B and B Stevenson Pty Ltd v Chief Commissioner of State Revenue

[2018] NSWCATAD 103

Civil and Administrative Tribunal

New South Wales

Medium Neutral Citation:	B & B Stevenson Pty Ltd v Chief Commissioner of State Revenue [2018] NSWCATAD 103
Hearing dates:	08 February 2018
Date of orders:	18 May 2018
Decision date:	18 May 2018
Jurisdiction:	Administrative and Equal Opportunity Division
Before:	R L Hamilton SC, Senior Member
Decision:	(1) Pursuant to s101 of the Taxation Administration Act 1996 the Assessments be confirmed.
Catchwords:	TAXES AND DUTIES – Payroll Tax – payments of company directors remuneration to another person-onus of proof of taxpayer’s case
Legislation Cited:	Interpretation Act 198Payroll Tax Act 2007 Pay-roll Tax Act 1971 Taxation Administration Act 1996
Cases Cited:	AES Wiring Pty Limited and AKS Distributions Pty Limited v Chief Commissioner of State Revenue [2012] NSWADT 11 Chief Commissioner of State Revenue v Incise Technologies Pty Ltd & Anor (RD) [2004] NSWADTAP 19 Commissioner of State Revenue [2012] NSWADT 204 Cornish Investments Pty Limited v Chief
Texts Cited:	Nil
Category:	Principal judgment
Parties:	B & B Stevenson Pty Ltd (Applicant) Chief Commissioner of State Revenue (Respondent)
Representation:	Counsel: G Carolan (Applicant) S Richardson (Respondent)   Solicitors: Bilbie Dan (Applicant) NSW Crown Solicitors Office (Respondent)
File Number(s):	2017/00178463
Publication restriction:	Nil

REASONS FOR DECISION

The facts

1. In about June 2003 Mr and Mrs Stevenson purchased the management rights to the Quest Serviced Apartments in Newcastle, by way of a franchise agreement.

2. The parties to the agreement were the franchisor, Mr and Mrs Stevenson as franchisees and as guarantors, and a company which I will call NQPL referred to in the agreement as the “Tenant Company”. The role of NQPL is not relevant here.

3. Mr and Mrs Stevenson regarded themselves as partners in holding the franchise. There was no written partnership agreement, but partnership accounts were prepared.

4. Mr and Mrs Stevenson arranged for the applicant company to take the role of manager of the Quest Newcastle Serviced Apartments business. That company made payments to the partnership. The Chief Commissioner instituted a payroll tax review and issued assessments to the applicant covering the five financial years ending 30 June 2008 to 30 June 2012. The taxpayer company lodged an objection, which was disallowed, and the taxpayer was notified in May 2014. Under s 99(1) of the Taxation Administration Act 1996 (TAA) the taxpayer had 60 days to apply to the Tribunal for a review pursuant to s 96(1) of the TAA. The taxpayer commenced the review proceeding in June 2017, nearly three years late. This is not a satisfactory position. The taxpayer’s explanation for the delay (that they were awaiting information from the respondent) was rather inadequate. However the respondent Chief Commissioner did not oppose the granting of leave by the Tribunal allowing the review to be heard out of time (s 99(1) TAA) and the matter was heard accordingly.

5. The taxpayer’s position is that the payments it made to the partnership between Mr and Mrs Stevenson were in the nature of fees for the grant of a sub licence to manage or operate the Newcastle Apartment business. Mr and Mrs Stevenson were the only directors and shareholders of the applicant company during the period under review. The Chief Commissioner’s position is that the payments are to be taken to be “wages” pursuant to s 46(2)(b) of the Payroll Tax Act 2007 (PRTA) (which covers wages paid by or to third parties by way of remuneration for the services of a company director); or alternatively as “wages” as defined under s 13(1)(c) of the PRTA (which deals with remuneration paid by company to or in relation to a director of that company). The taxpayer company has also sought remission of the market and premium interest imposts for the 2008-2011 years.

6. The original franchise agreement was in evidence as an exhibit (BS-1) to the affidavit of Mr B Stevenson of 4 May 2017. Clause 19 of the franchise agreement states that franchisee’s rights are personal, and prevents the assignment etc or other dealing with the franchise and franchise business by the franchisee without the prior written consent of the franchisor. The evidence, such as it is, suggests that the franchisor was advised of the arrangement involving the company in general terms in November 2003. The evidence is somewhat unsatisfactory and would not ordinarily be admissible by a court. It consists of an unsigned file note made by an unnamed person of a conversation with a person in the applicant’s former accountant’s office, which was provided to the applicant’s current accountants from the file of the franchisor. It deals with GST and states the partnership was operating a business “on behalf of a separate company [which was not named] and charging that company a fee for the services provided” (see Annexure ‘G’ to the affidavit of Mr Stevenson of 4 May 2017).

7. The financial accounts for the year ended 30 June 2004 of the applicant company were in evidence. So were tax returns for the applicant company (minus some schedules), and of the partnership for that financial year. The financial accounts show the applicant company paid a management fee of $90,000.00 and the partnership tax return shows $90,000.00 business income received. The partnership tax return shows the main business activity of the partnership as “Business management services nec”. The company’s financial statements do not show any separate item for directors’ fees.

8. Oral evidence was given that Mr and Mrs Stevenson were paid salary and wages before 2008 but it was not clear by whom and how much as no personal tax returns for the period were in evidence. Mr Stevenson’s first affidavit of 4 May 2017 was to the effect that until 2007 he and Mrs Stevenson worked hands-on in the business for the 4 years 2003 to 2007. In 2007 he was approaching 65 years of age and decided that he would “scale back from the business and transition to retirement”.

9. Mr Stevenson stated (para 25 affidavit of 4 May 2017) that in 2005 the Office of State Revenue conducted an investigation and apparently did not raise any additional assessment. Mr Stevenson’s evidence was that the Office of State Revenue at that time apparently accepted that the management fee paid by the applicant company to the partnership was not salary or wages or taken to be such under the previous payroll tax legislation, (see s 3 and s 3D of the Pay-roll Tax Act 1971).

10. Mr Stevenson said as part of the transition to retirement they engaged staff to manage “key business functions…[and] to perform the roles previously undertaken by [Mr and Mrs Stevenson]”, (para 7). He attached a schedule, Schedule ‘B’, to his affidavit setting out the staff who were engaged. It is to be noted only two staff members were shown as involved during 2007 - one as a relationship manager/business development manager, and the other worked in the accounts department. Other staff are shown on the schedule but they commenced work from September 2008 through to September 2012.

11. He also said (at para 9) that in 2008 as they grew more confident in the staff that he and his wife, who previously lived at the business premises at the Quest Newcastle Serviced Apartments, relocated to a house off-site.

12. In 2010 they purchased a farming property in the Hunter Valley. They also invested in another Quest property in Singleton and were involved in getting it up and running under another husband and wife team as managers.

13. Mr Stevenson also gave evidence of increasing leisure and travel activities from 2008 onwards accompanied generally by Mrs Stevenson (see Annexure ‘C’ to his first affidavit).

14. Mr Stevenson said that he and his wife had nothing to do with the day to day running of the Newcastle and Singleton businesses and regarded them as passive investments. He also said that this was from 2012 onwards. He stated however that the ultimate decision making power rested in them as the owners of the businesses (pars 19 and 10 affidavit of 4 May 2017).

15. Mr Stevenson in a second affidavit of 17 November 2017 states that the applicant company operated the Quest Newcastle Serviced Apartments business under a ‘sub-licence’ from the partnership. There is no documentary evidence of this ‘sub-licence’. I have more to say about this point later on.

16. Mrs Stevenson also provided an affidavit, basically affirming the evidence of her husband, but was rather unspecific about details and dates. She simply says that she and her husband “stepped back” from the Quest Newcastle Serviced Apartments business at the end of the 2007 financial year.

17. The taxpayers say that they had stepped back from the company in 2007. Prior to that the company had paid the partnership for “management services” but not by way of sub-licence fees according to the evidence. In 2004 the company paid $90,000.00 to the partnership. There is no evidence about amounts paid to the partnership in 2005, 2006 and 2007. It is also said that the company paid Mr and Mrs Stevenson’s salary or director’s fees in those years but we do not have any other evidence of this or of the amounts involved.

18. In the 2007/2008 financial year the company paid the partnership approximately $267,000.00. In 2008/9 it paid an amount of about $297,000.00 and in the financial years 2010, 2011 and 2012 it paid $147,600.00 annually to the partnership. It is noted that GST was paid on these amounts.

19. No director’s fees or other salary to directors is shown in the accounts as having been paid in the financial years ended 30 June 2008 to 30 June 2012. The amounts paid to the partnership were originally classified as “Management Expenses” in the financial accounts of the company. Recently the financial accounts were recast and the same amounts were reclassified as “Sub licence Expense”. The company’s current accountant Mr Davidson was a witness and agreed that this was done in preparation for the hearing.

20. The company’s accountant explained that this was to correct a ‘misclassification’ by the previous accountant for the company, which had been carried over when the Stevensons moved in 2005 to a new accounting firm headed by Mr Davidson. The classification was only reconsidered when the Office of State Revenue was reviewing the payroll tax position in 2013.

21. The accountant stated in correspondence with the Chief Commissioner in 2013 that amounts paid to the partnership were sub-licence fees.

22. There is however no sub-licence agreement in evidence. It appears that there was nothing in writing to substantiate the claim.

23. The taxpayer and the Stevensons seem to be relying on an understanding that in the commercial world there would be sub-licence fees paid between arms length parties, but there is nothing of substance to prove such an agreement was operating here. It seems that the characterisation of the payment by the taxpayer company to the partnership as a ‘sub-licence fee’ is something conceived as a line of argument when the Chief Commissioner’s officers were investigating.

24. There is no indication the amount paid to the partnership was calculated by reference to the amount of work performed by Mr and Mrs Stevenson. Equally there is no indication of how any ‘sub-licence fee’ was calculated.

25. From 2010 onwards the evidence is stronger that the day to day work at the Quest Newcastle Serviced Apartments was done by others. Mr Stevenson provided a list of employees covering the period. The Stevensons were involved in the start up of the Singleton Quest business. In 2010 Mr and Mrs Stevenson bought the farm near Singleton. Mr Stevenson’s diary of holidays was in evidence and shows considerably more time spent at leisure in the 2010 and following years.

26. But it still appears that Mr and Mrs Stevenson were keeping a close eye on the financial performance of the Quest Newcastle Serviced Apartment business conducted by the applicant company throughout the years under consideration. Until they went on holiday overseas in April 2010 they were the only signatories on the company bank account. Just before they left, three employees were made additional signatories on that bank account.

Consideration

27. The taxpayer bears the onus of proving its case (s 100(3) TAA). Here it must establish all the facts necessary to allow the Tribunal to conclude, on the civil standard, that the true character of the payments by the company was as sub licence fees (Cornish Investments Pty Limited v Chief Commissioner of State Revenue [2012] NSWADT 204).

28. In my view the payments were more consistent with the slow ‘stepping back’ and transition to retirement. There was no break in service of the Stevensons as directors, and Mr Davidson, the accountant, states that Mr Stevenson ‘retired’ during the 2009 financial year (when he turned 65) and commenced to receive a superannuation pension. The appearance is that work continued to be performed as directors of the company by Mr and Mrs Stevenson throughout the relevant years (albeit with greater responsibility being handed over gradually to others).

29. The question I must ask myself is whether I am satisfied that the taxpayer company has discharged its onus of proving its case that each one of the assessments is excessive because the payments were not subject to payroll tax. I must consider whether I am persuaded, on the balance of probabilities, that the payments made are truly characterised as being by way of consideration for a ‘sub licence’ of the right to operate the Quest Newcastle Serviced Apartments business. The absence of an agreement in writing or any real extrinsic evidence in support is nearly fatal. The file note from the franchisor’s files is unconvincing. Combined with the other facts including particularly the timing of the first suggestion that this was the proper character of the payments (in 2013); the original accounting treatment as ‘Management Expenses” of the company taxpayer; and the continuing involvement of the Stevensons in the central management and control and financial oversight of the taxpayer throughout the relevant period lead me to conclude that the taxpayer has not discharged the burden of proof imposed on it.

Further Comments

30. Although this disposes of the matter, it may be useful to consider the arguments put by the Chief Commissioner. The Chief Commissioner supported his assessments by reliance on s 46(2)(b) of the PRTA (which deems certain amounts paid by a company by way of director’s remuneration to a person other than the director to be taken to be wages if they would have been wages if paid directly to the director) , and in the alternative by reliance on s 13(1)(c) of the PRTA (which includes as wages amounts paid by a company by way of remuneration to or in relation to a director of a company). From there he stepped to s 6 of the PRTA which imposes payroll tax on all “taxable wages”, which are further defined by s 10 of the PRTA (which was amended effective 19 November 2009 but without any impact for this matter).

31. It is my view that the Chief Commissioner was correct to rely on s 46(2)(b) of the PRTA. The payments were made by the taxpayer company to the partnership, and being unconvinced that they represented sub licence fees, it seems to me that the most likely explanation is that they were by way of remuneration for the services of the directors. They both performed work for the company and did not otherwise receive any fees or other remuneration.

32. I sought some further submissions from the parties on the question of whether the partnership could be regarded as a “person” for the purposes of s 46(2)(b) PRTA (which deals with payments to a person other than the director). Obviously Mr and Mrs Stevenson as the members of the partnership are persons. The word “person” is not defined in the PRTA. The definition in s 21(1) Interpretation Act 1987 ("person" includes an individual, a corporation and a body corporate or politic) is inclusive but does not refer to a partnership. Both parties were in agreement that a partnership is a person for the purposes of paragraph (b) of s 46(2) of the PRTA, and I agree. Paragraphs (a) and (c) of s 46(2) deal with payments by a person, and it would be an odd result indeed if payments by a partnership were not caught under s 46(2) of the PRTA. The section is designed to include in the payroll tax net indirect payments of remuneration of directors. It must be assumed that the word “person” is used consistently in the subsection, and will include a partnership whether the payment is to or by that partnership.

33. The Chief Commissioner’s alternative argument which relies on s 13(1)(c) of the PRTA does not commend itself to me in the present circumstances. This is because s 13(1)(e) of the PRTA (which includes as “wages” amounts included as or taken to be wages by any other provision of the PRTA) seems to be specifically designed to deal with amounts caught by s 46(2)(b) of the PRTA.

Interest

34. Remission of market rate interest requires the establishment by the taxpayer of exceptional circumstances (AES Wiring Pty Limited and AKS Distributions Pty Limited v Chief Commissioner of State Revenue [2012] NSWADT 11).

35. The remission of premium interest component is perhaps not as strict. It is designed to disincentivise taxpayers from delaying payments of tax and duty (Chief Commissioner of State Revenue v Incise Technologies Pty Ltd & Anor (RD) [2004] NSWADTAP 19).

36. However the taxpayer has not made out any reasons why the interest components should be remitted, having put all of its eggs in the sub licence fee basket, so that interest charges should stand or fall with the determination of the substantive liability.

Order

37. For the above reasons I order,

1. Pursuant to s101 of the Taxation Administration Act 1996, that the Assessments be confirmed.

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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

Decision last updated: 18 May 2018