing state of the law and the mischief
which, by legitimate means such as those just mentioned, one may discern the statute intended to
remedy”. The Court went on to add that “...inconvenience or improbability of result may assist the
court in preferring to the literal meaning an alternative construction which, by the steps identified
above, is reasonably open and more closely conforms to the legislative intent.”
However, consideration of the context of grouping in its broadest sense in the various Payroll Tax
Acts does not obviate the need for close attention to the text of the provisions chosen by the various
Parliaments under consideration (which we will consider in more detail later) and the context of the
provision in that Act. As the High Court noted in the judgment of Gleeson CJ, Gummow, Hayne and
Heydon JJ in Stevens v. Kabushiki Kaisha Sony Computer Entertainment “No particular theory or
"rule" of statutory interpretation, including that of "purposive" construction, can obviate the need for
close attention to the text and structure of [the relevant part of the legislation].” Ultimately, the task of
the courts and the Commissioners is to construe the language of the statute.
Further, as has been noted by Kirby J in The Queen v. Lavender, it is important to take a consistent
approach to issues of statutory interpretation and not “...pluck out considerations of "context",
"purpose" and "history" arbitrarily, so as to sustain the outcomes of interpretation ... in some, but not
other cases.”
Propositions for characterising and analysing the grouping provisions
The propositions for characterising the grouping provisions flow from case decisions as well as the
text and structure of the Acts. As with any legislation, it can be argued that context necessarily
changes over time as case law evolves and the environment in which the particular sections operate
change. The propositions I propose are not universal; there may be exceptions or they be qualified by
the operation of particular provisions of the Act.
© Tony Ince, Thomson Reuters 2012
8
Tony Ince
Payroll Tax Grouping
The propositions below are exactly that, propositions. While discussion within each is treated as
factual, these are put forward as propositions, not necessarily defined, proven or fixed points of view. I
am hopeful that they will form the basis of discussion rather than be seen as universal truths.
3.1 Proposition One
The grouping provisions are not anti-avoidance provisions.
It is self evident that the grouping provisions started life as anti-avoidance provisions.
The High Court recently considered the grouping provisions in the Tasty Chicks case. The Court,
French CJ, Gummow, Crennan, Kiefel and Bell JJ said, speaking of the corresponding provisions in
the New South Wales legislation:
“The ‘group’ provisions were designed to counter tax avoidance through the splitting of business activities by the use
of additional entities, each attracting a threshold. The ‘de-grouping’ provisions were available through application by
the Chief Commissioner upon determination, in broad terms, that it would be unreasonable to apply the ‘grouping’
provisions.”
The Tribunal in Liquid Rock gave a more detailed explanation of the history of the grouping provisions
in Victoria:
“It can be seen that in the absence of some anti-avoidance measures an enterprise which would be liable to pay
payroll tax could avoid that liability by dividing itself into a series of separate employer companies each of which had a
payroll below the taxable threshold. Resort to these measures represented a threat both to the State’s tax base and
also to equity between taxpayers as between those who resorted to artificial structures for the avoidance of the tax
and those employers whose enterprises were structured by reference to more general commercial considerations not
involving the elaborate subdivision entailed in the exploitation of the non-taxable threshold.
In 1974 a Bill was introduced to the Victorian Parliament in the Spring Session of 1974 to amend the
Payroll Tax Act 1971 to curb this form of avoidance. Mr Murray Byrne, the Minister for State
Development and Decentralisation speaking in support of the second reading of the Bill in the
Legislative Council on 12 November 1974 at page 1921 of the relevant volume of Hansard said:
The underlying principle of the Bill is that related and associated employers will be grouped together for the purposes
of pay-roll tax, and will be allowed only the one ... exemption to which they would be entitled as one employer.”
In looking at the South Australian grouping provisions, the Full Court of the Supreme Court of South
Australia took a similar approach in Port Augusta Medical Centre but raised again the issue of the
“mischief” to which the grouping provisions were directed.
“A tax free threshold was enacted from the commencement of the Act. A general avoidance provision was also
enacted, but initially there was no grouping scheme such as that which is in issue on this appeal. Within just four
years, the Act was amended to address business structures which threatened to stunt the “growth tax.” The
predecessors of the grouping provisions and s 18I of the Act were first enacted in 1975. The 1975 amendments
reflected the realisation that economic and industrial activity had quickly become more complicated than the paradigm
contemplated by the Act. The grouping provisions, in effect, created fictional aggregated employers in accordance
© Tony Ince, Thomson Reuters 2012
9
Tony Ince
Payroll Tax Grouping
with the old paradigm. The independent business test was enacted because it was recognised that the net cast by the
grouping provisions might enmesh employers which, historically, would have been taxed separately. The concepts of
connection and independence in s 18I of the Act evoke the business model, on which the Act was premised in which
dependent or substantially connected businesses were undertaken by a single entity which engaged all of the workers
employed in those businesses.
Section 18D of the Act forms groups of just two businesses owned by entities which are “controlled” by the same
person or persons. Section 18D(1) of the Act expressly excludes from the operation of s 18D, any two businesses
which are owned, legally and beneficially, by the same person or persons, or which are held by a trustee or trustees
on the same trust. It is readily apparent that in such cases, the employees engaged for the purposes of those
businesses are employed by the same employer. There is therefore no reason to group them. However, it is not
obvious to me that a grouping of the businesses would have caused any mischief necessitating the enactment of
s 18D(1) of the Act. Perhaps it was feared that, but for the enactment of s 18D(1) a single employer with
diverse businesses might be cleaved into two separate employers by s 18I of the Act (emphasis added).”
This raises a question as to whether or not an anti-avoidance purpose of the taxpayer(s) is necessary
for the grouping provisions to apply. It seems accepted that it does not.
In concluding that businesses should not be excluded from a group, Dr Peter McDermott, the Tribunal
Member in Verra noted:
“I should record that I do not consider that the arrangements in question were motivated by a tax minimisation
purpose. If anything the arrangements would appear to have been adopted to ensure compliance with legislation
relating to the pharmaceutical industry as well as enabling Mrs McKerrell or Ms McKerrell to monitor their interests.”
This view was also expressed in the Tasty Chicks, Court of Appeal decision:
“Section 16C(a) should be interpreted in accordance with its terms without any pre-supposition that it is directed to the
“splitting” of an existing business. Although common ownership and control of both businesses would support a
finding that the section applied there is, in my judgment, no justification for reading in any such requirement. A
partnership and at least some types of joint ventures would also be within the section.”
Is it necessary to address a “mischief” in applying the grouping provisions? The answer in the first
instance would seem to be “no”, as in the case on related entities under the Corporations Act. There
is prima facie no anti-avoidance issue or apparent “mischief “here.
However, the power of Commissioners to exclude persons from a group may suggest that considering
the likely “mischief” could be a factor in their deliberations. I note that this does not seem to be an
explicit argument ever raised by the Commissioners although it appears to be implicit in some of the
cases (or is that just in my mind?).
Example:
A owns35% of coy1, B 35% and C 30%. Coy1operates an accounting practice. Coy2 is owned 60%
by A and 40% by D. It operates a manufacturing business. There are no common employees. The
businesses are not grouped.
© Tony Ince, Thomson Reuters 2012
10
Tony Ince
Payroll Tax Grouping
B sells her 35% share in the accounting practice to A. A now controls both coy1 and coy2 and the
businesses are grouped for payroll tax purposes, even though there is no evidence of any antiavoidance or “mischief”.
In most jurisdictions, the Commissioner would have the power to exclude either from the group.
May I suggest that, if the Commissioner did sense any form of mischief, he may be more reluctant to
de-group, albeit that the underlying facts may be largely the same.
3.2 Proposition Two
The grouping provisions do not require a group member to be an employer. Such group
members can result in wage-paying entities being grouped via these entities and smaller
groups being subsumed into larger groups.
The grouping provisions do not require a group member to be an employer. This is the case for
commonly controlled entities, related entities and entities grouped by way of common employees.
While the inclusion of an entity that does not pay taxable wages in a payroll tax group will not normally
have any financial implications, it may be via these entities that wage-paying entities are grouped or
that a larger group is formed.
This is a concept that many accountants/advisers and taxpayers do not understand.
Example
Coy1 pays wages and is owned 50/50 by M and N. Coy2 pays wages and is owned 50/50 by M and P.
They have no common employees and would not otherwise be grouped. However M, N and P each
have a one third share in a unit trust which holds property but does not have any employees or pay
any wages.
Coy1 is grouped with the unit trust and forms a group. Coy2 is grouped with the unit trust and forms
another group. The two smaller groups are subsumed into a larger group, thereby grouping Coy1 with
Coy2 even though there may be no other relationship between the businesses.
In most jurisdictions, the Commissioner would have the power to exclude either from the group.
The Tribunal in Liquid Rock noted:
“A de-grouping which eliminated SBM from the final group would be of no assistance to this taxpayer. SBM has no
payroll so its elimination from the final group gives this taxpayer no relief from payroll tax at all.”
Interestingly, in this decision there was some discussion as to whether or not the exclusion of a
common group member broke up the larger group where there was a continuing relationship between
the remaining group members.
“Mr Young on behalf of the Commissioner did not accept this premise. He contended that the de-grouping discretion
was applicable only to the group as finally formed by the grouping provisions and it was not appropriate to apply the
discretion to some intermediate step in the formation of the group as Mr Furnell’s submissions would have.
© Tony Ince, Thomson Reuters 2012
11
Tony Ince
Payroll Tax Grouping
I was told there was no authority on this point and so it is a matter for me to decide unguided by precedent. The
discretion to de-group in my view is, as the passage from the judgment of the High Court in the Tasty Chicks’ case
quoted above indicates, a final step. If that is a correct characterisation then this final step can only be taken with
respect to the situation which had been reached at the penultimate stage by the application of all the other provisions
of the payroll tax legislation, that is, by reference to the group as finally formed under that legislation”.
This highlights the importance in some cases of seeking exclusion from a payroll tax group of entities
which do not pay wages themselves but result in other wage-paying entities being grouped. A
common example of this is the use of a family trust in a group structure, with potentially each (and
every) beneficiary having deemed control of that trust. For example, section 72(6) of the NSW Payroll
Tax Act (2007) states:
“A person who may benefit from a discretionary trust as a result of the trustee ... exercising ... a power or discretion, is
taken, for the purposes of this Part, to be a beneficiary in respect of more than 50% of the value of the interests in the
trust.”
While the power to exclude still exists, many a business has unwittingly fallen foul of the grouping
provisions because of this far-reaching sub-section.
3.3 Proposition Three
The terms of any written contract(s) will prima facie evidence agreements between businesses.
Any written contracts between the parties will form the basis on which the relationship will be
considered. If the parties do not act in agreement with any parts of the contract, however, the
Commissioners may choose to disregard some or all of the contract and look at the actions of the
parties.
The Supreme Court in Tasty Chicks said:
“Even if the deeds of agreement are taken at face value, ignoring variations of them established by the conduct of
parties, they are not agreements in respect of performance of duties by the employees of Tasty Chicks on the one
hand and by the employees of Angelo Transport on the other.
By its deeds of agreement, Tasty Chicks was appointed by M&J Souris to provide managerial services for M & J
Chickens. It was agreed that in providing such services Tasty Chicks would, in the absence of agreement to the
contrary, employ the greater part of its staff in its leased premises at Marrickville. It covenanted that it and its
employees would not disclose trade secrets, or dealings with customers. It covenanted that it would not solicit any
customers or business associates, or engage in, or be interested in, financially or otherwise, any business of a similar
nature to that carried on by M&J Souris. It covenanted that it would not, directly or indirectly, hold or deal in any
shares of any other company carrying on a similar business to M & J Chickens.”
“A fortiori if the agreement is construed in light of the variations to it constituted by the parties’ conduct”.
© Tony Ince, Thomson Reuters 2012
12
Tony Ince
Payroll Tax Grouping
3.4 Proposition Four
The interrelationship of businesses change over time and this can affect the application of the
grouping provisions.
Firstly, factors that originally do not result in grouping may, over time, evolve into circumstances
where grouping becomes an issue.
In Tasty Chicks, the Supreme Court said:
“The original nature of a business does not determine its nature for all time. Businesses develop and as they do, their
nature may change. In this case M & J Chickens ceased to carry out administration activities when Tasty Chicks was
established and it provided those services. And the services provided to M & J Chickens by Angelo Transport became
larger and more sophisticated. The elements of the M & J Chickens business remained the buying of chickens, the
processing of chickens and the selling of chicken products. Transport and administration services were provided to it
by third parties. There is no suggestion that Minas and Jenny Souris had any ownership interest in Tasty Chicks or
Angelo Transport. Nor did they exercise control over the way in which Victoria and Sam Phylactou ran the Tasty
Chicks business or Michael Souris ran the Angelo Transport business.”
Next, the factors that lead to the original grouping may change resulting in exclusion from the group
being considered. If this is the case (for example, with the common employees provisions), it may be
necessary to go back to the Commissioner on more than one occasion to seek exclusion from the
group where the nature and extent of duties performed by common employees changes.
As Deputy President McNamara in Liquid Rock noted:
“If as clearly it is proper for an employer to self-assess itself into a group, why is it improper for an employer in a
hypothetically clear situation to self-assess itself out of a group? No doubt in more debatable circumstances than the
ones that I have supposed hypothetically, prudence would dictate that the employer liaise with the Commissioner.”
This is an interesting comment. While counsel for the Commissioner in Liquid Rocks noted (with
approval of the Tribunal) that Payroll Tax is self-assessing (perhaps in itself a topic for further
consideration), if an entity falls within the “common employees” grouping (itself difficult to determine in
some cases), it seems to me that it is not a matter for the taxpayer to self-assess exclusion but for the
Commissioner to exercise his power to exclude a person from the group.
This leads to another area of contention: at what stage should employers/persons seek confirmation
from the Commissioner that they should be excluded from a “common employees” group? If every
possible grouping was put to the Commissioners for consideration, surely the various State Revenue
Offices would almost collapse under the weight of applications.
Once again, Deputy President McNamara in Liquid Rock:
“I deal first with the Commissioner’s contention that once grouping takes place it is in effect permanent and aside from
an exercise of discretion on the Commissioner’s part under Section 9A(1J) of the 1971 Act or Section 79 of the Payroll
Tax Act 2007.
I reject that submission. The High Court recently considered these provisions in Tasty Chicks Pty Ltd v Chief
Commissioner of State Revenue [2011]. ...
© Tony Ince, Thomson Reuters 2012
13
Tony Ince
Payroll Tax Grouping
Their Honours therefore characterised the de-grouping provisions as a discretionary escape clause from the breadth
of the primary grouping rules where those rules would operate unreasonably. .... The discretion to de-group is
enlivened only by certain specific findings of fact. So much may be conceded but once those findings of fact are made
it is a matter of discretion whether to de-group or not.
Suppose hypothetically that two employers entered into a distinct and well defined transaction which had the effect
that they became a group under the Payroll Tax Act either 1971 or 2007. Can it be right to think that if a further
transaction were entered into which exactly reversed the first one that these employers would be at the mercy of the
Commissioner’s exercise of discretion to de-group? Mr Young correctly observed that the payroll tax legislation
operates on a model of self-assessment. How this observation could be supportive of the view put on this point by the
Commissioner is not obvious to me. In his determination as to penalty and interest the Commissioner has in effect
faulted LRC for not grouping itself with the other companies by self-assessment. If as clearly it is proper for an
employer to self-assess itself into a group, why is it improper for an employer in a hypothetically clear situation to selfassess itself out of a group? No doubt in more debatable circumstances than the ones that I have supposed
hypothetically, prudence would dictate that the employer liaise with the Commissioner. Section 86 of the 2007 Act
obliges an employer to register for the payment of payroll tax if during any month the employer pays or is liable to pay
wages above the threshold. The payment of tax therefore is a month to month proposition. Again, this is inconsistent
with the view that subject to an exercise of the Commissioner’s discretion grouping is perpetual.”
Thirdly and somewhat interestingly, it seems that events after the original can be taken into account in
determining whether persons should be excluded from a group. One wonders what influence these
events may have on the Commissioners’ (and the courts) decision as relationships evolve over time.
The Tribunal in Verra noted:
“I certainly accept the submission of learned counsel for the applicant that in considering the exercise of discretion
under s 68(2), s 69(7) or s 71(3) of the Act, it is possible to consider events that transpire after the years in
question (emphasis added). The appellant advanced an argument that in this case the St Ives Pharmacy should be
excluded from the group having regard to the St Ives Pharmacy being flooded this year. However, I have decided not
to rely upon that event which occurred sometime after the years in question.”
Example
X starts a business, owning 100% of the coy A. Over time, he offers one of his managers, Y, equity,
say 20%. The business diversifies with opportunities. X and Y form another entity, coy B, to better
reflect the diversified business and with a long term view of maybe selling it off.
“Common employees” are used for administration, bookkeeping and reception duties of the two
businesses.
Over the years, the ownership in both coy A and coy B is diluted to such a point that they are no
longer commonly controlled. The new equity owners have full faith in X and Y in running the
businesses but slowly move to put the arrangements with the common employees on a more formal
and commercial footing.
Ultimately, coy A and coy B operate largely independently of one another, with the use of common
employees reducing over time.
At some point in this saga, coy A and coy B would arguably be excluded from the group. Depending
on the point in time at which the arrangements were reviewed, it may be that a review later in the
© Tony Ince, Thomson Reuters 2012
14
Tony Ince
Payroll Tax Grouping
process may give a more favourable result as “it is possible to consider events that transpire after
the years in question”.
3.5 Proposition Five
In seeking to de-group, the Commissioner looks at the potential independence of the
businesses not the persons carrying on the business.
The Commissioner has power to exclude persons from a group in certain circumstances. For
example, section 79 in the NSW Payroll Tax Act says:
(1) The Chief Commissioner may, by order in writing, determine that a person who would, but for the determination,
be a member of a group is not a member of the group.
(2) The Chief Commissioner may only make such a determination if satisfied, having regard to the nature and degree
of ownership and control of the businesses, the nature of the businesses and any other matters the Chief
Commissioner considers relevant, that a business carried on by the person, is carried on independently of, and is not
connected with the carrying on of, a business carried on by any other member of that group.
In order to exclude, the Commissioner must come to the conclusion 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”.
The exclusion clause is a complex and composite clause.
The Supreme Court in Port Augusta Medical Centre noted (with my emphasis added):
“After setting out the provisions of s 18I of the Act, His Honour analysed the test upon which the Commissioner must
be satisfied. The analysis was on the basis that there were two tests, or limbs, which had to be satisfied. The
first limb was characterised by the judge as relating to the independence of the businesses. In the case of the
second limb, the test was characterised as being more concerned with the connection in the management of
the businesses.
Whilst it is correct that both limbs of the test had to be satisfied by the appellant, in my view there is really
just one test. The concepts in each limb of the test appear to be intrinsically linked with each other. It is difficult to see
how, on an analysis of whether a business is carried on “substantially independently” of any business carried on by
any other member of the group, there would not be considerations of “substantial connection” with the carrying on of
any such business.”
The Court then went on to decide the matter on the basis that the clause was a composite clause
made up of two limbs, rather than two separate tests.
In my view, substantially for the reasons given by Anderson J in [25] the clause “is carried on substantially
independently of, and is not substantially connected with” should be applied as a compound expression describing the
nature of the business relationship between the entities. 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.
© Tony Ince, Thomson Reuters 2012
15
Tony Ince
Payroll Tax Grouping
In looking at the relationships, the Court was at pains to point out that it was the relationship of the
businesses rather than the persons carrying on the businesses.
“I turn first to the relationship between PAMC and the Bhola and Yeung incorporated medical practices. In my view,
the critical question is not the extent to which Dr Bhola and Dr Yeung controlled the business of PAMC, but the extent
to which PAMC’s business was carried on in a way which was dependent on, and connected to, the businesses of
their incorporated medical practices. True it is that an investigation of the extent of the control exercised by Dr Bhola
and Dr Yeung over PAMC will inform the question of the degree of connection and dependence. However, it is the
latter, and not the former, which is the statutory test.”
In Tasty Chicks, the Supreme Court said
“The independence of the person or the business conducted by the person required by the statute is to be judged in
terms of ownership, control and nature of the businesses.
The nature of the businesses are separate and distinct. M & J Chickens processes chicken meats. Tasty Chicks
provides administrative services. Angelo Transport provides the services of a fleet of refrigerated vehicles and drivers.
Those matters to be taken into account suggest that the businesses are carried on substantially independently of each
other and there is no suggestion other than that they will continue to be so.
The shift in focus from the person carrying on business to the business carried on by that person does not alter the
conclusion to be drawn from the facts.”
The interaction of, for example, family members, should not flavour the nature of the businesses. In
Artistic Pty Ltd and Commissioner of State Revenue [2006] WASAT 39 (17 February 2006), the
Tribunal said:
“In this case, it is clear that the hairdressing business, a business of completely different nature from either the
electrical contracting business of DBR, or the investment business of Rowson Nominees, is carried on quite
independently and without regard to those other businesses. The fact that the businesses are all carried on by
members of the same family is, by itself, of little significance (my emphasis).
The respondent sought to characterise the three companies as part of a single family enterprise. From that premise,
the Commissioner sought to identify relationships between the different entities. Much emphasis was placed on the
inter-entity transactions apparent in the books of each entity. Not surprisingly in a family context, some payments from
one to another, and some book entries undoubtedly designed to minimise the tax position of family members, were
identified.”
So while an investigation of the extent of the control exercised by the natural person(s) over grouped
businesses may help to inform the question of the degree of connection and dependence, it is the
degree of connection and dependence, and not the control exercised by the natural person(s), which
is the statutory test.
© Tony Ince, Thomson Reuters 2012
16
Tony Ince
Payroll Tax Grouping
3.6 Proposition Six
It is the capacity to control rather than management control that is paramount in determining
whether or not exclusion from a group should apply.
It is the capacity to control rather than management (or day-to-day) control that is paramount in
determining whether or not exclusion from a group should apply (although this may vary in different
situations). The concept of “control” is important, and there are many potential forms of control. The
formal control imposed by statute or written contract is much easier to demonstrate. Businesses who
argue for exclusion on the basis of lack of effective control will have to have very good cause if they
cannot show why they still retain the capacity to control.
The Supreme Court in Port Augusta Medical Centre said, with my emphasis added:
In determining that the business of PAMC and Bhola Pty Ltd and/or Yeung Pty Ltd were “substantially connected”, His
Honour referred to the capacity of Doctors Bhola and Yeung to control the business. His Honour said at [62]-[66]:
[62] It is true that the doctors’ management meetings displayed considerable input by the other doctors on
matters of day-to-day practice and included examples of instances where the course preferred by Dr Bhola or
Dr Yeung was not adopted. However, in my view, this rather demonstrates that Dr Bhola and Dr Yeung
chose a consultative approach to the management of the business of the appellant rather than that
they did not retain substantial control of the business. It can readily be appreciated that a policy of
acceptance of a consensus of the views of the other practitioners on non-critical matters over their own views
from time to time was a sound business approach in keeping with maintaining good relations with the
appellant’s client medical practices and hence a high rate of occupancy of the available rooms.
[63] I consider that Dr Bhola and Dr Yeung did continue to exercise substantial control over the appellant
despite the fact that other doctors had input in relation to various matters. Dr Bhola and Dr Yeung remained the
sole directors and shareholders of the appellant and clearly made all “long term” decisions. While the day to
day management was no doubt undertaken by the respective practice managers, all employees, both legally
and practically, were subject to the directions of Dr Bhola and Dr Yeung in relation to matters of importance to
the long term interests of Dr Bhola and Dr Yeung.
[64] In my view, while in some cases de facto control of the day-to-day business may be important, I
consider that in the present case the retaining of the capacity to control the business is of greater
importance, particularly in relation to the “connection” question. In this regard, I note that in Garrett F
Hunter, Doyle CJ recognised that although the day-to-day running of the practice in that case was left to
another doctor, nevertheless Dr Vercoe, one of the directors of the company, was in a position to influence
the conduct of the business.
[65] Similarly, in Crusher Holdings Pty Ltd v Commissioner of Taxes, Martin CJ recognised the primary
importance of the capacity to control the affairs of the business even though de facto control of day-today business was vested elsewhere and stated:
Further, should the occasion arise, it would be open to Mr Kennon to exercise his powers as a life
governor of that company to inhibit its demand upon the appellant.
This seems to overcome the necessity to determine who has day-to-day “control” of a business. At the
risk of alienating any number of business owners, if you wish control of a business to rest with
© Tony Ince, Thomson Reuters 2012
17
Tony Ince
Payroll Tax Grouping
someone, they should be given the formal right as well as the capacity to control the business rather
than just management control.
3.7 Proposition Seven
The concept of “effective control” may be a two-edged sword.
If a partner has only a 50% interest but has a power of veto under the partnership agreement, this
may be seen as effective control. If unanimity is required before certain decisions are taken, does this
give “effective control” to any partner?
This also leads to a case of control by practice as distinct from control by agreement. It is not
uncommon for business owners/shareholders to have a practice that no decisions are taken without
agreement of all owners. Does this mean they all effectively control the business or does it mean that
none effectively control the business? The argument to me would seem to be a two edged sword.
In Verra, the Tribunal said:
“The evidence before me was that Ms McKerrell was for various reasons ... not actively involved in the management
of the independent pharmacies. There was evidence before me that the managing partners of the independent
pharmacies had made management decisions quite contrary to the wishes of Ms McKerrell. ...
Such evidence was advanced by the appellant to establish that Ms McKerrell did not have the “control” of the
businesses of the independent pharmacies within the meaning of s 69(7) of the Act. The appellant also contended that
“control” has been interpreted in the authorities as being a reference to management control.
The fact that Ms McKerrell was content to allow the managing partners to make management decisions in the
independent pharmacies is one consideration. However, Ms McKerrell also had rights under the partnership
agreements that related to the independent pharmacies.
In the case of the Albany Creek Amcal Chemist, clause 20.1.1 of the partnership agreement gave effective
control to Ms McKerrell as unanimity was required for the hire or dismissal of any agent or employee.”
Example
Using a previous example, A owns35% of coy1, B 35% and C 30%. Coy1operates an accounting
practice. Coy2 is owned 60% by A and 40% by D. It operates a manufacturing business. There are no
common employees. The businesses are not grouped.
B sells her 35% share in the accounting practice to A. A now controls both coy1 and coy2 and the
businesses are grouped for payroll tax purposes, even though there is no evidence of any antiavoidance or “mischief”.
In most jurisdictions, the Commissioner would have the power to exclude either from the group.
In arguing for exclusion Coy1 can point to the fact that it never makes decisions unless all owners
agree. In other words, each owner has the power of veto. Similarly for Coy2, even though A has a
© Tony Ince, Thomson Reuters 2012
18
Tony Ince
Payroll Tax Grouping
60% stake, it is agreed (formally or informally) that no major decision is made unless both
shareholders agree.
Arguably, no one person has effective control over either business.
© Tony Ince, Thomson Reuters 2012
19
Tony Ince
Payroll Tax Grouping
4 FOOD FOR THOUGHT
The various terms for “group members” are used interchangeably in the Payroll Tax
legislation grouping provisions. Is this change in terminology a deliberate application by the
legislators? Does it affect the effectiveness of the provisions?
The terms for group members include:
Person/persons – maybe Acts Interpretation Act or common law definition to include a
corporation as a person.
Bodies
Entity - defined
Corporation
Business/businesses – defined
Part of a group
Employer
Let’s start with the position that the various terms used are a conscious and deliberate application by
the legislators, and that they have been used for a reason.
As Lord Mersey remarked over a century ago:
It is a strong thing to read into an Act of Parliament words which are not there and in the absence of clear necessity it
is a wrong thing to do.
Thompson v Goold and Co [1910] AC 409, 420.
Does this use of many terms to describe group members reduce or enhance the effectiveness of the
provision?
In most contexts, they seem to mean the same thing. Whether or not the seemingly interchangeability of these terms has any effect on the grouping provisions is to be determined. What I
would suggest is that any wording not be taken for granted without a thorough and detailed tracing of
each section and sub-section to ensure that the grouping provisions do what they are (arguably)
supposed to do.
This is where I leave it to you. But first some background.
The basis for my question arises from the Western Australian grouping provisions. In short, section 35
groups “businesses” which are head and branch businesses. A business by definition is an activity
rather than an entity. Section 35 seems to group the activities rather than the “persons” running those
businesses.
Section 36 subsumes smaller groups into a larger group with the terminology:
“Where a person is a member of 2 or more groups...”
© Tony Ince, Thomson Reuters 2012
20
Tony Ince
Payroll Tax Grouping
This begs the question whether or not a “business” (as distinct from an individual, corporation or entity
controlling or running that business) can be said to be a “person”.
I have tried to follow the same pattern through the harmonised grouping provisions but have found
myself dazed and confused. I note I am not alone. The Tribunal Member in the original Muir case said,
in reference to the common employees grouping provisions:
“I have to say that I had a lot of difficulty following this smorgasbord of turgid exotica, but I think I can truthfully report
that I was not alone.”
While those provisions have been amended, it seems that clarity of the grouping provisions was not a
key issue in the amendments.
Part of my trail of in search of enlightenment went as follows:
A "group" is constituted by all the persons or bodies (not “businesses) forming a group that is
not a part of any larger group.
An entity and a corporation form part of a group
Sec 76. An entity that is two or more persons...
It seems a “person” can be a corporate entity. Eg s.36 Acts Interpretation Act (Qd) says:
“person includes ... an individual and a corporation.” I am reliably informed that this definition
merely states explicitly what the courts were saying before that definition.
"business" includes:
(a) a profession or trade, and
(b) any other activity carried on for fee, gain or reward, and
(c) the activity of employing one or more persons who perform duties in connection with another
business...
To date this does not seem to have caused the courts any concern, despite sometimes grappling with
the grouping provisions themselves.
© Tony Ince, Thomson Reuters 2012
21
Tony Ince
Payroll Tax Grouping
5 CONCLUSION
The main points I would like to leave you with are these.
The High Court decision in Tasty Chicks has resolved the issue of the powers of Tribunals and courts
when it comes to the exercise of the Commissioner’s discretion. The case turns very much on its facts
but should clarify the issue going forward. We await with interest the decision of the Court of Appeal in
relation to the grouping issue.
The decision in Liquid Rock shows once again the difficulty in distinguishing “duties” from “services”
when it comes to applying the common employees grouping provisions. In looking at the
master/servant relationship for guidance, I suspect we are simply put back on the treadmill of
indecision.
The decision in Verra highlights the issue of effective control rather than management (or day-to-day)
control when it comes to possible exclusion from grouping. I suspect that this may lead to some very
interesting arguments about effective control when any party (especially a minority interest party) has
the power of veto.
The decision in Port Augusta Medical Centre also considers the aspect of control when considering
the composite phrase “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” in the
exclusion clause.
My aim in putting forward the seven propositions was to clarify some issues in my own mind. In doing
so, I accept that there may be those that take issue with some or all of these propositions. In debating
those points, it is hoped that further clarity will arise (if clarity can arise). Those of you that know me
will know that I do like to push the issue from time to time but hopefully without overt self-interest and
certainly without malicious intent.
Perhaps those propositions can be refined; perhaps they can be built on to give some sort of basic
framework in which to try to apply the grouping provisions.
Similarly, with my “food for thought”. It is probable that smarter people than me have consciously and
deliberately conceived well-functioning payroll tax grouping provisions covering a multitude of
possible situations. Maybe this was in an effort to stay ahead of any tax-avoidance schemes by way
of splitting businesses; maybe it is just the way it had to be.
If this paper provokes some thought and comment, it has done its job. If it provokes a more active
response (other than violence toward the author), even better.
© Tony Ince, Thomson Reuters 2012
22
Tony Ince
Payroll Tax Grouping
The views in this document are those of the author only. This document is provided as general
information only and does not consider any one’s specific objectives, situation or needs. You should
not rely on the information in this document. The author does not accept any duty of care or liability to
anyone regarding this document or any loss suffered in connection with the use of this document or
any of its content.
© Tony Ince, Thomson Reuters 2012
23