Mastronardo v Chief Commissioner of State Revenue

[2019] NSWCATAD 256

Civil and Administrative Tribunal

New South Wales

Medium Neutral Citation:	Mastronardo v Chief Commissioner of State Revenue [2019] NSWCATAD 256
Hearing dates:	8 November 2019
Date of orders:	12 December 2019
Decision date:	12 December 2019
Jurisdiction:	Administrative and Equal Opportunity Division
Before:	R L Hamilton SC, Senior Member
Decision:	(1)   The respondent’s decision is affirmed. (2)   If the respondent wishes to seek costs he is to file and serve written submissions within 14 days after the publication of these reasons. The submissions are to also address the question of whether the costs issue is suitable to be determined "on the papers" without the need for a hearing. (3)   The applicant is to file and serve any submissions in reply within 14 days after service of the respondent's submissions.
Catchwords:	TAXES AND DUTIES- -payroll tax-grouping of individual and corporation-meaning of “business”-exclusion from group or “degrouping”-onus of proof
Legislation Cited:	Administrative Decisions Review Act 1997 Interpretation Act 1987 Payroll Tax Act 2007 Taxation Administration Act 1996
Cases Cited:	Lombard Farms Pty Ltd v Chief Commissioner of State Revenue [2013] NSWADTAP 42
Texts Cited:	None cited
Category:	Principal judgment
Parties:	Antonio Mastronardo (Applicant) Chief Commissioner of State Revenue (Respondent)
Representation:	Counsel: A Byrne (Respondent)   Solicitors: JT Law Pty Ltd (Applicant) Crown Solicitor (Respondent)
File Number(s):	2019/0043646
Publication restriction:	Nil

REASONS FOR DECISION

1. This matter provides an interesting example of the piercing of the corporate veil to hold directors and shareholders liable for the payroll tax debts of companies.

2. In the present case it was determined that under Part 5 of the Payroll Tax Act 2007 that the applicant was grouped with companies of which he was a shareholder and/or director for the payroll tax years 2010 - 2012.

3. The applicant was served with notice of assessment on the basis of joint and several liability for the payroll tax of two of the companies with which he was grouped. Every member of a group is jointly and severally liable for the amount of the payroll tax which another member of the group has failed to pay (S 80 (2) Payroll Tax Act 2007).

4. The applicant objected to the assessment on the basis that he was not part of a group for payroll tax purposes pursuant to Part 5 Payroll Tax Act 2007, and if he was he should have been 'degrouped' by exercise of the Chief Commissioner's discretion.

5. The objection was disallowed and the Chief Commissioner refused to exercise his discretion under S 79 of the Payroll Tax Act 2007 to exclude the applicant from the group.

6. The applicant has sought administrative review of the grouping determination and the decision by the respondent not to exercise his discretion to exclude him from the group

7. The Tribunal has jurisdiction through section 96 Taxation Administration Act 1996 (TAA) and s 9 Administrative Decisions Review Act 1997. The applicant bears the onus of proof that the assessment was excessive (S 100 (3) TAA).

The Facts

8. During the relevant period there was a group of 15 companies of which the applicant was a director and/or a direct or indirect shareholder (the "Remo group"). The applicant did not dispute that these 15 companies formed a group for payroll tax purposes.

9. The applicant was the sole director of 13 of the Remo group companies during the relevant period and one of two directors of the other two group companies. His wife was the other director of these two companies. ASIC records confirm this. This was not disputed.

10. The applicant was the sole or majority shareholder of six of the Remo group companies. His wife was the sole shareholder of one company. The applicant and his wife held one of the group companies 50:50. Six of the remaining group companies were held by other corporate members of the group. One member of the group was held as to 50% by another group member and 50% by another company with the same registered office address. As stated earlier this grouping of 15 companies was not challenged by the applicant.

11. The directorships and membership of the group companies were summarised in a submission document (or "aide memoire") provided by the respondent which was accepted by the applicant as correct.

12. Relevantly the applicant was the sole director of the two group companies which had failed to pay payroll tax.

13. The applicant was also the registered proprietor of two parcels of land in Five Dock NSW at the commencement of the relevant period. The parcels of land were located at 49 Queens Road and 97 - 99 Queens Road Five Dock.

14. The parcels of land were developed over the relevant period by two companies in the Remo group (the 'development companies').

15. The applicant allowed the development companies to conduct the development activities on the parcels of land. Security was provided to the bank for the development finance to the development companies by the applicant granting a mortgage over each of the parcels of land that he owned and giving a personal guarantee of development companies' obligations to the bank.

16. The development of the land appears from the applicant's affidavit of 6 August 2019 to have started out as an unwritten ‘joint venture’ between the applicant and his son through their family entities. The arrangement apparently came to an end in August 2009 when the applicant and his son entered into a "Separation Agreement" which was in evidence.

17. The respondent objected to evidence concerning the ‘joint venture’ and its termination, on technical grounds, including the absence of documentation and corroboration of the terms of the arrangement. I allowed the objection but will proceed on the basis that the applicant was stating his understanding of the arrangement. Not that much turns on it. The applicant argued that as a result of the termination of the arrangement with his son that he continued to have obligations towards the son and that this meant that he did not ‘control’ the companies.

18. I cannot follow the logic here and reject the submission.

The Legislation

19. Section 72 Payroll Tax Act 2007 provides in relevant part as follows :

72   Groups of commonly controlled businesses

(1)  If a person or set of persons has a controlling interest in each of 2 businesses, the persons who carry on those businesses constitute a group.

Note.

Section 79 (Exclusion of persons from groups) allows the Chief Commissioner, for payroll tax purposes, to exclude persons from a group constituted under this section in certain circumstances.

(2)  For the purposes of this section, a person or set of persons has a controlling interest in a business if:

(a)  in the case of 1 person—the person is the sole owner (whether or not as trustee) of the business, or

(b)  in the case of a set of persons—the persons are together as trustees the sole owners of the business, or

(c)  in the case of a business carried on by a corporation:

(i)  the person or each of the set of persons is a director of the corporation and the person or set of persons is entitled to exercise more than 50% of the voting power at meetings of the directors of the corporation, or

(ii)  a director or set of directors of the corporation that is entitled to exercise more than 50% of the voting power at meetings of the directors of the corporation is under an obligation, whether formal or informal, to act in accordance with the direction, instructions or wishes of that person or set of persons, or

(d)  in the case of a business carried on by a body corporate or unincorporate—that person or set of persons constitute more than 50% of the board of management (by whatever name called) of the body or control the composition of that board, or

(e)  in the case of a business carried on by a corporation that has a share capital—that person or set of persons can, directly or indirectly, exercise, control the exercise of, or substantially influence the exercise of, more than 50% of the voting power attached to the voting shares, or any class of voting shares, issued by the corporation, or…

(3)  If:

(a)  2 corporations are related bodies corporate within the meaning of the Corporations Act 2001 of the Commonwealth, and

(b)  1 of the corporations has a controlling interest in a business,

the other corporation has a controlling interest in the business.

(4)  If:

(a)  a person or set of persons has a controlling interest in a business, and

(b)  a person or set of persons who carry on the business has a controlling interest in another business,

the person or set of persons referred to in paragraph (a) has a controlling interest in that other business.

20. Section 67 Payroll Tax Act 2007 provides as follows:

67   Definitions

In this Part:

business includes:

(a)  a profession or trade, and

(b)  any other activity carried on for fee, gain or reward, and

(c)  the activity of employing one or more persons who perform duties in connection with another business, and

(d)  the carrying on of a trust (including a dormant trust), and

(e)  the activity of holding any money or property used for or in connection with another business,

whether carried on by 1 person or 2 or more persons together.

group means a group constituted under this Part, but does not include any member of the group in respect of whom a determination under Division 4 is in force.

21. The applicant has an ABN and is registered for GST purposes. In his affidavit he states that he commenced developing his Queens Road properties in conjunction with his son. The developments were to be multi-storey, multi-unit developments. Development companies under his control were incorporated to conduct the development work on his properties. The properties were used as security for finance. A commercial, profit-making purpose can be readily inferred, and certainly has not been negatived.

22. Without deciding the matter it could be found that the applicant was carrying on business according to ordinary concepts. I prefer to rely on the extended, inclusive definition of ‘business’ in s 67 Payroll Tax Act 2007.

23. Mr Mastronardo conducted an activity for fee, gain or reward; and he also carried on the activity of holding property (the land) for or in connection with the business of the development companies.

24. He was the sole controller of this “landholding business” (s 72(2)(a)). He had a controlling interest in the corporations in the Remo group (s 72(2)(c)(i) and (e) and would be treated as having a controlling interest in them all by s 72(4). They constitute a group under s 72(1). (All references are to Payroll Tax Act 2007).

25. This provides one method of grouping the applicant.

26. Section 74 Payroll Tax Act 2007 provides that smaller groups are subsumed into larger groups.

27. A second method of grouping is provided by Section 73 Payroll Tax Act 2007 relevantly as follows:

73   Groups arising from tracing of interests in corporations

(1)  An entity and a corporation form part of a group if the entity has a controlling interest in the corporation.

Note.

Section 79 (Exclusion of persons from groups) allows the Chief Commissioner, for payroll tax purposes, to exclude persons from a group constituted under this section in certain circumstances.

(2)  For the purposes of this section, an entity has a controlling interest in a corporation if the corporation has share capital and:

(a)  the entity has a direct interest in the corporation and the value of that direct interest exceeds 50%, or

(b)  the entity has an indirect interest in the corporation and the value of that indirect interest exceeds 50%, or

(c)  the entity has an aggregate interest in the corporation and the value of the aggregate interest exceeds 50%.

(3)  Division 3 applies for the purposes of the interpretation of this section.

Note.

Division 3 sets out the manner for determining whether an entity has a direct interest, indirect interest or aggregate interest in a corporation, and the value of such an interest.

(4)  In this section:

associated person means a person who is associated with another person in accordance with any of the following provisions:

(a)  persons are associated persons if they are related persons,

(b)  natural persons are associated persons if they are partners in a partnership,

(c)  private companies are associated persons if common shareholders have a majority interest in each private company,…

domestic partner of a person means a person to whom the person is not married but with whom the person is living as a couple on a genuine domestic basis (irrespective of gender).

entity means:

(a)  a person, or

(b)  2 or more persons who are associated persons (as defined in this section).

private company means a company that is not limited by shares, or whose shares are not quoted on the Australian Stock Exchange or any exchange of the World Federation of Exchanges.

related person means a person who is related to another person in accordance with any of the following provisions:

(a)  natural persons are related persons if:

(i)  one is the spouse or domestic partner of the other, or

(ii)  the relationship between them is that of parent and child, brothers, sisters, or brother and sister,

(b)  private companies are related persons if they are related bodies corporate within the meaning of the Corporations Act 2001 of the Commonwealth,

(c)  a natural person and a private company are related persons if the natural person is a majority shareholder or director of the company or of another private company that is a related body corporate of the company within the meaning of the Corporations Act 2001 of the Commonwealth,…

28. The applicant argued that he should not be regarded as an “entity” in the s 73(1) context despite the definition in s73(4) which refers to an entity meaning a “person”. Section 21 of the Interpretation Act 1987 provides as follows:

person includes an individual, a corporation and a body corporate or politic.

29. The applicant says that this interpretation is absurd as it would make the sole director and shareholder of a company personally liable for the unpaid payroll tax debts of the company. It may come as a surprise to such directors and shareholders, but it is the effect of the plain words of the section and not displaced by the context. There also arises a question about the interaction with Division 2 of Part 7 of the Taxation Administration Act 1996 (s 47A and following) designed to enable collection of corporate tax debts from directors. But this issue does not need to be dealt with here.

30. The applicant has not otherwise proved that he did not have a controlling interest in Remo group companies. He has not met the onus of proof that he was not grouped by operation of S 73 by having a controlling interest (direct or indirect) in the group companies.

31. Both ss.72 and 73 contain a note referring to the Chief Commissioner’s discretion to exclude a person from the group. S 79 of the Payroll Tax Act 2007 provides relevantly as follows:

79   Exclusion of persons from groups

(1)  The Chief Commissioner may, by order in writing, determine that a person who would, but for the determination, be a member of a group is not a member of the group.

(2)  The Chief Commissioner may only make such a determination if satisfied, having regard to the nature and degree of ownership and control of the businesses, the nature of the businesses and any other matters the Chief Commissioner considers relevant, that a business carried on by the person, is carried on independently of, and is not connected with the carrying on of, a business carried on by any other member of that group.

(3) The Chief Commissioner cannot exclude a person from a group if the person is a body corporate that, by reason of section 50 of the Corporations Act 2001 of the Commonwealth, is related to another body corporate that is a member of that group.

(4) This section extends to a group constituted by reason of section 74 (Smaller groups subsumed by larger groups)…

32. The Chief Commissioner submits in the first place that there is no room for the exercise of discretion if the group member does not carry on business. It has already been found that the applicant carries on business in the extended s 67 sense, so s 79 is enlivened.

33. The applicant accepts that the Remo companies are grouped. He is grouped with them by operation of s 72 and 73. S 74 operates to subsume smaller groups into a larger aggregated group.

34. Having concluded the applicant was grouped by operation of the provisions of Part 5 Division 2 Payroll Tax Act 2007 and is thus jointly and severally liable prima facie for the payroll tax debts of group companies, the issue is whether he should be excluded from the group by a determination under S 79 of the Payroll Tax Act 2007, which is a matter of discretionary judgement.

35. A determination to exclude a person from a group may only be made if, in this case the Tribunal in the Chief Commissioner's place is satisfied, “having regard to the nature and degree of ownership and control of the businesses, the nature of the businesses and any other matters the [Tribunal] considers relevant, that a business carried on by the person, is carried on independently of, and is not connected with the carrying on of, a business carried on by any other member of that group”

36. The applicant carries on a business as defined in S 67 Payroll Tax Act 2007 through the ownership of the land at numbers 49 and 97 - 99 Queens Road (the "landholding business"). Is that business is carried on independently of and not connected with the carrying on of business by any other member of the group?

37. It has been held that independence and a lack of connection between businesses is not absolute, but any connection or dependence must be immaterial or insignificant or not commercially meaningful (see Lombard Farms Pty Ltd v Chief Commissioner of State Revenue [2013] NSWADTAP 42 at paras 43 – 51).

38. Looking at the factors contained in s 79, the nature and degree of ownership and control of the businesses has already been described in paras 8-15 above.

39. The applicant's landholding business (the properties in Queens Road) is wholly owned and controlled by him.

40. The nature of the landholding business and the activities conducted on the land by development companies has been discussed in paragraph 15.

41. There is no clear evidence of the nature and extent of the involvement of the other Remo group companies in the developments conducted by the development companies on the property of the landholding business; it would probably be too much to infer that other group companies were involved in the developments, but the applicant has not negatived any such involvement.

42. Turning to other matters considered to be relevant the respondent drew attention to vital role of the Queens Road land in the business of the development companies; and the role played by the applicant in directing the businesses of group companies. Clearly the landholding business was closely tied to, and commercially meaningful to the development companies’ businesses at the very least. The applicant owned and controlled and made the key decisions for them all. The land was used as security for development financing, and the applicant gave a personal guarantee to the Bank.

43. The applicant did not put on any evidence which would establish that the landholding business was independent of and not connected with the business of any other member of the group. The Separation Agreement was of no assistance to the applicant. Indeed it reinforced the conclusion that there was a lack of independence and obvious connection. It left the applicant in sole control.

44. In the result I am not satisfied that an S 79 degrouping determination should be made. I affirm the decision of the Chief Commissioner.

45. The Chief Commissioner indicated he could seek costs but deferred dealing with the issue until the Tribunal's decision on the substantive question was published.

46. If the respondent wishes to seek costs he should file and serve written submissions within 14 days after the publication of these reasons. The submissions should also address the question of whether the costs issue is suitable to be determined "on the papers" without the need for a hearing.

32. The applicant should file and serve any submissions in reply within 14 days after service of the respondent's submissions.

Orders

1. The respondent’s decision is affirmed.

2. If the respondent wishes to seek costs he is to file and serve written submissions within 14 days after the publication of these reasons. The submissions are to also address the question of whether the costs issue is suitable to be determined "on the papers" without the need for a hearing.

3. The applicant is to file and serve any submissions in reply within 14 days after service of the respondent's submissions.

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I hereby certify that this is a true and accurate record of the reasons for decision of the New South Wales Civil and Administrative Tribunal.

Registrar

I hereby certify that this is a true and accurate record of the reasons for decision of the Civil and Administrative Tribunal of New South Wales.

Registrar

Decision last updated: 12 December 2019