Port Augusta Medical Centre Pty Ltd v Commissioner Of State Taxation - [2011] SASC 31

Supreme Court of South Australia
(Civil)
PORT AUGUSTA MEDICAL CENTRE PTY LTD v COMMISSIONER OF STATE TAXATION
[2011] SASC 31
Judgment of The Honourable Justice Peek
10 March 2011
TAXES AND DUTIES - PAY-ROLL TAX - LIABILITY TO TAXATION - EXEMPTIONS - GROUPING PROVISIONS
Appellant, a medical services company, appealed pursuant to s 92 of the Taxation Administration Act 1996 (SA) against a refusal by the Commissioner of State Taxation to exclude the appellant from a “group” for the purposes of the Pay-Roll Tax Act 1971 (SA) - appellant grouped under grouping provisions of the Act with four other companies (Vay P/L, Guyram P/L, Bhola P/L and Yueng P/L) – the two directors and shareholders of the appellant were also directors and shareholders of these four related entities.
Whether the appeal is a de novo hearing – what is the correct test to be applied in assessing whether to de-group the appellant from the group – whether the business carried on by the appellant is not substantially connected with the businesses carried on by the other four group members – whether the business carried on by the appellant was carried on substantially independently of the businesses carried on by the other four group members.
Held: appeal dismissed - appeal is a de novo hearing - legal test under s 18I(1) of Pay-Roll Tax Act 1971 (SA) involves satisfaction of two broad tests before appellant can be severed from group - both tests must be satisfied in relation to each business carried out by each member of the group - there is no satisfaction that the business carried on by the appellant is not substantially connected with the businesses carried on by the other four group members - not necessary to consider the independence test.
Taxation Administration Act 1996 (SA) s 82, 92, 96; Pay-Roll Tax Act 1971 (SA) s 18I; Medical Practice Act 2004 (SA); Pay-Roll Tax Assessment Act 1971 (NSW) s 16H, referred to.
Cyril Henschke Pty Ltd v Commissioner of State Taxation (2008) 104 SASR 1; Commissioner of Stamps v Rivington Farms Pty Ltd (1981) 28 SASR 169; Mead Packaging (Aust) PL v Commissioner of Pay-Roll Tax (1978) 78 ATC 4,164; Crusher Holdings Pty Ltd v Commissioner of Taxes (NT) (1994) 117 FLR 485; Plummers Border Valley Orchards Pty Ltd v Commissioner of Taxation (NT) (2002) ATC 4,530; John French Pty Ltd v The Commissioner for Pay-Roll Tax [1984] 1 Qd R 125, applied.
Commissioner of Stamps v Garrett F Hunter (1997) 69 SASR 275, discussed.
Denham Constructions Pty Ltd v Chief Commissioner of State Revenue (NSW) (1998) 99 ATC 4,139; Re Artistic Pty Ltd and Commissioner of State Revenue (2006) 62 ATR 372; Commissioner of Pay-Roll Tax v R G Elsegood & Co Pty Ltd [1983] 1 NSWLR 223; Baxter v Chief Commissioner of Pay-Roll Tax (NSW) (1986) 7 NSWLR 122; Chief Commissioner of State Revenue v Tasty Chicks Pty Ltd [2010] NSWCA 326; Balgra Office Enterprises Pty Ltd v Commissioner of State Taxation (2008) 253 LSJS 381, considered.

WORDS AND PHRASES CONSIDERED/DEFINED
"carried on substantially independently of"; "not substantially connected with"

PORT AUGUSTA MEDICAL CENTRE PTY LTD v COMMISSIONER OF STATE TAXATION
[2011] SASC 31
Civil

PEEK J. Port Augusta Medical Centre Pty Ltd appeals pursuant to s 92 of the Taxation Administration Act 1996 (SA) against a refusal by the Commissioner of State Taxation to exclude the appellant from a “group” for the purposes of the Pay-Roll Tax Act 1971 (SA).
Pay-Roll Tax Act 1971 (SA)
Pursuant to the Pay-Roll Tax Act 1971 (SA) (hereafter “the Act”), pay-roll tax is payable by employers on paid taxable wages exceeding a total of $504,000 in any financial year.[1] Since an employer could avoid paying pay-roll tax by operating a business through a series of different employing entities each separately falling beneath the threshold amount,[2] certain businesses are “grouped” together for the purpose of calculating whether the threshold has been met.[3] The Act confers on the Commissioner a power under s 18I of the Act to exclude group members from a particular group[4] and this provision will be considered below.
[1]    Sections 11A and 13A of the Act (at the relevant time). The rate was 5.5% from 1 July 2004 to 30 June 2006 and 5.25% from 1 July 2007.
[2]    Commissioner of Pay-Roll Tax v R G Elsegood & Co Pty Ltd [1983] 1 NSWLR 223, 229-230 per Mahoney JA; Crusher Holdings Pty Ltd v Commissioner of Taxes (1994) 117 FLR 485, 486 per Martin CJ.
[3]    See ss 18B-18H of the Act.
[4]    The purpose is said to be to prevent injustice in particular cases: Plummers Border Valley Orchards Pty Ltd v Commissioner of Taxation (NT) (2002) ATC 4530, 4,537 per Riley J; Baxter v Chief Commissioner of Payroll Tax (NSW) (1986) 7 NSWLR 122, 131 per Yeldham J.
The entities comprising the relevant “group”
The appellant Port Augusta Medical Centre Pty Ltd (hereafter PAMC P/L) was grouped with four other corporate entities, Dr V.K.P. Yeung Pty Ltd, Dr R. Bhola Pty Ltd, Vay Nominees Pty Ltd, and Guyram Pty Ltd. The appellant does not contend that this initial grouping was invalid. A brief overview of these entities and their relationships inter se is as follows.
Dr V.K.P. Yeung Pty Ltd (“Yeung P/L”) which carried on the business of a medical practitioner under the Medical Practice Act 2004 (SA) and was owned and controlled by Dr Yeung and his wife; Dr R. Bhola Pty Ltd (“Bhola P/L”) which carried on the business of a medical practitioner under the Medical Practice Act 2004 (SA) and was owned and controlled by Dr Bhola and his wife; Vay Nominees Pty Ltd (“Vay P/L”) which was the trustee of the Victor Yeung Family Trust Fund; and Guyram Pty Ltd (“Guyram P/L”) which was the trustee of the Bhola Family Trust Fund.
Dr Yeung and Dr Bhola were the sole directors and the sole shareholders of the appellant which in turn was trustee of both the PAMC Unit Trust (which was originally the owner of the land and buildings of PAMC and Beulah Park medical centres) and PAMC Unit Trust No 2 which owned the business of PAMC.
All of the profits from the operations of the appellant were required to be paid to the PAMC Unit Trust No 2 which in turn distributed those profits to the unit trust holders, Vay P/L and Guyram P/L which in turn made distributions to the beneficiaries of the Yeung Family Trust and the Bhola Family Trust who were all members of the Yeung and Bhola immediate families respectively.
Vay P/L and Guyram P/L originally had equal holdings in both the PAMC Unit Trust and PAMC Unit Trust No 2, but had transferred their units in PAMC Unit Trust to Dr Yeung’s and Dr Bhola’s respective superannuation funds which then came to own the land and buildings of PAMC.
The following diagram, submitted by counsel for the respondent, represents in diagrammatical form the above structures:[5]
[5] I have noted one typographical error in the diagram. In the top right hand box of the diagram, the words “Trustee of Bhola Family Trust” should read “Trustee of Yeung Family Trust”.
History of the present appeal to the Supreme Court
From about 2007 the accountants and solicitors for the appellants entered into correspondence with the respondent regarding the liability of the appellant for pay-roll tax for the period 1 July 2002 to 21 January 2007, and, in particular, whether the appellant should be excluded from the Group under s 18I(1).
On 11 July 2007, the Commissioner wrote to the appellant’s accountant and informed him that he was not satisfied that the business of the appellant was carried on substantially independently, and was not substantially connected with the carrying on of the businesses of Yeung P/L, Vay P/L, Bhola P/L and Guyram P/L. The Commissioner gave the following reasons for his decision:
Although not in order, some of the reasons for the above decision include the following:
·Vay Nominees Pty Ltd ATF the Yeung Family Trust and Guyram Pty Ltd ATF the Bhola Family Trust each held 50% of the units in the Port Augusta Medical Centre Unit Trust No 2.
·Vay Nominees Pty Ltd ATF the Yeung Family Trust and Guyram Pty Ltd ATF the Bhola Family Trust each received 50% of the profits made by “Port Augusta Medical”.
·The directors of “Port Augusta Medical” were Dr V P K Yeung and Dr R Bhola.
·Dr V P K Yeung and Dr R Bhola were cheque signatories of “Port Augusta Medical”.
On 5 November 2008 the Commissioner again declined to exclude the appellant from the constituted group and wrote to the solicitors of the appellant stating that Revenue SA was of the same opinion as that previously expressed in his letter of 11 July 2007. On this occasion the Commissioner provided the following reasons for his decision:
The main reasons for the above decision were as previously advised in my letter dated 11 July 2007 and also includes the following:
·Dr Yeung and Dr Bhola would have been responsible for hiring the Practice Managers.
·The Bhola Superannuation Fund and the Yeung Superannuation Fund jointly owned the property on which PAMC is located.
·Dr Yeung and Dr Bhola signed the agreement between PAMC and the medical practitioner as directors of PAMC.
By notice of objection dated 21 December 2008 the appellant, pursuant to s 82 of the Taxation Administration Act 1996 (SA), objected to the Treasurer of South Australia against the decision of the respondent.
On 30 June 2009 the Treasurer disallowed the appellant’s objection and confirmed the decision of the Commissioner. The Treasurer gave the following reasons for his decision:
I am not satisfied that PAMC carried on a business substantially independently of, and not substantially connected with the carrying on a business carried on by any other member of the group mentioned above. I consider the reasoning of Doyle CJ in Commissioner of Stamps v Garrett F Hunter (1997) 69 SASR 275 to be applicable in the present case, and I do not think the present circumstances can be sufficiently distinguished.
The nature of the present appeal to the Supreme Court
Following the decisions referred to above, the appellant appealed to the Supreme Court and sought orders revoking the assessment of taxation and requiring that a fresh assessment be made on the basis that the appellant should not be treated as a member of a group for the purposes of the Pay-Roll Tax Act 1971 (SA). It was agreed that the appellant claimed exclusion from the “Group” for the years ending 30 June 2005, 30 June 2006 and the period from 1 July 2006 to 31 January 2007 (i.e. from 1 July 2004 to 31 January 2007).
I note that ss 96-98 of the Taxation Administration Act 1996 (SA) provide:
96—Grounds of appeal
(1)     The appellant’s and respondent’s cases on an appeal are not limited to the grounds of the objection or the reasons for the determination of the objection or the facts on which the determination was made.
(2)     However, if the objection was to a reassessment, any limitation of the matters to which the objection could relate under Division 1 applies also to the appeal.
97—Onus on appeal
On an appeal, the appellant has the onus of proving the appellant’s case.
98—Determination of appeal
On an appeal, the Supreme Court may do one or more of the following:
(a)confirm or revoke the assessment or decision to which the appeal relates;
(b)make an assessment or decision in place of the assessment or decision to which the appeal relates;
(c)make an order for payment to the Commissioner of any amount of tax that is assessed as being payable but has not been paid;
(d)     make any further order as to costs or otherwise as it thinks just.
It was agreed by the parties that the appeal was properly brought pursuant to s 92 of the Taxation Administration Act 1996 (SA) and that such appeal is an appeal de novo, conducted against the background that there has been no previous judicial hearing. This would appear to be consistent with the approach of Gray J in Cyril Henschke Pty Ltd v Commissioner of State Taxation[6] where his Honour said in relation to a similar provision:[7]
This appeal is not an appeal strictly so-called. It is an appeal de novo, to be conducted against the background that there has been no prior hearing. The Stamp Duties Act contemplates a full hearing inter partes, with each party having the opportunity to tender evidence, to test opposing evidence, and to present submissions.
[6] (2008) 104 SASR 1.
[7] (2008) 104 SASR 1, 13 [36]. See, also Balgra Office Enterprises Pty Ltd v Commissioner of State Taxation (2008) 253 LSJS 381, per Gray J.
There may be some outstanding issues surrounding the precise application and interpretation of the above provisions and the nature of the present appeal.[8] However, it is not necessary to address such matters further in the present case since I have come to the view that approaching the right of appeal on its most favourable interpretation for the appellant, the present appeal cannot succeed.
[8] For example, I note that in the recent decision of Chief Commissioner of State Revenue v Tasty Chicks Pty Ltd [2010] NSWCA 326, the New South Wales Full Court decided that the right of appeal there under consideration was regulated by the Avon Downs approach. However, the legislation there under consideration was relevantly different to the present South Australian legislation.
The relevant facts
There were a number of witness affidavits received by consent. Although there was some cross-examination, there was no challenge to the credibility of the various witnesses and I find that each of the witnesses was endeavouring to tell the truth as to the circumstances within his recollection. The facts are uncontested and are essentially as follows.
Dr Ramdyal Bhola and Dr Victor Yeung first met each other while practising at Konanda Medical Clinic in Port Augusta in 1977. In about 1982, they commenced to practise at Carlton Medical Centre, also at Port Augusta. Both Dr Bhola and Dr Yeung incorporated their respective medical practices and provided medical treatment at Carlton Medical Centre through these corporate entities as corporate medical services providers.
In about 1990, Dr Bhola and Dr Yeung decided to start up their own medical practice centre, Port Augusta Medical Centre (“PAMC”). Dr Bhola then owned land in Gibson Street, Port Augusta, where PAMC was to be established and Dr Yeung purchased a half interest in that land, each of the doctors then owning a half share.
PAMC P/L was incorporated in 1991 as trustee for Port Augusta Medical Centre Unit Trust. Funding for the building of the PAMC building was provided by Guyram P/L (as trustee of the Bhola Family Trust) and Vay P/L (as trustee of the Yeung Family Trust) in addition to a bank loan.[9] Dr Bhola and Dr Yeung, and their wives, were the only shareholders of Guyram P/L and Vay P/L.
[9] PAMC P/L repaid this funding to Guyram P/L and Vay P/L in 1993.
Dr Bhola and Dr Yeung ceased working at Carlton Medical Centre on 16 April 1991 and on that date the appellant (as trustee of PAMC Unit Trust) started business as PAMC in Gibson Street, Port Augusta.
Shortly thereafter, PAMC Unit Trust transferred the PAMC business to PAMC Unit Trust 2. PAMC Unit Trust remained the owner of the land and buildings. At about the same time, Vay P/L and Guyram P/L transferred their units in PAMC Unit Trust to Dr Yeung’s and Dr Bhola’s respective superannuation funds.
The medical practice at PAMC grew rapidly and by 1999 there were about fourteen doctors carrying on their practices at PAMC, including Dr Bhola and Dr Yeung.
In 2004, PAMC Unit Trust purchased the land and buildings on which the Parade Medical Centre in Beulah Park was situated and at the same time PAMC Unit Trust No 2 purchased the business of the Parade Medical Centre. Dr Bhola and Dr Yeung, as directors of the appellant, commenced to run the Parade Medical Centre business in much the same way as they were running PAMC.
Section 18I(1) of the Pay-Roll Tax Act 1971 (SA)
Section 18I(1) is the most important provision for present purposes and at the relevant time provided:
18I––Exclusion of persons from groups
(1)Where the Commissioner is satisfied, having regard to the nature and degree of ownership or control of the businesses, the nature of the businesses and any other matters that the Commissioner considers relevant, that a business carried on by a member of a group is carried on substantially independently of, and is not substantially connected with the carrying on of, a business carried on by any other member of that group, the Commissioner may, by notice in writing served on that first mentioned member, exclude that member from that group.
(Emphasis added)
The terms “that first mentioned member” and “that member” in the last line of s 18I(1) as reproduced above each refer to the “member” contained within the term “a business carried on by a member of a group” in the third and fourth lines in the extract. This “member” in the present proceedings is, of course, PAMC P/L (the appellant) and “the business” carried on by the appellant is that of the provision of medical facilities as referred to above.
The essential structure of s 18I(1) is that the Commissioner must be satisfied of two broad tests before he can form the required satisfaction upon which the decision to sever from a group is to be based. Of course, there is a distinction between those two tests and the factors to be taken into account when considering or applying them. The factors to be taken into account when considering or applying them are declared by the section to be as follows:
·the nature and degree of ownership or control of the businesses in the group;
·the nature of the businesses in the group; and
·any other matters the Commissioner considers to be relevant.
However, as Mitchell J said almost 30 years ago in Commissioner of Stamps v Rivington Farms Pty Ltd:[10]
…the Commissioner must have regard to the nature and degree of ownership or control of the businesses, the nature of the businesses and any other relevant matters but, in the final analysis, what he has to decide is whether the businesses are carried on substantially independently and without substantial connection.
[10] (1981) 28 SASR 169, 174.
The first test as to which the Commissioner must be satisfied is that a business carried on by the appellant is carried on substantially independently of any business carried on by any other member of the group of which the appellant is a member. The second test as to which the Commissioner must also be satisfied is that the business carried on by the appellant is not substantially connected with the carrying on of any business carried on by any other member of the group of which the appellant is a member.
It has been said that the first test (or “limb”) largely relates to independence of businesses whereas the second limb relates more to connection in management. Thus in Mead Packaging (Aust) PL v Commissioner of Pay-roll Tax[11] Rath J stated:[12]
The first limb appears to relate to the independence of the businesses, and requires an examination of the connection between the business activities. The second limb appears to relate to connection in management. At all events the composite expression used in the subsection requires a consideration of the businesses and their control, and a finding of substantial independence and substantial absence of connection.
[11] (1978) 78 ATC 4,164.
[12] Mead Packaging (Aust) Pty Ltd v Commissioner of Pay-roll Tax (1978) 78 ATC 4,164, 4,172. His Honour was considering s 16H of the Pay-roll Tax Assessment Act 1971 (NSW) which was substantially similar to s 18I of the Pay-Roll Tax Act 1971 (SA).

Rath J’s comments have been approved in several later decisions.[13]
[13] See Crusher Holdings Pty Ltd v Commissioner of Taxes (NT) (1994) 117 FLR 485, 494; 29 ATR 156, 164, citing Mead Packaging (Aust) Pty Ltd v Commissioner of Pay-roll Tax (1978) 78 ATC 4,164, 4,172. See also Plummers Border Valley Orchards Pty Ltd v Commissioner of Taxation (NT) (2002) ATC 4,530, 4,534 per Riley J; and Denham Constructions Pty Ltd v Chief Commissioner of State Revenue (NSW) (1998) 99 ATC 4,139, 4,145-4,146 per Studdert J. Cf John French Pty Ltd v The Commissioner for Pay-roll Tax [1984] 1 Qd R 125, 141 where McPherson J, with whom Campbell J concurred, expressed some reservation as to whether the distinction Rath J drew between the first and second limbs was “readily apparent”. However, McPherson J added that “an examination of both business activities and management is clearly justified as part of the inquiry directed by the section”.
It is also of importance to note that not only must both tests be satisfied[14] but also that both tests must be satisfied in relation to each business carried out by each member of the group. Thus in Mead Packaging (Aust) Pty Ltd v Commissioner of Pay-roll Tax, Rath J stated:[15]
Where, as here, there are three members of the group, one of them will not be entitled to exclusion by an order under the subsection unless the requisite satisfaction is had in respect of each of the other members of the group.
[14] Crusher Holdings Pty Ltd v Commissioner of Taxes (NT) (1994) 117 FLR 485, 496 per Martin CJ; John French Pty Ltd v The Commissioner for Pay-roll Tax [1984] 1 Qd R 125, 140 per McPherson J.
[15] (1978) 78 ATC 4,164, 4,172.
This statement was subsequently approved in the case of John French Pty Ltd v The Commissioner for Pay-roll Tax[16] where McPherson J (with whom Campbell J concurred) stated:[17]
In other words, in the present case the existence of a connexion of the requisite kind between the business of Clive Nolan Motors carried on by Mrs French at 80 Annerley Road and the carrying on at the same address of the business of John French Pty Ltd will prevent the exclusion from the group of Mrs French, even if it were also established that the carrying on of either or both of the businesses conducted by Mr French at 524 Lutwyche Road was not substantially connected, etc., with the business of Clive Nolan Motors.
[16] [1984] 1 Qd R 125.
[17] John French Pty Ltd v The Commissioner for Pay-roll Tax [1984] 1 Qd R 125, 140.
Method of analysis
I make the following comments as to the approach now to be taken to the resolution of this appeal.
First, although it is the test second appearing, in what follows I will mainly concentrate on the “connection test”, or more accurately, the issue of satisfaction of whether a business carried on by a member of a group is not substantially connected with the carrying on of a business carried on by any other member of that group. As stated above, for the appellant to succeed, satisfaction must be produced in relation to both tests; accordingly, if I am not satisfied as to this second test, it matters little whether I may have been satisfied as to the first test.
Second, because the appellant must pass the “connection test” by reference to each of the relationships between the appellant company and each of the other companies in the group in order to succeed, I will examine each of the following relationships seriatim:
·between PAMC P/L and Vay P/L
·between PAMC P/L and Guyram P/L
·between PAMC P/L and Bhola P/L
·between PAMC P/L and Yueng P/L
However, it must be noted that such a regimented approach may be somewhat artificial in that “substantial connection” between businesses may be satisfied by both direct and indirect connection or a combination of both.
I will commence consideration with an examination of the business of PAMC P/L, the appellant.
The business of PAMC P/L
Dr Bhola and Dr Yeung were the only directors of the appellant, PAMC P/L and its shares were entirely held (in equal numbers) by Dr Yeung and Dr Bhola.
At the relevant times, the appellant carried on business as the owner and operator of two medical centres, one at Port Augusta and the other at Beulah Park, South Australia. It provided administration and support services to a total of approximately 20 doctors’ practices at the two medical centres, including the medical practices of Yeung P/L and Bhola P/L.
Each doctor conducted his or her own medical practice at the medical centres at Port Augusta and Beulah Park and, in some cases, elsewhere as well. Each doctor’s medical practice was owned and carried on by each respective doctor independently of the other doctors.
Each doctor had his or her own service agreement with the appellant. Under each service agreement the appellant provided to the doctor the non-exclusive use of the medical centre premises, rooms, facilities and consumables. The appellant employed nursing, management, clerical and administrative staff to operate the medical centres and to provide services to each doctor including the recovery of their fees from patients.
Each doctor paid service fees to the appellant in consideration for the above services which were computed as a percentage of recovered fees.
Was the business carried on by the appellant carried on substantially independently of, and not substantially connected with, the carrying on of the businesses of Vay P/L or Guyram P/L?
The business of both Vay P/L and Guyram P/L was to generate profits and then distribute them to the beneficiaries of the respective family trusts of Drs Yeung and Bhola. The directors and shareholders of Vay P/L were Dr Yeung and his wife and the business of Vay P/L was managed on a daily basis by Mrs Yeung, who received a salary of approximately $24,000 for doing so. Similarly, the directors and shareholders of Guyram P/L were Dr Bhola and his wife and the business of Guyram P/L was managed on a daily basis by Mrs Bhola, who received a salary of approximately $32,000 for doing so.
The business of the appellant was highly important to the businesses of both Vay P/L and Guyram P/L in that the activities of PAMC P/L were directed to maximising its own profit with the sole objective of maximising the payments it made to the businesses of Vay P/L and Guyram P/L. Those payments made by the appellant to Vay P/L and Guyram P/L were not the only income received by those companies but they did constitute a significant percentage of their respective incomes. At the commencement of the relevant period, approximately 40% of the income of Guyram P/L came from the appellant but this increased to 70% by the end of the relevant period. In the case of Vay P/L, 90% of its income was derived from the appellant at the start of the period, which increased to 95% of its income at the end of that period.[18]
[18] The profitability of the business indicates that PAMC was a significant asset of PAMC P/L. I note Dr Bhola’s evidence that PAMC P/L ultimately sold its business in 2007 for $2.6 million.
The appellant essentially submitted that the relationship between each of the trustee companies Vay P/L and Guyram P/L and the appellant was that of passive investors in the sense that both companies were entitled to receive 50% of the profits of the appellant and that the fact that they would then distribute the funds to beneficiaries does not result in dependence on, or connection between, the business of the appellant on the one hand, and that of Vay P/L or Guyram P/L on the other. The appellant referred to the following passage from the judgment of Chaney J in Re Artistic Pty Ltd and Commissioner of State Revenue:[19]
Many of the other transactions do demonstrate that the Rowson Nominees as trustee of the family trust has benefited from the business of DBR, and Jennifer Rowson has benefited in her personal capacity as a beneficiary of the family trust. Those transactions do not, however, in my view suggest a lack of independence between the carrying on of hairdressing business and either the carrying on of the electrical contracting business of DBR or the investment business of Rowson Nominees.
[19] (2006) 62 ATR 372, 389; [2006] WASAT 39, [92].
When considering this passage, it is critical to remember that the Western Australian pay-roll tax legislation there being considered was couched solely in terms of an “independence” test and did not have the twofold test presently under consideration. While it may be that a decision as to satisfaction as to “independence” could be a fairly close one in the present case, I find it unnecessary to pursue that matter to finality since I am firmly of the view that the relevant businesses were substantially connected.
In my view, the business of the appellant was essentially to maximise its profit which, because of the linkages and method of distribution referred to above, had the intended and inevitable consequence of maximising the payments to Vay P/L and Guyram P/L. As Riley J observed in Plummers Border Valley Orchards Pty Ltd v Commissioner of Taxation:[20]
In considering whether or not a business is substantially connected with the carrying on of a business carried on by any other member of a group, it is, in my opinion, relevant to observe that part of the income from the profit of those businesses is received by the entity concerned. It is one matter to be taken into account in combination with many others in determining whether there is a substantial connection between the businesses.
(Emphasis added)
[20] (2002) ATC 4,530, 4,535 [26]-[27].
I consider that the present facts clearly demonstrate that this matter of profit distribution in combination with the other matters referred to above including the common shareholdings and directorships, prevents me having satisfaction that the business carried on by the appellant was not substantially connected with the carrying on of the businesses carried on by Vay P/L and/or Guyram P/L.
Was the business carried on by the appellant carried on substantially independently of, and not substantially connected with, the carrying on of the businesses of Bhola P/L or Yeung P/L?
The decision I have come to above as to “connection” between the businesses of the appellant and Vay P/L or Guyram P/L would be sufficient to decide the appeal against the appellant because, as stated above, the appellant must pass the “connection test” by reference to each of the relationships between the appellant company and each of the other companies in the group in order to succeed. However, for completeness I will also consider the relationships between the business of the appellant and those of Bhola P/L and Yeung P/L.[21] I will again concentrate upon the element of “connection” rather than “independence”.[22]
[21] Because Bhola P/L and Yeung P/L are the mirror image of each other, and each has the same relationship with PAMC P/L, those two relationships may be considered at the same time.
[22] The appellant stressed that during the relevant period PAMC P/L was not financially dependent upon any related entities in that PAMC P/L was solvent and profitable, had no oppressive long term, non-reducing indebtedness to related entities, had positive cash flow and distributions were made on a continuous basis. I accept that the financial statements of PAMC P/L show that it was a successful and profitable business in each relevant year and that financial support was not required. However, as I put to counsel at the hearing, a favourable finding on the “independence” aspect does not mean that there should also be a favourable finding on the “connection” question.
Dr Yeung and Dr Bhola were directors of both the appellant and of their respective practice companies Yeung P/L and Bhola P/L. During the same relevant period, the shares in the appellant were entirely held (in equal numbers) by Dr Yeung and Dr Bhola. The shares in the practice company Yeung P/L were held by Dr Yeung and Mrs Yeung and the shares in the practice company Bhola P/L were held by Dr Bhola and Mrs Bhola, with both being joint shareholders.[23]
[23] The husbands owned “A” class shares and the wives “B” class shares, the two classes of shares having different rights under the Articles of Association in order to satisfy the requirement under the Medical Practice Act 2004 (SA) that an incorporated medical practice company be controlled by a registered medical practitioner.
The appellant submitted that PAMC P/L was a mere service provider to a number of different medical practices and that the mere fact that the medical practices of Yeung P/L and Bhola P/L were included in that larger number was an insufficient basis on which to conclude that the businesses of the appellant and Yeung P/L and/or Bhola P/L were substantially connected. The appellant cited the following passage in the judgment of Doyle CJ in Commissioner of Stamps v Garrett F Hunter:[24]
The medical practice conducted by Geoffrey S Vercoe Pty Ltd is conducted solely for the benefit of that company. There is no reason to think that decisions about the conduct of that business are in any way influenced or affected by considerations related to the success of the business of Meldrick. In that sense, the business of the practice company is conducted quite independently of Meldrick’s business. However, the practice company is provided with all secretarial and administrative services that are required for the practice by Meldrick, as well as its premises. In that sense there is a connection between the business of the practice company and the carrying on of business by Meldrick, but I do not regard that as a substantial connection. It is simply the connection between a service provider and a client.
(Emphasis added)
[24] (1997) 69 SASR 275, 285.
I make the following observations about this passage.
First, it must be remembered that a “substantial connection” may be constituted by the amalgam of a number of cumulative matters, none of which by itself would be sufficient. In the above passage, his Honour was saying no more than that the matter of connection under consideration did not constitute, by itself, a substantial connection. By contrast, in the present case, Drs Yeung and Bhola are the common factor by which PAMC P/L is closely connected, directly and indirectly, in a number of ways with both the businesses of Yeung P/L and Bhola P/L and also the businesses of Vay P/L and Guyram P/L.
Second, although it might be thought that Doyle CJ was saying that the connection between Meldrick and the practice companies was simply “a connection between a service provider and a client”, his Honour’s words must be seen in their broader context. Immediately before the above passage, his Honour had noted that the practice company in Garrett F Hunter was provided with all secretarial and administrative services that were required for the practice by Meldrick, as well as its premises, and it was this fact that his Honour said could not be taken by itself to be a substantial connection. However, later in his judgment, his Honour did find that there was a substantial connection between Meldrick and the practice company when one considered the matter from the opposite perspective of the position of Meldrick. Thus, his Honour there stated:[25]
At first sight it may seem contradictory to say that the business of the practice company is independent of that of Meldrick, but that the business of Meldrick is substantially connected with the business of the practice company. But what I mean is, as I have already said, that in my opinion decisions about the business of the practice company can and would be made independently of any consideration of the business of Meldrick, because Meldrick is simply a service provider to the practice company. But decisions about the business of Meldrick are closely involved with and must take account of the needs of the business of the practice company, and the manner in which its business is conducted having regard to their relationship.
From that point of view, in my opinion it is not possible to say that the business of Meldrick is carried on substantially independently of the business of the practice company and not possible to say that it is not substantially connected with the carrying on of the business of the practice company.
(Emphasis added)
[25] Commissioner of Stamps v Garrett F Hunter (1997) 69 SASR 275, 286.
The position of the respondent was that these remarks may aptly be applied to the relationship in the present case between the appellant and each of the practice companies Yeung P/L and Bhola P/L. However, the appellant contested that view and submitted that the position is different in the present case for a number of reasons.
First, it was submitted that the appellant generated the majority of its service fee income from practitioners other than Yeung P/L and Bhola P/L such that the business would remain profitable even if Dr Yeung and Dr Bhola reduced their own hours or even left.
Second, it was submitted that the business of the appellant required decisions to be made which took into account not only the needs of the businesses of Yeung P/L or Bhola P/L, but also the needs of up to 20 separate doctors and their individual medical practices.[26] Thus counsel emphasised that practice meetings were regularly attended by all or most of the practitioners at the medical centres[27] and that on some occasions decisions were made and implemented concerning the management of PAMC’s business which were different from Dr Bhola’s or Dr Yeung’s own views,[28] the evidence also indicated that some programmes were introduced at the centre with no participation by either Dr Bhola or Dr Yeung.[29]
[26] The names of all 20 doctors were listed on the entrances to the medical centres and appeared on letterhead and other business stationery of the medical centres.
[27] Thus in his written submission, counsel for the appellant submitted: “In the present case, the decision-making and management structures and practices were such as to de-emphasise the formal legal control that Dr Yeung and Dr Bhola had over PAMC, and place the de facto control into the hands of all of the medical practices, as well as the practice managers employed by PAMC. Within that structure, Dr Yeung and Dr Bhola retained some say, but exercised no more actual control than did any of the other doctors. Indeed, the practice was that they could be overruled or decisions could be made in their absence.”
[28] For example, Dr Bhola gave evidence that he and Dr Yeung wished to continue a contract that PAMC P/L had with Baxter Detention Centre for the provision of medical services. A number of other doctors did not want to continue and so the decision to cease providing those services was made. Other decisions affecting the business of PAMC that were made over the objection of, or in the absence of, Dr Bhola and/or Dr Yeung were the acceptance of medical students for attachment training at the medical centre and the engagement of some doctors at Port Augusta Hospital in respect of which PAMC could not charge a service fee.
[29] Thus Dr Bhola stated in his affidavit of 9 February 2010, at [73] that he could not recall a single occasion when Dr Yeung or he had vetoed a decision made by doctors or staff in relation to the business.
Similarly, it was submitted that after Dr Bhola and Dr Yeung acquired the Parade Medical Centre in Beulah Park, they spent less time at the clinic in Port Augusta and their absences necessarily meant a greater decision-making role for other doctors. Dr Don McQuistan stated in evidence that his decision-making role at Port Augusta extended to day-to-day liaising with the Practice Manager, Ms Williams, especially with respect to solving problems that affected the ongoing conduct of the business. The evidence was that Ms Williams, as practice manager of the Port Augusta clinic, held the key position in the day-to-day management of the PAMC business and that her role included such things as making decisions about rostering, supervising staff and administrative procedures, convening and chairing doctors’ meetings, giving effect to decisions made at those meetings and liaising with the 14 doctors and all staff.

In my view, while there may be some force in these various submissions in relation to the “independence test”, I consider that the increased number of doctors in this case as compared with the position in Garrett F Hunter does not negate or diminish the true extent of “connection” in the present case as between the appellant and Bhola P/L and/or Yeung P/L. I consider that the mere fact that each of the medical practices other than those of Bhola P/L and Yeung P/L had their own independent relationship with the appellant does not alter the closeness of the connections between the appellant and Bhola P/L and/or Yeung P/L arising from the structure of, and relationship between, the various corporate entities as analysed above.
It is true that the doctors’ management meetings displayed considerable input by the other doctors on matters of day-to-day practice and included examples of instances where the course preferred by Dr Bhola or Dr Yeung was not adopted. However, in my view, this rather demonstrates that Dr Bhola and Dr Yeung chose a consultative approach to the management of the business of the appellant rather than that they did not retain substantial control of the business. It can readily be appreciated that a policy of acceptance of a consensus of the views of the other practitioners on non-critical matters over their own views from time to time was a sound business approach in keeping with maintaining good relations with the appellant’s client medical practices and hence a high rate of occupancy of the available rooms.
I consider that Dr Bhola and Dr Yeung did continue to exercise substantial control over the appellant despite the fact that other doctors had input in relation to various matters. Dr Bhola and Dr Yeung remained the sole directors and shareholders of the appellant and clearly made all “long term” decisions. While the day to day management was no doubt undertaken by the respective practice managers, all employees, both legally and practically, were subject to the directions of Dr Bhola and Dr Yeung in relation to matters of importance to the long term interests of Dr Bhola and Dr Yeung.[30]
[30] I note that the Commissioner took into account that Dr Yeung and Dr Bhola were: the directors of “Port Augusta Medical”; were its cheque signatories; would have been responsible for hiring the Practice Managers; and signed the agreement between PAMC and each medical practitioner as directors of PAMC. On my independent review, I also take into account these matters. I also note that under cross-examination, Dr Bhola said that the practice manager, Ms Williams, sought approval from Dr Yeung or himself for any expense over $500 and that he and Dr Yeung continued to appoint and assess the performance of the practice managers at both the Port Augusta and the Beulah Park centres and to select the practitioners who would be permitted to join the clinics.
In my view, while in some cases de facto control of the day-to-day business may be important, I consider that in the present case the retaining of the capacity to control the business is of greater importance, particularly in relation to the “connection” question. In this regard, I note that in Garrett F Hunter, Doyle CJ recognised that although the day-to-day running of the practice in that case was left to another doctor, nevertheless Dr Vercoe, one of the directors of the company, was in a position to influence the conduct of the business. Thus his Honour said:[31]
It follows that Dr Vercoe is, as I have said, in a position to exercise substantial control over the business of the practice company and in a position to influence the conduct of the business of Meldrick.
…In his role as a director and shareholder of the trustee company he is in a position to exercise some influence over the affairs of Meldrick.
[31] Commissioner of Stamps v Garrett F Hunter (1997) 69 SASR 275, 285.
Similarly, in Crusher Holdings Pty Ltd v Commissioner of Taxes,[32] Martin CJ recognised the primary importance of the capacity to control the affairs of the business even though de facto control of day-to-day business was vested elsewhere and stated:[33]
Further, should the occasion arise, it would be open to Mr Kennon to exercise his powers as a life governor of that company to inhibit its demand upon the appellant.
[32] (1994) 117 FLR 485.
[33] Crusher Holdings Pty Ltd v Commissioner of Taxes (1994) 117 FLR 485, 497. Mr Kennon had a life governor’s share that carried with it 76 per cent of the total of votes cast at a general meeting of S G Kennon & Co Pty Ltd. Of course 76% is a large percentage, but in the present case Dr Bhola and Dr Yeung had 100% of the shares and votes between them. Their financial affairs were closely linked in a structural way although, of course, their total personal worth may have been quite different.
I therefore find that the business carried on by the appellant and the respective businesses of Bhola P/L and/or Yeung P/L were substantially connected for the above reasons.
Conclusion
Since I am not satisfied that the business carried on by the appellant was not substantially connected with the carrying on of a business or businesses carried on by other member(s) of the group, the appeal must be dismissed.
Orders
The appeal is dismissed.