Food Safety Consulting Services Pty Ltd and Director, Employer Support Payments Scheme
[2011] AATA 97
•11 February 2011
Administrative Appeals Tribunal
DECISION AND REASONS FOR DECISION [2011] AATA 97
ADMINISTRATIVE APPEALS TRIBUNAL )
) No 2009/1273
GENERAL ADMINISTRATIVE DIVISION ) Re FOOD SAFETY CONSULTING SERVICES PTY LTD Applicant
And
DIRECTOR, EMPLOYER SUPPORT PAYMENTS SCHEME
Respondent
DECISION
Tribunal Mr A Sweidan, Senior Member Date11 February 2011
PlacePerth
Decision The Tribunal affirms the decisions under review.
..(sgd) Mr A Sweidan...............
Senior Member
CATCHWORDS
DEFENCE - Australian Defence Force (ADF) Reserves' Employer Support Payment Scheme - whether presumption of "controlling interest" rebutted - alternatively whether employee a casual employee - decision under review affirmed
LEGISLATION
Defence (Employer Support Payments) Determination 2005
Defence Instruction (General) PERS 05-42
DESPS Advisory Notice 03/2005
Defence Act 1903 ss 9, 58CASES
Bromet v Oddie [2003] FCAFC 213
Accent Services Australia Pty Ltd and Director, Employer Support Payment Scheme [2010] AATA 205REASONS FOR DECISION
11 February 2011 Mr A Sweidan, Senior Member Background and History
1. The applicant is Food Safety Consulting Services Pty Ltd (FSCS). The matter before the Tribunal relates to the applicant’s claimed entitlement to Employer Support Payments (ESP) under section 7 of the Defence (Employer Support Payments) Determination 2005 (the Determination), in respect of Defence reserve service rendered by Mr John Nerney in various periods between 15 July 2007 and 15 June 2008. Except where otherwise indicated the following matters are not in dispute.
2. Mr John Nerney (Mr Nerney) was a director of FSCS from it’s incorporation on 16 March 2000. From 7 November 2001 until 27 February 2006, Mr Nerney was the sole director of FSCS and the secretary of the company.
3. Debra Nerney (Mr Nerney's ex-wife) was also a director of the company from 16 March 2000 to 7 November 2001.
4. Vicki Jackson Mr Nerney's current wife (Ms Jackson) has been sole director and secretary of the company since 27 February 2006.
5. There are two shares issued in the company. Both are presently held by Ms Jackson since at least 13 July 2006. Both shares were previously held by Mr Nerney. Earlier, one share was held by Debra Nerney.
6. Only nominal consideration ($2) was given for the transfer of ownership of FSCS from Mr Nerney to Ms Jackson.
7. Applicant asserts that Mr Nerney has been employed on an oral contract as an employee of FSCS since 27 February 2006.
8. Mr Nerney is and was at all relevant times an Army reservist.
9. Mr Nerney's remuneration from FSCS since 27 February 2006 was negotiated on the basis that he would spend long periods on Army reserve service.
10. FSCS has received employer support payments for the absences of Mr Nerney on Army reserve service since the inception of the Australian Defence Force Employer Support Payment Scheme in 2001.
11. Details of the extent of Mr Nerney’s Army reserve service in each financial year since the inception of the Employer Support Payment Scheme are shown in the table below. Reserve service comprises two types of service – periods of continuous full-time Defence service (CFTS) and days of Defence service served on Reserve training salaries. The combination of these two types of service constitutes the total number of days of Army reserve service served by Mr Nerney in each financial year as shown in the table. The table also details for each financial year how much in employer support payments was paid to FSCS in respect of Mr Nerney’s absences on periods of eligible Defence service and Mr Nerney’s salary/wage earnings from FSCS to the extent that this emerges from the evidence.
FY
Number of days on CFTS
Number of days on Res trg salaries
Total number of days Reserve service
Remaining days in FY (including weekends and public holidays)
ESP payments $
FSCS salary/wages $
01/02
119
91 2/3
210 2/3
154 1/3
16,436.91
?
02/03
166
43 ½
209 ½
155 ½
26,269.32
?
03/04
246
79 1/3
325 1/3
40 2/3
37,970.94
1,470
04/05
314
4 ½
318 ½
46 ½
37,683.62
?
05/06
336
23
359
6
64,451.52
1,470
06/07
184
137 ½
321 ½
43 ½
44,674.25
3,087
07/08
0
200
200
166
32,583.72
10,673
08/09
198
77 ½
275 ½
89 ½
8,870.02
?
09/10 (to 5 Oct 09)
97
0
97
0
Total
268,940.30
12. Based on FSCS company tax returns and financial statements, and Defence payment records for ESP payments, the following table represents the applicant's income and expenses since 2001:
Financial Year
07/08
06/07
05/06
04/05
03/04
02/03
01/02
Total Income
86,424
103,025
50,445
53,719
50,009
57,286
22,190
ESP
32,583
44,674
64,451
37,683
39,559
29,041
16,437
Total Income (less ESP)
53,841
58,351
14,006L
16,036
10.450
28,245
5,753
Total Expenses
114,612
100,532
51,280
59,421
47,304
57,675
23,004
Wages
96,333
87,974
39,683
42,637
37,325
33,176
13,797
Operating Profit/Loss
28,187L
2,493
835L
5,702L
2,705
389L
814L
13.1 FSCS had an operating loss in five of the seven financial years covered.
13.2 Without the employer support payments, the FSCS bottom line would have been significantly worse (with FSCS receiving over $260,000 in ESP over the seven years covered).
13.3 ESP payments are taxable income which must be declared on the appropriate tax return. FSCS company tax returns and financial statements show that FSCS declared ESP payments as income in it’s 2002 – 2004 company tax returns. Because of different wording in the later financial statements it is not possible to determine whether ESP payments were declared in subsequent tax returns.
13.4 In the financial year 2005/06, ESP payments exceeded the total income of the company.
13.5 In the most recent financial year 2007/08 wages significantly exceeded the total income of the company. If ESP payments were included in this total income figure (as had occurred in the financial statements for FYs 2001/02 – 2003/04), the wages bill exceeded the company’s income from non-ESP activities by 79%.
Decision Under Review
14. In the course of reviewing FSCS's entitlement to employer support payments in 2008, it apparently came to the respondent's attention for the first time that Ms Jackson is Mr Nerney's spouse. Following further investigation, the respondent made the following decisions which are disputed by FSCS and are now the subject of review by the Tribunal:
14.1that the applicant is not entitled to Employer Support Payments (ESP) under section 7 of the Defence (Employer Support Payments) Determination 2005 (the Determination) in respect of claims dated 3 December 2008 (T20) and 14 December 2008 (T23) for periods of defence service rendered by Mr Nerney between 20 October 2008 and 15 June 2009, on the ground that the applicant is not the employer of Mr Nerney because Mr Nerney is self-employed;
14.2that on reconsideration of a determination dated 16 June 2008 under section 15D of the Determination (T14), the applicant is not entitled to ESP in respect of a claim dated 9 May 2008 (T12) for periods of service rendered by Mr Nerney between 25 May 2008 and 20 June 2008, under section 7 of the Determination, on the ground that the applicant is not the employer of Mr Nerney because Mr Nerney is self-employed; and
14.3that on review of determinations dated 17 December 2007 (T8) and 16 June 2008 (T14) under section 10A of the Determination, the applicant is not entitled to ESP in respect of claims for periods of defence service rendered by Mr Nerney for various periods between 15 July 2007 and 28 November 2007 and between 11 January 2008 and 20 June 2008, under section 7 of the Determination, on the ground that the applicant is not the employer of Mr Nerney because Mr Nerney is self-employed.
Issues and Contentions of the Parties
Is Mr Nerney a 'self-employed member' for the purposes of the Defence (Employer Support Payments) Determination 2005 (the Determination)?
15. The first issue before the Tribunal in all the disputed claims is whether Mr Nerney is a self-employed member, under the definition in section 3 of the Determination. The significance of the issue is that for Mr Nerney to qualify for ESP as a self-employed member, FSCS would have to provide his principal source of income or principal source of employment over a continuous assessment period of at least six months duration. The Determination requires self-employed members who rely on the principal source of income requirement to re-establish their eligibility at least every three years.
16. It is common cause that to continue to qualify as a self-employed member in respect of periods of Defence service, Mr Nerney would have been required to satisfy the principal source of income requirement (or the principal source of employment requirement) over a new assessment period of at least six months duration. Respondent asserts that given Mr Nerney’s income from his Army reserve service and the volume of this service since May 2003, it appears very doubtful that Mr Nerney would have been able to re-satisfy either eligibility requirement and thus continue receiving employer support payments as a self-employed reservist.
17. However, the respondent contends that Mr Nerney is deemed to be self-employed for the purposes of the Determination because he has a 'controlling interest' in FSCS.
18. The applicant and Mr Nerney contend that he is an employee of FSCS, nad that he does not have a controlling interest in FSCS.
19. The respondent contends that on ordinary principles of administrative decision-making, the Tribunal should have regard to Defence Instruction (General) PERS 05-42 and DESPS Advisory Notice 03/2005 when considering if Mr Nerney is a self-employed member for the purposes of the Determination. The Tribunal accepts this contention.
20. The respondent concedes that Mr Nerney has not, on his own, owned more than 50% of FSCS since at least 13 July 2006, after which date he has held no shares in the company and has not been an officeholder in the company. However, the respondent does not accept that Mr Nerney has not had a controlling interest in the company.
21. Mr Nerney's wife, Ms Jackson, is his associate and she has been sole director and secretary of FSCS since 27 February 2006 and has held both shares in FSCS since at least 13 July 2006. In these circumstances, based on Defence Instruction (General) PERS 05-42 and DESPS Advisory Notice 03/2005, the respondent contends that there is a presumption that Mr Nerney has a controlling interest in FSCS because Mr Nerney and Ms Jackson between them are able to control the exercise of more than 50% of the voting power in the company; they receive more than 50% of the dividends of the company; and they have the right to receive more than 50% of any distribution of capital of the company.
22. The applicant and Mr Nerney seek to rebut the presumption on the ground that Ms Jackson is now the sole director of FSCS and that upon her acquiring FSCS, Mr Nerney stepped down as director and secretary and surrendered all shares.
23. The respondent asserts that these facts do not rebut the presumption that Mr Nerney retains a controlling interest on the basis that he and his associate Ms Jackson between them are able to control the exercise of more than 50% of the voting power in the company; receive more than 50% of the dividends of the company; and have the right to receive more than 50% of any distribution of capital of the company.
24. The applicant also seeks to rebut the presumption because it is claimed that the present circumstances are analogous to Case 3 in DESPS Advisory Notice 03/2005 in which:
the company is full (100%) owned by the Reservist's spouse. It employs a number of staff and has been operating for a lengthy period under its current arrangements. The Reservist is employed as a paid employee in a senior management position (but not in a position of control over the company). The company would be entitled to claim ESP as an employer.
25. The respondent contends that the present circumstances are not analogous to Case 3.
26. FSCS was a company set up and owned by Mr Nerney. The respondent contends that the changes to officeholder appointments and share ownership did not remove Mr Nerney, in conjunction with Ms Jackson (who as his wife is classed as his associate), from a position of control but rather were undertaken in order to ensure FSCS continued to receive employer support payments. Additionally, the respondent points out that:
26.1 There was no substantial consideration upon transfer of ownership.
26.2The company continues to operate from a property owned by Mr Nerney.
26.3No reason has been offered for the transfer of ownership which might suggest a ground for the rebuttal of the presumption that Mr Nerney continues to have a controlling interest.
27. The respondent contends that there is a presumption that Mr Nerney has a controlling interest in FSCS and the applicant has not rebutted the presumption.
28. Therefore the respondent contends that Mr Nerney is a self-employed member for the purposes of the Determination.
If Mr Nerney is not a self-employed member, is he a casual employee of FSCS?
29. In the event that the Tribunal finds that Mr Nerney is not self-employed, the next question for the Tribunal is whether he is a casual employee of FSCS, for the purposes of attracting employer support payments.
30. The Determination states at section 3 that employment does not include the following work arrangements:
(h) casual work, being employment on an irregular or unreliable basis.
31. Mr Nerney's maps of service show that most of his time since July 2001, and especially since May 2003, has been spent on Army reserve service.
32. The applicant contends that Mr Nerney is an employee of FSCS on the ground that he is paid as an employee by FSCS and receives a salary of $528.40 per week. This does not appear to be borne out in the evidence provided by the applicant.
33. Based on the periods of Mr Nerney’s Army reserve service, it is common cause that he was only available to work for FSCS on an intermittent or occasional basis during the relevant period and in one year this was no more than six days at most.
34. The respondent contends that Mr Nerney was a casual employee of FSCS because during the relevant period he rarely, if ever, did work for FSCS and any work he did was occasional and performed on an irregular or unreliable basis. As casual work is not included as employment under the Determination respondent asserts that FSCS would in any event not be entitled to ESP in respect of Mr Nerney’s reserve service.
If Mr Nerney is an employee of FSCS, is he a part-time or full-time employee?
35. If the Tribunal finds that Mr Nerney is an employee of FSCS and is not undertaking casual work for FSCS, the next question for the Tribunal is whether he is a part-time or full-time employee, for the purposes of determining the rate at which the applicant is entitled to employer support payments. For the reasons which follow the Tribunal does not find it necessary to determine this issue.
Relevant Legislation and Defence Instructions and Tribunal’s findings on the Evidence
Is Mr Nerney a 'self-employed member' for the purposes of the Determination?
36. As noted above the first issue before the Tribunal in all the disputed claims is whether Mr Nerney is a self-employed member, under the definition in section 3 of the Determination. The significance of the issue is that for Mr Nerney to qualify for ESP as a self-employed member, Food Safety Consulting Services Pty Ltd would have to provide his principal source of income or principal source of employment over a continuous assessment period of at least six months duration (section 3B and section 3C respectively).
37. The Determination requires self-employed members who rely on the principal source of income requirement to re-establish their eligibility at least every three years (section 3B(6)). Mr Nerney's claims for ESP prior to February 2006 relied upon his circumstances during an assessment period from December 2002 to May 2003, during which period the applicant company provided his principal source of income. To continue to qualify as a self-employed member after May 2006, in respect of the periods of Defence service claimed, Mr Nerney would have been required to satisfy the principal source of income requirement (or the principal source of employment requirement as part of the legitimate business test) over a new assessment period of at least six months duration.
38. Based on the evidence before the Tribunal Mr Nerney’s income from reserve service and from the applicant from 2003-2004 (ie from three years prior to May 2006) was as follows:
Year
Income from reserve service
No of days reserve service
Income from applicant
2003-2004
$54,543.44
325.3
$1,470
2004-2005
$62,694.35
318.5
$5,145
2005-2006
$74,212.32
359
$1,470
2006-2007
$70,444.15
321.5
$3,087
2007-2008
$54,931.07
200
$10,673
2008-2009
$78,268.94
275.5
$5,600
39. It is readily apparent from the table above that in the three year period up to May 2006 during which Mr Nerney could have attempted to establish a new entitlement under the principal source of income test, his principal source of income was, in fact, his income from Defence reserve service. Therefore, he was not able to establish a new entitlement under the principal source of income test in that period.
40. It is equally apparent that in the period from July 2006 (when ownership of the shares in the company was transferred to Ms Jackson) until 15 June 2009 (the last claimed date of Defence reserve service for which the applicant’s entitlement to ESP is under review), during which Mr Nerney could have established his entitlement under the principal source of income test, his principal source of income has been income from Defence Force reserve service. That is, there is no period of six months during which Mr Nerney’s principal source of income was from the applicant.
41. Further, in the same periods, it is apparent from the witness statement of George Agalianos especially at annexure C, that there is no relevant period of six months during which Mr Nerney’s principal source of employment was from the applicant.
42. The applicant has not disputed the evidence contained in the witness statement of George Agalianos.
43. Therefore the question whether Mr Nerney is a self-employed member for the purposes of the Determination is critical because if he is a self-employed member, the applicant will not be entitled to ESP for the periods of Mr Nerney’s service claimed.
44. The Tribunal finds that Mr Nerney is self-employed for the purposes of the Determination because he has a 'controlling interest' in FSCS.
45. 'Self-employed member' is defined in section 3 of the Determination and includes, relevantly, a member who is employed in an active role by a company in which the member has a controlling interest: (self-employed member (a)(iii)).
46. The expression 'controlling interest' is not defined in the Determination.
47. However, Defence Instruction (General) PERS 05-42 states (para 15(e)), relevantly:
A member has a controlling interest in a company if the member and the member's associates (including relatives of the member) between them are able to control the exercise of more than 50% of the voting power of the company; receive more than 50% of the dividends of the company; or have the right to receive more than 50% of any distribution of capital of the company.
48. DESPS Advisory Notice 03/2005: ESP claims - controlling interests & employment not at arms length states, relevantly (at T28, p213):
A reservist has a controlling interest in a company if the Reservist and the Reservist's associates between them are able to control the exercise of more than 50% of the voting power in the company; receive more than 50% of the dividends of the company; or have the right to receive more than 50% of any distribution of capital of the company.
Associates include relatives of the Reservist which may be the Reservist's spouse (and any of the spouse's children), parent, grandparent, brother, sister, uncle, aunt, nephew, niece, lineal descendant or adopted child, or any of their spouses.
If a Reservist, either alone or in combination with his/her associates, has a controlling interest in a company, the delegate is to presume that the Reservist is self-employed. Unless other evidence is provided, ESP must be claimed by the Reservist as a self-employed member. The presumption can be rebutted by the provision of evidence that demonstrates that the Reservist does not have a controlling interest in the company.
If a delegate is unsure as to whether a Reservist has a controlling interest in a company, the delegate may request additional information in support of the claim eg documentation on ownership, contract of employment or evidence from an independent accountant or auditor.
49. The Determination is a disallowable instrument authorised by section 58B(1)(ga) of the Defence Act 1903 (Cth).
50. Defence Instruction (General) PERS 05-42 is authorised by section 9A of the Defence Act 1903.
51. The Tribunal has had regard to Defence Instruction (General) PERS 05-42 and DESPS Advisory Notice 03/2005 when considering if Mr Nerney is a self-employed member for the purposes of the Determination, on the basis that they have the status of an Explanatory Memorandum or internal policy document, and they are intended to assist decision-makers in the interpretation of the Determination: Bromet v Oddie [2003] FCAFC 213; also Accent Services Australia Pty Ltd and Director, Employer Support Payment Scheme [2010] AATA 205 (24 March 2010).
52. The Tribunal notes that from 16 March 2000 to 13 July 2006, Mr Nerney owned all the shares in Food Safety Consulting Services Pty Ltd (FSCS) on his own or in combination with his former wife, Debra Nerney, (ASIC historical company extract T17, pp 46-50). Mr Nerney was the sole director and secretary of the company from 7 November 2001 to 27 February 2006 There is no dispute that Mr Nerney was a self-employed member until his shares were disposed of in favour of Ms Jackson in 2006 (ASIC historical company extract T17, pp 46-50).
53. The respondent concedes that Mr Nerney has not, on his own, owned more than 50% of FSCS since at least 13 July 2006, after which date he has held no shares in the company and has not been an officeholder in the company.
54. However, the respondent does not accept that Mr Nerney has not had a controlling interest in the company since 14 July 2006 and the Tribunal accepts the respondent’s contentions in this regard for the reasons which follow.
55. Mr Nerney's wife, Ms Jackson, is his associate and she has been sole director and secretary of FSCS since 27 February 2006 and has held both shares in FSCS since at least 14 July 2006. In these circumstances, based on Defence Instruction (General) PERS 05-42 and DESPS Advisory Notice 03/2005, the respondent contends and the Tribunal finds that there is a presumption that Mr Nerney has a controlling interest in FSCS because Mr Nerney and Ms Jackson between them are able to control the exercise of more than 50% of the voting power in the company; they receive more than 50% of the dividends of the company; and they have the right to receive more than 50% of any distribution of capital of the company.
56. The applicant sought to rebut the presumption on the ground that Ms Jackson is now the sole director of FSCS and that upon her acquiring FSCS, Mr Nerney stepped down as director and secretary and surrendered all shares. In the Tribunal’s opinion these facts are not sufficient to rebut the presumption that Mr Nerney retains a controlling interest on the basis that he and his associate between them are able to control the exercise of more than 50% of the voting power in the company; receive more than 50% of the dividends of the company; and have the right to receive more than 50% of any distribution of capital of the company.
57. The applicant further seeks to rebut the presumption on the ground that the present circumstances “are analogous” to Case 3 in DESPS Advisory Notice 03/2005 in which:
the company is fully (100%) owned by the Reservist's spouse. It employs a number of staff and has been operating for a lengthy period under its current arrangements. The Reservist is employed as a paid employee in a senior management position (but not in a position of control over the company). The company would be entitled to claim ESP as an employer.
58. The Tribunal is of the view that the present circumstances are not analogous to Case 3. In the present case, Ms Jackson had not owned FSCS for a lengthy period of time prior to the company’s employment of Mr Nerney as an employee. Rather, Mr Nerney had been the owner of FSCS immediately prior to the transfer of ownership to Ms Jackson and it is asserted that he became an employee immediately following the transfer.
59. In this respect, the present circumstances may be distinguished from the circumstances in the case of Accent Services, in which the wife, who was the sole owner of the business, had set up the business herself and run it for a number of years before the husband commenced working with her. In the Tribunal’s opinion, that is the kind of circumstance that is intended to be addressed by Case 3 in DESPS Advisory Notice 03/2005.
60. The Tribunal is of the view that there is no specific example in DESPS Advisory Notice 03/2005 which matches the circumstances of the applicant's situation.
61. It is further contended by the applicant that the presumption of controlling interest is rebutted on the following grounds (applicant’s final submissions, para 8.2):
That Mr Nerney has not been a shareholder, director, company secretary or beneficial owner of the applicant company since February 2006.
62. This contention appears to the Tribunal to be otiose and without any substance. These factors go to actual ownership and/or actual control of the applicant company. It is not disputed that Mr Nerney has not had actual ownership or control of the applicant company since 2006. If these were relevant factors to the determination of a presumption of controlling interest, there would be no need for a controlling interest test at all.
That Mr Nerney has not and does not participate in the operation of the company’s bank account nor access its funds and does not sign company cheques.
63. The Tribunal finds that this contention is not supported by the evidence adduced at the hearing. Mr Nerney and Ms Jackson both gave evidence that the company’s bank account has not changed since Mr Nerney was the owner of the company and that Mr Nerney remained the only signatory to the company cheque account until around six months before the hearing and continued to write cheques on behalf of the company as required from time to time (for example, transcript pp13-14). This situation prevailed for over four years after the change in ownership arrangements of the company and only changed after the commencement of these proceedings, which is also after the relevant period.
That Mr Nerney has not and does not have any day to day management or control of the company or the direction of the company at all or participate in the important decisions of the company.
64. The Tribunal accepts that prima facie that was the effect of Ms Jackson’s and Mr Nerney’s oral evidence at hearing. However, this is not necessarily a significant indicium of lack of control in circumstances where Mr Nerney is frequently absent on reserve service. Given his frequent absences, it is to be anticipated that much of the day to day management of the company falls to Ms Jackson as indeed it would have prior to 2006 when he was himself the owner of the company and she was the office manager.
65. Further, the Tribunal is of the view that Ms Jackson’s and Mr Nerney’s evidence on this point must be approached with considerable caution because their assertions are impossible to prove or disprove based on any external indicator. Ms Jackson and Mr Nerney were both at pains to give the appearance of a lack of control by Mr Nerney but, of course, it is in their interests to do so.
66. The Tribunal finds that some of their evidence on this point was not credible. For example, a significant part of the business of the company is the management of ten properties, nine of which are owned by Ms Jackson alone, Mr Nerney alone or by Ms Jackson and Mr Nerney in common. Six of the properties are owned solely or partly by Mr Nerney. It is not credible in the view of the Tribunal to present Mr Nerney as employee and client of the company but lacking any control over the activities of the company. To the extent that the direction of the company is to involve itself in property management it is clear that Mr Nerney is intimately connected with the direction of the company and any appearance to the contrary is a contrivance in the Tribunal’s opinion.
67. Mr Nerney’s evidence and that of Ms Jackson is that his duties include performing maintenance on these properties, including on the properties owned by himself. Their evidence was that he acts merely as an employee and works as directed by Ms Jackson. Subsequently, he is billed by the company for the work done by himself. For example, in the period 15 August 2008 to 12 December 2008, their evidence was that Mr Nerney undertook work for the company on 50 days allegedly, as directed by Ms Jackson. This work, which included construction of a garden shed, front and rear patios, a pergola and a new bathroom, was carried out on a property at 227 Daly Street that was owned by Mr Nerney. Mr Nerney was charged $4,400 per week by the applicant company for the work that he performed on his own property. (This was the only work for the applicant by Mr Nerney in 2008-2009.) Over the same period, the evidence adduced at hearing was that he was paid about $560 per week by the company as an employee. Thus, over this period, Mr Nerney purportedly paid the company $44,000 to work on his own property, receiving approximately $5,600 in salary for doing so.
68. The Tribunal is of the opinion that the arrangements as presented by Mr Nerney and Ms Jackson were clearly contrived to give the appearance of a lack of control by Mr Nerney, either for the purposes of attracting ESP or for the purposes of attracting tax advantages, or both, but the arrangements as presented are not credible.
69. Mr Nerney also gave evidence that he finds work from time to time in his own specialist field of food technology (transcript pp 89-90). Sourcing of work in this field is based on his own contacts and expertise. Notwithstanding that he fits this work around his other commitments, to the extent that the company holds itself out as a competent provider to perform this work, it is apparently Mr Nerney who directs this side of the company’s business. To suggest otherwise is clearly not plausible.
That Mr Nerney does not hire the employees of the company nor determine the amount of remuneration such employees will receive.
70. The evidence is that Ms Jackson is responsible for the hiring and management of employees. This is not surprising given Mr Nerney’s frequent absences on reserve service and given that the employees are generally employed to perform work on the disability services side of the business, which may generally be described as the side of the business which Ms Jackson has developed. In the circumstances, the Tribunal finds that this is not a significant indicium indicating lack of control by Mr Nerney.
That given Mr Nerney’s frequent absences on reserve service, he does not have the capacity to have control or any controlling interest in the company.
71. As stated above, the Tribunal finds that this is not a significant indicium indicating lack of control by Mr Nerney. Plainly, while he is away, he does not have the capacity to attend to the day to day business of the company but that is not necessarily indicative of a lack of control, nor does it go to the absence of a controlling interest based on the controlling interest test in PERS05-42 and DESPS Advisory Notice 03/2005. The Tribunal gives no weight to this argument.
72. The Tribunal finds for the reasons stated above that the applicant has failed to rebut the presumption of a controlling interest by Mr Nerney.
73. Not only is the presumption not rebutted on the grounds advanced on behalf of the applicant, but the Tribunal further finds that the following evidence shows that Ms Jackson’s and Mr Nerney’s affairs are so closely intertwined that it justifies a finding of fact that Mr Nerney has maintained at least joint control over the affairs of the applicant company after 2006:
73.1Ms Jackson gave evidence that when she took over the directorship and shares in the company in 2006, she did not conduct any due diligence on the assets and liabilities of the company. That suggests a very high degree of comfort that nothing was intended to change upon transfer of ownership.
73.2Nor was there any substantive consideration upon transfer of ownership of the company.
73.3Mr Nerney remained a signatory to the applicant company’s bank account until six months ago.
73.4The applicant does not contend that Mr Nerney's relationship to the applicant company changed in any way other than that he ceased to be director, secretary and shareholder. That is, his employment arrangements did not and were not intended to change at all. The clear inference to be drawn is that the changes in ownership arrangements of the applicant company were nominal and were never intended to be anything more than nominal.
73.5It appears that in fact, nothing of substance changed after the transfer. Ms Jackson and Mr Nerney did not even tell their clients about the change of ownership.
73.6One of Mr Nerney’s principal activities for the applicant company is office administration including auditing the company, preparing business activity statements, preparing the books and preparing invoices. He has also prepared all the documents for the applicant company’s appeal in the present proceedings. Those activities are consistent with intimate knowledge and control over the affairs of the company.
73.7The company continues to operate from a property owned by Mr Nerney.
73.8One of the principal activities of the applicant company is property management and maintenance. According to the evidence of the applicant adduced at hearing, this activity relates to 10 properties, nine of which are owned by Ms Jackson, Mr Nerney or Ms Jackson and Mr Nerney in common. Six of the properties are owned solely or partly by Mr Nerney (transcript pp 46-47).
73.9One of the properties managed by the company was gifted to Mr Nerney by Ms Jackson.
73.10Mr Nerney was paid at the rate of $18.80 per hour, significantly less than he is qualified to earn and much less than he is capable of generating in his field of expertise.
74. These factors clearly show a degree of intimacy in the company arrangements and the financial arrangements of Ms Jackson and Mr Nerney which is not consistent with a genuine separation of their interest. This supports rather than rebuts the presumption of controlling interest.
75. Further, Ms Jackson gave evidence that the sole reason for transferring ownership of the company to her was that sole ownership of the company by her was required in order for her to conduct the disability services side of the business. Upon closer questioning, it emerged that this was not in fact the case. She required an ABN, but it was not a requirement that the work be undertaken by a proprietary limited company, nor was it a requirement that she be the sole owner of the company.
76. She then maintained that the change of ownership was necessary because she wanted to avoid the possibility of Mr Nerney getting any financial benefit out of work brought into the company by her. Mr Nerney’s evidence was consistent with this. Both of them gave evidence that the prospect of losing the stream of income from ESP was not a factor in their decision to transfer ownership of the company.
77. In the opinion of the Tribunal, this was not credible evidence. Mr Nerney conceded that he knew at the time of the transfer of the business that by May 2006, the company’s entitlement to ESP would cease until such time as he met the principal source of income test again for a period of at least six months. He also gave evidence that at that time, he anticipated that he would continue to undertake a significant amount of reserve service, which would inevitably limit his opportunity to meet the principal source of income test in the foreseeable future. Ms Jackson gave evidence that although she did not have a clear understanding of the ESP scheme, she was nevertheless aware of the scheme and had been responsible for preparing ESP claims even before she took over as sole shareholder.
78. Over the period from the commencement of the ESP Scheme in 2001 to 26 February 2006, ESP payments of $164,243.99 were made to the applicant company in respect of Mr Nerney’s service. In 2005/06, prior to 27 February 2006, $45,883.20 in ESP payments were made (with a further $18,568.32 during the remainder of the financial year). After 27 February 2006, until the respondent’s decision was made to disallow further claims, ESP payments of $104,696.31 were made to the applicant company.
79. It is clear from the table at para.11 above that payment of ESP was by far the main source of income of the applicant company, without which the company would have made substantial losses in the relevant period.
80. Prior to 2005/2006, ESP is clearly recorded as income in the applicant's tax returns. In 2005/2006, the year in which the transfer of the applicant company occurred, ESP paid to the applicant company exceeded its total income by $14,006. The company's tax return for 2005/2006 shows its income as $634 gross interest and $49,811 other gross income. The tax return does not show any income from sale of goods and services (eg disability services or property management services) in that year. The Tribunal assumes other gross income refers to ESP. If so, the income from that source appears to be understated by $14,640. In any case, it is apparent from the company's tax return that in the year in which the transfer of the company from Mr Nerney to Ms Jackson occurred, not only was ESP the company's major source of income, it was the company's only source of income. In those circumstances, it is not credible that Ms Jackson and Mr Nerney did not discuss the potential loss of ESP from May 2006 as claimed by them.
81. Nor is it credible that the potential loss of ESP was not a factor in their decision to transfer ownership of the company to Ms Jackson. The logical inference to be drawn is that the transfer of ownership of the applicant company was undertaken in the belief that the company would continue to qualify for ESP if Mr Nerney was an employee rather than a self-employed member.
82. Mr Nerney gave evidence that the loss of ESP was not a relevant issue for him and Ms Jackson in 2006 because they own $4.5 million worth of property with mortgages of only up to $2.7 million, the inference being that they are wealthy people and do not need the income from ESP. Nevertheless, it is apparent from the table that they and the company were “asset rich and income poor” and the loss of the income from ESP would have had very significant ramifications for the continuing viability of the business. The evidence of Mr Nerney on this point is not credible.
83. Also, Ms Jackson and Mr Nerney both gave evidence that Mr Nerney has accumulated a large child support debt over a period of years. This indicates an inability to pay the child support debt contemporaneously, which is not consistent with the suggestion that Mr Nerney was so wealthy that he had no need to be concerned about the loss of the significant income stream from ESP.
84. Further, Ms Jackson's and Mr Nerney's evidence in general and in particular in relation to the establishment of Profusion Properties, Cornucopia Developments and Wealth Creations (entities with no legal personality that simply reflected titles for their individual and joint property holdings) as well as the artificially contrived arrangements in regard to the maintenance of those properties showed a clear interest in organising and managing their financial dealings and in maximising their income. This is not consistent with their claimed indifference to the potential loss of the significant ESP income stream, nor with their evidence that they did not even discuss the potential loss of ESP and that it was not a factor in their decision to transfer ownership of the company.
85. The reasons advanced by Ms Jackson and Mr Nerney for transferring ownership of the company in 2006 do not ring true. Ms Jackson did not need to be sole owner of a proprietary limited company in order to undertake disability support services work, nor was it necessary for her to be sole owner of the company in order to grow that side of the business.
86. The Tribunal finds that by far the most likely reason for the transfer of the ownership of the company in 2006 was the belief that the applicant company would continue to qualify for ESP if Mr Nerney was an employee rather than a self-employed member.
87. Even if this was not in fact the sole or primary motivation for the transfer, the evidence relating to the transfer, in particular the lack of any due diligence checks or substantive consideration, and the ongoing interconnection of Mr Nerney’s and the company’s affairs (such as his work for the company on his own properties, his remaining as a signatory on the cheque book until recently, his work on the company's books, his work in his own specialist field of food technology which he sources from his own contacts and expertise) are more than sufficient to show that Mr Nerney has maintained at least a joint controlling interest in the company at all relevant times.
88. The Tribunal finds that there is a presumption that Mr Nerney has a controlling interest in FSCS, based on his association with Ms Jackson as his spouse and that the applicant has not rebutted the presumption.
89. The Tribunal therefore finds that Mr Nerney is a self-employed member for the purposes of the Determination.
If Mr Nerney is not a self-employed member, is he a casual employee of FSCS?
90. Notwithstanding the Tribunal’s finding that Mr Nerney is self-employed, the Tribunal has further for the sake of completeness, considered whether in the alternative he is a casual employee of FSCS, for the purposes of employer support payments.
91. The Determination states at section 3 that employment does not include the following work arrangements:
(h) casual work, being employment on an irregular or unreliable basis.
92. As noted above Mr Nerney's maps of service show that most of his time since July 2001, and especially since May 2003, has been spent on Army reserve service (witness statement of George Agalianos, especially Annexure C). The witness statement of Melinda Gabriel also shows how many days reserve service were undertaken by Mr Nerney. Exhibit A7 shows how many days Mr Nerney worked for the applicant according to the applicant's evidence. The data may be represented thus:
FY
Number of days on CFTS
Number of days on Reserve training
Total number of days Reserve service
Days worked for applicant (A7)
01/02
119
91 2/3
210 2/3
Not stated
02/03
166
43 ½
209 ½
86
03/04
246
79 1/3
325 1/3
5
04/05
314
4 ½
318 ½
32
05/06
336
23
359
9
06/07
184
137 ½
321 ½
14
07/08
0
200
200
94
08/09
198
77 ½
275 ½
50
93. It is clear from the evidence that Mr Nerney only worked for the applicant on a very occasional and intermittent basis throughout this period.
94. Ms Jackson gave evidence that prior to her taking over the company, it was not doing much of anything else and not doing a great deal (transcript pp 24 & 59). Mr Nerney gave evidence that the $2 paid for the company’s shares was probably the true value of the company at the time (transcript, p 106). This evidence shows that due to the volume of reserve service undertaken by Mr Nerney from May 2003, Mr Nerney's contribution to the work of the applicant company was so reduced that the value of the company was negligible. Further, Mr Nerney's contribution to the work of the company did not increase after 27 February 2006 and simply continued a pattern of irregular or unreliable employment.
95. In her evidence at the hearing, Ms Jackson stated that she needed to own the company because “what’s mine is mine.” She further stated that 99.9% of the work coming into the company was her own work and she was bringing 99% of the income into the company. (transcript, pp 25-27). That evidence also suggests that Mr Nerney's contribution to the work of the company was minor, irregular and unreliable.
96. Ms Jackson also gave evidence that after the change of directorship and share ownership, Mr Nerney undertook work for the applicant company when he was home and available, otherwise she arranged for someone else to do the work (transcript p45). This arrangement is clearly consistent with that of a casual employee who works when available.
97. The applicant contends that Mr Nerney is an employee of FSCS on the ground that he is paid as an employee by FSCS. There is nothing else in the submissions advanced on behalf of the applicant that goes to why Mr Nerney’s limited and ad hoc employment by the applicant company should not be characterised as casual work.
98. It is clear from the evidence that due to Mr Nerney’s limited availability to work for the applicant company over many years his employment is readily characterised as irregular. He could not be relied upon to work for the applicant company except on the limited occasions when he was at home. The nature of his employment by the applicant company was necessarily casual. There was no reliable pattern to it.
99. Ms Jackson gave evidence that Mr Nerney was paid at the rate of $18.80 per hour and he was only paid for the hours he actually worked. That arrangement most closely resembles the pay arrangement for a casual employee.
100. The view of the Tribunal is that if Mr Nerney, contrary to the Tribunal’s finding that he is self-employed, is an employee of the applicant then he is a casual employee because he rarely does work for the applicant company and any work he does is occasional and performed on an irregular or unreliable basis. Further, his pay arrangement resembles the pay arrangement for a casual employee. As casual work is not included as employment under the Determination, the applicant is not entitled to ESP in respect of Mr Nerney’s reserve service.
The Review by the Inspector-General
101. The submissions on behalf of the applicant also allege that the respondent acted in bad faith in deciding this matter because he had previously referred the matter to the Inspector-General of Defence to investigate whether there had been any illegality by the applicant or Mr Nerney in the prosecution of their ESP claims. The applicant submitted that the reviewable decision was consequently attended by perceived and actual bias, was improper, was a breach of the rules of natural justice and was an exercise of power in bad faith.
102. It is trite law that any procedural defect in the reviewable decision will be cured by the Tribunal’s decision on review, so a submission alleging a procedural defect is irrelevant in the context of merits review.
103. In any case, the Tribunal rejects the submission. It is clear that there was a concern about the circumstances of the applicant's claim and it was therefore entirely proper for the respondent to refer the matter for investigation by the Inspector-General.
Decision
104. The decisions under review are affirmed on the basis that Mr Nerney was either self-employed or in the alternative, was a casual employee of the applicant during the relevant period and the applicant was therefore not entitled to Employer Support Payments.
I certify that the 104 preceding paragraphs are a true copy of the reasons for the decision herein of Mr A Sweidan, Senior Member
Signed:...(sgd) T Freeman.......................
AssociateDate/s of Hearing 8 and 9 July 2010
Date of Final Submissions 31 January 2011
Date of Decision 11 February 2011
Counsel for the Applicant Senator D Johnston
Counsel for the Respondent Mr A Reilly
Solicitor for the Respondent DLA Phillips Fox
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