Seovic Engineering Pty Ltd v Chief Commissioner of State Revenue

[2015] NSWCA 242

Court of Appeal

Supreme Court

New South Wales

Medium Neutral Citation:	Seovic Engineering Pty Ltd v Chief Commissioner of State Revenue [2015] NSWCA 242
Hearing dates:	4 August 2015
Decision date:	20 August 2015
Before:	Beazley P at [1]; Macfarlan JA at [2]; Meagher JA at [3]
Decision:	1.   Dismiss the summons seeking leave to appeal. 2.   Applicants pay the respondent’s costs of that summons.
Catchwords:	TAX – payroll tax – Chief Commissioner’s de-grouping discretion under Payroll Tax Act 2007 (NSW), s 79 – whether Appeal Panel erred in law in concluding that precondition in s 79(2) not satisfied – whether precondition in s 79(2) satisfied when it is just and reasonable to exclude persons from a group in order to alleviate harsh consequences of grouping provisions – whether matters required to be considered when addressing that precondition include presence or absence of artificial arrangements to avoid duty; the splitting of existing business and other stratagems; and/or commercial arm’s-length terms of dealings between members
Legislation Cited:	Civil and Administrative Tribunal Act 2013 (NSW), ss 62, 80, 83 Payroll Tax Act 2007 (NSW), ss 71, 72, 74, 79 Taxation Administration Act 1996 (NSW), s 96
Cases Cited:	Baxter v Chief Commissioner of Pay-Roll Tax (1986) 7 NSWLR 122 Commissioner of Pay-Roll Tax v R G Elsegood & Co Pty Ltd [1983] 1 NSWLR 223 Commissioner of Stamps v Garrett F Hunter Pty Ltd (1997) 69 SASR 275 Chief Commissioner of State Revenue v Tasty Chicks Pty Ltd [2012] NSWCA 181; 87 ATR 880 FCT v Consolidated Media Holdings Ltd [2012] HCA 55; 250 CLR 503 R G Elsegood (Sales) Pty Ltd v Commissioner of Pay-Roll Tax (NSW) (1982) 12 ATR 750 Seovic Civil Engineering Pty Ltd v Chief Commissioner of State Revenue [2014] NSWCATAD 52 Tasty Chicks Pty Ltd v Chief Commissioner of State Revenue of the State of New South Wales [2011] HCA 41; 245 CLR 446 Thiess v Collector of Customs [2014] HCA 12; 250 CLR 664
Category:	Principal judgment
Parties:	Seovic Engineering Pty Ltd (First Applicant) Seovic Civil Engineering Pty Ltd (Second Applicant) Exell Management Pty Ltd (Third Applicant) Chief Commissioner of State Revenue (Respondent)
Representation:	Counsel: I Young with Arthur Korakis (Applicants) M Richmond with B L Jones (Respondent)   Solicitors: Paul Bard Lawyers (Applicants) Crown Solicitor’s Office (Respondent)
File Number(s):	2014/371573
Decision under appeal	Court or tribunal: Civil and Administrative Tribunal (NSW) Jurisdiction: Appeal Panel Citation: [2014] NSWCATAP 94 Date of Decision: 1 December 2014 Before: Wright J, President; M Schyvens, Deputy President; R Seiden SC, Principal Member File Number(s): AP 14/46396

HEADNOTE

[This headnote is not to be read as part of the judgment]

This is an application for leave to appeal. The three applicant companies, Seovic Civil Engineering Pty Ltd (Civil), Seovic Engineering Pty Ltd (Engineering) and Exell Management Pty Ltd (Exell), were grouped together for payroll tax purposes by the operation of ss 71(2) and 74(1) of the Payroll Tax Act 2007 (NSW). Members of a group are jointly and severally liable to pay payroll tax on the taxable wages of the group in excess of a single tax threshold. The applicants objected to their grouping on the basis that the Chief Commissioner should have exercised the discretion under s 79(1) to exclude one or more of them from their respective groupings.

The Civil and Administrative Tribunal found that the Chief Commissioner had erred in not exercising the discretion in s 79 to exclude Exell from its groupings with Civil and Engineering under s 71(2). The Chief Commissioner’s appeal from that decision to the Appeal Panel of the Tribunal was successful. The Appeal Panel rejected the applicants’ argument that, on the facts as agreed or found by the Tribunal, Civil and Engineering should have been excluded from the groups with Exell constituted by s 71(2).

The issues sought to be raised in the proposed appeal to the Court were:

whether the Appeal Panel erred in not construing s 79 as conferring a broad discretion enlivened whenever the exclusion of persons from a group is just and reasonable in order to alleviate otherwise harsh consequences of the grouping provisions;

whether the Appeal Panel was obliged to take into account as mandatory relevant considerations the presence or absence of artificial or contrived arrangements to avoid duty; the splitting of existing business and other stratagems; and the commercial arm’s-length terms of the dealings between group members; and

whether the Appeal Panel erred in failing to consider the “nature and degree of ownership and control of the businesses” of Civil and Engineering as a mandatory relevant consideration.

The Court held, refusing leave to appeal, that none of the questions sought to be raised was sufficiently arguable to justify a grant of leave.

In relation to (i):

The precondition of the Chief Commissioner’s discretion to relieve against the unreasonable operation of the grouping provisions is described in s 79(2). The power cannot be exercised unless the Commissioner is satisfied as to those matters described: [1], [2], [20], [22].

In relation to (ii):

That the dealings between the three companies were on commercial arm’s-length terms was considered by the Appeal Panel: [25]. The two other matters relied on were not required to be considered by the Appeal Panel, although they might, in some circumstances, have been relevant to the ultimate question about which the Chief Commissioner is required to be satisfied in the terms of 79(2): [1], [2], [26], [27].

In relation to (iii):

The Appeal Panel did take into account the matters to which the applicants referred: [1], [2], [29], [30].

Judgment

1. BEAZLEY P: I have had the advantage of reading in draft the reasons of Meagher JA. I agree with his Honour’s reasons and with the orders he proposes.

2. MACFARLAN JA: I agree with Meagher JA.

3. MEAGHER JA: The three applicant companies seek leave to appeal from the decision of the Appeal Panel of the Civil and Administrative Tribunal of New South Wales in Chief Commissioner of State Revenue v Seovic Engineering Pty Ltd [2014] NSWCATAP 94. That right of appeal is by leave and limited to questions of law: Civil and Administrative Tribunal Act 2013 (NSW), s 83.

4. The proposed appeal seeks to challenge the decision of the Appeal Panel in relation to the existence of the de-grouping discretion in s 79(1) of the Payroll Tax Act 2007 (NSW). That discretion depends for its exercise on the respondent Chief Commissioner first being satisfied of the matters in s 79(2) in relation to the business of any company sought to be excluded from the group of employers.

5. Section 79 relevantly provides:

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

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

…

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

6. The applicants’ draft notice of appeal raises three questions said to involve errors of law on the part of the Appeal Panel. In my view none of those questions discloses legal error. For the reasons which follow the application for leave to appeal should be dismissed with costs.

Background facts

7. The applicants are Seovic Civil Engineering Pty Ltd (Civil), Seovic Engineering Pty Ltd (Engineering) and Exell Management Pty Ltd (Exell). The relevant payroll tax assessment period extends from 1 July 2007 to 30 November 2011. During that period Civil carried on a civil engineering business specialising in concrete slip forming, Engineering carried on a mechanical engineering business specialising in repair and maintenance of mining equipment and Exell’s business was the provision of contract workers to Civil and Engineering.

8. During that period, for the purpose of assessing their liability to payroll tax, the Chief Commissioner grouped the three companies under Pt 5 of the Payroll Tax Act. The consequence was that the members of the group were jointly and severally liable to pay payroll tax on the taxable wages of the group in excess of a single tax threshold, rather than being separately liable for payroll tax assessed on the wages paid by each in excess of its own tax threshold.

9. Under the provisions of the Payroll Tax Act, that grouping occurred in two stages. Exell and Civil and Exell and Engineering were constituted as separate groups by the operation of s 71(2), which provides that if one or more employees of an employer are employed solely or mainly to perform duties for a business carried on by another person, the employer and that other person constitute a group. Those two groups were then included in a single larger group by s 74(1), which provides that if a person is a member of two or more groups, the members of all the groups together constitute a group. That larger group comprised the three companies.

10. The applicants objected to the Chief Commissioner’s assessments on the basis that there was a failure to exercise the discretion under s 79(1) to exclude one or more of them from the smaller groups. An exercise of that discretion in relation to one of the applicants would have had the effect of dissolving the larger group. Those objections were disallowed.

The administrative review by the Tribunal

11. The applicants applied to the Administrative Decisions Tribunal under s 96 of the Taxation Administration Act 1996 (NSW) for an administrative review of the Commissioner’s decisions. As that review was not determined before 1 January 2014 it was taken to have been duly commenced in the Civil and Administrative Tribunal of New South Wales (the Tribunal): Civil and Administrative Tribunal Act 2013 (NSW), Sch 1, Div 3, cll 6(1), 7(1). By its decision delivered on 30 April 2014 the Tribunal (constituted by Senior Member Verick) concluded that the Chief Commissioner had erred in not exercising the discretion under s 79 to exclude Exell from each of the smaller groups constituted by s 71(2), which also would have de-grouped the larger group constituted by s 74(1). The Tribunal remitted the matter to the Chief Commissioner “to exercise his discretion under s 79 of the Act to de-group Exell from Civil + Exell and Engineering + Exell groups”: Seovic Civil Engineering Pty Ltd v Chief Commissioner of State Revenue [2014] NSWCATAD 52 at [44].

The appeal to the Appeal Panel

12. The Chief Commissioner appealed from that decision under the Civil and Administrative Tribunal Act, s 80(1). By s 80(2) there is a right to appeal to an Appeal Panel from an “internally appealable decision” on any question of law. The question raised, as formulated by the Appeal Panel, was whether the undisputed facts and facts as found by the Tribunal were capable of satisfying the precondition in s 79(2): [2014] NSWCATAP 94 at [10].

13. Before the Tribunal the applicants had argued that those facts enabled the Chief Commissioner to be satisfied that Exell should be excluded from each of the groups constituted under s 71(2). Before the Appeal Panel it was accepted that the Chief Commissioner (and Tribunal) could not have been satisfied of the matters in s 79(2) in relation to the business of Exell. However the applicants sought to support the Tribunal’s orders (or more accurately, what were said to be orders having the same consequence for the tax-payers) on the basis that the Chief Commissioner and Tribunal could and should have been satisfied of those matters in relation to the exclusion of Civil from one of the smaller groups and of Engineering from the other.

14. The Appeal Panel agreed that the Tribunal had erred in law in holding that the pre-condition in s 79(2) was satisfied with respect to the exclusion of Exell. The proposed appeal is not directed to that conclusion. The Appeal Panel did not accept the applicants’ argument that, on the agreed facts and facts as found by the Tribunal, s 79(2) was satisfied with respect to the exclusion of Civil and Engineering from their respective subgroups. As the Tribunal’s decision could not be supported on that alternative basis, the Appeal Panel allowed the appeal, set aside the Tribunal’s order and dismissed the application. Those orders and the Appeal Panel’s rejection of this argument are the subject of the proposed appeal.

Proposed grounds of appeal

15. The questions of law which the applicants seek to raise by their draft notice of appeal are:

(1) Whether the Appeal Panel erred in not construing s 79 of the Payroll Tax Act as conferring a broad discretion to exclude persons from a group where it is just and reasonable to do so in order to alleviate otherwise harsh consequences of the grouping provisions (proposed grounds 1 and 2)?

(2) Whether, when addressing s 79(2) in relation to Civil and Engineering, the Appeal Panel was obliged to take into account as mandatory relevant considerations the presence or absence of artificial or contrived arrangements to avoid duty; the splitting of existing business and other stratagems; and that dealings between group members were on commercial arm's-length terms (proposed ground 4)?

(3) Whether, when addressing s 79(2) in relation to Civil and Engineering, the Appeal Panel erred in failing to have regard to the “nature and degree of ownership and control of the businesses” as a mandatory relevant consideration (proposed ground 3)?

Merits of the proposed appeal

(1) Whether error in not construing s 79 as conferring a broad discretion?

16. In addressing the Tribunal’s conclusion that the precondition in s 79(2) was satisfied in relation to the exclusion of Exell, the Appeal Panel noted that the Tribunal had not considered whether Excell’s business was connected with the carrying on of the businesses of Civil or Engineering: [2014] NSWCATAP 94 at [34]. The Panel had earlier noted that instead of considering any connections between the carrying on of those businesses, the Tribunal “had regard to the fact that there was no evidence or suggestion of any contrivance, no evidence of control in the management of Exell and the business arrangements between group members were commercial”: [33].

17. The Appeal Panel continued at [35]:

The discretion in s 79 is not a broad discretion that may be exercised on the basis that it is just and reasonable to do so in order to alleviate harsh consequences. The Tribunal, at first instance, erred at law by asking the wrong question. On the undisputed facts, the Tribunal erred in holding that it was open to the Chief Commissioner to exercise the discretion to exclude Exell from the group. The pre-requisites were not met.

18. The “pre-requisites” referred to were that the Chief Commissioner (and accordingly the Tribunal standing in his or her shoes) had to be satisfied as to each of the matters in s 79(2) with respect to the carrying on of the business sought to be excluded.

19. The High Court has repeatedly stated that the task of statutory construction begins and ends with a consideration of the text, which is to be considered in its context (including its legislative history and any extrinsic materials): FCT v Consolidated Media Holdings Ltd [2012] HCA 55; 250 CLR 503 at [39]; Thiess v Collector of Customs [2014] HCA 12; 250 CLR 664 at [22].

20. The applicants’ submission that the power conferred by s 79(1) is enlivened whenever it is just and reasonable to exclude members from a group to alleviate any harsh consequences of the grouping provisions finds no support in the statutory language. The precondition for the exercise of that power is described in s 79(2). That subsection provides that the Chief Commissioner may only make a determination to exclude members if satisfied “that a business carried on by the person [being the person sought to be excluded from a group], is carried on independently of, and is not connected with the carrying on of, a business carried on by any other member of that group”.

21. The applicants refer to three decisions containing general observations as to the purpose or object of de-grouping powers such as that in Pt 5 of the Payroll Tax Act. One of those decisions is Tasty Chicks Pty Ltd v Chief Commissioner of State Revenueof the State of New South Wales [2011] HCA 41; 245 CLR 446 at [8]. There the “de-grouping” provisions were described as “available for application by the Chief Commissioner upon determination, in broad terms, that it would be unreasonable to apply the ‘grouping’ provisions”. The Court was not directing its attention to the meaning or application of a provision in the same or similar terms to s 79(2). The other decisions referred to, which also do not address that question, are Baxter v Chief Commissioner of Pay-Roll Tax (1986) 7 NSWLR 122 (Yeldham J) and R G Elsegood (Sales) Pty Ltd v Commissioner of Pay-Roll Tax (NSW) (1982) 12 ATR 750 (Hunt J) and, on appeal to this Court, [1983] 1 NSWLR 223.

22. It may readily be accepted that the broad purpose of the power to exclude is to enable the Chief Commissioner to relieve against the unreasonable operation of the grouping provisions. However the circumstances in which the power to do so is engaged are described in s 79(2). Whilst that description should be construed having regard to that purpose, it nevertheless remains the position that the Commissioner must in terms be satisfied that the business sought to be excluded is not connected with the carrying on of a relevant business.

23. The argument made in support of proposed grounds 1 and 2 does not have reasonable prospects of success.

(2) Whether error in not treating certain matters as mandatory relevant considerations?

24. The applicants submit that the Appeal Panel was required to take into account as mandatory relevant considerations the three matters set out in [15] above. Of those matters only one, that is that the dealings between the group members were on commercial arm's-length terms, is a fact.

25. That the dealings between the three companies were on commercial arm’s-length terms describes a characteristic of the business activities between them. For that reason it may fall within “the nature of the businesses”, a subject the Chief Commissioner is required to take into account. In Commissioner of Stamps v Garrett F Hunter Pty Ltd (1997) 69 SASR 275 at 285, Doyle CJ considered that subject to include the activities comprising the relevant businesses. It is not necessary, however, to pursue this question further because the fact of those commercial terms being arm’s-length was taken into account by the Appeal Panel. By its reference to the “facts of this matter” in [51], the Appeal Panel is to be understood as describing the undisputed facts and facts as found by the Tribunal. The former are described by the Appeal Panel at [25]. The facts as determined by the Tribunal are set out in [43] of its reasons, which in turn is extracted by the Appeal Panel at [26]. Those facts, as the Appeal Panel notes at [33], included that “the business arrangements between group members were commercial”.

26. The remaining two matters do not concern “the nature and degree of ownership and control of the businesses” or “the nature of the businesses”, which are the matters to which the Chief Commissioner must have regard. Depending on the circumstances it may be relevant to the ultimate question about which the Chief Commissioner must be satisfied that any arrangements as to ownership and control, or as to the way in which the businesses are carried on, are in some respect artificial or contrived. It does not follow, however, that the Chief Commissioner is required from the outset to have regard to those matters in the abstract. Also the Commissioner is able, but not bound, to have regard to “any other matters the Chief Commissioner considers relevant”. As was observed in Chief Commissioner of State Revenue v Tasty Chicks Pty Ltd [2012] NSWCA 181; 87 ATR 880 at [55], this provision confers a discretion to look beyond the specifically mentioned matters to other factors bearing on the existence or absence of independence and connection between the carrying on of the relevant businesses.

24. In summary, the Appeal Panel took one of the three matters relied on into account and was not required separately to consider either of the other two matters. Proposed ground 4 does not have reasonable prospects of success.

(3) Whether error in not considering nature and degree of ownership and control of the businesses?

28. The Tribunal proceeded upon the basis that as between Civil and Exell and as between Engineering and Exell there was no ownership and no control by one of the other during the relevant period. The applicants contend that the Appeal Panel did not take that fact into account when addressing whether it could be satisfied in the terms of s 79(2) with respect to the exclusion of Civil from its grouping with Exell and the exclusion of Engineering from its grouping with Exell.

29. That the Appeal Panel proceeded on that basis appears from its description of the undisputed facts in [25] and reference to the facts as found by the Tribunal, as extracted in [26]. In addition it recorded at [33] that “Civil and Engineering each carried on a business independently and without any connection with each other” and that there was “no evidence of control in the management of Exell”.

30. Against this background the Appeal Panel addressed the applicants’ argument that each of Civil and Engineering satisfied “the requisite test of independence and lack of connectivity”: [27]. The focus of that argument was on the latter.

31. The Appeal Panel addressed the precondition in s 79(2) on the basis that the relevant businesses were carried on independently and that there was no connection by common ownership: [48]-[55]. Having done so, it concluded at [56]:

On the facts as found, Exell supplied contract workers to its only two customers Civil and Engineering. Each of Civil and Engineering were in a commercial position to influence the business of Exell through continued custom. Exell was in a commercial position to influence business decisions of Civil and Engineering. These business decisions included, most significantly, decisions as to whether Civil and Engineering employed their own staff or continued to obtain staff from Exell. Furthermore, the day to day management and administrative staff of Civil and Engineering were solely or predominately supplied by Exell. In these circumstances, it can be said that the carrying on of the businesses of each of Civil and Engineering was connected to Exell's carrying on of its business. Accordingly, a statutory precondition to exclude a member from a group (absence of connection) is not met. There is therefore no power to exclude Civil or Engineering from the group, pursuant to s 79 of the PT Act.

32. In these circumstances, it is apparent from reading the Appeal Panel’s judgment as a whole that it took into account that which the applicants contend it omitted to consider. Furthermore, such an omission would not have been material, in any event, to the Panel’s conclusion that it could not be satisfied as to the absence of a connection between the carrying on of the relevant businesses. That conclusion is wholly consistent with the position being that there was no common ownership and control as between the businesses. For these reasons proposed ground 3 does not have sufficient prospects of success to warrant a grant of leave.

Application for leave to amend draft notice of appeal

33. During the course of oral argument counsel for the applicants applied for leave to amend the draft notice of appeal to include, as an additional ground, that the Appeal Panel had failed to give adequate reasons for its conclusion in [56]. That application was dismissed. The Appeal Panel gave reasons (between [48] and [55]) for not being satisfied that the carrying on of the businesses of Civil and of Engineering was not connected with the carrying on of the business of Exell. The argument in support of the application to amend did not identify any particular respect in which its statement of reasons did not, in accordance with s 62 of the Civil and Administrative Tribunal Act 2013, set out its findings on material questions of fact, its understanding of the applicable law and the reasoning processes that led to its conclusion at [56].

Conclusion

34. The proposed appeal does not have sufficient prospects of success to justify a grant of leave to appeal. Accordingly, the orders I propose are:

1.   Dismiss the summons seeking leave to appeal.

2.   Applicants pay the respondent’s costs of that summons.

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Decision last updated: 20 August 2015