S J Buller Pty Ltd and Commissioner of Taxation
[2013] AATA 617
[2013] AATA 617
Division TAXATION APPEALS DIVISION File Number
2012/1570
Re
S J Buller Pty Ltd
APPLICANT
And
Commissioner of Taxation
RESPONDENT
DECISION
Tribunal Mr F D O'Loughlin, Senior Member
Date 30 August 2013 Place Melbourne The Tribunal affirms the decision under review.
...................[sgd].....................................................
Mr F D O'Loughlin, Senior Member
WINE EQUALISATION TAX – associated producer, whether a producer is under an obligation or might reasonably be expected to act in accordance with the directions, instructions or wishes of the other producer, penalty
Legislation
A New Tax System (Wine Equalisation Tax) Act 1999 (C’th) s 19-5(1), s 19‑15(1), s 19‑15(2), s 33-1.
Taxation Administration Act 1953 (C’th) Schedule 1 s 298-20
Corporations Act 2001 (C’th) s 9(b)(ii)
Tax Laws Amendment (Wine Producer Rebate and Other Measures) Bill 2004
Cases
Australian Securities and Investments Commission v Murdaca [2008] FCA 1399
Buzzle Operations Pty Ltd (In Liq) v Apple Computer Australia Pty Ltd (2011) 81 NSWLR 47
Granby Pty Ltd v Federal Commissioner of Taxation (1995) 129 ALR 503
Sanctuary Lakes Pty Ltd v Commissioner of Taxation [2013] FCAFC 50
REASONS FOR DECISION
Mr F D O'Loughlin, Senior Member
30 August 2013
During the March and June 2010 quarters, the Applicant purchased grapes from independent parties and paid R L Buller[1] for those grapes to be produced into wine. The Applicant then sold all the wine in one sale transaction to R L Buller. The Applicant claims to be, and the Commissioner accepts, that for the March 2010 and June 2010 quarters, it was a wine producer for the purpose of the WET Act.[2] The Applicant also claims to be entitled to producer rebates pursuant to Division 19 of the WET Act for the financial year ended 30 June 2010. The Commissioner has denied that entitlement, because, in his view, the Applicant was an associated producer of R L Buller in the 2010 financial year.
[1]R L Buller & Son Pty Ltd.
[2] A New Tax System (Wine Equalisation Tax) Act 1999 (C’th).
The result of the denial of the producer rebates has led to disputed tax shortfall amounts of:
(a)$431,172 for the March 2010 quarter;
(b)$99,557 for the June 2010 quarter.
and shortfall penalty (calculated at the 25% rate) of $132,682.25.
The Tribunal needs to decide three issues:
(a)Was the Applicant an associated producer of R L Buller for the purposes of Division 19 of the WET Act during the 2010 financial year; and therefore ineligible for producer rebates?
(b)Is the Applicant liable to pay an administrative penalty at the base rate of 25% with respect to the tax shortfalls arising, on the basis that the Applicant, or its tax agent, failed to take reasonable care with respect to the preparation of its business activity statements (BASs) for the relevant quarterly tax periods?
(c)Should any applicable administrative penalty be remitted in full or in part?
Was the Applicant an associated producer of R L Buller?
The relevant rules
The heart of the producer rebates dispute lies in the scope of the definition of associated producer in s 19-20 of the WET Act, the applicable extracts of which provide:
Associated producers
(1) A * producer is an associated producer of another producer for a * financial year if, at the end of that financial year:
(a)the producer would be * connected with the other producer if subsection 328-125(8) of the * ITAA 1997 [Income Tax Assessment Act 1997] were omitted; or
(b)the producer:
(i) is under an obligation (whether formal or informal); or
(ii) might reasonably be expected;
to act in accordance with the directions, instructions or wishes (however communicated) of the other producer in relation to the first producer's financial affairs; or
(c)the other producer:
(i) is under an obligation (whether formal or informal); or
(ii) might reasonably be expected;
to act in accordance with the directions, instructions or wishes (however communicated) of the first producer in relation to the other producer's financial affairs.
…
The definition of associated producer is part of the general scheme of the WET Act which is not in dispute. While not in dispute, it is necessary to understand it so as to give a proper construction to some of its terms. The following is an overview of the general scheme of the WET Act.[3]
(a)The WET Act provides for an imposition of wine tax in respect of assessable dealings in wine. Assessable dealings are generally the last wholesale sales of wine.
(b)Wine tax is imposed at a rate of 29% of the taxable value of wine. Taxable value is, relevantly, defined as the GST-exclusive, wholesale sale price of the wine.
(c)In certain circumstances, an entity may be entitled to a wine tax credit. Section 17-5 of the WET Act includes a table that sets out 15 grounds pursuant to which a wine tax credit may arise. Relevantly, ground CR9 provides for the payment of a producer rebate. Producer rebates are provided for under Division 19 of the WET Act. The amount is 29% of the price (excluding wine tax and GST) for which the wine is sold.[4]
(d)There is a $500,000 cap on the amount of producer rebate a wine producer can claim in a financial year.[5]
(e)The net effect of the producer rebate being calculated at 29% of the sale price (GST and wine tax excluded) is that a producer receives a producer rebate for the first $1,896,552 (including GST) of its wholesale wine sales.[6]
[3]Taken largely from the Commissioner’s Statement of Facts, Issues and Contentions.
[4]WET Act, s 19-5(1) and s 19-15(1).
[5]WET Act, s 19-15(2).
[6]That is, $500,000 divided by 0.29 and multiplied by 11/10.
As with many taxation concessions, the WET Act contains an integrity system[7], designed to ensure that large producers cannot take advantage of associated entities to enjoy multiple rebate entitlements.[8]
[7]WET Act, s 19-15(3).
[8]See paragraphs [1.11] and [1.24] of the Revised Explanatory Memorandum accompanying the Tax Laws Amendment (Wine Producer Rebate and Other Measures) Bill 2004.
Section 19-20, reproduced above, sets out a number of alternative tests to determine if two producers are associated producers.
A potentially important element of the associated producer definition is the concept of financial affairs.
The parties debated what is meant by financial affairs. The Commissioner contended that they include business affairs and the Applicant contended that they are limited to matters pertaining to finance. Little assistance is to be found to resolve this debate beyond the context of the scheme of which the associated producer concept is a part. That scheme is to determine whether two, or more, wine producers are to be treated as a single economic unit so that wine producer rebates are not inappropriately duplicated.
Accordingly, neither of the constructions advanced by the parties would give a scope of operation to the term financial affairs that is contemplated. The Applicant's narrow construction potentially not bringing in all cases intended and the Commissioner's bringing in too many.
In a setting where the focus is wine production, the concept ought be construed as meaning business and financial affairs in relation to wine production activities.
If the Applicant could reasonably be expected to act in accordance with the directions, instructions or wishes of R L Buller, or vice versa, in relation to all or some of its important wine producing activities, then it is appropriate to regard it as satisfying the s 19-20(1)(b) or (c) tests. The proper threshold may be lower than that, and toward the end of the spectrum advanced by the Commissioner. It is not necessary in this case to determine where it is, because the present focus of attention is the Applicant's and R L Buller's wine producing activities.
The associated producer test has parallels with the definition of director in s 9 of the Corporations Act 2001 (C’th). That test was effectively considered in Buzzle Operations Pty Ltd (In Liq) v Apple Computer Australia Pty Ltd.[9] The following principles can be derived from the discussion of the scope of the accustomed to act in accordance with … wishes limb[10] of that definition:
(a)treating another person’s instructions or wishes as a sufficient reason so to act, rather than making personal decisions where those wishes or instructions are merely a factor considered, meets the test of being accustomed so to act;[11]
(b)it is not necessary that the behaviour be universal - at least some decisions, one or more of which is an important decision, would be enough.[12] Some or all decision making is the focus;[13]
(c)making decisions in pursuit of one’s own business goals, even if consistent with the wishes of another party, does not necessarily cause the decision maker to be regarded as accustomed to acting in accordance with the other party’s wishes. The other party may have superior bargaining power;[14]
(d)while not significantly different, acting in accordance with a person’s wishes covers a wider field than acting in accordance with a person’s directions or instructions;[15] and
(e)it is necessary to undertake a critical assessment of the way in which the party under examination is managed.[16]
[9](2011) 81 NSWLR 47 Hodgson, Young and Whealy JJA. The Court considered the terms of the same definition in s 9(b)(ii) of the Corporations Law as the relevant events occurred before the commencement of the Corporations Act 2001.
[10]“director” of a company or other body means:
….
(b) unless the contrary intention appears, a person who is not validly appointed as a director if:
.....
(ii) the directors of the company or body are accustomed to act in accordance with the person’s instructions or wishes.
Subparagraph (b)(ii) does not apply merely because the directors act on advice given by the person in the proper performance of functions attaching to the person’s professional capacity, or the person’s business relationship with the directors or the company or body.
[11](2011) 81 NSWLR 47 at 51[9] Hodgson JA.
[12](2011) 81 NSWLR 47 at 51[10] Hodgson JA.
[13](2011) 81 NSWLR 47 at 74 [208] Young JA (with whom Hodgson and Whealy JJA agreed) endorsing Finn J in Australian Securities Commission v AS Nominees Ltd (1995) 62 FCR 504.
[14](2011) 81 NSWLR 47 at 70-71 [191-192] Young JA (with whom Hodgson and Whealy JJA agreed).
[15](2011) 81 NSWLR 47 at 70 [187] Young JA (with whom Hodgson and Whealy JJA agreed).
[16]Gordon J in Australian Securities and Investments Commission v Murdaca [2008] FCA 1399 at [11] as endorsed in a corporate law context in Buzzle Operations Pty Ltd (In Liq) v Apple Computer Australia Pty Ltd (2011) 81 NSWLR 47 at 74 [203] Young JA (with whom Hodgson and Whealy JJA agreed).
These corporate law principles can be applied in the present context because the concepts are similar and an assessment of whether a person might reasonably be expected to act in a particular way can be made by enquiring as to whether that person is accustomed to act in that way.
Applying these rules to the Applicant and R L Buller
The Applicant's contentions come down to two propositions – that:
(a)the two businesses were separately owned and separate ownership presumes independence; and
(b)a business owner may concur with the wishes of a business associate for reasons that make good sense in pursuit of the owner’s business but that does not make them associated in the requisite sense.
The Applicant's second contention amounts to acceptance of the proposition that making personal business decisions in a particular way, where others' wishes are merely a factor considered, does not render the decision-maker an associated producer of the other party; and a contention that that is what has happened here.
The Commissioner contends that there was one business and/or that each of the Applicant and R L Buller were associated producers of the other; because each might reasonably be expected to act in accordance with the direction, instructions or wishes of the other.
It is necessary to examine the facts and circumstances of the Applicant’s business and the involvement of R L Buller in it, and vice versa.
The Applicant tendered extensive documentary material and witness statements of Mrs Buller,[17] Mr Buller[18] and Mr Bell.[19] Each witness was extensively cross-examined in relation to the finer details of the businesses conducted by the Applicant and R L Buller. In the context of the issues to be resolved, it is not necessary to make findings concerning all of the matters covered by the evidence led and adduced in cross-examination. The necessary factual findings, given the tests to be applied, and the conclusions reached are as follows.
[17]Mrs Susan Buller.
[18]Mr Richard Buller (Mrs Buller’s husband).
[19]Mr Gary Bell (R L Buller’s General Manager).
The Commissioner and the Applicant agree:[20]
(a)the Applicant was registered for GST;
(b)the Applicant was a producer of rebatable wines for the purposes of the WET Act;
(c)the wine products sold by the Applicant during the March 2010 and June 2010 quarters were rebatable wines for the purposes of the WET Act;
(d)the amounts for wine sales reported by the Applicant in its March and June 2010 quarter BASs are correct;
(e)subject to the operation of the applicable cap,[21] the Applicant was entitled to claim the WET Act Division 19 producer rebate with respect to its wine sales in those BASs; and
(f)R L Buller had previously claimed the full $500,000 producer rebate in its BAS earlier in the 2010 Year.
[20]Taken largely from the Commissioner’s Statement of Facts, Issues and Contentions.
[21]WET Act, s 19-15(3).
R L Buller has for many years conducted a winery business consisting of either growing or purchasing grapes, crushing them, producing wine, packaging and labelling the wine, and marketing and selling the wine. R L Buller was established in 1921 and owns wineries at Beverford and Rutherglen. R L Buller trades under the name “Buller Wines”. At times, the R L Buller business provided some of these services to others.
Mr Buller and other members of his immediate family own and control the winemaking business conducted by R L Buller. Within the family group, managerial effort is divided and Mr Buller, at least nominally, manages the Beverford winery business while his brother Andrew Buller manages the Rutherglen winery. Mr Buller spent substantial parts of the 2009 – 2011 years overseas.
R L Buller is a wine producer for the purposes of the WET Act and has claimed the maximum allowable wine producer rebate in each of the financial years since 2006.
The Applicant was incorporated on 8 January 2010. The sole director and shareholder is Mrs Buller. The Applicant’s business address in Corowa NSW is also Mrs and Mr Buller’s residential address.
Mrs Buller has worked in management roles for R L Buller for 38 years, since 1975.
For various reasons that do not bear upon the outcome in the present application, in late 2009 and 2010 Mrs Buller wanted to commence her own wine-making business that would entail the activities summarised above.[22]
[22] Paragraph [1].
The first business transaction of substance in the Applicant’s bank account was the $170,000 received from R L Buller on 7 June 2010.
The Applicant’s business activities entailed:
(a)sourcing grapes from grape growers who had traditionally supplied R L Buller;
(b)using the services of an R L Buller chief wine maker for a range of tasks. He visited growers’ premises, undertook quality control, decided which grapes would be purchased by the Applicant, decided the quantity of grapes that would be purchased, and negotiated the price that would be paid to growers for those grapes. The quality control process was undertaken at the growers’ premises because R L Buller did not want to be identifying problems with grapes at the weighbridge to its Beverford processing facility. R L Buller did not want fruit delivered that had problems. The sanitisation and cleaning processes at the winery were such that it was far more efficient to protect R L Buller by rejecting grapes at the vineyard. The inevitable consequence of this failure of the arrangements between the Applicant and R L Buller was that, in the protection of R L Buller’s interests by protecting the winery from the inconvenience of diseased fruit being delivered to it, R L Buller had the ability at either the point of entry into contracts on behalf of the Applicant to choose whether to contract to buy particular grapes and at the point before delivery to choose to cancel contracts already entered into by the Applicant;
(c)engaging R L Buller to process the grapes into wine and to package it;
(d)selling the packaged wine to R L Buller. The vast majority of the grapes that came through the R L Buller Beverford facility were to be processed at the facility and would ultimately be processed into wines marketed under the R L Buller brand and label. All of the wine made from the grapes purchased by the Applicant were so sold; and
(e)purchasing grapes in circumstances where grape growers were unaware that their grapes were being purchased by the Applicant or R L Buller.
Further features of the Applicant’s business operations included the following.
(a)Mrs Buller controlled the bank account of the Applicant and is also one of five signatories for the R L Buller bank accounts.
(b)The Applicant did not have a website or advertise externally. It did not own any vineyards or plant and equipment and related facilities to process grapes to make wine or to store grapes and/or wine. It did not have any employees. All work involved in pursuit of its business activities was undertaken for it by R L Buller’s employees, either travelling to grape growers premises or on R L Buller’s premises. R L Buller’s plant and equipment and related facilities to process grapes to make wine and to store wine and grapes were used.
(c)The Applicant had no funds to pay for the purchased grapes or for the processing of the grapes and was reliant on R L Buller purchasing the produced wine in order to pay the growers and R L Buller.
(d)R L Buller arranged for the transport of the grapes to R L Buller’s processing facilities.
(e)The processing of the grapes into wine was carried out by R L Buller to its specifications including as to the varieties of wine. This followed the pattern of production by R L Buller for earlier vintages, when it processed the grapes it purchased on its own account.
(f)R L Buller decided what charges were levied on the Applicant for the processing, storage and management of the wine.
(g)All of the wine produced for the Applicant was sold to R L Buller during the 2010 financial year. There was no apparent negotiation of the price to be paid; and the prices to be paid produced a loss which could only be recouped if the Applicant was entitled to the producer rebate. The evidence was that this entitlement was a consideration in setting the price to be paid by R L Buller to the Applicant. The effect of so doing was to pass the benefit of the Applicant’s producer rebate entitlement, if there was any, to R L Buller.
(h)The inter-company arrangements between R L Buller and the Applicant lacked some of the features of arrangements between truly independent parties. Examples include:
(i)R L Buller invoiced for processing of grapes in excess of the volume of grapes that had passed over the weighbridge;
(ii)the Applicant was obliged to insure its goods but did not - it potentially relied on R L Buller’s insurances;
(iii)the Applicant was charged storage fees that, under arrangements it had documented with R L Buller, it was not obliged to pay;
(iv)the Applicant was entitled to charge R L Buller interest but did not, which was consistent with R L Buller’s policy of not paying interest on debts paid late;
(v)the Applicant contracted for approximately 1000 tonnes of grapes to be processed to wine and, at R L Buller’s instigation, grapes nearly double that weight were processed;
(vi)the arrangements between the Applicant and R L Buller required schedules of estimated requirements to be provided, which was not done; and
(vii)the arrangements between the Applicant and R L Buller were terminated at the instigation of R L Buller. The evidence of its general manager was that –
After the initial dealings with SL Buller, I decided we would not pursue any more business with this company … I felt it better to handle this situation in house.
…
This occurred in circumstances where R L Buller had cash flow problems with creditors.
The Applicant’s first contention, that separate ownership is enough, is not the test imposed by s 19-20 of the WET Act. Separately owned businesses may be so conducted that they are a single business or by the owner of one business completely subjecting itself to the will of the owner of the other. As noted by Gordon J in a parallel context, it is necessary to undertake a critical assessment of the way in which the producer is managed.[23] This is an enquiry into activities and decision making, not an enquiry into ownership. Just as parties who share an arm’s length relationship can be regarded as not transacting on arm’s length terms,[24] parties who have an arm’s length relationship or who are independently owned may act in a way that makes them associated producers.
[23]Gordon J in Australian Securities and Investments Commission v Murdaca [2008] FCA 1399 at [11] as endorsed in a corporate law context in Buzzle Operations Pty Ltd (In Liq) v Apple Computer Australia Pty Ltd (2011) 81 NSWLR 47 at 74 [203] Young JA (with whom Hodgson and Whealy JJA agreed).
[24]Granby Pty Ltd v Federal Commissioner of Taxation (1995) 129 ALR 503 at 507 per Lee J.
The Applicant’s contention that a party may conform to another’s wishes because it makes good business sense to do so, and that doing so does not make it an associated producer, can be accepted. The court said as much in the parallel context of the definition of a director.[25]
[25](2011) 81 NSWLR 47 at 70-71 [191-192] Young JA (with whom Hodgson and Whealy JJA agreed).
There may be a spectrum, with business choices made because they make good business sense for the business owner at one end, and business choices made by a business owner because another party wishes those choices to be made, at the other end. It is possible that choices at the latter end of the spectrum may also be profitable business choices and when viewed qualitatively may seem to be good business choices.
The critical question is at which end of the spectrum do the Applicant’s choices lie? Put another way: were R L Buller’s wishes followed in relation to important features of the Applicant’s business because they made good business sense for the Applicant or because they were R L Buller’s wishes?
For the reasons that follow, the answer to that question is - because they were R L Buller’s wishes.
Potentially, the fundamental aspect of the Applicant’s business involved sourcing and purchasing grapes and entering into and performing contracts to make those purchases. In undertaking these activities, the Applicant was totally reliant on the work of R L Buller’s employees. R L Buller’s chief winemaker selected the grape sources and varieties, undertook quality control and made the decisions that contracts would not be completed if quality was less than standard. Importantly, these decisions were made to protect R L Buller’s interests in ensuring poor quality grapes did not enter its processing facilities and cause disruption there. It is difficult to conceive of a description of these circumstances other than that the Applicant was acting in a particular way because in protection of its own interests R L Buller made decisions that compelled the Applicant to do so.
The volume of grapes purchased by the Applicant increased beyond what R L Buller had agreed to process because R L Buller decided that was to be so because it suited its business. Once again, this fact shows that the Applicant acted in the way that it did because R L Buller made decisions that compelled it to do so.
The varieties of wine to be produced for the Applicant and the volumes of each variety were determined by R L Buller to suit its business.
The arrangements with R L Buller were terminated abruptly because R L Buller decided that was to be so. That put an end to the Applicant’s business.
While it may be true that these decisions could have been profitable for the Applicant (albeit only if a producer rebate was available to it, given the pricing structures adopted) the Applicant’s circumstances are such that it ought be seen as adopting R L Buller’s wishes or directions primarily because they were R L Buller’s wishes or directions.
In these circumstances, it is not necessary to determine whether R L Buller acted in accordance with the Applicant’s wishes or directions or could reasonably be expected to do so. Nor is it necessary to determine whether there was a single business. In relation to the latter, it is possible to carve certain activities out of a pre-existing business and contract with a new provider of the goods or services produced by those activities and consume them in a continuing but differently configured business.
Administrative Penalty
The Commissioner has assessed administrative penalty at the base rate of 25% of the tax shortfall in relation to the producer rebate claimed by the Applicant in the BASs for the March and June 2010 quarters.
Subsection 284-75(1) of Schedule 1 to the Administration Act[26] applies if:
(a)the taxpayer or its tax agent makes a statement to the Commissioner;
(b)the statement is false or misleading in a material particular; and
(c)because of the statement there is a tax shortfall.
[26] Taxation Administration Act 1953 (C’th)
The Applicant’s BASs for the March 2010 and June 2010 quarters were the relevant statements. They were false or misleading because they impermissibly included claims for producer rebates. There were tax shortfalls as a consequence.
The Applicant has not discharged the onus of showing that both it and its tax agent took reasonable care in preparing the BASs for the March 2010 and June 2010 quarters.
Penalty remission
The Commissioner and the Tribunal on review have discretion to remit penalty.[27] No guidelines are set for exercising that discretion. The issue is simply whether it is appropriate to remit penalties in whole or in part.
[27]Administration Act Schedule 1 s 298-20.
A significant consideration in the exercise of this discretion is whether, having regard to the particular circumstances of the taxpayer, the outcome would otherwise be harsh or produce an unjust, inappropriate or unreasonable outcome.[28]
[28] Sanctuary Lakes Pty Ltd v Commissioner of Taxation [2013] FCAFC 50 at [248]-[249] Griffiths J with whom Edmonds J agreed.
The Applicant has not identified any basis for a full or partial remission of the administrative penalty imposed.
DECISION
The Tribunal affirms the decision under review.
I certify that the preceding 48 (forty -eight) paragraphs are a true copy of the reasons for the decision herein of Mr F D O'Loughlin, Senior Member.
.............[sgd]..........................................................
K. Randall, Associate
Dated 30 August 2013
Date(s) of hearing 22, 23 and 29 April 2013 Advocate for the Applicant Mr Stan Daniels Counsel for the Respondent Mr Stephen Sharpley Solicitors for the Respondent Ms Carmen Basilicata, ATO Legal Practice
Key Legal Topics
Areas of Law
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Administrative Law
Legal Concepts
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Administrative Penalty
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Affirmation of Decision
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