KinCare Community Services Limited v Chief Commissioner of State Revenue

[2019] NSWSC 182

Supreme Court

New South Wales

• Amendment notes

Medium Neutral Citation:

KinCare Community Services Limited v Chief Commissioner of State Revenue [2019] NSWSC 182

Hearing dates:

13,14,15 and 16 August 2018

Date of orders:

06 March 2019

Decision date:

06 March 2019

Jurisdiction:

Equity

Before:

Payne J

Decision:

(1)   Application allowed.
(2)   Objection decision revoked.
(3)   The assessments of payroll tax to KinCare Community Services Limited in the 2009, 2010, 2011, 2012, 2013 and 2014 years are revoked.
(4)   Remit the matter to the Commissioner to issue assessments in accordance with these reasons.
(5)   The Commissioner pay KinCare’s costs of the application.

Catchwords:

TAXES AND DUTIES – pay-roll tax – liability to taxation – arrangements affecting liability to tax – objections and appeals – collection and recovery of tax

 

TAXES AND DUTIES – Payroll Tax Act 2007 (NSW), Sch 2 cl 12 – transitional provisions relating to the continuation of exemptions under s 10 of the repealed Payroll Tax Act 1971 (NSW)

 

TAXES AND DUTIES – meaning of “non-profit organisation” – whether a “non-profit organisation” – where constitution contained an express restriction on distribution of profits to members – where no distribution of profits were made to members – where there were transactions with related entities that received incidental benefits – where alleged that transactions were not arm’s length and on commercial terms – where alleged that the organisation was “carried on for the benefit or gain of particular individuals”

 

TAXES AND DUTIES – meaning of “public benevolent institution” – whether a “public benevolent institution” – whether benevolence was directed to the public at large – whether benevolence was directed to the profit or gain of particular individuals

 

TAXES AND DUTIES – apportionment – whether wages were wages paid or payable to a person in respect of time when the person was engaged in charitable work of a non-profit organisation – whether wages were wages paid or payable to a person in respect of time when the person was engaged in work of a public benevolent nature – apportionment of wages based on time spent by the person engaged in charitable work or work of a public benevolent nature – absence of sufficient evidence

 

STATUTORY INTERPRETATION – extrinsic materials – Interpretation Act 1987 (NSW), s 34 – legislative history – explanatory memoranda

  EVIDENCE – weight of evidence – expert evidence –letter of instruction – absence of adequate instructions – where no assumptions of fact or questions to be addressed or guidance about how to approach the task was given

Legislation Cited:

Australian Charities and Not‑for‑profits Commission Act 2012 (Cth)
Broadcasting and Television Act 1942 (Cth), s 81
Charitable Fundraising Act 1991 (NSW), Sch 1
Charities (Consequential Amendments and Transitional Provisions) Act 2013 (Cth)
Companies and Securities Legislation (Miscellaneous Amendments) Act 1983 (Cth)
Co-operation Act 1923 (NSW)
Corporations Act 2001 (Cth), ss 34, 124, 125, 180, 181, 182, 254SA, Pt 2D.1
Income Tax and Social Services Contribution Assessment Act 1936-1962 (Cth), s 23
Income Tax Assessment Act 1936 (Cth)
Income Tax Assessment Act 1997 (Cth), ss 50-5, 50-40
Interpretation Act 1987 (NSW), ss 33, 34
Land Tax Management Act 1956 (NSW), s 10
Payroll Tax Act 2007 (NSW), ss 3, 6, 10, 48, Sch 2 cl 12
Pay-roll Tax Act 1941 (Cth)
Pay-roll Tax Act 1971 (NSW), s 10
Pay-roll Tax Act 1971 (SA), s 12
Pay-roll Tax Assessment Act 1941 (Cth)
Pay-roll Tax (Amendment) Act 1979 (NSW), Sch 1
Pay-roll Tax (Further Amendment) Act 1977 (NSW), Sch 1
State Revenue Legislation (Amendment) Act 1994 (NSW), Sch 6
Statute Law (Miscellaneous Provisions) Act (No 2) 1995 (NSW), Sch 2
Taxation Administration Act 1996 (NSW), s 97

Cases Cited:

ACI Operations Pty Ltd v Berri Ltd (2005) 15 VR 312; [2005] VSC 201
Adelaide City Mission v South Australian Planning Commission (1993) 60 SASR 178
Allied Pastoral Holdings Pty Ltd v Commissioner of Taxation (Cth) [1983] 1 NSWLR 1
Australian Council of Social Service Inc v Commissioner of Pay-roll Tax (1985) 1 NSWLR 567
Canberra and District Racing and Sporting Broadcasters Ltd v Canberra Stereo Public Radio Inc (1985) 63 ALR 502
Canberra Stereo Public Radio Inc v Australian Broadcasting Tribunal (1985) 6 FCR 456
CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384
Collector of Customs v Agfa-Gevaert Ltd (1996) 186 CLR 389
Cooperative Bulk Handling Ltd v Commissioner of Taxation [2010] FCA 508; 79 ATR 582
Crows Nest Club Ltd v Commissioner of Land Tax [1978] 1 NSWLR 523
Dasreef Pty Ltd v Hawchar (2011) 243 CLR 588; [2011] HCA 21
Evans v Federal Commissioner of Taxation (1988) 19 ATR 1784
Federal Commissioner of Taxation v Co-operative Bulk Handling Ltd (2010) 189 FCR 322; [2010] FCAFC 155
Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614
Federal Commissioner of Taxation v Slater Holdings Ltd (1984) 156 CLR 447
Federal Commissioner of Taxation v Sun Alliance Investments Pty Ltd (in liq) (2005) 225 CLR 488; [2005] HCA 70
Federal Commissioner of Taxation v Word Investments Ltd (2008) 236 CLR 204; [2008] HCA 55
Grain Growers Ltd v Chief Commissioner of State Revenue [2015] NSWSC 925
Grain Growers Ltd v Chief Commissioner of State Revenue (NSW) (2016) 93 NSWLR 415; [2016] NSWCA 359
Illawarra Suburbs Lawn Tennis Association Ltd v Commissioner of Land Tax (NSW) (1985) 16 ATR 664
Incorporated Council of Law Reporting of Queensland v Federal Commissioner of Taxation (1971) 125 CLR 659
Maughan v Federal Commissioner of Taxation (1942) 66 CLR 388
McAndrew v Federal Commissioner of Taxation (1956) 98 CLR 263
New York Life Insurance Co v Styles (1889) 14 App Cas 381
Pamas Foundation (Inc) v Commissioner of Taxation (1992) 35 FCR 117
Perpetual Trustee Co Ltd v Federal Commissioner of Taxation (1931) 45 CLR 224
Public Trustee of New South Wales v Federal Commissioner of Taxation (1934) 51 CLR 75
R v Brown [1996] 1 AC 543
Re Spanish Prospecting Co Ltd [1911] 1 Ch 92
Repromed Pty Ltd v Lucas (2000) 76 SASR 575; [2000] SASC 203
South Australian Employers’ Chamber of Commerce & Industry Inc v Commissioner of State Taxation [2017] SASC 127; 106 ATR 305
Stratton v Simpson (1970) 125 CLR 138
Sydney Water Board Employees’ Credit Union Ltd v Federal Commissioner of Taxation (1973) 129 CLR 446
SZTAL v Minister for Immigration and Border Protection [2017] HCA 34; 91 ALJR 936
Taylor v The Owners – Strata Plan No 11564 (2014) 253 CLR 531; [2014] HCA 9
Theosophical Foundation Pty Ltd v Commissioner of Land Tax (1966) 67 SR (NSW) 70
Trustee for the Estate of the Late A W Furse No 5 Will Trust v Federal Commissioner of Taxation (1990) 21 ATR 1123
Trustees of the Allport Bequest v Federal Commissioner of Taxation (1988) 19 ATR 1335
Trustees of the Indigenous Barristers’ Trust v Commissioner of Taxation (2002) 127 FCR 63; [2002] FCA 1474
Union Trustee Co of Australia Ltd v Federal Commissioner of Taxation (1962) 108 CLR 451

Texts Cited:

K L Fletcher, The Law Relating to Non-profit Associations in Australia and New Zealand (1986, Law Book)
J Mitchell, “Non-Profit? It’s Not What You Think It Means” (2018) 46 ABLR 32

Category:

Principal judgment

Parties:

KinCare Community Services Limited (Plaintiff)
Chief Commissioner of State Revenue (Defendant)

Representation:

Counsel:
F L Harrison QC / M Sealey (Plaintiff)
R Seiden SC / H El-Hage / T Russell (Defendant)

  Solicitors:
PPM Tax & Legal (Plaintiff)
Crown Solicitor’s Office (Defendant)

File Number(s):

2016/00321955

Publication restriction:

None

Judgment

1. PAYNE J: This is a case raising issues under the Payroll Tax Act 2007 (NSW) (the Payroll Tax Act). KinCare Community Services Limited (KinCare) is a company limited by guarantee which was incorporated in 1998. KinCare has since that time been a provider of home care services to aged people, people with disabilities and more recently Aboriginal and Torres Strait Islander people. From 1 April 2014, KinCare was subject to a significant restructuring and ceased from that day to employ any staff or pay any taxable wages. Accordingly, no question of payroll tax, including the operation of any exemption, arises after 1 April 2014.

2. On 4 November 2015, over 18 months after KinCare had ceased to employ any staff, the Chief Commissioner of State Revenue (the Commissioner) decided that with effect from 1 July 2008, wages paid by KinCare were not exempt wages, and assessed KinCare to payroll tax of $3,238,157.10 in total for the financial years between 30 June 2009 and 30 June 2014 (the Assessments). KinCare had previously been granted an exemption from payroll tax on the basis that it was a non-profit charitable organisation under former s 10(1)(j) of the Pay-roll Tax Act 1971 (NSW) (now repealed).

3. KinCare objected to the Assessments. KinCare seeks review under s 97(1)(a) of the Taxation Administration Act1996 (NSW) and seeks to have the Assessments set aside on the basis that the relevant wages were exempt wages under Sch 2 cl 12 of the Payroll Tax Act. That provision is a transitional provision available to entities that meet its terms. The Commissioner rejected the objection. By the time of the hearing before me, however, the Commissioner accepted that KinCare had as one of its objects a charitable purpose.

4. By the time the hearing before me commenced, the parties had narrowed the issues even further to the following:

1. whether KinCare was a non-profit organisation during the relevant period within the meaning of Sch 2 cl 12(1)(c) of the Payroll Tax Act. The essential issue to be determined is whether KinCare was a “non-profit organisation”;

2. whether wages paid by KinCare were wages paid or payable to a person in respect of time when the person was engaged in the charitable work of KinCare within the meaning of Sch 2 cl 12(1)(c) of the Payroll Tax Act. This issue only arises if KinCare was a non-profit organisation during the relevant period. The essential issue is whether wages paid to KinCare’s administrative staff (who worked for KinCare and also for related entities) qualified as exempt from payroll tax;

3. whether KinCare was a public benevolent institution during the relevant period within the meaning of Sch 2 cl 12(1)(b) of the Payroll Tax Act. The essential issue to be determined is whether KinCare was a “public benevolent institution”; and

4. whether wages paid by KinCare were wages paid or payable to a person in respect of time when the person was engaged in work of a public benevolent nature for KinCare within the meaning of the Sch 2 cl 12(1)(b) of the Payroll Tax Act. The same issue as arises under issue 2 needs to be determined.

5. In the way the case was ultimately presented, issues 3 and 4 were very much subsidiary to issues 1 and 2. Senior Counsel for KinCare, Mr Harrison QC who appeared with Mr Sealey, explained that in the way the issues and evidence had developed he did not need issues 3 and 4 to be determined in his favour if he succeeded on issues 1 and 2, and probably could not succeed on issues 3 and 4 if he failed on issues 1 and 2. Nevertheless, as issues 3 and 4 remained at the end of the case I will address them, albeit briefly.

Evidence relied upon

6. KinCare read affidavits from: Scott Joseph Pease, sworn on 27 October 2016; David George Francis Morgan, sworn on 28 March 2017; Alice Leah Kim, sworn on 29 March 2017; James Ian Howie, sworn on 30 March 2017; Margaret Lynette Howie, sworn on 30 March 2017; Jason Andrew Howie, sworn on 30 March 2017 and 20 December 2017; and Xiaocong Zhao, sworn on 20 December 2017. Only Mr Jason Howie was cross-examined. I will not attempt to summarise the affidavit and oral evidence here but will refer to the most important aspects of it when explaining my factual findings.

7. The Commissioner relied upon two expert reports from Goodwin Cullimore Allen Gower, dated 25 September 2017 and 8 March 2018, and one from Dennis John Roams, dated 14 November 2017. KinCare relied upon an expert report of Tamara Lindsay, dated 20 December 2017 and a note prepared by Ms Lindsay, dated 13 August 2018 in reply to Mr Gower’s second report. Mr Gower and Ms Lindsay gave concurrent evidence. Mr Roams was not required for cross-examination. As the expert evidence, and in particular Mr Gower’s second report, is important in the resolution of issues 1 and 3 described above, I will address my findings based on that report separately in a little detail.

8. Voluminous documentary evidence was tendered. I will not attempt to summarise that evidence here but will refer to the most important of the documents when explaining my factual findings.

Relevant facts

9. I make the following findings of fact about the relevant entities the subject of these proceedings.

10. Mr James Howie is a retired teacher and pastor with the Seventh-day Adventist Church. Before founding KinCare and its “for profit” related entities (which I will refer to as the KinCare Group), Mr Howie worked as a teacher and pastor for approximately 30 years. Prior to 1990 his wife, Mrs Margaret Lynette Howie, a co-founder of KinCare and the KinCare Group, worked for approximately 25 years as a registered nurse in aged care facilities. In 1990, Mrs Howie began providing home care nursing support services on behalf of Parramatta Nursing Services. In 1991, Mrs Howie was offered the opportunity to take 16 existing home care nursing support clients as her own by arrangement with Parramatta Nursing Services and the Commonwealth Department of Veterans’ Affairs. Mr and Mrs Howie commenced a business in 1992 to provide those services which was conducted from the Howie family home in West Pennant Hills. Over the next few years the business grew and the home care services provided by Mr and Mrs Howie and nurses employed by them expanded beyond veterans to include other community groups. In 1998, Mr and Mrs Howie decided to form a not-for-profit charitable organisation to provide home care packages using funding provided principally by the Commonwealth Government.

11. On 14 April 1998, KinCare was incorporated as a company limited by guarantee. Mr and Mrs Howie were co-founders and directors of the company. The subscribers to the Memorandum of KinCare were James Ian Howie, Margaret Lynette Howie, Megan Joy Howie, Hunka Holdings Pty Ltd and KinCare Pty Ltd. The Memorandum and Articles of Association of KinCare have remained unchanged since they were signed by Mr and Mrs Howie on 14 April 1998.

12. Clause 2 of the Memorandum of Association lists KinCare’s objects. The primary objects in subcll (a)(i), (a)(ii) and (a)(iii) of the Memorandum of Association are as follows:

“(i) To provide support and services for aged people, people with disabilities and their carers.

(ii) To provide support and services in respect of aged people and people with disabilities to continue living in the community and to assist in the prevention of inappropriate entry to residential care.

(iii) To enter into contracts with Government or Government Agencies to provide services or support in connection with or related to the Home and Community Care Program and to provide such support and services in connection therewith and pursuant to the Home and Community Care Act 1985 or otherwise.”

13. Clause 3 of KinCare’s Memorandum of Association provides:

“3. The income and property of [KinCare] whencesoever derived, shall be applied solely towards the promotion of the objects of [KinCare] as set forth in this Memorandum of Association; and no portion thereof shall be paid or transferred, directly or indirectly, by way of dividend, bonus or otherwise, to the members of [KinCare]. Provided that nothing herein contained shall prevent the payment in good faith of remuneration to any officers or servants of [KinCare] or to any member of [KinCare] in return for any services actually rendered to [KinCare] or for goods supplied in the ordinary and usual way of business nor prevent the payment of interest at a rate not exceeding the rate for the time being fixed for the purpose of this paragraph by the Articles of Association on money borrowed from any member of [KinCare] or reasonable and proper rent for premises demised or let by any member to [KinCare].”

14. Clause 6 of KinCare’s Memorandum of Association provides:

“6. If upon the winding-up or dissolution of [KinCare] there remains, after satisfaction of all its debts and liabilities, any property whatsoever, the same shall not be paid to or distributed among the members of [KinCare], but shall be given or transferred to some other institution or institutions having objects similar to the objects of [KinCare], and whose Memorandum of Association or constitution shall prohibit the distribution of its or their income and property among its or their members to an extent at least as great as is imposed on [KinCare] under or by virtue of clause 4 hereof, such institution or institutions to be determined by the members of [KinCare] at or before the time of the dissolution and in default thereof by application to the appropriate Supreme Court for determination.”

15. It is now common ground that the reference in cl 6 to cl 4 is a mistake. The Commissioner accepted, and I find, that this was a mistake, based on the unchallenged evidence of Mr Morgan who prepared the Memorandum. The reference in cl 6 should have instead been to cl 3. When cl 6 is read as referring to cl 3, as I find it should be, the same wide prohibition on direct and indirect distributions that exists with respect to members of KinCare exists also in relation to members of any institutions with similar objects to which the assets of KinCare might be given or transferred on a winding up of KinCare.

16. In the relevant period, 1 July 2008 to 31 March 2014, KinCare provided home based care to aged people and people with disabilities. KinCare has also provided home based care for Aboriginal and Torres Strait Islander people. On 27 March 2002, Mr Jason Howie, the son of the founders, became the CEO of KinCare. As I have said, from 1 April 2014, KinCare was subject to a significant restructuring and ceased from that day to employ any staff or pay any taxable wages. Accordingly, no question of the payroll tax exemption arises after 1 April 2014. KinCare continued, however, to operate after that date and to provide services to its clients under existing funding arrangements and client service agreements.

17. KinCare received the bulk of its income during the relevant period from Commonwealth Government contracts under which it provided services or support, predominantly in connection with the Commonwealth Home Support Programme and Home Care Packages. Towards the end of the relevant period KinCare also received funding under agreements with the NSW Department of Ageing, Disability and Home Care. Each of the respective funding agreements was renewed by the Commonwealth and the relevant NSW Government departments throughout the period. Each of the agreements contained strict provisions about expenditure of the funds granted by the agreement for the purposes of the agreement. There is no evidence that any Commonwealth or NSW funding body has ever complained about expenditure by KinCare other than for the purposes for which the funding was advanced.

18. The Commonwealth agreements throughout the relevant period contained detailed record keeping and reporting provisions. Those agreements required KinCare to keep financial records so as to enable the Commonwealth to identify all of the income and expenditure related to the funding to be identified in the accounts. KinCare’s accounts were to be prepared in accordance with Australian Accounting Standards. The audit of those accounts was to be in accordance with Australian Audit Standards. I find that KinCare complied with those requirements and that its financial statements were in each year of income prepared in accordance with Australian Accounting Standards and audited in accordance with Australian Audit Standards. There is no evidence that the Commonwealth, or any emanation of the Commonwealth, ever complained that KinCare’s financial statements did not accurately record KinCare’s income and expenditure related to its Commonwealth funding in any year of income.

15. The financial statements of KinCare in evidence demonstrate a number of matters relevant to the issues before me.

16. The audited 30 June 2009 Special Purpose Financial Report for KinCare demonstrated that:

1. KinCare had 85 employees across Australia;

2. net surplus for the 2008-2009 year was $171,979 but no income tax was payable as KinCare was exempt from income tax; [1]

   1. KinCare was at times all endorsed as exempt for income tax purposes by the Federal Commissioner of Taxation as both a “Charitable Institution” and a “Public Benevolent Institution” with effect from 1 July 2000. It has retained that exemption under the transitional provisions of the current regime for income tax now governed by the Australian Charities and Not-for-profits Commission Act 2012 (Cth), the Charities (Consequential Amendments and Transitional Provisions) Act 2013 (Cth), and related legislation.

3. KinCare’s revenue for the year was $10,967,499 of which $10,063,404 was grant revenue, principally from the Commonwealth Government;

4. KinCare’s total employee benefit expense was $7,092,029 (the total expense in that year of all KinCare’s administrative staff was $1,103,880 according to the affidavit evidence of Ms Kim which I address below at [33]);

5. KinCare had total equity of $433,102;

6. the Financial Statements had been prepared in accordance with AASB 101 (Presentation of Financial Statements); AASB 107 (Cash Flow Statements); AASB 108 (Accounting Policies); AASB 117 (Leases); AASB 1031 (Materiality); AASB 110 (Events after Balance Sheet Date); and AASB 1048 (Interpretation and Application of Standards);

7. KinCare declared that it was economically dependent upon the Howie Family Trust (trading as KinCare Nursing Services) and KinCare Health Services Pty Ltd for the provision of fieldwork staff under a continuing staff supply agreement. Staff were provided to KinCare by those entities at rates equivalent to those charged to third parties; and

8. the auditor, Mr Milner of PKF Chartered Accountants, provided an unqualified audit opinion including an opinion that the Financial Statements gave a true and fair view of the Company’s financial position as at 30 June 2009.

21. The audited 30 June 2010 Special Purpose Financial Report for KinCare demonstrated that:

1. KinCare had 93 employees across Australia;

2. net surplus for the 2009-2010 year was $179,678 but no income tax was payable as KinCare remained exempt from income tax;

3. KinCare’s revenue for the year was $14,452,198 of which $13,218,377 was grant revenue, principally from the Commonwealth Government;

4. KinCare’s total employee benefit expense was $10,628,185 (the total employee expense in that year of all KinCare’s administrative staff was $1,264,501 according to the affidavit evidence of Ms Kim);

5. KinCare had total equity of $612,780;

6. the Financial Statements had been prepared in accordance with AASB 101 (Presentation of Financial Statements); AASB 107 (Cash Flow Statements); AASB 108 (Accounting Policies); AASB 117 (Leases); AASB 1031 (Materiality); AASB 110 (Events after Balance Sheet Date); and AASB 1048 (Interpretation and Application of Standards);

7. KinCare declared that it was economically dependent upon the Howie Family Trust (trading as KinCare Nursing Services) and KinCare Health Services Pty Ltd for the provision of fieldwork staff under a continuing staff supply agreement. Staff were provided to KinCare at rates equivalent to those charged to third parties; and

8. the auditor, Mr Milner of PKF Chartered Accountants, provided an unqualified audit opinion including an opinion that the Financial Statements gave a true and fair view of the Company’s financial position as at 30 June 2010.

22. The audited 30 June 2011 Special Purpose Financial Report for KinCare demonstrated that:

1. KinCare had 97 employees across Australia;

2. net surplus for the 2010-2011 year was $274,556 but no income tax was payable as KinCare remained exempt from income tax;

3. KinCare’s revenue for the year was $17,787,006 of which $16,542,871 was grant revenue, principally from the Commonwealth Government;

4. KinCare’s total employee benefit expense was $13,209,508 (the total employee expense in that year of all KinCare’s administrative staff was $1,268,852 according to the affidavit evidence of Ms Kim);

5. KinCare had total equity of $887,336;

6. the Financial Statements had been prepared in accordance with AASB 101 (Presentation of Financial Statements); AASB 107 (Cash Flow Statements); AASB 108 (Accounting Policies); AASB 117 (Leases); AASB 1031 (Materiality); AASB 110 (Events after Balance Sheet Date); and AASB 1048 (Interpretation and Application of Standards);

7. KinCare declared that it was economically dependent upon the Howie Family Trust (trading as KinCare Nursing Services) and KinCare Health Services Pty Ltd for the provision of fieldwork staff under a continuing staff supply agreement. Staff were provided to KinCare at rates equivalent to those charged to third parties; and

8. the auditor, Mr Milner of PKF Chartered Accountants, provided an unqualified audit opinion including an opinion that the Financial Statements gave a true and fair view of the Company’s financial position as at 30 June 2011.

23. The audited 30 June 2012 Special Purpose Financial Report for KinCare demonstrated that:

1. net surplus for the 2011-2012 year was $163,120 but no income tax was payable as KinCare remained exempt from income tax;

2. KinCare’s revenue for the year was $26,049,372 of which $24,261,301 was grant revenue, principally from the Commonwealth Government although there was significant NSW Government funding during this year;

3. KinCare’s total employee benefit expense was $20,527,880 (the total employee expense in that year of all KinCare’s administrative staff was $1,875,225 according to the affidavit evidence of Ms Kim);

4. KinCare had total equity of $1,050,456;

5. the Financial Statements had been prepared in accordance with AASB 101 (Presentation of Financial Statements); AASB 107 (Cash Flow Statements); AASB 108 (Accounting Policies); AASB 1031 (Materiality); AASB 110 (Events after Balance Sheet Date); and AASB 1048 (Interpretation and Application of Standards);

6. KinCare declared that it was economically dependent upon the Howie Family Trust (trading as KinCare Nursing Services) and KinCare Health Services Pty Ltd for the provision of fieldwork staff under a continuing staff supply agreement. Staff were provided to KinCare at rates equivalent to those charged to third parties; and

7. the auditor, Mr Milner of BDO East Coast Partnership, provided an unqualified audit opinion including an opinion that the Financial Statements gave a true and fair view of the Company’s financial position as at 30 June 2012.

24. The audited 30 June 2013 Special Purpose Financial Report for KinCare demonstrated that:

1. net surplus for the 2012-2013 year was $370,806 but no income tax was payable as KinCare remained exempt from income tax;

2. KinCare’s revenue for the year was $29,641,868 of which $28,376,540 was grant revenue, principally from the Commonwealth Government although there was significant NSW Government funding during this year;

3. KinCare’s total employee benefit expense was $26,855,416 (the total expense in that year of all KinCare’s administrative staff was $1,942,544 according to the affidavit evidence of Ms Kim);

4. KinCare had total equity of $1,412,262;

5. the Financial Statements adopted “all of the new, revised or amended Accounting Standards … that are mandatory for the current reporting period”;

6. KinCare declared that it was economically dependent upon KinCare Health Services Pty Ltd for the provision of fieldwork staff under a continuing staff supply agreement. Staff were provided to KinCare at rates equivalent to those charged to third parties; and

7. the auditor, Mr Milner of BDO East Coast Partnership, provided an unqualified audit opinion including an opinion that the Financial Statements gave a true and fair view of the Company’s financial position as at 30 June 2013.

25. The audited 30 June 2014 Special Purpose Financial Report for KinCare demonstrated that:

1. net surplus for the 2013-2014 year was $219,506 but no income tax was payable as KinCare remained exempt from income tax;

2. KinCare’s revenue for the year was $32,026,882 of which $12,122,984 was grant revenue, principally from the Commonwealth Government;

3. KinCare’s total employee benefit expense was $28,282,434 (the total expense in that year of all KinCare’s administrative staff was $1,160,845 according to the affidavit evidence of Ms Kim);

4. KinCare had total equity of $1,641,201;

5. the Financial Statements adopted all of the amendments to Australian Accounting Standards which were relevant to and effective for financial statements for the period;

6. KinCare declared that it was economically dependent upon KinCare Health Services Pty Ltd for the provision of fieldwork staff under a continuing staff supply agreement. Staff were provided to KinCare at rates equivalent to those charged to third parties; and

7. the auditor, Mr Kemp of Grant Thornton, provided an unqualified audit opinion including an opinion that the Financial Statements gave a true and fair view of the Company’s financial position as at 30 June 2014.

26. I find that the audited financial statements of KinCare demonstrate that no dividend was paid during the relevant period, 1 July 2008 to 31 March 2014, and no distribution of profit was made by KinCare at any time during that period.

27. As is apparent from the summary of KinCare’s financial statements during the relevant period, KinCare had a number of related entities, ultimately controlled by the Howie family.

28. In this case, the most important “for profit” related entity was KinCare Health Services Pty Ltd which was a provider of nursing services to aged people, people with disabilities and their carers throughout the relevant period. In the year ended 30 June 2011, KinCare Health Services Pty Ltd became part of a consolidated group, the head company of which was KinCare (Holdings) Pty Ltd. Throughout the relevant period, KinCare Health Services Pty Ltd provided field staff to KinCare. The Commissioner now accepts that the services of field staff were supplied to KinCare by KinCare Health Services Pty Ltd at rates equivalent to those charged to third parties.

29. The other related entity the subject of disclosure in KinCare’s accounts in the years 2009 to 2012 was the Howie Family Trust (trading as KinCare Nursing Services). It also provided field staff to KinCare at rates equivalent to those charged to third parties.

30. There were other related entities of KinCare, which do not play a prominent role in the issues in this case:

1. TeleResponse Australia Pty Ltd – which acted as an after-hours provider of nursing services to aged people, people with disabilities and their carers;

2. National College Australia Pty Ltd – which was a registered training organisation, delivering nationally recognised community care qualifications; and

3. KinCare Management Pty Ltd – which was a provider of employee management and office services to the KinCare Group.

31. The relationship between KinCare and the “for profit” related entities was at the heart of this case. KinCare devised care plans for aged and disabled people. The most important interaction between KinCare and “for profit” related entities was in the provision of most of the field staff to KinCare by KinCare Health Services Pty Ltd (and to a lesser extent by the Howie Family Trust) so that KinCare could give effect to the home care plans it had devised. KinCare paid a market rate to those related companies for the provision of those field staff. I find that in order to carry on its activities of providing services to aged and disabled persons in the community (including, but not limited to, basic domestic assistance in the home, personal care, social support and respite services, and high level nursing care) KinCare engaged with KinCare Health Services Pty Ltd (and, in the early years, with the Howie Family Trust) to the extent necessary to provide those services, most importantly in relation to the provision of field staff who were primarily responsible for executing the field care plans designed by KinCare for its clients.

32. Another important interaction between KinCare and its “for profit” related entities was in relation to services provided by administrative staff. Administrative staff employed by KinCare also provided services to related entities. I find that at the end of each financial year an allocation was made based on an apportionment of administrative services provided and a charge levied by KinCare and paid by the related companies for those administrative services. I find that the allocation was misdescribed by Mr Jason Howie in his evidence. Mr Jason Howie accepted in cross-examination that the fees charged for the provision of administrative services in the KinCare Group did not include an hourly operation charge. Where he had referred to “an hourly operation charge” in his affidavits he was incorrect. This finding has consequences in the determination of issues 2 and 4. Nevertheless, I accept that there was an allocation made in relation to administrative services provided and a charge levied by KinCare and paid by the “for profit” related companies for those administrative services. For reasons I will develop when addressing the expert accounting evidence, I find that the allocation was a reasonable one.

33. I find that KinCare management would propose an allocation each year about the relative levels of activity undertaken by KinCare and the KinCare Group and allocate administrative costs across the two groups on the basis of that activity. That allocation was the subject of audit in each financial year. The principal effect of this allocation was that KinCare was recompensed for administrative services provided to the KinCare Group. That is, funds flowed from the “for profit” KinCare Group to KinCare as a balancing charge at year end. This is not a promising start for the Commissioner’s central thesis on issues 1 and 3 which was that KinCare was being operated to confer “benefits” on related entities. The essence of the Commissioner’s submission about KinCare conferring “benefits” on related companies by reason of the amount of this charge is based on the expert evidence of Mr Gower. It is sufficient for present purposes to note that for reasons I will explain in detail when addressing the expert evidence, the attack by the Commissioner on the charge levied by KinCare for administrative services fails.

34. There is an issue (particularly relevant to issues 2 and 4 that I need to decide) about the total amount of wages paid to KinCare’s administrative staff during the relevant period. Mr Jason Howie addressed the question of services provided by administrative staff of KinCare at [34]-[50] and [65]-[71] of his affidavit sworn on 30 March 2017. Mr Jason Howie described the process whereby administrative staff providing services to KinCare and to the KinCare Group came to be employed by KinCare. Mr Jason Howie described the administrative services supplied by administrative staff as “including” the provision of human resource services, finance functions, IT support services and general clerical functions.

35. Ms Kim, who is the solicitor acting for the firm appearing for KinCare, conducted an analysis of the employee lists forming part of the business records of KinCare (contained in Exhibit A). Ms Kim identified all employees whose job classifications were Administration, Information Technology, Finance and Human Resources. She calculated the total taxable wages paid to each of those employees (from documents contained in Exhibits D, E, F, G, H and I).

36. I have examined the underlying documents used by Ms Kim to derive those total payments. I was initially troubled that Mr Jason Howie’s evidence, in describing the services provided by administrative staff as “including” certain services, may have left open the question of whether Ms Kim’s analysis adequately captured the administrative staff the subject of issues 2 and 4. Having examined those records, however, I am satisfied that, with the exception of the 2009 year, Ms Kim has correctly identified the administrative staff employed by KinCare and correctly calculated the total wages paid to KinCare’s administrative staff being: $1,264,501 for the year ended 30 June 2010; $1,268,852 for the year ended 30 June 2011; $1,875,225 for the year ended 30 June 2012; $1,942,544 for the year ended 30 June 2013; and $1,160,845 for the year ended 30 June 2014. As earlier noted, the Commissioner now raises no issue about the field staff employed by KinCare. The job classification categories for the remaining employees, other than those identified by Ms Kim as “administrative”, were all involved in providing client services to KinCare’s clients. For example, in the 2012-2013 year, those categories were “Care Coordinator”, “Client and Clinical Services”, “Customer Service Representative”, “Customer Service and Business Administrator”, “Quality Manager”, “Program Management”, “Operations and Service Manager”, “Training”, “Junior Financial Analyst/Claims Officer”, “Transpac Coordinator”, “Administration Assistant”, “Project Manager”, “Call Centre”, “Management”, “Staff Management” and “Executive Management”. Whilst it would perhaps have been useful to have more information about the last three of these job classification descriptions, on the balance of probabilities I am satisfied on the basis of Mr Jason Howie’s evidence and the available business records that Ms Kim’s identification of KinCare’s administrative staff is correct.

37. The reason I am unable to conclude that administrative staff in the 2009 year have been correctly identified by Ms Kim is that the job description field at p 117 of Exhibit A which addresses employees in the period 1 July 2008 to 30 June 2009 is blank. I am unable to be satisfied whether the employees listed on p 117 of Exhibit A and the first two employees listed on p 118 were or were not administrative staff of KinCare. I will address the consequence of that conclusion for the 2009 assessment when I have dealt with the remaining issues.

38. As the parties spent a deal of time analysing the evidence of Mr Jason Howie I will make findings about that evidence. In truth, however, most of the evidence of Mr Jason Howie was of little assistance to either party. The voluminous documentary evidence in this case, and in particular the audited accounts of KinCare, provide much more compelling proof of the matters that I need to decide.

39. Mr Jason Howie’s cross-examination established that he did not calculate any of the management fees in KinCare’s accounts. That was done by KinCare’s finance department. Mr Howie had only a high level understanding of the calculation criteria. He accepted that the calculation criteria changed between 2009 and 2014. His understanding was that the costs in the KinCare Group had been split between administrative and field costs, partially to recognise the actual cost of the field workers and partially to recognise the administrative costs. In that sense, he said, there was some discount on the actual services delivered because the profit margin also includes some of the costs that KinCare was already covering and then the rest of the “rebate” (which I explain below) covers the remaining costs that have been incurred. He could not explain how the split was calculated or how the discount was achieved but maintained that there was a discount. Whether “rebate” is the correct term may be open to debate.

40. What is not open to debate is that there was a balancing charge in each of the years 2009 to 2012 from the KinCare Group to KinCare. That is, there were items in KinCare’s accounts in respect of employee payments showing a payment by the KinCare Group to KinCare. To take an example, in 2010, KinCare paid $10,156,137 to the Howie Family Trust (trading as KinCare Nursing Services) and KinCare Health Services Pty Ltd for the provision of field staff, for which KinCare received payment from the Commonwealth Government. The Commissioner accepts, and I find, that the payment for field staff by KinCare was at rates equivalent to those charged to third parties. The 2010 accounts also record a payment of $3,437,610 flowing from the KinCare Group to KinCare in respect of employee costs recharged to related parties. An additional payment was made by the KinCare Group to KinCare of $1,145,870 described in the accounts as “rebate on contracted field workers”. These two inflows (about $4.5 million in total) from the KinCare Group in respect of employee payments are greater in total than the entire amount paid in 2010 by KinCare for administrative staff being $1,264,501 according to the evidence of Ms Kim which I accept. The Commissioner’s submission that KinCare has, for this reason, been operated during the relevant period so as to confer benefits upon the “for profit” KinCare Group should be rejected.

31. The issue is a little more complicated in 2013 and 2014. In respect of 2013 and 2014 Mr Jason Howie could not explain why KinCare achieved a profit of about 2% of revenue in those years, but explained that as CEO he ensured that the auditors saw the draft financial statements. Mr Gower’s evidence, which I will address below, was that in 2013 adjustments between KinCare and the KinCare Group resulting from management fees had the effect of an adjustment payment from the KinCare Group in favour of KinCare. This is inconsistent with the submission that KinCare was operated during the relevant period so as to confer benefits upon the “for profit” KinCare Group.

32. In 2014, the position is more complex. Mr Gower pointed to the amount of a management fee and an administration fee which he opined had the effect that KinCare reported a profit of $169,808 rather than a profit of $762,966 which he said would otherwise have been achieved if the management fee and administration fee had been differently calculated. There was, however, no challenge to Mr Jason Howie’s evidence that KinCare ceased to employ staff after 1 April 2014 but nevertheless continued to provide services to its existing clients. KinCare was charged a fee by the KinCare Group for providing those services. I will return to this topic when addressing Mr Gower’s report but I do not accept that the charging of a management fee so that KinCare obtained a 2% profit in 2014 provides a basis to conclude, of itself, that KinCare was operated in 2014 for the purposes of the “for profit” KinCare Group.

33. As I will explain when addressing Mr Gower’s evidence, I do not accept that the management fees in the audited accounts had the effect that “profits” that otherwise would have flowed to KinCare flowed instead to the “for profit” KinCare Group.

34. There is also an issue about interest on inter-company loans. I find that, when money was lent by KinCare to the KinCare Group, interest was levied and paid. The timing of KinCare’s Commonwealth funding varied and funds were deposited by KinCare into a central bank account from which the various entities in the KinCare Group and KinCare then withdrew. It was from this central account that KinCare obtained funds to pay the administrative and field staff through inter-company transactions and loan accounts with the KinCare Group. Interest calculations on loan balances would be conducted at the end of the year and a balancing charge levied and paid. Detailed business records comprising the calculations of interest on inter-company loans were in evidence. I find that interest at the same rate was calculated and paid on loan balances owed and owing by KinCare in each of the relevant years of income. I reject the submission that by reason of any timing difference in the calculation of interest on funds owing by KinCare to the KinCare Group, KinCare thereby conferred a “benefit” on any related entity. I also reject the submission that by reason of the way interest was levied and paid on inter-company loans, profits (or any potential “operating surplus”) that otherwise would have flowed to KinCare flowed instead to the “for profit” KinCare Group.

35. There was also an issue about a guarantee KinCare provided to KinCare (Holdings) Pty Ltd in 2011. It will be recalled that KinCare (Holdings) Pty Ltd was the head company of the consolidated group that KinCare Health Services Pty Ltd was part of. KinCare was dependent upon KinCare Health Services Pty Ltd throughout the relevant period to supply field staff. The guarantee was provided to ANZ Bank to enable the acquisition by KinCare Health Services Pty Ltd of PNS (Home Care) Pty Ltd, a provider of aged care services. I accept, as the Commissioner submitted, that KinCare would not have provided a guarantee to an entity not controlled by the Howie family. I also accept that the guarantee was valuable to KinCare (Holdings) Pty Ltd and KinCare Health Services Pty Ltd. It would not otherwise have been required. It does not follow that KinCare was thus carried on from 2011 (the year the guarantee was given) for the benefit of the KinCare Group. I reject that submission. I also reject the submission that by reason of giving the guarantee, profits that otherwise would have flowed to KinCare flowed instead to the “for profit” KinCare Group.

36. Standing back from the issues in this case, and subject to Mr Gower’s thesis that KinCare is not a “not-profit organisation” by reason of it allegedly conferring “benefits” on “for profit” related entities (which thesis I will address in detail below), there is no issue that the wages paid to KinCare’s employees, other than those engaged in providing administrative services, were paid in respect of time when the employees were engaged full-time in the charitable purposes of KinCare, designing care packages for KinCare’s clients, and giving effect to those home care packages.

37. In short, I find that KinCare did not confer “benefits” upon the KinCare Group such that profits that otherwise would have flowed to KinCare flowed instead to the “for profit” KinCare Group. I find that no income or property of KinCare had ever been paid or transferred to the members of KinCare. To the extent that this issue was addressed in the expert evidence, I will now turn to that issue. To the extent necessary I will make additional findings of fact when addressing that evidence.

Expert evidence

48. The Commissioner’s case about the “non-profit organisation” issue centred around two reports prepared by an accounting expert, Mr Gower. It appears that a principal purpose of Mr Gower’s reports was to cast doubt upon the accuracy of the audited accounts of KinCare. By the time of the trial Mr Gower’s first report, dated 25 September 2017, was in most respects redundant. The second report, dated 8 March 2018, essentially identified different ways that KinCare’s financial statements could have been expressed. Mr Gower’s reports did not address, at least directly, the issue about whether KinCare is a “non-profit organisation” within the meaning of cl 12 of Sch 2 of the Payroll Tax Act.

49. There is a significant question at the outset about what issues Mr Gower’s reports address. In par 14 of Mr Gower’s first report he said:

“I have been instructed to provide expert assistance with evaluating the financial and operational interdependency of the various corporate entities within the “KinCare Group” of companies.”

50. In Mr Gower’s second report he was simply instructed to respond to Ms Lindsay’s report dated 20 December 2017. Ms Lindsay, in turn, was instructed to respond to Mr Gower’s first report and also prepared a note dated 13 August 2018 responding to Mr Gower’s second report. Whilst served late, and after KinCare’s solicitors indicated that no reply was to be served to Mr Gower’s second report, there was ultimately no objection to the admission in evidence of Ms Lindsay’s note concerning Mr Gower’s second report.

51. It appears that Mr Gower understood that all he was doing in his reports was providing expert assistance and not answering specific questions posed to him:

“HIS HONOUR: Go to paragraph 14 of that first report.  Am I right in thinking that's the only instruction you were given by your instructing solicitors in this case?

WITNESS GOWER: My instruction is attached but essentially, yes, that's as I understand it.

HIS HONOUR: No criticism at all.  My question is really this.  How we've got here is what you're doing is providing expert assistance with evaluating the financial and operational independency of various companies and that's all you've set out to do?

WITNESS GOWER: That's correct, your Honour.

HIS HONOUR: And you weren't asked to make any assumptions about the relevant legal framework in which that evaluation is to be conducted?

WITNESS GOWER: No, I wasn't.

HIS HONOUR: And you weren't asked to answer any questions?

WITNESS GOWER: No, your Honour.

HIS HONOUR: You weren't instructed to consider the possible operation of, for example, the Corporations Act or Australian Accounting Standards or Australian Audit Standards?

WITNESS GOWER: No, I wasn't.

HIS HONOUR: And you haven't done that, have you?

WITNESS GOWER: No.”

52. After he had left the witness box, Senior Counsel for the Commissioner read a further affidavit from Mr Gower sworn on 15 August 2018 which did annex a letter of instruction dated 21 April 2017. That letter of instruction asked Mr Gower to address three “issues”, namely:

1. the interdependency (both financial and operational) of the various corporate entities, including the Plaintiff, within the KinCare Group of companies;

2. the flow of funds/financial benefits between companies within the KinCare Group; and

3. the possible financial consequences if, during the period in issue (2008-2014) corporate entities within the KinCare Group (excluding the Plaintiff) engaged their own staff, instead of using staff employed by KinCare.

53. Perhaps in par 14 of his first report quoted above Mr Gower was attempting to summarise those questions. In any event, as Ms Seiden SC, Senior Counsel for the Commissioner accepted, the letter of instruction did not really illuminate the questions that Mr Gower was addressing in his reports. Whilst in his affidavit sworn on 15 August 2018 Mr Gower said that he addressed the questions in the letter of instruction dated 21 April 2017, it is not apparent to me that he did so, at least directly.

54. In essence, Mr Gower critiqued various aspects of KinCare’s accounts and accounts of the KinCare Group and presented arguments for a different treatment of various items in those accounts. Mr Gower opined that, if various accounting adjustments were made in a way Mr Gower suggested they could have been, KinCare “would have recorded substantially greater surpluses in total across the relevant period than it actually recorded”. It followed, Mr Gower opined, that a “substantial transfer of profit occurred from [KinCare] to other KinCare Group entities”. I have concluded that Mr Gower did not demonstrate anything that could be described as a transfer of profit from KinCare to the KinCare Group.

55. All Mr Gower set out to do was evaluate “the financial and operational independency of various companies”, being KinCare and the KinCare Group. It is no criticism of Mr Gower to record that this approach, with no assumptions or clear questions or guidance being given to an expert, is an unhelpful way for litigation to be conducted. As the High Court has explained, an expert’s evidence must explain how the field of specialised knowledge in which the witness is expert, by reason of training, study or experience and on which the opinion is wholly or substantially based, applies to facts assumed or observed so as to produce the opinion propounded: Dasreef Pty Ltd v Hawchar (2011) 243 CLR 588; [2011] HCA 21 at [37]. Mr Gower was not asked to assume any facts and in critical respects it is not clear what, if any, facts were assumed in expressing his opinion.

56. This case was made much more difficult by the Commissioner’s expert embarking on the task of reconstructing KinCare’s audited financial statements without any assumptions of fact being identified or guidance being given about how to approach the task. The assumptions Mr Gower made about the legal framework in which that task should be approached were not identified. Ultimately, by reason of the absence of adequate instructions given to Mr Gower, including the absence of assumptions of fact and questions to be addressed, his ultimate opinions are not entitled to the weight I would ordinarily accord an expert of his stature.

57. It is necessary nonetheless to descend a little into the detail of the accounting evidence to explain how it was Mr Gower came to the view that a “substantial transfer of profit occurred from [KinCare] to other KinCare Group entities” and why it was that KinCare’s expert, Ms Lindsay, disagreed with Mr Gower’s conclusions.

58. In the way the evidence developed the first reports prepared by Mr Gower and Ms Lindsay played little part in the position each ultimately adopted. Mr Gower, in particular, produced a prodigious amount of paper comprising numerous schedules and recalculations of aspects of KinCare’s accounts and the accounts of other entities in the KinCare Group. The critical exchanges occurred in Mr Gower’s second report and Ms Lindsay’s note in response to that report, and during the concurrent evidence which was given.

59. Whilst framed as a response to the first report of Ms Lindsay, Mr Gower’s second report contained a number of quite new opinions travelling outside a response to anything that Ms Lindsay had said. No objection was taken to the second Gower report by KinCare.

60. In his second report, Mr Gower opined that the audited financial statements of KinCare did not property reflect the “operating surpluses” of KinCare. Mr Gower opined that “benefits” had informally been transferred to related entities through erroneously calculated management fees and incorrect inter-entity interest charges. The steps in Mr Gower’s reasoning to reach these conclusions were as follows:

1. Mr Gower opined that there was a “shortfall” in management fees that should have been paid to KinCare (as a result of the miscalculation of those fees); and

2. notwithstanding that KinCare’s financial statements for the years 2009 to 2014 had been audited and received an unqualified audit opinion:

1. disclosures in the years 2009, 2010 and 2011 of employee costs recharged to related parties and rebates on contracted field workers were in Mr Gower’s opinion “incorrect”. This was because there were no rebates allowed on contracted field workers. The apportionment of overhead costs across the KinCare Group was “incorrect”. Revenues had not been adjusted as Mr Gower opined they should be to “exclude related entity transactions” (as Mr Gower opined had correctly been done in 2012);

2. disclosure of employee costs in the year ended 30 June 2012 was “inaccurate”. Mr Gower opined that what was described as “employee costs” was really a reallocation of certain overhead costs;

3. the management fees in the years 2013 and 2014 were merely a reallocation of profit between KinCare Group entities; and

4. the criterion by which the apportionment of overhead costs was determined differed materially from year to year.

61. Ms Lindsay’s response to Mr Gower’s second report was pithy. Ms Lindsay did not accept that Mr Gower had identified any legitimate basis to criticise the choices made by KinCare management and approved by the auditors in the financial statements. Ms Lindsay opined that there is an important distinction between, on the one hand, operating surpluses and, on the other, distributions or dividends. The existence of a hypothetical “operating surplus” in a counterfactual world, created by adopting Mr Gower’s opinions about the “correct” apportionment of overhead costs and “correct” calculation of employee costs recharged to related parties and rebates on contracted field workers, does not mean that something which, in that alternative world, would have contributed to an increased operating surplus is, in the real world, a “distribution” made or a “dividend” paid by KinCare to a related company.

62. The experts were agreed that no dividends had been paid by KinCare. As to distributions, Ms Lindsay:

“assume[d] that the reference to a distribution is to:

‘… a payment or drawing out of KCS’ net surplus for a FY [ie financial year] or out of its retained earnings (which comprises the “equity” on the balance sheet).’”

63. Mr Gower said of that paragraph: “I don’t disagree with that statement at all, your Honour.” Later, Mr Gower agreed that “there’s been no distribution or dividend paid” by KinCare.

64. As a preliminary observation about this issue, an operating surplus is not equivalent to a distribution of profit or a dividend. Even assuming that operating surpluses in KinCare should have been calculated in a different way and been greater, it does not follow that amounts representing a dividend or a distribution of profit have in fact been paid. I will return to this topic when addressing the relevant legal question in addressing issue 1 which is whether KinCare met the statutory description of “non-profit organisation” in cl 12 of Sch 2 of the Payroll Tax Act.

65. In his second report, Mr Gower did not assert that KinCare paid a dividend or made a distribution but rather identified amounts which he said had been “distributed informally” by KinCare. Mr Gower stated:

“[34] In my opinion, Ms Lindsay’s assumption that distributions or dividends are not paid out of KCS’ net surpluses relies on the assumption that the net surplus has been properly determined. I disagree with Ms Lindsay’s assumption that the surpluses have been properly determined. The reasons for my opinion are detailed in this report.

[35] Ms Lindsay’s assumption does not include in distributions and dividends the effect of the shortfall in management fees that should have been paid to KCS.”

66. About these paragraphs Mr Gower said:

“HIS HONOUR: Drop down to paragraph 34. Mr Gower, you disagree with Ms Lindsay's assumption that surpluses in KCS had been properly determined?

WITNESS GOWER: That's correct, your Honour.

HIS HONOUR: You're not saying though, as I understand it, that the audited financial statements are incorrect for any reason [of] non-compliance with the Accounting Standards or the Audit Standards, are you?

WITNESS GOWER: Your Honour, I say that the financial statements are incorrect because the disclosures are incorrect.

HIS HONOUR: You'll have to help me, I don't understand that.

WITNESS GOWER: Your Honour, matters which are disclosed in those accounts are factually incorrect.

HIS HONOUR: And this is the methodology, if you like, for certain calculations that you draw attention later; is that what you - that the point you're making?

WITNESS GOWER: That's correct.”

67. To address the issue raised by Mr Gower identified at [65] it is thus necessary to examine what Mr Gower opined was “incorrect” about KinCare’s accounts.

68. At a high level, the principal issue raised by Mr Gower was the composition and amount of the integers used to conduct an apportionment of administrative overheads provided by KinCare to related entities in each financial year. Much of the criticism levelled by Mr Gower at KinCare’s accounts relates to descriptions in those accounts, for example, the “rebate” applied to field workers. It is important to understand that ultimately, Mr Gower accepted that the critical issue was not the disclosures or descriptions in the accounts but rather the substance – the apportionments conducted.

69. Mr Gower explained the issue thus:

“… It is quite common within groups of companies that one company will provide a particular service for the whole group and then it is a matter of reasonableness as to how that cost is applied across the various entities in order to ensure that the costs relating to each entity correctly reflect the costs relating to their revenues. And so that's the genesis of this apportionment of costs. In this case … [KinCare] has incurred overhead costs which in relation to management, the provision of a head office which effectively services all of the other entities or these other related entities.”

70. Mr Gower accepted that “there's no one particular standard” for conducting an apportionment. Mr Gower and Ms Lindsay agreed that an apportionment was a matter for management to conduct. It is the role of the auditor to opine about the reasonableness of that apportionment.

71. The first, and perhaps most significant, “error” pointed to by Mr Gower in KinCare’s apportionment was what he described as “double counting” in KinCare’s accounts. As I have explained in making factual findings, KinCare was provided with field staff by the Howie Family Trust (trading as KinCare Nursing Services) and KinCare Health Services Pty Ltd. The field workers provided services to the aged and disabled clients of KinCare. The Commissioner now accepts that an arm’s length price was paid by KinCare for the services of those field staff.

209. The Commissioner submitted that KinCare was not a “public benevolent institution” because it was conducted for profit or gain. Further, KinCare lacked the requisite characteristics of a public “institution” because it was controlled and operated by members of the Howie family.

Consideration of issue 3 – was KinCare a public benevolent institution?

211. There is no real dispute between the parties about the legal test to be applied in determining whether KinCare was a public benevolent institution. The dispute was really an echo of the factual dispute in relation to the “non-profit organisation” issue. That is, was KinCare being carried on for private profit or gain, being the profit or gain of members of the Howie family?

212. I will first address the Commissioner’s six points, in the order they were addressed:

1. it is common ground that the term “public benevolent institution” is a composite or compound expression: Public Trustee at 103 per Dixon J;

2. it is also common ground that a “public benevolent institution” is one organised for the relief of poverty, sickness, destitution, or helplessness: Perpetual Trustee at 232 per Starke J; Union Trustee Co of Australia at 454 per Taylor J;

3. it may be accepted for present purposes that whether an institution is “public” depends on whether its benevolence is directed to the public at large: Australian Council of Social Service Inc v Commissioner of Pay-roll Tax (1985) 1 NSWLR 567 at 568 per Street CJ; Maughan at 397 per Williams J; Trustees of the Allport Bequest at 1338-1339 per Northrop J. The continued authority of Australian Council of Social Service after Word Investments and the precise meaning of “public at large” does not need to be determined here. KinCare’s services were directed in the relevant sense to the public at large. I do not understand the Commissioner to submit to the contrary;

4. if an organisation is conducted for individual profit or gain, it is not a “public benevolent institution”: Repromed at [42] per Debelle J. I am prepared to accept this as an accurate statement, the outer boundaries of which do not need to be determined here. For the reasons in relation to issue 1, KinCare was not conducted for private profit or gain;

5. an “institution” includes, but is not limited to, “an establishment, organization, or association, instituted for the promotion of some object, especially one of public utility, religious, charitable, educational etc”: Stratton at 158 per Gibbs J; Word Investments at [33] per Gummow, Hayne, Heydon and Crennan JJ. It will be recalled that the Commissioner accepted that one of KinCare’s objects was charitable and in any event I find that KinCare was an “institution” in the sense described in the authorities; and

6. in Pamas Foundation (Inc) v Commissioner of Taxation (1992) 35 FCR 117 at 125-126, Beaumont and Lee JJ held that “the term ‘institution’ is to be given a meaning greater than a structure controlled and operated by family members and friends”. I accept that Pamas correctly states the law. The facts found by French J, sitting as the Tribunal in that case, were far removed from the present case. The Pamas Foundation was a small and exclusive organisation. The scale of its activities was “relatively small”. The Foundation was closely integrated with the business affairs of a Dr Staer. The Foundation was “substantially engaged in commercial activity”. It was a vehicle for Dr Staer and his family to pursue “their Christian purposes”. I find that KinCare was a body which was the recipient of millions of dollars from the Commonwealth and State Governments to pursue the important work of providing home care to the aged and disabled in our society and not a “structure controlled and operated by family members and friends” of the kind addressed in Pamas.

213. I find that KinCare is a public benevolent institution because it provides benevolent relief to the aged, the disabled and Aboriginal and Torres Strait Islander people and it was not being carried on for individual profit or gain.

214. In making these findings I adopt, without repeating them all, the findings I have made at [9]-[89] and [118]-[184].

Issue 4 – were wages paid to persons engaged in work of a public benevolent nature of KinCare?

215. Both KinCare and the Commissioner simply re-iterated the submissions each made about issue 2.

Consideration of issue 4 – were wages paid to persons engaged in work of a public benevolent nature of KinCare?

216. I make the same finding as I made in relation to issue 2 at [190]-[203]. KinCare did not prove in relation to wages paid to administrative staff that those wages were paid to a person “in respect of time when the person is engaged in work of a public benevolent nature”.

217. The same conclusions as in relation to issue 2 apply. It is of course possible that by acting for companies in the KinCare Group administrative staff of KinCare may have been engaged in work of a public benevolent nature for KinCare. On all of the evidence, however, I am not satisfied that KinCare has demonstrated that to be the case.

218. It follows that in relation to the following wages paid to administrative staff by KinCare between 2010 and 2014, which I found were the following:

1. $1,264,501 for the year ended 30 June 2010;

2. $1,268,852 for the year ended 30 June 2011;

3. $1,875,225 for the year ended 30 June 2012;

4. $1,942,544 for the year ended 30 June 2013; and

5. $1,160,845 for the year ended 30 June 2014

KinCare is not entitled to the exemption in cl 12 of Sch 2 of the Payroll Tax Act.

219. The matter should be remitted to the Commissioner to calculate the amounts of payroll tax to be paid in each year having regard to these findings.

220. In relation to the year ended 2009, the Commissioner must first determine the wages paid to administrative staff in accordance with these reasons before calculating the correct amount of payroll tax payable on those wages.

Conclusion and orders

221. Whilst not successful on all issues, KinCare has been successful on the major issue litigated before me in all the relevant income years. KinCare is entitled to an award of costs in its favour.

222. I make the following orders:

1. Application allowed.

2. Objection decision revoked.

3. The assessments of payroll tax to KinCare Community Services Limited in the 2009, 2010, 2011, 2012, 2013 and 2014 years are revoked.

4. Remit the matter to the Commissioner to issue assessments in accordance with these reasons.

5. The Commissioner pay KinCare’s costs of the application.

**********

Endnotes

Amendments

06 March 2019 - [107] changed "effectation" to "effectuation" in quote; [118] changed "Hoffman LJ" to "Lord Hoffman"

Decision last updated: 06 March 2019