Pastel Pines International v Chief Commissioner of State Revenue
[2013] NSWADT 49
•01 March 2013
Administrative Decisions Tribunal
New South Wales
Medium Neutral Citation: Pastel Pines International v Chief Commissioner of State Revenue [2013] NSWADT 49 Hearing dates: 20 February 2013 Decision date: 01 March 2013 Jurisdiction: Revenue Division Before: G D Walker, Judicial member Decision: The decision under review is affirmed.
Catchwords: Payroll tax - grouping- constitution of corporation - shareholder agreement Legislation Cited: Payroll Tax Act 2007
Taxation Administration Act 1997Cases Cited: Commissioner of Pay-Roll Tax v RG Elsegood [1983] 1 NSWLR 223
FCT v Dalco (1990) 168 CLR 614Category: Principal judgment Parties: Pastel Pines International Pty Limited (Applicant)
Chief Commissioner of State Revenue (Respondent)Representation: Counsel
Ms Kaur-Bains (Respondent)
Peter G. Sterelny (Applicant,agent)
Crown Solicitor (Respondent)
File Number(s): 126091
reasons for decision
Background
This case concerns the grouping provisions of the Taxation Administration Act 1996 and the Payroll Tax Act 2007.
The applicant seeks review of the respondent's decision to treat Pastel Pines International Pty Limited ("Pastel Pines") and another entity, JPS Nominees Pty Limited ("JPS Nominees") as trustee for the Petjo Trust as a group for payroll tax purposes and to issue notices of assessment in accordance with the grouping decision for the tax years ending 30 June 2007 and 30 June 2008. The grouping decision, dated 23 September 2011 is at page 346 of Exhibit R4. The assessments issued as a result of the grouping decision are at pages 361 and 364 of Exhibit R4.
Interest was imposed at the market rate from the date liability first arose through to the date when the applicant provided a response to the notice of investigation. No penalty has been imposed.
By letter dated 24 November 2011, the applicant objected to the assessments (Exhibit R4, p.382). By letter dated May 2012, the Chief Commissioner disallowed the objection ( Exhibit R4, p 392).
In 1992 Peter Sterelny and his wife Joan Sterelny began conducting a business called JPS Agencies, which was a partnership wholly owned by them. The business distributed giftware products from various suppliers, including Pastel Pines Pty Limited, a manufacturer of such products, which was owned and operated by Mr Rodney Edwards and located in Victoria.
In April 1993, Pastel Pines Pty Limited went into liquidation. The liquidated company is of no relevance in these proceedings.
Pastel Pines International Pty Limited was formed immediately, using the assets of the liquidated corporation and operating from the same premises. The owners were Mr Roger B. Kiddle and Mr Bradley J. Edwards. JPS Agencies continued as the distributor.
In late 1993, JPS Agencies began manufacturing giftware itself while continuing to distribute giftware for Pastel Pines. JPS Agencies secured factory premises in Castle Hill, New South Wales.
In November 1995, Peter and Joan Sterelny purchased 50 percent of the shares in Pastel Pines from Mr Kiddle. Mr Edwards, through the Edwards family company Eighteenth SRJ Pty Limited ("Eighteenth") ,acquired the other 50 percent of the shares in Pastel Pines.
Following their respective acquisitions of the shares in Pastel Pines, Rodney Edwards and Peter Sterelny on 30 November 1995 became the only two directors of Pastel Pines. JPS Agencies and Pastel Pines continued to operate as separate businesses under separate ownership and with separate management structures.
JPS Nominees was registered on 7 September 1999. Peter Sterelny has been the sole director of JPS Nominees since 7 September 1999. JPS Nominees has an issued share capital of two $1 shares, of which Mr Sterelny holds one, and Mrs Sterelny the other.
JPS Nominees is the trustee of the Petjo Trust. The Petjo Trust is the family trust of Peter and Joan Sterelny and is a discretionary trust. By letter dated 18 February 2013 (Exhibit R1) the applicant conceded that Peter and Joan Sterelny were a set of persons who had a controlling interest in the business of JPS Nominees.
For reasons of administrative and marketing efficiency, Mr Edwards and the Sterelnys decided in 1999 to amalgamate the businesses of Pastel Pines and JPS Agencies, which was wholly owned by the Sterelnys. For that purpose, Pastel Pines purchased JPS Agencies, the sale being formally concluded in 2002.
The amalgamation of JPS Agencies was structured by a transfer of Pastel Pines shares from Eighteenth to the Sterelnys, the additional shares being the consideration for the transfer of the Sterelny business JPS Agencies, no finance being available for that purpose. Accordingly Eighteenth transferred 20 percent of its shares in Pastel Pines, being 10 percent of the overall issued share capital in Pastel Pines, to the Sterelnys.
As a result of the amalgamation, therefore, the shareholding in Pastel Pines was 60 percent ordinary shares held jointly by Peter and Joan Sterelny, and 40 percent ordinary shares held by Eighteenth.
The applicant maintains that despite the change in share ownership, the Pastel Pines business continued to be operated as if the Sterelnys and Eighteenth respectively owned 50 percent each. Both Mr Edwards and Mr Sterelny state that a "shareholders' agreement" was entered into that provided for the management and operation of the business as if the shareholding were 50 percent each. That agreement was never signed or lodged with ASIC. A copy of it was forwarded to the Chief Commissioner (Exhibit R4, pp.297 to 311) on the basis that the shareholders' agreement was "formalised" in August 2004. The document bears the date 1 August 2011, but the year has been altered by hand to 2004. It is not disputed that the insertion of an incorrect year resulted from the unintentional operation of an automatic updating system in the accountant's office.
As a result of financial difficulties caused by unfavourable economic conditions, in April 2010 the Sterelnys made an offer to Mr Edwards to acquire Eighteenth's holding in Pastel Pines, and in May 2010 the sale of Eighteenth's holding in Pastel Pines to JPS Nominees was completed, that change being registered with ASIC on 15 December 2012. Following the acquisition, Mr Edwards ceased to be a director of Pastel Pines on 1 May 2010. Since that date, Mr Peter Sterelny has been the sole director of the applicant corporation.
Issue
The Commissioner's grouping decision relates to two corporations, Pastel Pines and JPS Nominees. The applicant has very properly conceded that there is no issue that Peter and Joan Sterelny have a controlling interest in JPS Nominees as trustee for the Petjo Trust
Consequently the only issue in these proceedings is whether Peter and Joan Sterelny are a set of persons who have a controlling interest in Pastel Pines within the meaning of s 106I(2)(d) of the TA Act for the financial year ended 30 June 2007 and within the meaning of s 72(2)(e) of the PT Act for the financial year ended 30 June 2008.
Applicable legislation
Section 72 of the PT Act provides as follows:
(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
(f) in the case of a business carried on by a partnership-that person or set of persons:
(i) own (whether beneficially or not) more than 50% of the capital of the partnership, or
(ii) is entitled (whether beneficially or not) to more than 50% of the profits of the partnership, or
(g) in the case of a business carried on under a trust-the person or set of persons (whether or not as a trustee of, or beneficiary under, another trust) is the beneficiary in respect of more than 50% of the value of the interests in the first-mentioned trust.
(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.
(5) If:
(a) a person or set of persons is the beneficiary of a trust in respect of more than 50% of the value of the interests in the trust, and
(b) the trustee of the trust (whether alone or together with another trustee or trustees) has a controlling interest in the business of another trust,
the person or set of persons has a controlling interest in the business.
(6) A person who may benefit from a discretionary trust as a result of the trustee or another person, or the trustee and another person, exercising or failing to exercise a power or discretion, is taken, for the purposes of this Part, to be a beneficiary in respect of more than 50% of the value of the interests in the trust.
(7) If:
(a) a person or set of persons has a controlling interest in the business of a trust, and
(b) the trustee of the trust (whether alone or together with another trustee or trustees) has a controlling interest in the business of a corporation,
the person or set of persons is taken to have a controlling interest in the business of the corporation.
(8) If:
(a) a person or set of persons has a controlling interest in the business of a trust, and
(b) the trustee of the trust (whether alone or together with another trustee or trustees) has a controlling interest in the business of a partnership,
the person or set of persons is taken to have a controlling interest in the business of the partnership.
For present purposes, s106I of the TA Act is to a similar effect.
Applicant's evidence
At the hearing Mr Sterelny adopted his statement dated 16 October 2012 (Exhibit A3), which outlined the history of the applicant and stressed that the change in the shareholding consequent on the merger did not alter the 50-50 management arrangement that had prevailed until then. Mr Edwards considered that he had founded the business and refused to contemplate having less than 50 percent control of it.. Mr Sterelny believed that if he wanted the business to continue, he had no option but to agree to maintain the status quo and operate the business as if each party still owned 50 percent. The draft shareholders' agreement was amended to reflect that change but was never signed. Whenever there was a disagreement between the directors, the company accountant, Mr Wayne Griffith exercised his casting vote and resolved the differences that arose.
In cross-examination Mr Sterelny stated that the shareholders' agreement represented the final form of the agreement between the parties but had never been signed because Mr Sterelny did not see that matter as important. The business had been operating on the basis of a handshake for six years. Nevertheless, Mr Griffiths had taken him through the agreement and explained its provisions to him, and he had also obtained legal advice about it.
Mr Wayne Griffiths in his statement of 17 October 2012 (Exhibit A1) said he had been the external accountant for JPS Agencies and Pastel Pines International Pty Ltd from late 1999 until the present day. He outlined the reasons for moving Mr Sterelny's shareholding to 60 percent and that of Mr Edwards to 40 percent and the insistence of Mr Edwards on retaining 50 percent control and on Mr Griffiths acting as an independent arbitrator.
Although the shareholders' agreement was not signed, it was an effective document which both parties observed and enforced. This was illustrated by the fact that when Mr Edwards agreed to sell his shareholding and Mr Sterelny agreed to purchase it, the method of sale adopted accorded with the agreement. Mr Griffiths said in cross-examination that it embodied the agreement between the parties. It was not formally signed but was instituted and operated, as it was the fourth draft of the understanding. It worked from 1999 to 2010, the 2010 sale to Mr Edwards being based on it.
Mr Griffiths had taken Peter Sterelny through the contents of the agreement and Joan Sterelny was also conversant with it, though perhaps to a lesser extent. The agreement was never signed as other matters got in the road and formal execution was not a high priority because everyone knew the ground rules. Nevertheless it recorded the final agreement between the parties.
Mr Rodney John Edwards at the hearing adopted his statutory declaration of 23 November 2011 (Exhibit A2) in which he described the preparation of the shareholder agreement and noted that the section on voting rights which he thought might endanger his interests was deleted from the draft agreement and replaced by a provision for equal voting rights of directors. At no time during his shareholding did either party have absolute control of the company through voting rights or any other matter. In May 2010 the Sterelnys purchased his share of the business, resulting in their having 100 percent ownership of it.
In cross-examination Mr Edwards also noted that legal advice had been obtained in relation to the draft but the parties had never got around to signing it. Nevertheless it recorded the oral agreement and the company was operated within the framework of the document.
The applicant also tendered signed statements by Samantha Marie Maitland and Pamela Bliss (together Exhibit A4). Ms Maitland, sales and marketing manager of the applicant and a 5 percent shareholder in the company, was employed by the applicant in a number of capacities from 2000 onwards. The company had two directors at that time and her understanding was that each had an equal say in managing the company, and her observation confirmed that. Mr Sterelny was responsible for manufacturing and administration, and Mr Edwards for export sales and major accounts. Mrs Joan Sterelny managed the majority of smaller customers, but had a diminished role in the company after serious financial problems were encountered in 2008 -- 2009. This was a period of extreme conflict and Ms Maitland had no doubt that if Mr Sterelny had possessed control of the company at that time, its performance would have been enhanced.
Ms Bliss, the office manager of Pastel Pines, commenced employment with JPS Agencies in March 1998. From the outset she worked for both directors, Mr Edwards and Mr Sterelny. Her understanding was that both directors had an equal say in managing the business, both before and after the takeover of JPS Agencies.
In her observation that was definitely the way the company operated. During times of extreme conflict and stress between the directors, there was no doubt in her mind that if either had possessed sole control of the company, the issues would have been resolved differently.
Neither Ms Maitland nor Ms Bliss was called for cross-examination.
Mrs Joan Sterelny gave no evidence, orally or in writing.
The respondent called no oral evidence.
Applicant's submissions
In his submissions on behalf of the applicant, Mr Sterelny reiterated the applicant corporation's history and noted that JPS Nominees had been formed after the sale of JPS Agencies to Pastel Pines on 1 September 1999. After the sale of JPS Agencies, the parties had agreed to keep running the business on 50-50 basis as Mr Edwards would not accept less than a half say.
After the valuations were completed in 2002, the final agreement evolved from 2002 to 2004 to reflect how the business was operated and to deal with the question of how to resolve disagreements. The method adopted included Mr Griffiths having a casting vote on the board.
Mr Sterelny stressed that he had never attempted to "pull rank" and go outside the agreement. The arrangement to conduct the business on 50-50 basis had been disputed only by the Office of State Revenue. Whatever the position in relation to shareholding, Mr Sterelny submitted in reply, the fact was that the directors and the shareholders were the same people. The arrangement was entered into on the basis of a handshake in 1999 because everyone knew at that time that there would be some change in the shareholdings and it would take some time to decide how to run the business under the new structure.
Nothing had happened to change the 50-50 concept. Mr Sterelny thought he might not have considered the payroll tax implications sufficiently, but the fact was that everyone knew that he and Mrs Sterelny did not have control. It was unfortunate, however, that the "paperwork" did not fully reflect the true situation. The amount of tax claimed was not large but he was disputing the assessments as a matter of principle because he and Mrs Sterelny did not have control of the business.
The grouping provisions
The grouping provisions on which the Chief Commissioner seeks relies are s 106I(2)(d) of the TA Act and s 729(2)(e) of the PT Act The assessments group the applicant and JPS Nominees together such that the group benefits from only one tax threshold rather than two.
Section 106I was in force until 1 July 2007, when it was repealed by the PT Act (Schedule 4.3 [2]) and replaced by s 72 of that Act. Thus s 106I governs the financial year ending 30 June 2007, while s 72 applies to the financial year ending 30 June 2008.
The two provisions are in similar terms, with the immaterial difference that s 106I(2)(d) does not contain the words " or any class of voting shares".
The rationale behind these provisions was explained by the Court of Appeal in the context of an earlier, similar section, in Commissioner of Pay-Roll Tax v RG Elsegood & Co. Pty Limited [1983] 1 NSWLR 223 at 229 to 230. Mahoney JA adopted a submission by the Commissioner to this effect:
Tax relief was given by the Act to businesses employing less than a specified number of employees. Attempts have been, or could be, made by larger businesses to obtain that relief by splitting their businesses into a number of smaller or separate businesses, employing no more than the specified number of employees. The remedy adopted by the statute to avoid that mischief was to deny such relief to members of a "group"; to provide for the employees of " commonly controlled" businesses to be deemed to constitute a " group"; to define " group" for this purpose in wide terms so as hopefully to include all who might be involved in the avoidance of the purpose of the legislation....
Burden of proof
The applicant bears the burden of proving its case in the application for review: TA Act s 100(3). It must meet the ordinary civil standard, that is, proof on the balance (meaning preponderance) of probabilities: Ma v. Federal Commissioner of Taxation (1992) 37 FCR 225, 232. In Federal Commissioner of Taxation v Dalco (1990) 160 CLR 614, 624, Brennan J observed that " the Commissioner is entitled to rely upon any deficiency in proof of the excessiveness of the amount assessed to uphold the assessment".
Application of ss 106I and 72
Pastel Pines " carries on" the business of manufacturing and wholesaling giftware products (Exhibit R4, p 2) and its activities clearly fall within the definition of " business" within the meaning of both s 106E(a) and (b) of the TA Act and s 67(a) and (b) of the PT Act, in that they plainly constitute a trade and an activity carried on for fee or reward. JPS Nominees, it is not disputed, also carries on a business.
Pastel Pines is a corporation with liability limited by share capital. Thus s106I(2)(d) of the TA Act and s 72(2)(e) of the PT Act determine which person or persons have a controlling interest in Pastel Pines. The share capital and voting rights of the company are determined by the constitution of the corporation.
Pastel Pines was registered in 1993 (under its original shelf name of Rumnee Pty Ltd) on the basis of a memorandum and articles of association, in accordance with the then current practice (Exhibit R2). On 1 July 1998, the memoranda and articles of existing corporations were deemed to be constitutions (former Corporations Law s 1415, inserted by Act No. 61 of 1998).Section 9 the Corporations Act 2001 also defines corporate constitutions as including memoranda and articles.
Clauses 2, 4(1), 5 and 50 to 61 of the Pastel Pines constitution set out the voting rights attaching to the ordinary shares issued . Clause 2 (b) of the constitution provides as follows:
(b) All issued shares in the company which are issued from time to time shall be called Ordinary shares and shall be deemed to be of one class (with the exception of any shares which by terms of issue by the directors pursuant to Regulation 3 are classified as Ordinary Shares of any class or as Preference Shares of any type or class) and are herein called "Voting Shares" unless by the terms of the issue they are declared to be non-voting shares.
Clause 53 of the constitution provides:
Subject to clause 62(b)(i) of these Regulations and to any rights or restrictions for the time being attached to any classes of shares, at meetings of members or classes of members each member entitled to vote may vote in person or by proxy or by attorney and on a show of hands every person present in person or by proxy or by attorney or other duly authorised representative shall have one vote for each share he holds.
As Peter and Joan Sterelny together hold 60 percent of the issued ordinary shares in Pastel Pines (Exhibit R4 pp 1-2, 234; Exhibit R3, annexure A), they have the power to exercise more than 50 percent of the voting power in the corporation.
The shareholders' agreement
The applicant does not dispute that after Pastel Pines acquired JPS Agencies, the Sterelnys, as a set of persons, jointly owned 60 percent of the issued shares in Pastel Pines. On the basis of the evidence of Messrs Sterelny, Edwards and Griffiths, and the statements in Exhibit A4, the applicant submits, however, that there was an agreement with Mr Edwards that control of the business would remain on a 50-50 basis, although that agreement was not registered with ASIC. Consequently, in the applicant's submission, Peter and Joan Sterelny did not have the necessary control of more than 50 percent of the voting power attached to the shares owned by them in Pastel Pines.
A corporate constitution has the effect of an enforceable contract: Corporations Act 2001 s 140(1). In general it should be more strictly construed than other contracts because it is an instrument on which third parties may rely: Simon v HPM Industries Pty Ltd (1989) 15 ACLR 427, 433.
The evidence of all three of the witnesses who referred to the point makes it clear that the shareholders' agreement document (Exhibit R4, pp 297-311), although unsigned, embodied the shareholders' agreement in its final form. All three also explained why it had not been signed.
Mr Griffiths said it was the final agreement resulting from the oral discussions about the control of Pastel Pines. He had taken Peter Sterelny through the agreement and explained its contents to him. Mr Sterelny and Mr Edwards also both obtained legal advice about it. Mrs Joan Sterelny was also aware of its contents.
Mr Sterelny confirmed that the document was the final form of the oral agreement. It was a written record of their understanding about the control of Pastel Pines. Mr Griffiths had gone through it with him and he also had sought legal advice about the agreement.
Mr Edwards stated that the document reflected the final oral agreement about the control of Pastel Pines. The McLaren law firm had looked at it for him.
The three witnesses explained that they had never got around to signing the document because they had always conducted the business on a handshake and formally executing the agreement had not seemed to be a high priority. In his submissions Mr Sterelny did not dispute that the agreement document embodied the terms of the understanding.
The question then becomes whether the agreement altered the voting power in Pastel Pines. Recital C and Clause 2(3) of the agreement provide that it prevails over the constitution.Clause 4.1 deals with the annual general meeting; clause 4.2 the matters that can be raised at shareholders' meetings. Clause 4.3 deals with the board of directors and clause 4.4 directors' voting rights. Those provisions deal with Mr Edwards' concerns about his position under a 60-40 shareholding structure, but only in relation to the directors' level.
The evidence therefore shows that the voting power attached to the respective shareholdings (s 106I(2)(d) and s 72(2)(e)) remains to be determined by the ownership of the shares and the agreement changes nothing about voting rights at the shareholder level.
The substantial amount of evidence dealing with the 50-50 running of the business is therefore irrelevant because it relates only to the board of directors and the Chief Commissioner does not rely on the powers of directors. As no explanation was offered for the absence of evidence from Mrs Joan Sterelny, it might have been possible to invoke Jones v Dunkel (1959) 101 CLR 298, but as the evidence has evolved it is not necessary to do so.
As Peter and Joan Sterelny thus had a controlling interest in both Pastel Pines and JPS Nominees, they are deemed to constitute a primary group within s 106I(1) and s 72(1). They thus exceeded the statutory threshhold and were assessed accordingly (Exhibit R4 pp 220, 347,361-370).
The decision under review is therefore affirmed.
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Decision last updated: 14 March 2013
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