B & L Linings Pty Ltd and L & B Linings Pty Ltd v Chief Commissioner of State Revenue - [2005] NSWADT 129

No judgment structure available for this case.

Set aside by Appeal:

CITATION: B & L Linings Pty Ltd and L & B Linings Pty Ltd v Chief Commissioner of State Revenue [2005] NSWADT 129

DIVISION: Revenue Division

PARTIES: APPLICANTS
B & L Linings Pty Ltd and L & B Linings Pty Ltd
RESPONDENT
Chief Commissioner of State Revenue

FILE NUMBER: 046025

HEARING DATES: 5/10/2004-6/10/2004, 29/03/2005, 13/05/2005, 2/06/2005

SUBMISSIONS CLOSED: 06/02/2005

DATE OF DECISION:
06/10/2005

BEFORE: Block J - ADCJ (Judicial Member)

APPLICATION: Pay-roll tax - contractors

MATTER FOR DECISION: Principal matter

LEGISLATION CITED: Administrative Decisions Tribunal Act 1997
Pay-roll Tax Act 1971
Taxation Administration Act 1996

CASES CITED: Bloemen v Federal Commissioner of Taxation (1981) 147 CLR 360
Commissioner of Taxation v Metaskills Pty Ltd [2003] FCA 766
Federal Commissioner of Taxation v Dalco (1990) 168 CLR
Hollis v Vabu (2001) 207 CLR 21
Jones v Dunkel (1959) 101 CLR 298
Manly Council v Byrne [2004] NSWCA 123
Trautwein v The Federal Commissioner of Taxation (1936) 56 CLR 211
Vabu v Commissioner of Taxation 1996 ATC 4898

REPRESENTATION:
APPLICANT
C Bevan, barrister (5-6/10/2004)
J Eager, solicitor (29/03/2005, 13/05/2005, 2/06/2005)
RESPONDENT
I Latham, barrister

ORDERS: The decision under review is affirmed in respect of the 2002 year for all 36 contentious entities and is remitted to the Respondent to enable him to assess the Applicants, in accordance with this decision, in respect of the relevant years. Either party is entitled to seek a hearing on costs after the expiry of a reasonable time after the issue of this decision and, where relevant, any appeal process has been completed.

Preliminary and introduction

1 The objection decision which is under review is the disallowance of the Applicants’ objection against assessments of payroll tax for the years ended June 2000, June 2001, June 2002 and June 2003 (collectively the “relevant years”). By agreement between the parties the relevant year ending June 2002 (referred to separately as the “2002 year”) has been treated as a sample year and on the basis that the Tribunal’s findings in respect of the 2002 year will bind the parties in respect of all relevant years.

2 The Tribunal was furnished with the documents required pursuant to section 58 of the Administrative Decisions Tribunal Act 1997, contained in large binders and separated by numbered tabs.

3 The Tribunal also admitted into evidence a large number of exhibits and including affidavits, the exhibits to those affidavits, a video tape (the “video”), a CD Rom (the “CD”) and a large box containing financial documents. In addition the Tribunal received numerous written submissions. Hearings took place over 5 days. On 5 October 2004 (“first hearing day”) and 6 October 2004 (“second hearing day”) the Tribunal heard oral evidence. The transcript (“TS”) is not numbered sequentially; accordingly TS references preceded by “1” refer to the first hearing day while similarly TS references preceded by “2” refer to the second hearing day. At the end of those two days there was insufficient time for final submissions. A time-table for written submissions was arranged and agreed, and the matter was then set down for oral submissions on 29 March 2005. For reasons which need not be detailed, oral submissions were in fact taken on 13 May 2005. However and at a late stage the Respondent furnished additional written submissions and an adjournment until 2 June 2005 (“fifth hearing day”) was allowed to the Applicants, to enable them to deal with the Respondent’s final submissions.

4 The documentation before the Tribunal cannot be described otherwise than as vast. Some of the exhibits tendered (and especially the video and CD) were of little relevance. On the penultimate day the parties undertook (if possible) to furnish the Tribunal with a joint and agreed memorandum detailing those documents considered to be relevant but, in the result, were unable to reach agreement as to this aspect.

5 On the first and second hearing days the Applicants were represented by Mr. CJ Bevan of counsel instructed by Mr John Eager of Byrons; on all of the subsequent days Mr. Eager appeared alone. Mr Latham of counsel represented the Respondent throughout.

6 It was agreed at an early stage that, having regard to certain matters of an arithmetical or mathematical nature, the Tribunal would make its findings in relation to the 36 entities and in respect of which there is a dispute between the parties; those findings would constitute the decision of the Tribunal and on the basis of which the decision under review would be remitted to the Respondent to enable him to calculate and, if need be, reassess the Applicants in respect of the other relevant years. This arose in particular from the fact that there are certain calculations of an arithmetical or mathematical kind (the nature of which need not be dealt with in this decision), to be effected (1TS5).

7 In an opening statement (to be referred to in more detail later in these reasons) Mr. Bevan explained that there were originally and in relation to the relevant years, 62 entities who were the subject of an audit by the Respondent. The Applicants conceded that 9 of those entities were within the tax base because those entities comprise “people who work either full-time or almost full-time either as managers or in the maintenance division of L & B Linings Pty Limited” (That latter company is separately referred to as the “Second Applicant” while the other Applicant, B & L Linings Pty Limited, is separately referred to as the “First Applicant”). The Respondent agreed that 15 of the 62 entities were excluded. In respect of the remaining 38 entities (referred to in clause 3.1(c) of the objection by the Applicants) the Applicants later conceded that 2 were within the tax base, thus leaving 36 still in dispute. I have generally in this decision referred to the Applicants and in other words using the plural form, although it would appear that vis-à-vis each the entity the other contracting party was the Second Applicant; references to the Applicants should be construed where appropriate accordingly.

8 In respect of the 36 entities which are in dispute the Tribunal was furnished by the Applicants with a summary which sets out in respect of each of them (inter alia) its name, the nature of its activity and other information. For reasons connected with the display of this decision on the Tribunal’s website it is not possible to include the summary (which is henceforth in this decision referred to as the “summary” in the form in which it was submitted. For this reason I commence and in this clause 8 with a list of the entities, (all designated in the summary as “subcontractor”) accompanied by and in respect of each of them the reference number allotted to it in the summary, contained in the first and second columns of the summary (and on the basis that in succeeding clauses, will be included, by description, most but not all of the information contained in the summary) as follows:

C2 Ananin, Valery

C3 Babenko, Alexandre

C4 Ball, Allan R & Norma L

C5 Basargin, Larry & Ulita

C6 Blundell, John

C7 Bortz, Brett Peter

C8 Chen, Jia Long

C9 Crawford, David

C10 Downs Plastering Pty Ltd

C11 Drywall Linings (Gostevsky)

C12 DT Interior Linings

C13 Fefelov, Arkensy E

C14 Kamp, Michael A

C15 K.B.M Cornice Fixing

C16 Kirpichnikov, Fred & Marina

C18 Kirpichnikov, Serge & Rima

C19 G&A Liskov Plastering Serv

C20 Luo, Xiao Kang

C21 MJ Ceilings & Partitions P/L

C22 Milson, Owen S

C23 Ng, Ah Chui

C24 Pan, John (Jin An Yang)

C25 RMW Plastering Service Co

C26 Rodionov, Max

C27 Sara Linings - V & I Saraikin

C28 Seletkoff, Vasili

C29 Seng Kiat Services Centre

C30 Smith, Brendan Paul

C31 Tchernamor, Vladimir

C32 Tonkih, Dimian

C34 Weifang Internat'l Trdng P/L

C35 Wong, Chi Wah

C36 Yi Mei Lin Plast'ng Serv. Co

C37 Z. G. Lining Pty Ltd

C38 Zhu, Ben Qian

9 The next column of the summary, and under the head of “Trade” indicates that the following entities were designated as “gyprock”: C1, C2, C5, C8, C9, C11, C20, C22, C23, C24, C27, C28, C29, C31, C32, C34, C35, C36, C37, C38. Under the same head the following entities were designated “cornice”: C3, C4, C6, C7, C10, C12, C14, C15, C19, C25, C30. C26 was designated as a “sander” and all of the remaining entities were designated as “G & C”, which indicates both gyprock and cornice.

10 The next column of the summary, and under the head of “Entity Type” indicates that the following entities were partnerships: C1, C4, C5, C11, C16, C18, C19, C25, C27. Under the same head the following entities were designated “Sole Trader”: C2, C3, C6, C7, C8, C9, C12, C13, C14, C15, C20, C22, C23, C24, C26, C28, C29, C30, C31, C32, C35, C36, C38. The description “Company” was assigned to C10, C21, C34, C37.

11 The next column of the summary dealt with ABNs and including the ABN number referable to each entity and the date of effect of that ABN. I do not think it necessary to include the actual ABNs or the date of effect of each; the years of effect were 1999, 2000, and 2001. The summary does not specify in respect of any entity that its ABN ceased and the date of that cessation. An ABN was reflected for all entities.

12 The next column of the summary dealt with GST and specifying the date with effect from which GST was applicable. In respect of all except four entities GST was applicable and in most, but not all, cases with effect from 1 July 2000. GST was not applicable in respect of C3, C23, C26, C30.

13 The next column of the summary specified the amount received by that entity in the 2002 year. I do not think that I need to set out the actual amount received by each entity; the amount varied from a low of $140 in the case of C26 to a high of $102813 in the case of C27.

14 The next column of the summary specified the number of invoices referable to that entity in the 2002 year. Again I need not specify the actual number which varied from a low of 1 for C26 to a high of 48 for each of C1, C27 and C31.

15 The next column is headed “Notes on Factors re Business Operated”. I do not include any of that information because none of the entities gave evidence and whether as to that specific information or anything else.

16 The next column dealt with “Section 3A(1) (e) (iii)?” That section (the 90 days exemption, as described hereafter in this decision) is reflected as applying in respect of C2, C4, C5, C7, C8, C9, C11, C13, C15, C20, C22, C24, C25, C26, C28, C30, C32, C35, C37 and C38; all of the remaining entities were designated “no”.

17 The next column dealt with” Section 3A (1) (f)?” (the 2 or more persons exemption as described hereafter in this decision). C26 was designated “no” and all the other entities were designated “yes”.

18 The terms “entity”, “entities”, “relevant entity” and “relevant entities” have been selected as suitably neutral terms in respect of the 36 contentious entities on the basis that this matter turns on the basis that it is first necessary to enquire whether those entities were employees at common law or independent contractors. It will be noted that the summary describes each of the entities as a subcontractor. The fact that the summary is included in the form in which it was submitted should not be construed in such fashion that I accept that that description was accurate. The summary describes each entity as a partnership, a company, or a sole trader. It is clear enough on the evidence that some of the partnerships were husband and wife partnerships; see by way of example C16 and C18, F & M Kirpichnikov and S & R Kirpichnikov respectively. It may be that other partnerships fall into this category. In other cases and where the entity is a company, the Tribunal does not know whether the entity was or was not the trustee of a discretionary trust and whether or not this was so, how the company was capitalised or who its shareholders and directors were.

19 The questions of law involved are (notwithstanding numerous and very lengthy submissions, and in particular on behalf of the Applicants) not at all complex. It is necessary in the first instance to determine whether an entity was, in the 2002 year, an employee or an independent contractor. If an entity was an employee that ends the matter so far as that entity is concerned because its remuneration by the Applicants will be wages and included in the tax base in accordance with section 3AA of the Pay-Roll Tax Act 1971 (‘the Act”). This is a convenient point at which to note that, as appears from the summary, and on the basis that an inference can be drawn from the content of the summary and in particular its content as to the 90 day exemption, some of the entities worked for or performed work for the Applicants during and not all of the 2002 year. The fact that this was so might suggest that that entity was an independent contractor but at the same time the fact that there was evidence as to supervision of the work (together with other relevant evidence) might lead to a different conclusion on the basis that it is entirely possible that although an entity did not work for the Applicants throughout all of the 2002 year it was nevertheless an employee when it did.

20 The case law establishes that to determine whether an entity is an employee or an independent contractor involves the consideration of a number of tests, the nature and importance of which has changed and evolved over time. It is unnecessary to refer, otherwise than briefly and later in this decision, to that case law. The Tribunal is unable in relation to any entity to determine into which category it falls simply because it heard evidence from none of them. Evidence was given by four persons; in the case of three of those persons the Tribunal considers that their evidence was unsatisfactory.

21 The only other questions arise in relation to entities which were in the 2002 year independent contractors. Their contracts will be relevant contracts under section 3A of the Act; however in relation to any such entity its remuneration will not form part of the tax base where the entity was so involved (put in broad terms) for less than 90 days in the relevant year (section 3A (1) (e) (iii) of the Act) or where the relevant work was performed by two or more persons (section 3A (1) (f) of the Act). Of these two exemptions the latter received far more attention; the summary indicates that while some of the entities might fall within the former exemption this was not so of all of them. Those exemptions are referred to in brief as respectively, the “90 day exemption” and the “2 or more persons exemption”.

22 The Applicants did not dispute the fact that they bear the onus of establishing firstly that the 36 entities were not employees at common law and secondly (insofar as the Applicants succeeded in establishing that any entity was an independent contractor) that it fell within a relevant exemption. It was conceded that the onus on the Applicants is the same as that which falls upon a taxpayer under an income tax statute. Federal Commissioner of Taxation v Dalco (1990) 168 CLR; Bloemen v Federal Commissioner of Taxation (1981) 147 CLR 360; Trautwein v The Federal Commissioner of Taxation (1936) 56 CLR 211.

23 During the course of a length opening statement Mr Bevan contended that the coming into force of GST as from 1 July 2000 had the effect that a fundamentally different approach was needed in the analysis of payroll tax obligations.

24 I have previously indicated that the documentation before me is vast. In respect of three of the four witnesses who gave oral evidence, the evidence of three of them was not satisfactory. Some of the statements from the bar table by Mr. Bevan were, to my mind, surprising. I have come to the conclusion that I can best demonstrate the nature of that evidence and of those statements by quoting and, in some cases extensively, from TS. It is my view that the nature of that evidence and those statements can be fully appreciated in no other fashion. In respect of some of the quoted TS extracts unnecessary matter has been eliminated; eliminations are indicated by dotted lines.

25 The Applicants ran this case in a manner which in my view cannot be characterised otherwise than as odd. It was necessary in the first place to establish that the relevant entities were independent contractors and not employees. The Applicants sought to do so in part through documentation as to individual jobs and where and in respect of each job all of that documentation and including the relevant invoice was prepared by the Applicants. This was so in relation to tax invoices for GST purposes and also invoices where GST was not relevant.

26 The Applicants sought to establish that (assuming that they had first established that the relevant entities were independent contractors) they fell within either or both of the exemptions. The relevance of the 90 days exemption was, so it was contended, demonstrated by the summary. Let me assume by way of hypothesis, that the summary can in this regard be accepted as correct; the summary would tend to support the view, in respect of some of the entities, that the 90 day exemption would have applied. However there were other entities in respect of which the 90 day exemption was not relevant. As to the 2 or more persons exemption the Applicants relied on the evidence and including the video and on the CD. Those two items, the showing of which took a considerable period of time did not establish anything of probative value. The CD sought to establish that the nature of the work was always such it required two or more persons to perform it. Leaving aside the fact that there was evidence before the Tribunal of work by persons working alone, there was no evidence that where there were two or more persons in involved in a given job they were not co-employees (or for that matter co-independent contractors) working on that particular job as a team. There was no attempt whatever to identify the persons involved. The video was of even less probative value. It emphasized the importance, when lifting a heavy object, of bending the knees when one does so.

27 The Applicants cannot be heard to say that they were not aware of the consequences of not calling any of the entities. At a very early stage and when told that none would be called I indicated surprise, while Mr. Latham thought that that omission would be fatal. In quoting from the TS I intend, as indicated previously, also to include extracts from statements. Mr Bevan said in categoric terms that none of the entities would be called because they were mostly immigrants who did not speak English. That contention by Mr. Bevan was contradicted by the oral evidence and in particular that of Mr Kirpichnikov. Under income tax law personal exertion income cannot effectively be derived for tax purposes otherwise than by the person whose exertion produced it. Income splitting has been difficult as a matter of law for some years. It became even more difficult or even impossible with the introduction of legislation in 2000, the New Business Tax System (Alienation of Personal Services Income) Act, applicable as from the year ending June 2001 and pursuant to which a personal services determination can be sought and obtained in certain limited circumstances; see Commissioner of Taxation v Metaskills Pty Ltd [2003] FCA 766. (On the fifth hearing day Mr. Eager suggested that that statute might have come into effect at a later time in respect of some classes of construction workers; (nothing very much turns on when precisely that statute commenced in relation to the entities, assuming that any of them fell within classes for whom commencement occurred later than the 2001 year). There might moreover and in relation to the relevant entities be disadvantages in that some benefits (e.g. superannuation guarantee and workers compensation benefits) might be lost or endangered. The only obvious beneficiaries of such a regime would seem to be the Applicants on the basis that where their employees (assuming that they were employees) are structured as independent contractors, they, the Applicants escape liability for payroll tax on amounts which would otherwise be caught. It is against this background that the Applicants had no option but to call the relevant entities. Because they have not done so I, (and for reasons set out later in this decision) must draw an (adverse) inference that such evidence would not have assisted them. In fact I draw an inference that such evidence would in all probability have been adverse to the Applicants. Jones v Dunkel (1959) 101 CLR 298; Manly Council v Byrne [2004] NSWCA 123.

28 The manner in which this case was run (and the expense thereby incurred) leads me to think that this decision may be appealed. It is for this reason that I make it clear that my decision is against the Applicants on the simple basis that they have not discharged the onus on them, and indeed made no real attempt to do so. My findings are findings of fact and not of law. The tax would have been avoided if the Applicants had established that the entities were independent contractors and that they fell within either of the exemptions. Insofar as it may be contended that as a matter of law my drawing of an inference under Jones v Dunkel was incorrect, I note merely that that there were differing and contradictory reasons (none satisfactory) as to why that evidence was not called; I refer to these aspects later in this decision.

29 On the first hearing day Mr. Bevan in answer to a question from the Tribunal explained what is meant by plasterboard (gyprock) and cornice (1TS15) in the following terms:

BEVAN: Well for example, behind you would probably be two sheets of plasterboard. And about where it says the Administrative Decisions Tribunal, would be where the two sheets of plasterboard would meet. The work involves putting the plasterboard up against the battened wall. In the case of walls, they’re nailed on. In the case of ceilings, it’s screwed on and glued. Where there’s a join, it is plastered three times. The first time, base coat, then a tape, then another base coat and then a final coat and that’s sanded by a chap called a sander. So that you end up with a wall which is a smooth surface like the wall behind you. And the same thing works in a ceiling, not in an office block, but in a block of flats or a home unit or a house. We don’t have any cornice in this hearing room, but in most homes where the ceiling meets the wall there is a cornice, which is a piece of plaster, these days it’s usually that shape looking side on. It runs right across the corner, and that’s glued in place. The CD-ROM will explain how all of this is physically done. The number of men it takes to do it, what the modus operandi for a team of plastering subcontractors is. Now it’s our case that all of the subcontractors work in teams of two or more. Most of them work in teams of probably five or six. The only ones who work alone are sanders. The sanders tend to, not all the time, but often work alone. Now the sanders are a small part of this case because most of the plastering subcontractors do their own sanding. It’s only where the plastering subcontractor doesn’t do his own sanding that we retain sanding subcontractors. And the sanding subcontractors tend to be the ones with the smaller payments. They tend to be the ones who are not registered for GST, because they’re receiving smaller amounts of money and they tend to work shorter hours. But most of the thirty six contentious entities are what are called plasterboard fixers. They’re doing the heavy work, they’re fixing plasterboard to walls and ceilings and then attaching Cornices. If they do their own sanding, that’s part of a quote. If they don’t do their own sanding, we withhold ten per cent of their invoice price and we retain a sander who is another contractor, to sand the plasterwork. The plasterwork is the joins between the plasterboard.

30 The written submissions filed by the parties and particularly the Applicants, lengthy and detailed as they are, might lead one to think that this case was one of enormous complexity. See for example the Applicants’ Reply to the Respondent’s Final Submissions. In my view it was not. Many cases were cited; in respect of many of them no mention in this decision is necessary. From time to time during the hearings issues arose which turned out in the result to be of little if any moment. Industrial awards (dealt with at length on the fifth hearing day in oral submissions by Mr. Eager) fall into this category; so do contentions by Mr. Bevan as to the effect on the Act of the GST and ABN legislation.

31 Mr. Bevan had previously (at 1TS10and 11) contended that the introduction of GST in July 2000 had the effect that the method of characterising entities as either independent contractors or employees needed fundamental revision; he said:

BEVAN: Yes, because part of what occurred was, that’s when prescribed payments system went. And head contractors were no longer liable for withholding prescribed payments system payments at the rate of 20 per cent. Remember what happened on 1 July 2000. Anyone who did not want to have tax withheld at the maximum marginal rate of personal tax had to register with the Commissioner of Taxation as an Australian Business Number. By quoting an Australian Business Number, you were doing two things. You were saying I am part of the Australian tax system. I am conducting an enterprise because employees are not allowed to register for the Australian Business Number for reasons I’ll explain in my closing argument. And the person who quotes the Australian Business Number is also saying, you do not have to withhold any of my subcontract payments under PAYG withholding. I will pay my own tax at the end of this quarter when I lodge my BAS statement. Because I am within the Australian tax system. The other critical feature of the post 1 July 2000 regime which we say the Chief Commissioner has rejected in our submissions to him during the audit and in our objection is, all but four of these thirty six entities are registered for GST. And each week or each month when they give us a tax invoice for subcontract plastering work, they invoice us for GST. And we pay GST we assume, but the legislation doesn’t require us to prove it. We assume they remit that GST to the Commissioner of Taxation. And one of the other propositions I will develop by reference to the GST Act in my closing argument is, it is against the law for an employee to collect GST. It is against the law for an employee to register as a GST remitter. It is against the law for the Applicants to claim input tax credits for money they have paid to employees. Now we say that the principle analysis to be undertaken under 3AA is an analysis which requires the Payroll Tax Act to recognise the reality of the legal relationship between the Applicants on the one hand and the thirty six entities on the other hand. That’s the thirty six contentious entities, on the other hand. Because (a) it would be a nonsense just as a matter of Commonwealth state relations to have thirty six entities who are treated as enterprises and independent businesses, who operate under the Australian Business Number and GST regime as enterprises, and who by definition in the Australian Business Number Act and GST Act cannot be operating as employees on the one hand, while treating them as common law employees under state payroll tax on the other hand. And quite apart from that, we would say that because 3AA of the Payroll Tax Act relies on the common law concept of wages and employees, the common law cannot override the treatment under Commonwealth legislation of the legal relationship between.

32 Mr. Bevan’s contentions as set out in the preceding clause were without foundation. The mere fact that an entity quotes an ABN or is registered for GST is determinative of nothing other than the fact that it has been so registered as such. The Applicants contended that the fact that this was so entitled them to treat the entities as independent contractors. (These aspects also will be dealt with further later in this decision) Those contentions indeed gave rise to the possibility of a constitutional issue which in the result did not arise.

33 Towards the end of his opening address Mr. Bevan indicated that he intended to call four witnesses only and being Messrs Saraikin, Ierace, Kirpichnikov and Dickie. This lead to a first exchange as to the evidence to be called by the Applicants (at 1 TS32 and 33) as follows:

…

HIS HONOUR: I hope you won’t mind my suggesting - it strikes me as odd that the people who are “the 36”, are they not going to give evidence at all?

BEVAN: No.

LATHAM: No, we would say not odd; fatal.

HIS HONOUR: Would you like to take that under advisement?

BEVAN: No, we’ve already considered it and we have their business records here.

HIS HONOUR: Well that’s not the test Mr Bevan. As to what exactly they do, as to how they do it, as to how they contract with your clients, as to how they organise their affairs, surely the best evidence is their own evidence? But I don’t try and teach people like you how to run cases, but you’re on notice that I used the word “odd”, Mr Latham used a rather more draconian word. I’m not going to take it further at this stage.

34 Mr. Dickie is an accountant and a member of the firm (Byrons) which represents the Applicants in this matter; (Mr Eager, although a solicitor, is a member of the same firm). Exhibits A1 and A2 are affidavits by Mr. Dickie dated 14 July 2004 and 28 September 2004 respectively; the exhibits to his affidavits were referred to by reference to his initials and thus JWD 1, JWD2, JWD 3 and JWD4 respectively. It was agreed that the Tribunal would refer to those exhibits (and similar exhibits by the other witnesses who gave oral testimony) in the same way.

35 Mr Dickie was referred in the first instance to Exhibit JWD3 which is a summary of ABN searches referable to the 36 entities. He was referred in the first instance to A & N Gyprock; he said that it is an entity name and that it engages in gyprock.

36 Mr. Dickie confirmed that in preparing the exhibit he merely searched the ABN numbers. He did not, where an entity was described as a partnership, see or consider any partnership agreement. Mr Dickie stated (1TS39) that the ABN status of A & N Gyprock was cancelled as from 21 July 2000 although it had been active prior to that date.

37 Mr. Dickie was referred having regard to Exhibit A1 to the manner in which an ABN is obtained. At 1TS 41 and 42 the following exchange took place:

HIS HONOUR: Q. So your answer then is an ABN is prima facie indicative of the fact that there is a business?

A. That’s correct your Honour.

38 It was then put to him that the mere fact that an individual has an ABN is in no way determinative; he answered (1TS42) that “I can’t say that that’s correct or incorrect”.

39 The following exchange occurred shortly thereafter at 1TS43:

A. That’s exactly what I said.

40 Mr. Dickie was then constrained to admit that some of the full-time employees of one of the Applicants had ABN numbers. The following exchange which deals both with this aspect (and also certain relevant tax aspects) is taken from 1TS43 and following pages:

A. Yes.

Q. For example, there is Mr Saraikin?

A. Yeah.

Q. Does he have an ABN number?

A. Yes he does.

Q. Is he an employee of B & L Linings?

A. We are of the opinion that he is.

Q. That he is an employee?

A. That’s correct.

Q. But how could he be an employee if he’s got an ABN number?

A. Well in that particular instance - excuse me - his employment with B & L probably shouldn’t have been under by way of use of an ABN and that’s an issue that we’re addressing with the tax office.

Q. So he might be guilty of some sort of breach of the tax legislation might he?

A. Maybe.

Q. I see. Let’s have a look at Mr Ierace. He’s the maintenance manager of B & L isn’t he?

A. That’s correct.

Q. Is he on an ABN?

A. I believe so.

Q. Is he an employee or is he a contractor?

A. We believe that he may well be an - a common law employee, and again, that’s an issue that’s being addressed with the tax office.

HIS HONOUR: Q. When you say he’s an employee, does that mean that when you pay him you take off PAYE?

A. Well we - that’s not been the case at this point, your Honour, but we formed the opinion that it probably should be the case.

LATHAM: Q. So he might be in breach of the tax legislation as well then, is he?

A. Possibly.

Q. I see. And what about Mr Kirpichnikov? Are you aware of who he is?

A. There’s a few. I’m not being smart—

Q. Sorry, Mr Vasili?

A. Bill?

Q. Yes?

A. He’s an employee. Sorry he’s an employee of B & L Linings.

Q. Sorry he’s a—

A. An employee of B & L Linings.

Q. So he doesn’t have an ABN number?

A. That’s correct.

Q. Now in relation then to Mr Saraikin and Mr Ierace, in those circumstances you couldn’t possibly say that having an ABN number was prima facie evidence of being a contractor, could you?

A. Well—

Q. Because that would wrong, wouldn’t it?

A. No it’s not wrong. As far as the public at large dealing with him, you’re entitled to go to the - Australian Business Register and see whether a person has an ABN, then the question - it’s a question of what the relationship is.

Q. It’s a question of what the relationship is. Yes. And are you the tax accountant for Mr Ierace and Mr Saraikin?

A. Mr Ierace I’m not. Mr Saraikin became a client recently. I couldn’t tell you when.

Q. But you haven’t put a tax return in for him since that time?

A. We’ve done—

HIS HONOUR: Q. Could I get that answer again? I am not the tax accountant for Ierace. And what was your answer about Mr Saraikin?

A. I am.

Q. I am?

A. The accountant, yes.

Q. So that means you file his returns?

A. That’s correct.

LATHAM: Q. And have you filed a return in relation to that person?

A. I think 2002 is the last one that we’ve got for him.

Q. And when you filed that return did you describe him as an employee or did you describe him as a contractor?

A. At the time we described him as a contractor.

Q. And that’s clearly not right, is it?

A. We’ve since discovered or formed the view that that may well be incorrect.

41 Mr. Dickie admitted shortly thereafter that having an ABN demonstrates very little and that what is important is always the nature of the relationship.

42 And from 1TS53:

A. Correct.

Q. They are not contractors, they are full time employees. Now if that is so, why would they have got - why would they have applied for and sought ABNs, what purpose would it serve?

A. It’s just a flow-on from the moving away from the old prescribed payment system, and a misunderstanding of the actual law, which is being addressed.

Q. We’re now in the year 2004 and nearly at the end of it. As the accountant to this company, I ask you again, do you know whether when they pay these two gentlemen they take off PAYE?

A. No they don’t.

Q. They don’t. Should they?

A. It would appear that’s the case, your Honour—

43 The evidence of Mr Dickie was in general terms unreliable. It seems clear that in relation to some senior employees of the Applicants there has been tax activity of a distinctly dubious nature and in which Mr Dickie was (to a greater or lesser extent) involved. In particular his evidence as to the fact that senior full-time employees obtained ABNs and quoted them to the Applicants, in circumstances where and to the knowledge of the Applicants they should not have done so (and thus inter alia obviating PAYE tax) was of particular significance. It will be noted that his evidence commenced with an assertion that the quotation of an ABN permits the payer to rely on it; that assertion was watered down to a considerable extent later in his evidence. (That assertion was raised during the hearing thereafter and in particular by Mr. Eager in his closing submissions on the fifth hearing day). The evidence of Mr. Dickie did not assist the Applicants.

The evidence of Fedor Saraikin; evidence in chief

44 Mr. Saraikin swore three affidavits dated 14 July 2004 (10 pages) 14 July 2004 (5 pages) and 5 October 2004; they are exhibits A3 A4 and A5. As was the case with Mr Dickie his affidavits refer to their own exhibits which are designated by his initials and being FS. Exhibit FS2 is complicated by the fact that it consists of five sets; it was agreed that it would be referred to as Exhibit FS2 followed by a number which would in turn relate to the number in the set.

45 Some of Mr Saraikin’s evidence related to the CD (exhibit VK4) and to the video (exhibit VK5). (It may be noted that Mr Bevan explained at this time that the CD establishes that the work requires two or more persons. He said also that the Applicants rely principally on the 2 or more persons exemption and that the 90 day exemption is relied on in the alternative, in respect of some entities. It was at this time also that Mr Bevan again said that none of the 36 entities would be giving evidence before the Tribunal; see 1TS70 and 71 as follows:

BEVAN: No Mr Saraikin and Mr Ierace give evidence as to what’s involved coupled with the CD-ROM and video cassette. We’ve approached it this way because the bulk of these people don’t speak English, they are migrants.

46 It will be noted that Mr. Bevan said categorically that “the bulk of these people don’t speak English”. It is a matter for regret that I must say that I do not think that that statement was truthful. One has only to read the list of names in the summary to see that many of them are names which indicate that they are English speaking. The witnesses who gave oral evidence and have names suggesting a Russian or former Soviet Union origin all spoke fluent English; there is no reason to doubt that this is true of the entities whose principals have names indicating an origin in the same region.

47 Mr. Saraikin said in commenting on the CD as it was shown: (1TS71 and following pages);

…

BEVAN: Q. Mr Saraikin, the plasterboard is in different dimensions?

A. Yeah they come in - on the ground floor we use all long sheets because they work off the stack and they just do the long sheets first then they use off cuts wherever they fit.

Q. Are the plasterboard sheets of different thicknesses?

A. Yeah they’ve got 10 mil 13 mil and there’s 16 mil board. They’re all used for different purposes.

Q. What’s the weight of these boards?

A. I think they’re 60 to 80 kilos.

48 At this juncture I note that the CD did indicate tasks being carried out by two or more persons. It does not indicate who they are. It may be that in relation to a given task co-operation between two or more persons is required for the performance of that task. The fact remains that those persons might be employees (and full-time employees) of the builder. It does not follow that because a given task is bulky or cumbersome that of necessity, the men who are carrying out that task are employees of a single independent contractor.. It may be that there are cases where this in fact occurred but there was no evidence to this effect before the Tribunal. As I have indicated Mr. Bevan called none of the 36 entities. There was other evidence by Mr Kirpichnikov as to whey they were not called and which indicated reasons different from those given by Mr. Bevan.

49 The CD was in my view a waste of valuable time; if it was a waste of time it paled into insignificance beside the video. The latter emphasised repeatedly the importance of bending the knees when lifting a heavy object. I was told that the video is used as a safety training mechanism. I can see why this would be so. But it had no probative value in relation to the issues in this case.

Mr Saraikin’s evidence continued on the second hearing day

50 I commence by including an extract from 2 TS1 as follows:

I think it’s only fair that I draw to your attention the fact that if I find that that evidence would have been important and you failed to call it, then it may, I say only may at this stage, may be necessary for me to draw an inference. The reason why I tell you what must have been obvious to you and Mr Eager right from the word go, given the experience that you both have, is that I want it on the record as a matter of natural justice. Would you like to comment?

(By Mr. Bevan in reply) Well you raised yesterday – in response to it I said that a number of these people are immigrants although that is not the principal reason for not calling them, the principal reason for not calling these people is they are true arms length sub contractors with whom we deal, they are not employees, they are not people who we can direct as we wish, in order to bring them to Court we would need to subpoena them, if we subpoena people that we do business with on and off in the conduct of our business they will stop, we apprehend, reasonably apprehend, they will stop doing business with us by involving them in our taxation affairs. Our approach to this litigation is that we have an onus of establishing the Applicants’ contractual relationship with each of these 36 entities, the reason you’re confused about the number is as I said in my opening, two are already conceded, that’s C17 and C33.

HIS HONOUR: C17 and C33. These people all do work for your clients and judging from the amounts involved sometimes to a considerable extent. You really fear that giving evidence, if they were called upon to give evidence they might stop doing work for a major work supplier or a substantial work supplier?

BEVAN: That’s our apprehension. Our approach is that it’s unnecessary to call these people because we have an onus of proving our contractual relationship with each of these 36 contentious entities.

51 Mr. Saraikin said (2TS7) that the First Applicant enters into contracts with builders and pursuant to which it, the First Applicant, engages to carry out plastering work in NSW and primarily in the Sydney Metropolitan area. Having entered into those contracts the First Applicant enters into sub-contracts with the Second Applicant in order to have the work done. The Second Applicant in turn has a “stable of subcontractors” which it dealt with for the purpose of having the plasterboard and cornice work carried out. He was referred to a list of 38 names and said that of them two (C17 and C33) were sanding contractors while the other 36 were gyprock contractors “which is plasterboard and cornice fixers”. It will be recalled that prior to the hearing there were 38 entities in dispute but two were conceded by the Applicants leaving in dispute the 36 entities described in the summary.

52 Mr Saraikin was referred to the list of entities described in the summary; he explained that they are all gyprock contractors (plasterboard and cornice fixers) excepting only C26 who is a sander.

53 Mr. Saraikin said that he is the general manager of both Applicants but that he is not on the board of directors of either of them. Mr Saraikin was then referred to the fact that although he is the general manager there is in fact a partnership entity and in which he and his wife are the partners; the following exchange is taken from 2TS 12 and following pages:

A. Yes they do.

Q. And what’s the role of L & B Linings maintenance division?

A. Well when we start a house we get the subcontractor to start the house and they do the plasterboard fixing, the cornice and most houses have stairs because they’re two storey homes, we’ve got to come back and - when the subcontractor finishes the job well he’s not obliged to do the stairs because the stairs come in at a later stage so when they put the stairs in the builder requests that we come out and fix around the stairs to finish off, so we need people like that to go around and repair things, check on other trades and do reports and what not.

HIS HONOUR: Q. So they’re the finisher off’s, is that right?

A. Yes plus they supervise as well.

Q. So they supervise?

A. Yes they can supervise as well.

BEVAN: Q. Supervise what?

A. Oh well they go out to the job and they can report if there’s a problem, they can report to us because they’re like—

Q. This is after the work’s been done?

A. Yes, during and after yes.

HIS HONOUR: Q. Could I trouble you for just one second. You are the general manager?

A. Correct.

Q. But is that accurate, is it you who is the general manager or is it the partnership of you and your wife which is the general manager?

A. I’m the general manager.

Q. Let me repeat the question. You are referred to here as F & J Saraikin and you’ve already told us that that’s a partnership between you and your wife?

A. Correct.

Q. But you are a full time - you work full time for these companies as the general manager of both?

A. That’s correct.

Q. Does that mean that you do the work or does your wife do the work?

A. I do the work.

Q. So what purpose does the partnership serve?

A. There’s no real purpose there.

Q. So to be accurate it’s really you, you are a full time employee of these companies, you work for them and for no one else?

A. That’s correct.

54 In relation to the manner in which any new contractor enters into terms of engagement 2 TS17 (and following pages) record:

A. Yes I’ve got that page.

Q. What is that document?

A. Oh that’s just part of the way I do a quote.

Q. Well from whom to whom?

A. This is from Elamond Homes, we do work for them, they engaged us to do some work so—

Q. Who is we?

A. Well B & L Linings and in turn L & B do the work.

Q. So this is the quote for the head contract between the builder, Elamond Homes and B & L Linings?

A. Correct.

Q. And if you go over the page you’ll see that’s C7/20, what’s that document?

…

BEVAN: Q. You prepare the quote as the general manager of B & L?

A. Correct.

Q. And you work out the price that you’re prepared to do the work on the plan for?

A. Yes that’s correct.

Q. That’s the plaster fixing and cornice fixing and sanding?

A. Correct.

Q. And that price is reflected at the bottom of the page 12,425?

A. That’s the price.

Q. And you go over the page to see 7/20, that’s a typed version of the quote, is that right?

A. Correct.

Q. And then page C8/20, that’s the acceptance of the quote, being the purchase order from Elamond Homes to B & L Linings?

A. Correct.

Q. And over the page at C9/20, that’s a purchase order from Allcastle Homes to B & L Linings?

A. Correct.

Q. And what’s that for?

A. Well that’s just probably an example of an order, I don’t—

Q. That’s an example of the standard conditions isn’t it?

A. Yes correct.

Q. That’s got nothing to do with this particular job?

A. No.

Q. That’s just showing the standard builders conditions on the head contract?

A. Yes.

55 I do not think it necessary for me to deal in detail with the manner in which an entity was engaged for a particular job. It is clear however that all of the relevant documentation was prepared by the Applicants and none by the relevant entity. This is so even in relation to the invoice which is also prepared by the Applicants. His evidence was that there might be some negotiation as to price but overall it seemed clear that price fell within a narrow compass.

56 The manner in which documentation with the relevant entities was organised was dealt with at some length (2TS15 and following pages) Mr. Saraikin was taken through two sets of documentation in Exhibit FS2; as indicated previously Exhibit FS2 contains worked sets of documents. In respect of one set Mr. Saraikin was asked why in relation to two documents, one was on letterhead and the other not. He replied at 2TS16 “It just depends on who is in the office at the time if we run out they might just do a different copy.” One thing is clear in respect of the documentation and that is that it was in its entirety prepared by the Applicants, and in particular (probably) the Second Applicant.

57 That tax invoices (prepared by the Second Applicant) did not always accord with the letter of the law emerged from the following extract from Mr. Saraikin’s evidence in chief; see 2TS33 and following pages as follows:

Saraikin Well this must be the acceptance then, it was just a few minutes after or whatever, about an hour later afterwards.

His Honour At this stage we still are in negotiation about the contract, the work hasn’t been done.

Saraikin Yeah, well I’ve just looked at the dates there, because his tax invoice is the same as this.

Bevan His tax invoice he uses to prepare quotations.

Saraikin To us, he sends to us the same as this, that’s why.

His Honour So this particular member of the workforce, as opposed to work pool, uses a tax invoice to quote?

Saraikin Well in our industry people are you know, not that literate and they – give you proper documents and that. Sometimes they give you a piece of paper –

His Honour Mr Saraikin, I am not querying it, I just want to understand it.

Saraikin No well, to him, this could be a quote or either way, but in this case here, that’s just an acceptance of the offer because he’s only faxed the first one at 11.16 and after we had the discussion.

His Honour So this is acceptance of the offer even though it is described as a tax invoice?

Saraikin Yes.

His Honour But, so, and you know it wasn’t a tax invoice and it certainly not the sort of thing that you could go and use to claim a GST credit is it?

Saraikin No, no.

His Honour They were going to do the sanding, they just haven’t done it yet.

Saraikin Correct. And he might not chose to do it either.

His Honour Even though he quoted for the whole thing.

Saraikin Yeah but we deducted it off him anyway. There is 10% we hold back from it.

His Honour Yes, but as Mr Bevan, I think you were there, or present, when Mr Bevan explained to me that the 10% is taken off when somebody else is going to the sanding right from the word go.

Bevan No, I said when, if the sanding isn’t done 10% is withheld. And if you go to C19 you will see an invoice from J Kirpichnikov to L&B Lining, do you see that?

Saraikin Correct.

Bevan And you will see the builder is Elamond.

Saraikin Correct.

Bevan And there’s an invoice for $317.00 on 30th October 2003.

Saraikin Correct.

Bevan Now is that an invoice for the sanding work which was not completed by QWS, was carried out by Mr Kirpichnikov?

Saraikin Yes.

Bevan And the price that has been paid for Mr Kirpichnikov is less than the price that was deducted from QWS for not completing the sanding work. Is that right?

Saraikin Correct.

58 The evidence as to the manner in which documentation was prepared took up a considerable period of time; I do not think that I need to go into it in detail. However that evidence left me in considerable doubt as to whether it truly reflected the real contract between the Second Applicant and the relevant entity or as to whether it was effected (and not necessarily on the dates reflected) so as to create the necessary paper trail. Mr. Saraikin said that relevant entities at times received progress payments which were sometime made prior to the completion of the relevant work; see 2TS50 as follows:

Saraikin Yeah, he got, he would have got a progress payment on 20th of the 12th and the balance would have been paid on the 13th of the 12th.

His Honour But that’s before. You’ve got your date order wrong surely.

Saraikin Sorry.

His Honour The 13th comes before the 20th.

Saraikin Yeah I understand, I am just having a look here now.

(inaudible muttering)

59 The Applicants did in fact supervise the work although the extent of that supervision was far from clear; see 2TS 57 as follows:

Saraikin Yeah, well we, we do always drive around because we are working in all areas and we do pop in and check and you know, the people that do work for us on a regular basis, the ones that we already know, we already know their work and you know, we still check on them but bits and pieces that are done at the end, well you know, we trust them to do get the job done in a proper manner, because next time if it is not done right we just back charge them or something, if it is not done right.

Bevan Now this quality report … is set down for every job that sub contractors perform?

Saraikin It is supposed to be done for every job.

Bevan And it is done after the work is completed?

Saraikin Yes.

His Honour But this time it was done without the sanding.

Saraikin Yes, correct.

His Honour Well why was it done before the job was completed?

Saraikin Well because we still need to know how the gyprocking was anyway, because there are different stages there.

60 And in the same context see 2TS59 as follows;

Bevan Is that at the time when you get the –

His Honour So you ask each for a certificate that they know about safety, it is simple as that isn’t it?

Saraikin Yes.

Bevan Now –

His Honour Do you stay on site watching to see whether they are bending properly?

Saraikin No, we don’t.

Bevan Is it the case in the only site supervision is the builder’s on site supervisor? Or the builder’s supervisor who travels from site to site.

Saraikin Well the builder supervisor is the probably the only one supervising unless we have to pop into the job.

Bevan The sub-contractors are tradesmen are they?

Saraikin They’re, correct.

61 The manner in which payments to relevant entities was by no means as precise as had been suggested; see 2TS63 as follows:

Saraikin Yes.

Bevan Is that right?

Saraikin No it is not right. We pay them for the full job, but if they want a progress payment, in some cases they do, we’ll pay them less than what they’ve done to make sure that we are covered, you know.

His Honour So sometimes they haven’t completed it at the end of the week but they need money to complete it.

Saraikin Yes, correct.

His Honour So you will give them something, and you will work out what a suitable progress payment is.

Saraikin Yes, but we will always give less than what they’ve done.

His Honour In other words you will retain something so that your cost to complete position is kept whole, is that right?

Saraikin Correct.

His Honour Well how do you calculate what they are entitled to?

Saraikin Well, we physically check it.

His Honour Okay.

Bevan Do you ordinarily pay on progress claims, or is that only for …

Saraikin Some people are desperate sometimes, or they are taking a couple of days extra and pay day comes up.

62 Mr Saraikin said that the relevant entities supplied some of the materials needed and that they also supplied their own tools.

63 Although Mr. Saraikin gave evidence as to a system of quotations and acceptance of quotations it would seem that the rates were in general terms fairly standard; see 2TS69 and 2TS70.

64 Mr. Saraikin said that of the stable of entities who were available some worked for the Applicants more than did others. He said (2TS72) “most of them do work for other people” However he could not furnish more precise details; see 2TS72:

“Saraikin Well they would work for other people too, but if I’d have to prove it, I’d have to look up all the paperwork you know, to show you how many days or weeks they worked, how many times they got paid”

.

65 Mr. Latham at the beginning of his cross-examination asked Mr. Saraikin questions as to the ability (or lack of it) of relevant entities in respect of English; see 2TS73 and 74 as follows:

Saraikin Yes I do.

Latham Okay, do you know Alan Bull and Norma Bull for example? Or do you know Alan Bull?

Saraikin Personally, no.

Latham Do you know John Blundell?

Saraikin Yes.

Latham Does John Blundell speak English?

Saraikin Yes.

Latham Do you know David Crawford?

Saraikin Yes.

Latham Does he speak English?

Saraikin Yes.

Latham Do you know Michael Camp?

Saraikin Yes.

Latham Does he speak English?

Saraikin Yes

Latham Do you know Fred Kirpichnikov?

Saraikin Yes

Latham Does he speak English?

Saraikin Yes.

Latham Do you know Owen Milson?

Saraikin Yes.

Latham Does he speak English?

Saraikin Yes.

Latham Do you know Paul Brendan Smith? Sorry Brendan Paul Smith?

Saraikin Not personally, I might have met him once.

Latham Okay. Are any of the people in that list dead to your knowledge?

Saraikin No, not to my knowledge.

66 As to rates and haggling the Tribunal draws attention to 2TS78 and following pages as follows:

Saraikin $3.00 to $3.40 thereabouts.

Latham But just assume it was a very simple process you’d say, I’ll put that at $3.00 and a complicated process would be $3.40. Would that be the differences between the different figures?

Saraikin Not always, but just for example –

Latham But largely.

Saraikin Yes.

Latham Okay. And then a person would ring up and you would say, all right, this is a simple job the price is $3.00 a lineal metre and he would say yes, or no.

Saraikin Square metre.

Latham And in fact I think your words were that you’d give them the rate, that’s what happens isn’t it?

Saraikin Yeah we give them a rate and then we see from there.

Latham Yeah.

Saraikin If they are happy with it, if they can go ahead, if not we can talk about it.

Latham Yeah and in fact what happens isn’t it, with your stable, if we can call them that of contractors, is that they accept the rate, don’t they?

Saraikin Well if they want to work they do accept it.

Latham Yes, okay.

His Honour So by and large, is it your evidence that by and large that when you offer a rate, because you are a regular client, so to speak, you are a constant source of supply, by and large they are going to accept what you say?

Bevan I object to that question – there is no evidence ...

Latham … tribunal …

Bevan There is no evidence that they are a constant source of supply.

His Honour Let me start again, Mr Bevan. Are you a constant source of supply to these people?

Saraikin Maybe to some people but not all the people.

His Honour All right. To those to whom you are a constant source of supply, will they generally speaking accept your rate because they want more work from you in the future, they are thinking of the future.

Saraikin Possibly yes.

His Honour What I am trying to get at is that I am trying to get a picture of how it works. Generally speaking, because you pay regularly and you are a good employer, do people by and large work on the basis that you are going to be fair and they accept your rate?

Saraikin Yes.

His Honour So would it be fair to say that … an awful lot of haggling about rate? If there is a lot of haggling, tell me.

Saraikin Yes, there is and there isn’t, sometimes there is, sometimes there’s not. Every day’s got a different basis. Every day is different in this business.

Latham But let’s talk about the people who get a lot of work from you. There are some entities who work virtually all the time, aren’t there?

Saraikin Well there are some – entities do a lot of work for us, yes.

Latham Yes. I mean you would almost say they are full time employees, or sorry you would say they were full time workers, wouldn’t you?

Saraikin No I wouldn’t say they are full time workers.

Latham Well, what about V Saraikin, do you know V Saraikin?

Saraikin Yes.

Latham Who’s that? How often does that person work roughly in the year for you?

Saraikin Then or now?

Latham Then.

Saraikin Well he did a fair bit of work that year.

Latham A fair bit?

Saraikin Yes.

Latham How many days roughly would you say?

Saraikin I couldn’t tell you the days. I don’t count days.

Latham You don’t count days?

Saraikin No I don’t count the days.

Latham So you’ve got no way of determining how many days –

His Honour Sorry I may have missed something, did you say, is he a relation of yours?

Saraikin Yes.

His Honour And did you ask him what relation?

Latham No I haven’t yet. So you’ve got no way of telling how many days a particular person has worked.

Saraikin We give them jobs and they do the jobs for us.

Latham No I understand that.

Saraikin Yes.

Latham But you don’t know for example whether it took them one day to do the job or whether it took them four days to do the job for example, do you?

67 Mr. Saraikin said that relevant entities were not engaged unless they quoted ABNs; see generally 2TS82 and following pages. Additional evidence in this context need not be dealt with in detail. It may be noted also that Mr. Saraikin took the view that where an entity quoted an ABN he or it was necessarily a contractor.

68 Mr. Saraikin admitted (although somewhat reluctantly) that there were occasions when work was performed by men working on their own; 2TS90 and following pages. He admitted also (2TS95) that there are gyprock lifting machines which are available and which can be used but only in “big open spaces”.

69 The cross-examination of Mr. Saraikin (at 2TS 111 and following pages) as to the use of tax partnerships tells its own story; in this context:

Saraikin Mm.

Latham Do you see that?

Saraikin Yes.

Latham And you say, I say that none of the wives in the seven partnerships listed below provided services as a gyprocker or a cornice fixer on any projects.

Saraikin Mm.

Latham Do you have any knowledge as to what duties any of those people performed?

Saraikin No I don’t.

Latham Or are these –

Saraikin Are you talking about the wives?

Latham Yes.

Saraikin I couldn’t tell you exactly what they’ve done.

Latham None of them?

Saraikin No, I couldn’t.

Latham Not even your sister-in-law?

Saraikin No I don’t speak to him about business about what she does or –

Latham So –

His Honour Before you leave that, a little earlier I asked you what tax advantages does a partnership provides? And you told me that the advantage of a tax partnership is that you can make claims for items that you use. And then you were asked whether you made any such claims and you said no you didn’t.

Saraikin No.

His Honour So why – would you like to amplify on what the tax advantages of using a partnership, especially of a husband and wife partnership? Although I want you to understand something, this is the Administrative Decisions Tribunal, I am here concerned with a payroll tax matter. What happens with the Commonwealth’s tax office is of no concern of mine. I don’t mind in the slightest what the position is. Is the reason why you use these partnerships then simply to be able to make claims?

Saraikin Firstly to answer your question, what I thought you said before was as a sub-contractor, not a partnership.

Latham I think, that was my memory, Your Honour. That’s why I said to you –

His Honour Well okay, I’ll accept that, then what useful purpose in the partnership between you and your wife serve.

Saraikin Well you can split the income.

His Honour Yes. Exactly so. Now, when you split your income with your wife, did she do anything to earn that income? I’m not suggesting there was anything illegal, although the tax office might think differently, it certainly is not a criminal offence, but what you are really saying, are you not, isn’t it fair to say that you have these partnerships because that way you get a lower tax rate by splitting with your wife even if she does nothing at all?

Saraikin Correct.

Latham Yeah, but payment for the expense of travel.

Saraikin Extra for petrol.

70 Mr. Saraikin agreed that some of the entities received petrol allowances in certain circumstances where they travelled more than a certain distance; 2TS 113. And moreover the men wore shirts indicating a close connection with the First Applicant; 2TS 114. Mr Saraikin said that the men wore the shirts because they were provided to them.

71 And Mr. Saraikin said that although he is the general manager of both Applicants he did not know why there were two Applicants or as to the purpose served; he said that “the directors make that decision so it is nothing to do with me”.

Mr. Saraikin; cross-examination

72 As to whether the work invariably required 2 or more persons see 2TS 90 and following pages as follows:

Latham In most cases they do?

Saraikin Yes.

Latham And in some cases do they not?

Saraikin Well I couldn’t tell you 100% because people we give work to they can engage anyone they want, so we are not going –

Latham So you don’t really know one way or the other do you?

Saraikin Well I don’t physically go and check them.

Latham No.

Latham So would it be fair to say that while the terms of engagement may say that there are at least two people required to work that they may not actually be the case in reality?

Saraikin It is possible.

Latham Yeah, well its true isn’t? There are occasions where people work by themselves, aren’t there?

Saraikin Well depending on what type of job.

Latham Yes, well take me through that then.

Saraikin Well if we do a house like this I find it impossible to work by themselves.

Latham Okay well.

Saraikin Well if we do a house like this for example, I find it impossible for someone to do that by themselves.

Latham But then there may be other houses that people can do by themselves, aren’t there?

Saraikin I wouldn’t call it houses because it wouldn’t be worthwhile giving someone on their own a job to do and get them to finish a job on their own.

Latham Well for example Mr Blundell, are you aware of him?

Saraikin Yes.

Latham You know him don’t you? He works by himself, doesn’t he?

Saraikin Well I’ve seen him with other people before.

Latham Have you seen him work by himself?

Saraikin Physically?

Latham Yes.

Saraikin Yeah many years ago I have.

Latham Okay.

Saraikin Yeah I’ve seen him work with others and I’ve seen him on the job on his own.

Latham And Mr Kamp you know, don’t you, K A M P. Do you know him?

Saraikin Michael Kamp, yes.

Latham Yes. He works by himself doesn’t he?

Saraikin Well like I said it is up to him.

Latham Yes. Have you seen him work by himself?

Saraikin Many years ago I have.

Latham Yes. And Mr Kirpichnikov works by himself, doesn’t he? Fred Kirpichnikov.

Saraikin No he doesn’t.

Latham Sorry?

Saraikin No he doesn’t.

Latham He doesn’t.

Saraikin No, what does he do on his own?

Latham Well I am just asking you, have you ever seen him work on his own?

Saraikin No.

Latham You are quite sure about that?

Saraikin Well doing what?.

Latham Think very carefully about this. Are you quite sure about that?

Saraikin Doing what?

Latham No answer my question Mr Saraikin.

Bevan Well I object.

His Honour Why? It is a perfectly valid point to make.

Bevan Well he wants to know what he is doing, I mean, whether he works alone …

His Honour Mr Bevan, the witness should know that he is there to answer questions and not ask them.

Bevan If the witness says I don’t know what he is being asked to answer.

His Honour Then he is entitled to say so Mr Bevan. He

73 As to the manner in which he conducted his own tax affairs see 2TS 82 and following pages as follows:

Saraikin Correct.

Latham I suppose you’re, in terms of – you are doing the paperwork for their finances – is a simple way of putting it.

Saraikin We are doing a reciprocated invoice.

Latham Yep. And you say unless a sub-contractor has an ABN I do not engage the sub-contractor. Now why is that?

Saraikin Why is that?

Latham Yeah.

Saraikin Well it is obvious we just don’t, we don’t engage anybody without ABN numbers.

Latham Oh I see, do you go through in your own mind and determine whether you think they are an employee or a contractor?

Saraikin Well as far as we are concerned they are all sub-contractors to us.

Latham Oh I see. Okay. And what is the difference between a sub-contractor and an employee as far as you’re concerned?

Bevan I object.

Latham Well I will accept that objection. I won’t press that, but do you have an ABN number?

Saraikin I had an ABN number.

Latham In this particular year, did you have an ABN number?

Saraikin Yes.

Latham Did you describe yourself to the tax office as a sub-contractor?

Saraikin Yes I did, but its all been –

Latham No, no, no, just answer my questions.

Saraikin Yes.

Latham Did you work for anybody else apart from B&L and L&B Linings?

Saraikin No I didn’t.

Latham And did you describe yourself as the manager of those companies to other people?

Saraikin To which people?

Latham To anybody you dealt with.

Saraikin Like in business?

Latham Yes.

Saraikin Yes.

Latham You did. Why did you describe yourself as a sub-contractor to the tax office?

Saraikin Well we had, the way we did our payments we found out we were wrong and I think it is all fixed up now.

Latham No, no, answer my question. Why did you describe yourself as a sub-contractor to the tax office?

Saraikin We thought we were doing the right thing at the time.

Latham You thought you were doing the right thing by who, by the tax office or by yourself?

Saraikin By the way we were getting paid.

Latham By the way you were getting – sorry, can you explain that to me.

Saraikin Well by the way we were getting paid – we thought we were doing the right thing by the way we done it, but we realised that we were wrong there.

Latham Sorry, because you were putting an invoice in, you thought therefore you were a sub-contractor? Was that the method of payment you are talking about?

Saraikin Can you repeat that again?

Latham Yes. You talked about the method of payment, you said because of the method of payment we thought we were doing the right thing.

Saraikin Yeah.

Latham Now does that method of payment that you are referring to that you put in invoices to these companies? Or was there some other issue that convinced you?

Saraikin I don’t understand.

Latham Okay, I’ll ask the question again. Why did you tell the tax office you were a sub-contractor?

Saraikin Well we thought we were doing the right thing at the time.

Latham Yes. Why did you think you were doing the right thing at the time?

Saraikin Well I can’t explain it, I don’t know.

Latham You can’t explain it.

Saraikin No.

His Honour Did you have any kind of advice?

Saraikin Pardon.

His Honour Did you have some sort of advice that you were a sub-contractor? Did somebody advise you?

Saraikin No, no.

Latham Did you have an accountant at the time?

Saraikin Yes.

Latham Yes. Did your accountant give you advice?

Saraikin I can’t remember.

Latham Oh I see. Now there are significant tax advantages in being a sub-contractor, aren’t there?

Saraikin Yes.

Latham And isn’t this the truth, that you described yourself as a sub-contractor to the tax office so that you could take advantage of those tax advantages isn’t it?

Saraikin No that’s not true.

Latham All right, but you can’t actually remember what was true then.

S I said I can’t remember if the accountant advised me at that time about that situation.

Latham Mm.

His Honour What were the advantages of being a sub-contractor? You said, Mr Latham asked you what the, if there were significant tax advantages and you said yes. But what are those advantages?

Saraikin Well in a situation they probably can claim on things.

Saraikin They can claim on tools and equipment and all that sort of stuff.

His Honour You mean you can claim the cost of them as a deduction?

Saraikin Yes.

Latham And is that the reason why you described yourself as a sub-contractor so that you could make these sorts of claims?

Saraikin No because I had no claims to make – any tools or equipment.

Latham What about your car, who provided that?

Saraikin Which car?

Latham Do you have a car?

Saraikin I’ve got a car which is part of my package.

Latham Your package?

Saraikin Yes.

Latham As a contractor?

Saraikin No, where I work.

Latham At L&B?

Saraikin Yes.

Latham And is that part of an employment package?

Saraikin It is part of my package, yes.

Latham Yes. And is that package described as one of employment or one of being a contractor?

Saraikin Well as far as I’m aware its part of my package as far as employment or sub-contractor I can’t tell you.

Latham Yes. And do you, when people, when you talk to people about whether they have an ABN number, do you actually make any effort to determine whether they’re really an employee or a sub-contractor?

Saraikin Well they are engaging in like all the other sub-contractors, so no, we don’t.

Latham So you really come to the conclusion that if they’ve got an ABN number they’re a sub-contractor? Is that really it?

Saraikin No I don’t, no.

Latham Well on what basis do you say that these people are sub-contractors?

Saraikin On what they do and what they provide for us.

Latham And what do they do and what do they provide for you?

Saraikin They do a service for us.

74 Mr Saraikin’s evidence (much of it leading in nature) took up a considerable part of the second day. It cannot be said that it was illuminating as to the relationship between the Applicants and entities. His evidence indicated that although there was at times some degree of negotiation as to price the range involved was narrow. The entities generally accepted the price offered. That this is so is hardly surprising given that the entity was (presumably) dependent (to a greater or lesser extent) on the work flow provided by the Applicants. The summary suggests that while some entities were less dependent than others there were a number who worked for the Applicants most if not all of the time. This is a matter of supposition only and having regard to the summary. In the absence of evidence from the entities it is not possible to do more that guess as to these aspects. It must also be remembered that the Applicants engaged an entity having previously accepted a tender and so that room for manoeuvre was necessarily limited. On the basis that the Applicants wished to trade at a profit the amount which could be paid to the entities would be the tender price less (broadly) the Applicants’ profit. His evidence in relation to the two worked sets of documents was, as I have said unsatisfactory. The fact that some entities received payments in advance of the completion of the work (and Mr. Saraikin referred to cases which were “desperate”) might be suggestive of employment. I do not think it necessary to deal in greater detail with Mr Saraikin’s evidence. It was unreliable as demonstrated by the quoted parts of his evidence. (I might here note that written submissions by the Respondent deal in some cases and in relation to the witnesses with passages referred to by the Tribunal and also to other passages which are not dealt with categorically by the Tribunal; the fact that the Tribunal has not done so should not be construed so as to indicate that the Tribunal rejects those submissions; in order to confine this decision to manageable length the Tribunal has not sought to deal with all of the evidence).

The evidence of Mr Joseph Francis Ierace

75 The affidavit of Mr Ierace dated 14 July 2004 is exhibit A7; as with the other witnesses there are exhibits marked with his initials, JF.

76 Mr Ierace’s evidence related to the maintenance and supervision which the Applicants carry out in order to ensure that the work is performed and completed properly. That evidence would tend to suggest that the degree of supervision is rather more extensive than was indicated by the evidence of Mr. Saraikin. The evidence of Mr. Ierace was not controversial and cross-examination of this witness was brief. The TS in respect of his evidence indicates that Mr. Bevan objected to a number of questions by Mr. Latham but that nevertheless the answers were given.

77 Mr. Ierace’s evidence before the Tribunal was acceptable; however it did not throw light on the contractual arrangements between the Applicants and the entities. That this is so is indicated by the content of his affidavit as follows:

[“B&L Linings”]

[“L&B Linings”]

2. I was born in 1941. I started my 5-year plasterer’s apprenticeship when I was 16 years old. I have been a dry plasterer since then. In the 1950s and 1960s dry plasterers worked with fibrous plaster, not plasterboard such as we have had since the 1960s. Part of my apprenticeship was working in a fibrous plaster factory manufacturing fibrous plaster sheets for walls and ceilings and fibrous plaster cornices.

3. After my apprenticeship, I worked for wages as a maintenance plasterer for about 22 years. I worked mainly for Yennora Interiors: doing plastering maintenance for the NSW Housing Commission and others. Then for about 5 years I worked as an employed General Assistant at a Primary School and then at a High School.

4. In 1989 I started work with B&L Linings as a maintenance dry plasterer, using plasterboard for wall and ceiling work and paper-bound plaster cornices and sometimes decorative (or ornamental) cornices.

5. In January 1999, I became Maintenance Manager of L&B Linings, responsible for doing work myself and also supervising L&B Linings’ team of full-time maintenance subcontractors. In the 2001-02 financial year, that team consisted of myself and 6 subcontractors: Michael Aksenoff, Goran Janovic (GJL Linings Pty Ltd), Nick Melasich (N&A Interior Linings), Paul Shahmatov, George Starnovsky, and Alex Kirpichnikov (Van Dieman Interiors). N&A Interior Linings finished up with L&B Linings towards the end of the 2001-02 financial year (as shown by the fact that there are no Quality Report/ Maintenance forms allocated to Nick Melasich after April 2002)

Kirpichnikov Just progresses.

Latham Yes, that’s not the evidence you gave earlier is it?

Kirpichnikov In what regards?

Latham Before when I asked you the question you said, they don’t get paid until they finish the job, didn’t you?

Kirpichnikov That’s usually the norm, but there are exceptions.

82 Mr. Kirpichnichnikov was examined as to why none of the relevant entities was called as a witness; his evidence at 2TS 154 and following pages, and particularly at the end of the quoted part deserves particular consideration::

Kirpichnikov Well like its just a verbal agreement and on a hand shake.

Latham Do you know whether they were engaged as employees?

Kirpichnikov Well we didn’t really consider like an employee or whatever, it was just like on a verbal agreement and handshake.

Latham Now could I just ask you one question about some of these sanding contractors? Is John Kirpichnikov related to you?

Kirpichnikov Yes.

Latham Is he a close relative, is he a brother?

Kirpichnikov Yes.

Latham Okay. You know how he works, don’t you, you’ve seen him at work.

Kirpichnikov Yes.

Latham And he works almost entirely by himself, doesn’t he?

Kirpichnikov I think so.

Latham Well you are sure so, aren’t you?

Kirpichnikov Well we don’t check on him everyday.

Latham No, no, but it would be fair to say that John Kirpichnikov almost always works alone, isn’t it?

Kirpichnikov Well I presume so.

Latham No, no, you know so, don’t you?

Kirpichnikov No.

Latham You don’t, what did you say in your affidavit in paragraph 22?

Kirpichnikov Well as far as we know he works on his own but sometimes he may engage others.

Latham Nothing further Your Honour.

His Honour I just want to ask you one question. There are 36 odd entities who might have been called to give evidence and you say that each and every one of them would not have come here even under subpoena because they wouldn’t want to get involved. Does that mean that you contacted each and every one of them and asked if they would give evidence?

Kirpichnikov No.

His Honour How many did you contact to ask if they would give evidence of the 36?

Kirpichnikov When, well firstly, Your Honour, they are not my employees and –

His Honour Mr – please, please, please answer the question. The question demands a number, or an approximate number. How many did you contact to ask to give evidence?

Kirpichnikov None.

83 In re-examination Mr. Kirpichnichnikov was asked a number of questions as to the availability of relevant entities to give evidence and the extent to which he sought their assistance; see generally 2TS 156 and following pages. It is my view that his evidence on this aspect, in some respects inconsistent with his prior evidence in cross-examination did not assist the Applicants.

84 As evasive as Mr Dickie and Mr Saraikin were Mr Kirpichnikov surpassed them and by a considerable margin. The TS speaks volumes as to the entirely unsatisfactory nature of his evidence. The TS does not of course reflect the manner in which he gave evidence. He spoke both quickly and quietly and so that at times it was difficult to understand what he was saying. His evidence was even less credible than that of Messrs Dickie and Saraikin. In many cases his answer could not fairly be described as an answer to the question asked. On other occasions he simply stonewalled. This was so in particular as to why there are two Applicant companies. Notwithstanding a lengthy examination he did not ever answer the question. As to the relevant entities I do not for one moment believe that not one of the relevant entities was prepared to assist the Applicants who are after all substantial suppliers of work to them (the entities) and it may be that at least some of the entities are reliant on that work flow. Some of the entities indeed hail, it would seem, from the same part of the world; some of the persons concerned are closely related; this too is a reason why, at the very least in the case of entities involving siblings evidence would in all probability have been available, . The fact that he was eventually constrained to answer that he had contacted none of them speaks for itself. There is a particular reason in particular why the evidence of Mr. Kirpichnikov in this context must be untrue; (this applies also to the second of the statements by Mr. Bevan in this context). The summary indicates that there are two entities (husband and wife partnerships) in which the husbands are Fred Kirpichnikov and Serge Kirpichnikov respectively. Mr. Kirpichnikov referred in his evidence to a John Kirpichnikov; as to whether he is yet another involved Kirpichnikov is not known. But that they are relations and in at least one case and perhaps more, close relations cannot be doubted. In the same context the summary refers to a Saraikin entity, also a husband and wife partnership and where the husband is Mr. Saraikin’s brother; I refer to those three entities collectively as “the related entities”. Mr. Kirpichnikov said as I have indicated that the entities could not be asked to give evidence because the continued availability of their services would be endangered. Even if this is so in relation to those entities who were not related entities (and this is itself extremely doubtful) it cannot possibly be so in respect of the related entities. They surely would have given evidence if asked to do so, and to ask the Tribunal to believe otherwise especially where they were not even approached can only be described as ludicrous. The tax problems on the balance of probabilities were those of the Applicants and not the entities; by “tax problems” is meant, again on the balance of probabilities, their reluctance to pay payroll tax. It is significant that in the result the combined payroll of the Applicants has at all relevant times been below the threshold.

The failure of the relevant entities to give evidence

85 A number of reasons were given for the failure to call any of the entities. Those reasons ranged from the contention that they were mostly immigrants without English to the fact that they would not be prepared to be involved. Mr Kirpichnikov said that he was concerned that they would want to stay out of the issue and feared the loss of their services. When examined and at some length as to how many had been approached to give evidence the answer after some pressure and some considerable hesitation, was “none”. He did in re-examination seek to go back on those answers but his answers at that stage and in this context were not credible.

86 It must be remembered that the entities (or some of them) received substantial revenue from the Applicants.There is no basis upon which they could or even would in my view have refused to give evidence. (This is so in particular in respect of the related entities). Mr. Kirpichnikov said that they would not have wanted to do so because of possible payroll tax problems. It would appear though that the problems, if problems there were, would have been those of the Applicants. Mr Kirpichnikov was as untruthful in this regard as he was in others.

87 The relevant entities consisted of sole traders, partnerships and companies. The partnerships would appear at least in some cases and possibly most or all, to have been husband and wife partnerships and which might have been vulnerable to income splitting problems in relation to tax. However it has been known for some considerable time that income splitting for personal exertion income is not possible. (And as I have indicated legislation in 2000 made it even more difficult). I have previously indicated that I do not know how they were constituted and whether any trusts were involved. It is equally to the point that many were sole traders and for them there is so far as I can see no tax problem of any kind. I have come to the conclusion that the reason why none of them gave evidence arises purely and only because that evidence would have been adverse to the Applicants.

88 On the fifth hearing day argument was heard and in particular by Mr. Eager, who, it will be recollected was allowed an adjournment on the preceding hearing day (13 May 2005) in order to deal with the Respondent’s final submissions. The hearing on the fifth day was scheduled for 2 hours commencing at 2 p.m. In fact it lasted for nearly 3 hours almost all taken up by submissions by Mr Eager.

89 Mr. Eager contended that the rule in Jones v Dunkel as explained in Manly Council v Byrne has not been satisfied (and so that no adverse inference could be drawn) because the Applicants were not advised or aware of what evidence would be required to avert any such inference. In the same context he argued that the Applicants at the objection stage elected to establish their case through documentation and that there was no reason why they should not have continued to do so. He contended that the documentation comprised contemporaneous records whereas evidence by the entities would require them to remember events which occurred some time ago. He said also that in the light of the documentation it was incumbent on the Respondent if he wished to do so, to compel the attendance of the relevant entities. That contention was of course entirely without foundation; it ignores the fact that the Applicants bear the onus.

90 As Mr. Eager noted Mr Saraikin gave evidence as to the manner in which documentation was prepared and, it would appear, at the quotation level by Mr. Saraikin himself (but not apparently thereafter). It will be recollected that Mr. Saraikin suggested in the context of letterheads that someone else was involved; moreover there was (in relation to the set about which he was giving evidence) some degree of “merger” (if that is the correct term) between the quotation and the tax invoice. Mr. Saraikin was giving evidence as to a methodology in which he appears to have been partly involved and where some aspects were attended to by others. Evidence from those others was required; the evidence of Mr. Saraikin in this context and quoted earlier in this decision speaks for itself. That evidence in any event indicates that there was at times some confusion both as to dates and otherwise and so much so that it may be that the documentation served rather to establish a needed paper trail.

91 On one aspect the evidence was consistent and that is that the Applicants were not prepared to contract with an entity who could not quote an ABN. Mr. Eager referred to legislation (and he referred in this context to the Taxation Administration Act of the Commonwealth) which permits a payer to rely on an ABN as evidence of the existence of an enterprise unless the payer is aware of the fact that it is not proper to do so. (In this case of course the payer was so aware). He referred also to the ABN legislation which penalises improper use of an ABN. Mr Eager himself is, so he said, an employee of Byrons but he has an ABN for other activities. All of this ignores the fact that the oral evidence (and in particular by Mr. Dickie) establishes that full-time employees of the Applicants routinely quoted ABNs to the Applicants; there was no suggestion that the Applicants being aware of the true position queried the use by their own employees of ABNs (and insisted on deducting PAYE tax), and indeed all of the evidence indicates entirely the contrary. Mr. Eager said that the Applicants insisted on dealing with enterprises who could quote ABNs so as to escape liability for health and safety requirements and liabilities flowing from breach of those requirements. There was no acceptable evidence to this effect and statements by Mr. Eager are of course not evidence.

92 The evidence that the Applicants would deal only with ABN- quoting enterprises was at best for the Applicants somewhat double-edged. It indicated that the Applicants had the negotiating power to withhold work from entities who did not quote. (In respect of one entity whose ABN ceased there was no suggestion that its work-flow ceased). There was another and highly significant result and that is that the remuneration paid to the quoting entities did not fall within the tax base under the Act. Mr. Eager said (as indicated previously) that during the relevant years the combined payroll of the Applicants was below the threshold level of $600000 and so that no payroll tax was in fact paid.

93 Put in succinct terms the Applicants may have chosen at the objection stage and prior thereto to rely on documentation. The oral evidence indicated that the documentation was at times haphazard. Tax invoices it seems were not always what they seemed but were rather (somehow or other) quotations. The evidence of Mr. Saraikin as to how the documentation was prepared was at least in part hearsay.

94 It is in these circumstances that the Tribunal finds that the Applicants must have been aware that the evidence of others was required. This decision makes it clear that the Applicants were aware of the implications of calling none of the entities; this question was raised for the first time at an early stage. Mr. Bevan early on said that they were immigrants without English; (that explanation was itself, as I have said, demonstrably untrue). Mr. Bevan then changed tack so as to explain that there was another reason and that was fear of loss of the work force. The evidence of Mr Kirpichnikov was in line with the latter but not the former statement, but the evidence of Mr. Kirpichnikov was totally unacceptable. Insofar as the rule in Jones and Dunkel required that the Applicants were aware of the need for evidence the Tribunal finds that they were so aware. There is in my view a very real possibility that the entities were required and by the Applicants themselves, to have ABNs so as to enable the Applicants to avoid their payroll tax obligations, and for no other reason and more particularly because it is hard to see where there was an advantage for the entities; indeed in loss of benefits there may have been disadvantages for the them.

95 As indicated previously in this decision Mr. Eager referred at length to industrial award matters and in order to contend that the entities were rewarded at a higher rate than are industrial award recipients. Leaving aside the fact that Mr. Eager could not give evidence it is sufficient to note that the oral evidence did not refer to these aspects and I need not deal with them further.

96 Mr. Eager referred at length to a number of decided cases (Hollis v Vabu (2001) 207 CLR and Vabu v Commissioner of Taxation 1996 ATC 4898 and other cases) in order to distinguish the position of the employees or contractors in those cases from that of the entities. He pointed in particular to the fact that the entities supplied their own material and tools. His difficulty is that there is no basis for a comparison when there is no proper evidence as to the circumstances in fact in the 2002 year of the entities.

97 By the end of the second hearing day the witnesses who gave oral evidence had completed their evidence and the Applicants closed their case. It was clear enough at that stage that the oral evidence thus far presented was unsatisfactory. Mr. Eager is a practitioner of no little experience and considerable tenacity. Much the same can be said of Mr. Bevan. The evidence to which I have referred ended towards the close of the second hearing day. It was open to the Applicants to determine not to close their case and so as to enable them to call additional oral evidence when the hearings resumed. Had the Applicants having closed their case, sought permission to reopen it for this purpose, natural justice would in my view have probably have had the effect that I would have allowed them to do so. Mr. Eager said that it was not possible to call all 36 entities. To do so would no doubt have been time consuming and expensive; it would also, in my view have been unnecessary in that a representative sample could have been called either with the consent of the Respondent or (in the unlikely event that the Respondent refused his consent) without it. The Applicants did nothing of the kind; instead they embarked on the production of submissions of great length and density. Mr. Eager is clearly expert in the production of complex documents; however submissions could not take the place of missing evidence. The Applicants’ Reply to the Respondent’s Submissions is a very length document containing vast quantities of detail and in particular as regards entities. It clearly involved very considerable effort and time and (no doubt) expense. As I have noted and repeatedly that evidence should have been given by the entities themselves. There is only one inference to be drawn and that is that such evidence would not have assisted the Applicants; in fact I have come to the conclusion that it would have achieved the reverse. It will be recollected that Mr. Kirpichnikov said that he approached none of the entities; “none” must include the related entities.

98 Nor can the Applicants argue that because they confined their case at the audit and objection stage to documentation this somehow compelled them to continue on that tack thereafter. (The basis on which this particular argument was put is unclear.)

99 An adverse inference fatal to the Applicants just as Mr. Latham had foreshadowed, on the first hearing day must be drawn.

Penalty tax

100 The Applicants claim that they are entitled to a 20% reduction in the penalty tax assessed pursuant to section 29 of the Taxation Administration Act 1996 (“TAA”) which reads as follows

Chief Commissioner

taxpayer

investigation

taxpayer

Chief Commissioner

tax default

101 Mr. Latham contended that the Applicants did not comply with the requirements of that section; apart from references by him to other parts of the T documents, reference can be made to two clauses (82 and 83) in the Respondent’s Final Submissions as follows:

O’Mara Family Trust v CCSR

83. There is, however, evidence as to the lack of cooperation and belligerence of the advisers. At Tab 17 of the index of documents is set out a letter from Byrons (presumably written on instructions). It states in part that:

Pay-roll Tax Act 1971

Our clients have concluded that in such an environment, it is a waste of our clients’ money and our time further discussing the issues with your team allocated to this review

5. Our client has not started the time-consuming, wasteful and laborious task of gathering the evidence that the Administrative Decisions Tribunal and Court would require to make a decision. ….

6. Clearly, in the circumstances of this client in the context of this review, the intended imposition of 25% penalty + full penalty interest is both ‘savage’ and unreasonable. Presumably, it is designed to bludgeon our clients into submission. However, in the long term the issue of penalties will be come a secondary issue.”

102 The Respondent in the administration of the Act is charged with certain functions and obligations and including where relevant audit processes. The terms of Mr. Eager’s letter, an extract from which appears in the preceding clause, was uncalled for and, to say the least of it, unfortunate and ill-judged.

103 Mr. Eager contended that section 29 of TAA does not require compliance within any particular time period. That view of section 29 is incorrect; the section requires compliance within the period of the investigation, and as appears from the letter by Mr. Eager referred to previously, the Applicants did not do so.

104 Mr. Eager then went on to contend that in addition to the section 29 20% rebate the Applicants were entitled to ask for the total elimination of the remainder of the penalty tax and inclusively of interest. He said that the fact that the Applicants acted on legal advice should weigh in their favour. As to what precise legal advice he was referring to is not clear. Mr. Kirpichnikov gave evidence as to advice obtained when the two-company structure was set up but, as I have said, that evidence was so remarkably uninformative of anything at all, that it cannot be that evidence. If it was advice as to the fact that the Applicants should contest the assessment and the manner in which to do so then that advice would not be germane to this question. The Applicants were of course entitled to contest the assessments and they did so, but their failure to produce credible evidence and whether from the entities or otherwise, must tell against them. The Tribunal finds that this is not a case in respect of which any reduction in penalty and whether under section 29 of TAA or otherwise, would be appropriate.

Costs

105 The Respondent gave notice that he would seek an order as to costs. The Applicants then (somewhat to my surprise) gave notice that they would wish to join in such an application but on the basis that questions as to costs be held over until the expiry of a reasonable period after the issue of this decision. I infer that the Applicants sought to join in that application on the basis that they, the Applicants would seek an order for costs; it will be clear from this decision that any such application by the Applicants could not possibly have any prospect of success. In the course of discussion on the fifth hearing day mention was made of the possibility of an appeal. It was agreed that costs would be dealt with at a separate hearing, convened at the instance of either party but only after the expiry of a reasonable period after the issue of this decision and moreover and if, applicable, the finalisation of all appeal processes. (The fact that I refer to the possibility of an appeal should not be construed in such manner that it can be said that I consider either that an appeal will necessarily be brought or if the Applicants wish to bring an appeal that they will be allowed to do so. This is because this decision is one of fact and not of law; the adverse inference under Jones and Dunkel is itself founded on findings of fact.)

106 It will be clear from the preceding provisions of this decision that the manner in which the Applicants conducted their case was not to my mind in all respects all that it should have been. Mr. Bevan made a statement from the bar table which he must have known was not true. There were other aspects of the manner in which the Applicants ran this case which were in my view unfortunate and ill-judged, but I have decided that it is not necessary for me to refer in categoric terms to any of those other aspects save one. Before the hearings commenced and at a directions hearing Mr. Bevan objected in writing to two summonses which the Respondent wished to serve. In the result the terms of the summonses were after discussion agreed and that matter did not again arise. But the terms of the written objection, akin to those set out in Mr. Eager’s letter referred to previously in this decision were most unfortunate; there was never any basis on which the Applicants were entitled to claim that the Respondent was not acting in good faith.

107 I have noted previously that the evidence as a whole gives rise to the very real possibility that the entire structure and including the manner in which the entities were engaged was driven by nothing more than a desire to avoid payroll tax. To that end the Applicants were set up as two separate companies but there was never any explanation of why this was necessary or desirable. A stable of “contractors” was utilised; some of them performed more work for the Applicants than did others. It is possible that some of them performed work on a full-time basis but this is not known. The Applicants required all of their “contractors” to have ABNs. They all did so although in respect of one of them the ABN ceased in its operation. Senior full-time employees obtained ABNs, quoted them to the Applicants who accepted the quotations and in consequence did not deduct PAYE tax. The Applicants must have known that this was (to say the least) improper; Mr. Dickie too must have known but he appears to have cooperated or perhaps turned a Nelsonian blind eye. It may be that some of the entities were indeed independent contractors in the 2002 year but if so one wonders why there was no acceptable evidence to this effect. It is unnecessary to make a finding to this effect since it is clear that the Applicants have failed to discharge their onus.

108 In the circumstances the finding of the Tribunal is that in relation to the 2002 year and the 36 entities the decision under review is affirmed; in respect of the relevant years, and as was agreed between the parties when the hearings commenced, the decision under review is remitted to the Respondent to enable him to assess the Applicants in accordance with this decision. In respect of costs either party is entitled to require a separate hearing after the expiry of a reasonable period after the issue of this decision and, where relevant, the completion of any appeal process.

Citations

B & L Linings Pty Ltd and L & B Linings Pty Ltd v Chief Commissioner of State Revenue [2005] NSWADT 129

Most Recent Citation

Cases Citing This Decision

8

B & L Linings Pty Ltd v Chief Commissioner of State Revenue [2008] NSWCA 187

B & L Linings Pty Ltd v Chief Commissioner of State Revenue (No 6) (RD) [2012] NSWADTAP 26

B & L Linings Pty Ltd v Chief Commissioner of State Revenue (No 5) [2010] NSWADTAP 21

Cases Cited

10

Statutory Material Cited

3

Deputy Commissioner of Taxation v Brown [1958] HCA 2

Screenco Pty Ltd v R L Dew Pty Ltd [2003] NSWCA 319

Federal Commissioner of Taxation v Dalco [1990] HCA 3

Actions

Download as PDF Download as Word Document

CITATION:	B & L Linings Pty Ltd and L & B Linings Pty Ltd v Chief Commissioner of State Revenue [2005] NSWADT 129
DIVISION:	Revenue Division
PARTIES:	APPLICANTS B & L Linings Pty Ltd and L & B Linings Pty Ltd RESPONDENT Chief Commissioner of State Revenue
FILE NUMBER:	046025
HEARING DATES:	5/10/2004-6/10/2004, 29/03/2005, 13/05/2005, 2/06/2005
SUBMISSIONS CLOSED:	06/02/2005
DATE OF DECISION:	06/10/2005
BEFORE:	Block J - ADCJ (Judicial Member)
APPLICATION:	Pay-roll tax - contractors
MATTER FOR DECISION:	Principal matter
LEGISLATION CITED:	Administrative Decisions Tribunal Act 1997 Pay-roll Tax Act 1971 Taxation Administration Act 1996
CASES CITED:	Bloemen v Federal Commissioner of Taxation (1981) 147 CLR 360 Commissioner of Taxation v Metaskills Pty Ltd [2003] FCA 766 Federal Commissioner of Taxation v Dalco (1990) 168 CLR Hollis v Vabu (2001) 207 CLR 21 Jones v Dunkel (1959) 101 CLR 298 Manly Council v Byrne [2004] NSWCA 123 Trautwein v The Federal Commissioner of Taxation (1936) 56 CLR 211 Vabu v Commissioner of Taxation 1996 ATC 4898
REPRESENTATION:	APPLICANT C Bevan, barrister (5-6/10/2004) J Eager, solicitor (29/03/2005, 13/05/2005, 2/06/2005) RESPONDENT I Latham, barrister
ORDERS:	The decision under review is affirmed in respect of the 2002 year for all 36 contentious entities and is remitted to the Respondent to enable him to assess the Applicants, in accordance with this decision, in respect of the relevant years. Either party is entitled to seek a hearing on costs after the expiry of a reasonable time after the issue of this decision and, where relevant, any appeal process has been completed.