Sexyworld (Aust) Pty Ltd and Commissioner of Taxation (Taxation)
[2023] AATA 1919
•15 June 2023
Sexyworld (Aust) Pty Ltd and Commissioner of Taxation (Taxation) [2023] AATA 1919 (15 June 2023)
Division:SMALL BUSINESS TAXATION DIVISION
File Number(s): 2021/6364
Re:Sexyworld (Aust) Pty Ltd
APPLICANT
AndCommissioner of Taxation
RESPONDENT
File Number(s):2021/6376
Robhill Dandenong Pty Ltd
APPLICANT
AndCommissioner of Taxation
RESPONDENT
File Number(s):2021/6406
Fugazzi Pty Ltd
APPLICANT
AndCommissioner of Taxation
RESPONDENT
File Number(s):2021/6411
The Trustee for Cybersex Unit Trust
APPLICANT
AndCommissioner of Taxation
RESPONDENT
File Number(s):2021/6416
Club X Ballarat Pty Ltd
APPLICANT
AndCommissioner of Taxation
RESPONDENT
File Number(s):2021/6417
The Trustee for the QLD Shops Trust Pty Ltd
APPLICANT
AndCommissioner of Taxation
RESPONDENT
DECISION
Tribunal:Senior Member G Lazanas
Date:15 June 2023
Place:Sydney
The objection decisions in respect of each of the Applicants dated 13 July 2021 are affirmed.
...............................[SGD].........................................
Senior Member G Lazanas
CATCHWORDS
CASH FLOW BOOST (CFB) – eligibility for CFB – pay as you go withholding (PAYGW) – whether the applicants paid amounts to individuals as employees (whether of the applicants or of another entity) from which the applicants must withhold PAYGW tax – where amounts paid by another entity to individuals as employees of the applicants – whether applicants and or associates or agents of the applicants entered into or carried out a scheme or part of a scheme for the sole or dominant purpose of making the applicants entitled to the CFB or increasing the amount of their CFB entitlement – objection decisions affirmed
LEGISLATION
Taxation Administration Act 1953 (Cth), s 14ZZK(b)(ii), Schedule 1, ss 11-5, 12-35
Boosting Cash Flow for Employers (Coronavirus Economic Response Package) Act 2020 (Cth) ss 4, 5, 6
A New Tax System (Goods and Services Tax) Act 1999 (Cth), s 165-10
CASES
CLK Kitchens & Joinery Pty Ltd v Commissioner of Taxation [2019] FCA 1086
Deputy Federal Commissioner of Taxation v Applied Design Development Pty Ltd (in liq) [2002] FCA
205
VNBM v Federal Commissioner of Taxation [2021] AATA 3579
SECONDARY MATERIALS
Explanatory Memorandum to Coronavirus Economic Response Package Omnibus Bill 2020 and associated Bills 2020
Coronavirus Economic Response Package (Payments and Benefits) Rules 2020
REASONS FOR DECISION
Senior Member G Lazanas
15 June 2023
INTRODUCTION
This decision concerns six separate applications for review relating to cash flow boost (CFB) claims made by each of the following entities: Sexyworld (Aust) Pty Ltd (Sexyworld), Robhill Dandenong Pty Ltd (Robhill), Fugazzi Pty Ltd (Fugazzi), The Trustee for Cybersex Unit Trust (CUT), Club X Ballarat Pty Ltd (Club X) and The Trustee for The Qld Shops Trust (QST) (collectively the Applicants).
The CFB is a cash incentive introduced by Parliament as part of a suite of COVID-19 pandemic related economic stimulus measures. Parliament’s intention in introducing the CFB under the Boosting Cash Flow for Employers (Coronavirus Economic Response Package) Act 2020 (Cth) (CFB Act) was to support small and medium businesses who employ staff to retain those employees throughout any downturn experienced during two defined periods of the COVID-19 pandemic.[1]
[1] Explanatory Memorandum to Coronavirus Economic Response Package Omnibus Bill 2020 and associated Bills at [3.2].
An entity that is eligible for the CFB would receive a minimum payment of $10,000 in the first period for which it is eligible, and could then receive further amounts, up to a maximum cap of $50,000 (First Boost). The same entity may then receive a subsequent amount in later periods (Second Boost) up to another maximum cap of $50,000.
Broadly, the entitlement to the CFB and the amount of the CFB is based on the entity’s pay as you go withholding (PAYGW) tax liability on eligible payments that the entity has made such as salary and wages. This is because the CFB statutory provisions were designed to take advantage of criteria found in existing taxation legislation, including the PAYGW tax provisions in Schedule 1 to the Taxation Administration Act 1953 (Cth) (TAA).
The relevant CFB payments in dispute between the parties and the Relevant Periods are, as follows:
(a)$20,000 for the quarterly tax periods ending 31 March 2020, 30 June 2020 and 30 September 2020 for Sexyworld;
(b)$26,674 for the quarterly tax periods ending 31 March 2020, 30 June 2020 and 30 September 2020 for Robhill;
(c)$28,184 for the quarterly tax periods ending 31 March 2020, 30 June 2020 and 30 September 2020 for Fugazzi;
(d)$20,000 for the quarterly tax periods ending 31 March 2020, 30 June 2020 and 30 September 2020 for CUT;
(e)$10,096 for the quarterly tax periods ending 31 March 2020 and 30 June 2020 for Club X; and
(f)$70,692 for the monthly periods of March 2020, April 2020, May 2020, June 2020, July 2020, August 2020 and September 2020 for QST.
The respondent, the Commissioner of Taxation (Commissioner), considered that the Applicants were not entitled to the CFB in his objection decisions dated 13 July 2021. The Commissioner determined that each Applicant did not discharge its burden of proving that the objection decision should not have been made or should have been made differently for the purposes of subparagraph 14ZZK(b)(ii) of the TAA. Specifically, following his audits of the respective Applicants, the Commissioner determined that they failed the “integrity measures” in the CFB Act because the Applicants took steps to alter longstanding arrangements to create a CFB entitlement for each of the Applicants (or, in the case of one of the Applicants, QST, to increase its CFB entitlement). The Commissioner concluded that the Applicants entered into a scheme for the sole or dominant purpose of claiming the CFB and were, therefore, not entitled to claim the CFB.
The Commissioner maintained his arguments under the abovementioned “integrity measures” at the hearing but he also argued the Applicants failed to satisfy other eligibility criteria under the CFB Act as well.
The ultimate question for the Tribunal is whether the objection decisions are correct.
As these reasons will explain, I have concluded that the objection decisions are correct and that each of the Applicants is not entitled to the CFB.
THE ISSUES BEFORE THE TRIBUNAL
The essential issue for determination by the Tribunal is whether each of the Applicants are entitled to the CFB they claimed. That depends on the determination of the following two issues which the parties were still disputing at the hearing:
(a)First, whether, in accordance with paragraph 5(1)(a) of the CFB Act, the Applicants paid amounts in the Relevant Periods which were subject to a withholding obligation under, relevantly, Subdivision 12-B of Schedule 1 to the TAA (the Payment Issue); and
(b)Secondly, whether the Applicants or any associate or agent entered into or carried out a scheme (or part of a scheme) for the sole or dominant purpose of the Applicants becoming entitled to the CFB (or increasing the amount of the CFB to which they were entitled) under the “integrity measures” as set out in paragraphs 5(1)(g) and 6(1)(e) of the CFB Act (the Integrity Measures Issue).
It was common ground that the requirements for the Applicants to be entitled to the CFB are cumulative. That is, both abovementioned issues must be found in favour of each of the Applicants for them to be eligible for the CFB. The Commissioner agreed that other requirements for eligibility in relation to the CFB were satisfied and no longer in issue.[2]
[2] The issue of whether the Applicants were small or medium business entities fell away after the Applicants provided further information at the hearing on 22 May 2023 and immediately following the hearing on 23 May 2023. The Commissioner accepted that this issue was no longer in issue by email dated 24 May 2023.
THE LEGISLATION
Subsection 5(1) of the CFB Act contains the eligibility criteria an entity must meet to be entitled to a CFB payment up to the quarter or month, as appropriate, ending 30 June 2020 for the First Boost. Sub-section 5(1) states, as follows:
(1) An entity is entitled to a payment (known as a cash flow boost) for a period covered by subsection (2) if:
(a)any of the following requirements are satisfied:
(i) the entity makes a payment in the period and must withhold an amount from the payment under Subdivision 12-B, 12-C or 12-D in Schedule 1 to the Taxation Administration Act 1953 (regardless of whether the entity actually withholds the amount);
(ii) the entity must pay an amount under Division 13 in that Schedule in relation to an alienated personal services payment that it receives in the period (regardless of whether the entity actually pays the amount); and
(c)the period applies to the entity under subsection (3); and
(d)any of the following requirements are satisfied:
(i) the entity was a small business entity or a medium business entity for the most recent income year for which there is an assessment in respect of the entity of a kind mentioned in subparagraph (a)(ii) of the definition of assessment in subsection 6(1) of the Income Tax Assessment Act 1936;
(ii) the Commissioner is satisfied on a reasonable basis that the entity is a small business entity or a medium business entity for the income year in which the period starts; and
(e) the entity notifies the Commissioner, in the approved form lodged with the Commissioner, of its withholding period total for the period; and
(f) either:
(i)the entity is an ACNC-registered charity at any time in the period; or
(ii) the entity had an ABN on 12 March 2020 (or a later time allowed by the Commissioner), and the requirement in subsection (5) or (6) is satisfied; and
(g)neither the entity nor any associate or agent of the entity has entered into or carried out a scheme or part of a scheme for the sole or dominant purpose of achieving any of the following:
(i) making the entity entitled to the cash flow boost for the period;
(ii) increasing the amount of the cash flow boost to which the entity is entitled (disregarding this paragraph) for the period.
(Bolding is emphasis added)
Subsection 6(1) contains the eligibility criteria an entity must meet to be entitled to the Second Boost for monthly or quarterly periods, as appropriate, between 1 July 2020 to 30 September 2020 and are similarly cumulative. They are as follows:
(1) An entity is entitled to a payment (also known as a cash flow boost) for a period covered by subsection (2) if:
(a)the period covered by subsection (2) applies to the entity under subsection (3); and
(b)the entity is entitled to one or more cash flow boosts for periods covered by subsection 5(2); and
(c) the entity notifies the Commissioner, in the approved form lodged with the Commissioner, in respect of the entitlement; and
(d)either:
(i) the entity is an ACNC-registered charity at any time in the period; or
(ii) the entity had an ABN on 12 March 2020 (or a later time allowed by the Commissioner), and the requirement in subsection (5) or (6) is satisfied; and
(e)neither the entity nor any associate or agent of the entity has entered into or carried out a scheme or part of a scheme for the sole or dominant purpose of achieving any of the following:
(i) making the entity entitled to the cash flow boost for the period;
(ii) increasing the amount of the cash flow boost to which the entity is entitled (disregarding this paragraph) for the period.
(Bolding is emphasis added)
All of the criteria in s 5(1) need to be satisfied for an entity to be entitled to the First Boost. Additionally, with respect to the Second Boost, all of the criteria for both the First Boost and the Second Boost must be satisfied.
As the criteria in s 6(1) are relevantly the same criteria as in s 5(1), the analysis below addresses s 5(1), however, the conclusions are equally applicable in respect of both the First Boost and the Second Boost and, accordingly, not repeated.
The first issue – the Payment Issue - arises under subparagraph 5(1)(a)(i) of the CFB Act. As stated in the extract at [12] above, that subparagraph requires that the entity makes a payment in the relevant period from which the entity must withhold an amount under a specified Subdivision in Schedule 1 to the TAA (regardless of whether the entity withholds the amount). In other words, the CFB Act identifies the category of payments made by the entity as the basis for CFB eligibility by also referencing payments made by the entity in respect of which withholding amounts were required under specified Subdivisions in Schedule 1 to the TAA. It was common ground that only Subdivision 12-B in Schedule 1 to the TAA was relevant.
Subdivision 12-B relates to PAYGW tax obligations in relation to certain payments to individuals as employees. Specifically, s 12-35, contained in Subdivision 12-B of Schedule 1 to the TAA states, as follows, under the heading ‘Payment to Employee’:
An entity must withhold an amount from salary, wages, commission, bonuses or allowances it pays to an individual as an employee (whether of that or another entity).
The other important provisions raised in these proceedings and relevant to the second issue are the “integrity measures” set out in paragraph 5(1)(g) of the CFB Act (see [12] above). In turn, s 4(1) of the CFB Act defines a “scheme” by reference to the definition of that term in the A New Tax System (Goods and Services Tax) Act 1999 (Cth) (GST Act). “Scheme” is defined in s 165-10(2) of the GST Act, as follows:
What is a scheme?
(2) A scheme is:
(a) any arrangement, agreement, understanding, promise or undertaking:
(i) whether it is express or implied; and
(ii) whether or not it is, or is intended to be, enforceable by legal proceedings; or
(b) any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise.
THE BROAD BACKGROUND
The following findings of fact are based on the respective Statement of Facts Issues and Contentions (SFICs) filed by the Applicants and the Commissioner, including the Commissioner’s Amended SFIC, as well as the evidence given by the Applicants to which I will come shortly. There were also five volumes of T-Documents which were filed by the Commissioner, and which relevantly comprised documents provided by the Applicants throughout the audits conducted by the Commissioner.
Each of the Applicants operate adult shop businesses.
Each of the Applicants is wholly or substantially owned by Mr Kenneth Hill and Ms Margaret Hill.
Mr Alexei Glavenko is the current director of each of Sexyworld, Robhill, Fugazzi and Club X. The Cybersex Unit Trust is a fixed unit trust, and its trustee is Zen Products Pty Ltd. The QLD Shops Trust is also a unit trust, and its trustee is OZ News TV Aust Pty Ltd (also referred to in this decision as QST). The current director of both trustee companies is Mr Alexei Glavenko.
At all relevant times, QST paid the salary and wages to its employees through HGC Administrative Services Pty Ltd, an entity that was related to the Applicants (the Payroll Entity). That is, QST discharged its obligations to pay the remuneration payable to its employees by arranging for the Payroll Entity to pay its employees on its behalf and QST then reimbursed the Payroll Entity.
Sexyworld, Robhill, Fugazzi, CUT and Club X (the Other Applicants) also claimed to have adopted the same process as QST, namely, utilising the Payroll Entity to pay their respective employees on their behalf. However, as detailed below, there was considerable uncertainty as to whether the Other Applicants had employees and whether they repaid the Payroll Entity amounts on account of wages which were claimed to have been paid by them through the Payroll Entity to their purported employees.
The Payroll Entity was described by the Applicants as an administrative and finance company. The Applicants stated that the Payroll Entity manages payments for more than 50 related entities, including each of the Applicants. Mr Alexei Glavenko is the current director of the Payroll Entity, having been appointed on 28 September 2020.
The Payroll Entity has its own employees and received the maximum CFB entitlement.
THE EVIDENCE
There were two witness statements in support of the Applicants, one from Mr Dean Williams, the General Manager of the Payroll Entity and the second statement was from Mr Helmut Putz, the tax agent for the Applicants. No-one from the Applicants gave evidence. This was curious as some information, including regarding the employment relationships which the Other Applicants claimed to have and which were disputed by the Commissioner, would have been within the knowledge of those Other Applicants.
The witness statement of Mr Williams, the General Manager of the Payroll Entity, focused on QST. Mr Williams stated that QST remitted the PAYG withholding tax on its own BAS for its own employees and that during the Relevant Periods, the Payroll Entity did the funds transfers and paid the employees of QST. QST would then transfer the equivalent money to reimburse the Payroll Entity. He stated that the Payroll Entity is only an intermediary. I accept the evidence given by Mr Williams as it was straightforward and consistent with the information and documents that QST provided to the Commissioner during the audit as set out further below.
Mr Putz additionally gave oral evidence and was cross-examined at the hearing. Mr Putz is the tax agent for the Applicants and other related entities and the proprietor of the tax and accounting practice known as ‘ACT NOW Taxation Consultants’. He has approximately 45 years’ experience as an accountant. Most of Mr Putz’s oral evidence concerned the issue of whether the Applicants were small or medium enterprises which issue fell away after further material was provided by the Applicants (see [11] and footnote 2 above).
Mr Putz also explained why the March 2020 BAS of QST was revised by him (or his firm) on numerous occasions. That evidence is relevant to the second issue and is set out further below. At this juncture, it suffices to observe that, like the evidence of Mr Williams, the evidence of Mr Putz was directed to QST’s situation. Neither Mr Williams nor Mr Putz traversed the facts pertaining to the Other Applicants, at least insofar as those facts were relevant in determining the two issues for determination by the Tribunal (see [10] above).
QST - FACTUAL BACKGROUND
The Leading case
The Applicants’ representative, Mr Andrew McLachlan, who is a colleague of Mr Putz’s at ACT NOW Taxation Consultants, asserted that QST was the leading case amongst the Applicants as it had the most favourable factual matrix. QST had also provided the most information and documents during the Commissioner’s audits of the CFB claims. At the hearing, Mr McLachlan made submissions mostly in relation to QST. One of his submissions was that if QST was not able to satisfy the CFB eligibility criteria, the Other Applicants had much lesser prospects of success.
Accordingly, the following further information in relation to QST, which is not in dispute, is set out in considerable detail while more limited information is set out in relation to the Other Applicants further below. The facts in relation to the Other Applicants were not settled between the parties.
One of the reasons that QST was in a better factual position is that it was the only Applicant that had registered for Single Touch Payroll (STP) before COVID-19. STP is a reporting system initiated by the Government to reduce employers' reporting burdens to government agencies. STP allows employers to report employees' payroll information to the Commissioner each time the employer pays them through STP-enabled software. The payroll information includes the amounts of salaries and wages, PAYGW tax and superannuation that are (ostensibly) paid by the employer.
The Employees and the Payments
During the Relevant Periods, QST employed approximately 30 people in its three retail stores. One of these stores was newly opened in Underwood, Queensland in or about February 2020. The employees of QST (including those of the newly opened Underwood store) had signed employment contracts stipulating QST was their employer. The employees had also previously completed Tax File Number declarations naming QST as their employer. Additionally, the employees regularly received pay slips in the name of QST.
QST was registered for PAYGW on a monthly basis. It also lodged its BASs monthly (whereas the other Applicants lodged their BASs on a quarterly basis).
QST consistently reported sales (the G1 label on the BAS) and acquisitions (the G11 label) in its monthly BASs before and during the Relevant Periods. It also consistently reported wages (the W1 label) and PAYGW (the W2 label) in its BASs before and during the Relevant Periods. QST also remitted superannuation payments to the relevant superannuation fund for its employees. Further, QST remitted payroll tax to the Queensland Office of State Revenue from its bank account.
While QST reported salary and wages in its income tax returns for the financial years ended 30 June 2013 to 2017, it did not, for some inexplicable reason, report the salary and wages in its income tax returns for the financial years ended 30 June 2018 and 2019. However, it did report superannuation expenses in the income tax returns for those latter financial years which suggested that there was some oversight in the latter years.
Significantly, however, and a key finding with respect to the first issue is the fact that QST did not make the payment of wages to its employees or, to be more precise, did not make the payment of ‘net wages’. The reference to ‘net wages’ is the amount paid to employees after the PAYGW tax amount is required to be withheld from their gross wages pursuant to s 12-35 in Schedule 1 to the TAA. Instead, pursuant to an undocumented and longstanding internal arrangement between the Payroll Entity and QST, the Payroll Entity paid the ‘net wages’ of the employees of QST – even though QST reported the wages and PAYGW tax through STP. Indeed, the Payroll Entity also always paid the salary and wages of the purported employees of the other Applicants as well.
The Applicants explained that the reason the Payroll Entity paid the employees of the Applicants was because it was more efficient for it to pay the wages through a so-called “batch payment system” that the Payroll Entity had set up with its bank. QST (and the Other Applicants) would have otherwise had to pay the employees individually directly from their bank account as they had not organised this system for themselves.
Mr McLachlan acknowledged that the wages amounts were not directly paid by QST to its employees and that the net wages were paid to them by the Payroll Entity. Mr McLachlan notwithstanding maintained that the net wages amount is calculated by QST and distributed to the individual employees through the Payroll Entity’s payroll system. He submitted this is because QST reimburses the Payroll Entity the total amount of the net wages paid by the Payroll Entity to the employees of QST. Mr McLachlan specifically referenced examples of wage reimbursements from the bank account of QST to the bank account of the Payroll Entity.
Audit in relation to eligibility to the CFB
It is necessary to briefly set out some of the background information in relation to the Commissioner’s audit which started on or about 15 September 2020 when the Commissioner advised QST of a review of its BAS and eligibility for the CFB with respect to the First Boost. This correspondence included a request for information and documents including pay slips for the periods 1 March 2020 to 30 June 2020, employment contracts and bank account statements for the same period showing wages paid.
On 28 September 2020, QST provided a response to the abovementioned request, including a statement and documents such as the profit and loss statement for the financial year ended 30 June 2018 which referred to amounts paid for ‘Salaries – Staff’. QST relevantly stated that:
(a)when QST began operating it was agreed that it’s business administration and finance would be conducted by the Payroll Entity for simplicity and cost saving;
(b)the Payroll Entity has one bank account for all income and expenses for multiple entities;
(c)an accounting software package separated the income and expenses that belonged to QST and separate reports were produced which formed the basis for its income tax returns;
(d)the finance department of the Payroll Entity prepared and lodged QST’s BAS and its STP information for each of its employees; and
(e)it became apparent that the procedures carried out by the Payroll Entity may not have been carried out correctly including having only one STP system to report employee information and the March 2020 BAS for QST not including salaries and PAYGW tax which was instead included in the Payroll Entity’s BAS (these procedures have since been rectified).
On 21 October 2020, the Commissioner requested further information from QST including its payroll data, which QST complied with. Another three requests for information ensued with QST providing further documents and clarifications. For example, on 27 November 2020, QST stated in relation to the period 1 January to 30 June 2020, as follows:
(a)the wages and PAYGW tax for QST are not included in labels W1 and W2 of the Payroll Entity’s BASs;
(b)the wages were paid from the Payroll Entity’s bank account which was repaid, or noted to be paid, by QST;
(c)the finance manager of the Payroll Entity generally prepares all the BASs, however, due to the finance manager having left the Payroll Entity, the tax agent for the Applicants began preparing the BASs due from April 2020;
(d)when preparing the March 2020 BAS, it was identified that QST’s PAYGW was being reported in the Payroll Entity’s BAS instead of its own BAS. As a result, the Payroll Entity’s BASs for the quarterly tax period ending March 2020 were reduced and QST’s PAYGW tax was reported in its BAS for the month of March 2020.
On 19 March 2021, the Commissioner determined that QST had not met the necessary eligibility criteria and was not eligible for CFB for the period 1 March 2020 to 30 September 2020 (the Eligibility Decision), on the basis that QST entered into or carried out a scheme for the sole or dominant purpose of becoming entitled to or increasing the amount of its CFB. The Commissioner considered that the steps taken were covered by the “integrity measures” in the CFB Act as QST had increased the wages reported at label W1 in its March 2020, April 2020, May 2020 and June 2020 BASs as compared to amounts reported prior to the announcement of the CFB Act. The Commissioner noted that the amounts reported as PAYGW tax at label W2 in its BASs for the months of March 2020 and April 2020 were increased compared to prior tax periods.
The following table extracted from the Commissioner’s Amended SFIC and based on the BASs in the T-Documents relevantly sets out QST’s initial reporting of wages and PAYGW tax amounts for the monthly periods immediately before the Relevant Periods as well as the Relevant Periods:
Date lodged Tax period Total salary, wages and other payments (W1) PAYGW tax shown (W2) 11 February 2020 1 Jan 2020 to 31
Jan 2020
$25,809 $3,437 20 March 2020 1 Feb 2020 to 29
Feb 2020$25,356 $3,393 29 April 2020 1 Mar 2020 to 31
Mar 2020
$0 $0 10 June 2020 1 April 2020 to 30
April 2020
$58,137 $10,384 7 September
2020
01 May 2020 to 31
May 2020
$39,306 $6,972 7 September
2020
1 Jun 2020 to 30
Jun 2020
$38,656 $6,554 17 November
2020
1 Jul 2020 to 31 Jul
2020
$40,609 $6,862 17 November
2020
1 Aug 2020 to 31
Aug 2020
$43,224 $7,716 17 November
2020
1 Sep 2020 to 30
Sep 2020
$99,832 $23,382
QST relevantly revised its reporting for its March 2020 BAS as indicated below.
Date lodged Tax period Total salary, wages and other payments (W1) PAYGW tax shown (W2) 6 May 2020 1 Mar 2020 to 31
Mar 2020
$74,960 $10,642 1 October 2021 1 Mar 2020 to 31
Mar 2020
$74,960 $3,812
The following table contains the Payroll Entity’s initial reporting of wages and PAYGW tax for monthly periods before and during the Relevant Periods.
Date lodged Tax period Total salary, wages and other payments (W1) PAYGW tax shown (W2) 11 February 2020 01 Jan 2020 to 31
Jan 2020
$345,858 $65,436 19 March 2020 01 Feb 2020 to 29
Feb 2020$306,422 $51,359 8 May 2020 01 Mar 2020 to 31
Mar 2020
$2,090,596 $16,988 7 September
2020
01 Apr 2020 to 30
Apr 2020
$320,378 $66,207 7 September
2020
01 May 2020 to 30
May 2020
$219,973 $41,233 7 September
2020
01 June 2020 to 30
Jun 2020
$228,210 $43,387
The Payroll Entity revised some of its BASs as indicated below.
Date lodged Tax period Total salary, wages and other payments (W1) PAYGW tax shown (W2) 8 May 2020 01 Jan 2020 to 31
Jan 2020$240,401 $65,436 8 May 2020 01 Feb 2020 to 29
Feb 2020
$200,964 $51,359 8 May 2020 01 Mar 2020 to 31
Mar 2020
$209,059 $16,988
Broadly, the revised figures in the Payroll Entity’s BASs with respect to the wages amounts decreased substantially, especially with respect to the month of March 2020. The Commissioner suspected that the reductions in the Payroll Entity’s total wages and PAYGW amounts were “distributed” to the Applicants as the Payroll Entity had reached the capped amount of the CFB and the Applicants had not made their own CFB claims. Besides QST, the Other Applicants had not previously reported wages or PAYGW tax in their quarterly BASs before the commencement of the CFB announcement lending credence to the Commissioner’s suspicions. As detailed below, the position of QST was different.
On 17 May 2021, QST objected to the Eligibility Decision. In its objection, QST advised the Commissioner the most recent retail shop it opened in Underwood Queensland commenced operations in February 2020 and new staff were employed. QST stated that was “the reason for the increase in the W1 [wages] and W2 [PAYGW tax] amounts reported on [BASs] that were lodged subsequent to the announcement of the Government Stimulus measures”.[3] QST added “[t]he increase was not because of “a contrived arrangement” or “scheme being entered into””.[4]
[3] T41, p 236 of 2021/6417.
[4] T41, p 236 of 2021/6417.
Separately, QST also acknowledged the PAYGW tax amount shown at the W2 label in its revised March 2020 BAS was overstated by $6,830 as a result of a further error and the correct figure was $3,812 relating to the month of March 2020 only (see table in [45] above). QST stated that the incorrect figure reported in the revised March 2020 BAS was due to the mistaken inclusion of the W2 amounts from the January and February 2020 BASs as the tax agent had overlooked the fact that QST was lodging on a monthly and not a quarterly basis. Mr Putz, QST’s tax agent, additionally explained that “so many quarterly BASs for other clients were being prepared and lodged at the same time and it was incorrectly assumed that that the March 2020 [BAS] for this client was also required to be lodged as a quarterly Activity Statement”.[5]
[5] T41, p 236 of 2021/6417.
On 13 July 2021, the Commissioner issued his objection decision disallowing the objection lodged by QST to the Eligibility Decision on the basis that it did not satisfy the “integrity measures” for CFB under paragraph 5(1)(g) of the CFB Act and, in the alternative, there was insufficient evidence to establish that there was actual or constructive payment of wages to the employees by QST. (Relevantly identical objection decisions disallowing the objections lodged by the Other Applicants were issued by the Commissioner on 13 July 2021).
On 8 September 2021, QST filed an application for review of the Commissioner’s objection decision with the Tribunal. (The Other Applicants did the same).
THE OTHER APPLICANTS
The Other Applicants also claimed to have their own employees work in their own adult retail stores but, unlike the position with respect to QST, there was virtually no documentation supporting their assertions about their employees. For instance, the Other Applicants were not able to provide employment contracts and payroll records and had not implemented STP. Except for QST, none of the Applicants had a history of reporting wages (label W1) and PAYGW (label W2) in their BASs.[6] Rather, the Other Applicants only commenced doing so after the announcement of the CFB announcement.[7]
[6] T6, T7, T8, T9, T10; T11 and T28 of 2021/6364; T6, T7, T8, T9, T10, T11 and T27 of 2021/6376; T6, T7, T8, T9, T10, T11 and T27 of 2021/6406; T6, T7, T8, T9, T10, T11 and T28 of 2021/6411; T6, T7, T8, T9, T10, T11 and T25 of 2021/6416.
[7] T12; T14; T24; T25 and T28 of 2021/6364; T12, T14 and T27 of 2021/6376; T12, T14 and T27 of 2021/6406; T12, T14, T28 and ST65, of 2021/6411; T12, T14 and T25 of 2021/6416.
Mr McLachlan acknowledged that all the supporting information requested by the Commissioner for the Other Applicants (which followed similar patterns to the audit questions for QST) was in the name of the Payroll Entity. In the face of this difficulty, Mr McLachlan argued that the CFB Act does not stipulate additional documentation is necessary and that the treatment of the wages was evident from the financial statements and income tax returns of the Other Applicants which showed salary and wages as expenses. He argued that should be sufficient evidence that the payments that were made to the individuals as employees of the Other Applicants. Furthermore, the Other Applicants claimed to have repaid the Payroll Entity by way of offset from loan accounts with the Payroll Entity. However, the financial statements and income tax returns of the Other Applicants which were relied on by the Other Applicants are not proof of the information they contain as they are self-evidently not primary documents nor contemporaneous documents.
It follows from the abovementioned deficiencies that I was not persuaded that the Other Applicants had their own employees. There were too many shortcomings in the evidence of the Other Applicants to make concrete findings about whether they had employees and whether the Other Applicants reimbursed the Payroll Entity. The fact the neither of the two witnesses (Mr Williams and Mr Putz) addressed the positions of the Other Applicants, coupled with the fact that no witness gave evidence for the Other Applicants, reinforced my view that the positions of the Other Applicants were not well-founded.
THE FIRST ISSUE: HAVE THE APPLICANTS MADE THE PAYMENTS?
It is convenient to address the position of the Other Applicants with respect to their CFB eligibility first. The Payroll Entity cannot have made payments to individuals as employees of the Other Applicants of the kind required by subparagraph 5(1)(a)(i) of the CFB Act, as there was insufficient reliable evidence to show that the Other Applicants had employees. Nor was there any reliable evidence to show that the Other Applicants made the payments to the individuals as its employees through the Payroll Entity. Accordingly, the Other Applicants failed to discharge the burden of proving, on the balance of probabilities, that the Commissioner’s decision in relation to their CFB eligibility should not have been made or should have been made differently for the purposes of subparagraph 14ZZK(b)(ii) of the TAA. Consequently, the Other Applicants are not entitled to the CFB.
The factual matrix of QST is different to the Other Applicants as QST produced contemporaneous documentation as to the employment relationships and reported the payment of the wages, PAYGW tax and superannuation on its STP and BASs. QST also remitted the PAYGW tax to the Commissioner and reported and remitted amounts on account of superannuation and payroll tax. The critical question, however, is whether QST made the requisite payments for the purposes of subparagraph 5(1)(a)(i) of the CFB Act.
QST submitted that the Payroll Entity made the payments to QST’s employees as agent for it because QST incurred the wages expense. QST submitted that it was the principal making the payments, and the Payroll Entity was its agent and/or merely doing the operational aspects of making the payments under their long standing arrangement. QST argued that the Payroll Entity merely provided the mechanism through its batch payment system to distribute the monies to the employees of QST.
I disagree with QST’s arguments and consider that QST did not make the payments for the purposes of CFB eligibility. As set out at [12] above, subparagraph 5(1)(a)(i) of the CFB Act expressly provides for CFB eligibility for the entity that makes the payment in respect of which there is a withholding obligation under, relevantly, Subdivision 12-B in Schedule 1 to the TAA. As also set out at [17] above, s 12-35 in Subdivision 12-B in Schedule 1 to the TAA, in turn, provides that the entity that must withhold an amount is the entity that makes the payment of wages to an individual as an employee (whether of that entity or another entity).
In the present case, the entity that made the payments to QST’s employees was the Payroll Entity. It follows that it is clear from the express words used in the statutory provision in the CFB Act, when read together with the statutory provision in the TAA, that the only entity eligible to claim the CFB is the entity that makes the payment to the individuals as employees and that has the obligation to withhold, regardless of whether that entity withholds. Accordingly, the Commissioner submitted, and I agree, that the entitlement to the CFB flows to the entity that satisfied both of those criteria. The fact that QST claims to have withheld, reported and remitted the “PAYGW tax” to the Commissioner is not to the point. It is also not to the point that QST utilised STP to notify the Commissioner that payments of wages were made to employees. This is because the Payroll Entity made the payments and had the obligation to withhold PAYGW tax. It also follows that, even if it is accepted that the Payroll Entity was an agent of QST, and the Payroll Entity was reimbursed by QST, the payment to the individuals as employees was made by the Payroll Entity.
The Commissioner relied on Deputy Federal Commissioner of Taxation v Applied Design Development Pty Ltd (in liq) [2002] FCA 205 (Applied Design Development) in support of his position and the abovementioned interpretation of the CFB Act statutory provision, which I also agree is relevant and I am bound to apply. That case was concerned with the issue of whether a liquidator who pays amounts to employees owed by a company that was being wound up is required to withhold PAYGW tax under s 12-35. Mansfiled J held at [12], as follows in relation to the application of s 12-35 in Schedule 1 to the TAA:
The correctness of the applicant's contention depends on the proper construction of s 12-35, and on the characterisation of the payment of 10 July 2000 as a payment of (in this case) wages to M as an employee. In my view, this is so whether or not the payment was made by the liquidated company itself, or by the liquidators in their capacity as agents of the liquidated company, or by the liquidators in pursuance of a statutory duty under the Corporations Law, or in their personal capacity. That is because s 12-35 does not impose the obligation to withhold the prescribed amount by reference to the identity or character of the entity that in fact pays the employee. Indeed, it specifically provides for the possibility that one entity may make a payment of salary, wages, commission, bonuses or allowances to an individual, being an employee of another entity. So much can be concluded from the text of the provision, and support for that conclusion can be found in the contrast between s 12-35 and its immediate predecessor, s 221C(1A) of the ITAA: see Beckwith v R (1976) 12 ALR 333 at 340-344 per Mason J. It relevantly provided: ``Where an employer pays to an employee salary or wages,... the employer shall, at the time of paying the salary or wages, make a deduction from the salary or wages...'' (Bolding is emphasis added)
In summary, Mansfield J was of the view that the payment of wages to the person as an employee and its characterisation as such meant that there was a withholding obligation under s 12-35 on the payer regardless of whether it was paid by the liquidated company or the liquidators in their capacity as agents of the liquidated company or the liquidators acting in their statutory role. His Honour observed that s 12-35 specifically contemplated the possibility that an entity may make a payment to an individual who is an employee of another entity and the entity that made the payment has the withholding obligation.
After I had reserved my decision in these proceedings, I became aware of the more recent decision of Derrington J in CLK Kitchens & Joinery Pty Ltd v Commissioner of Taxation [2019] FCA 1086 (CLK Kitchens). As none of the parties had referred to this case in their submissions, I provided them with an opportunity to provide further written submissions. CLK Kitchens also comprehensively canvasses the issue of who has the obligation to withhold tax under s 12-35 which, as stated above, informs the analysis and interpretation of subparagraph 5(1)(b)(i) of the CFB Act.
CLK Kitchens concerned two entities, CLK Kitchens Pty Ltd (CLK Kitchens) and CLK Services Pty Ltd (CLK Services), both of which were controlled by the same director. CLK Services was a labour hire company that employed workers and then provided their services as labour to CLK Kitchens. Despite CLK Services being the employer, CLK Kitchens paid the workers the wages that the workers would have been owed by CLK Services, net of PAYGW amounts. CLK Kitchens claimed it had sought reimbursement for the wages it paid to the workers. CLK Kitchens had not remitted the PAYGW tax to the Commissioner nor lodged any BASs.
In determining whether the Estimate Notice and Director Penalty Notice (DPN) issued by the Commissioner to CLK Kitchens were valid, Derrington J considered whether CLK Kitchens as payer of the wages was obliged to withhold PAYGW amounts under s 12-35 in Schedule 1 to the TAA. Derrington J commenced with an explanation of s 12-35 which imposes the primary obligation to withhold PAYGW and stated at [52] that the statutory provision “makes it pellucid that the obligation to withhold is imposed upon the person or entity which makes the payment of the salary, wages…to the employee, even if not the employer”.
Derrington J then cites Mansfield J in Applied Design Development favourably, particularly the passage extracted above at [62]. Derrington J, relying on Applied Design Development stated that for the imposition of the withholding obligation, the issue is one of the characterisation of the payment in question and whether it was the payment of wages to the person as an employee. Derrington J found that the payments made by CLK Kitchens to employees effected a discharge of the wages obligation which had arisen by reason of the employees providing their services. Derrington J held at [101] that: “[t]he mere fact that the payments were made by CLK Kitchens on behalf of CLK Services…makes no difference as far as s 12-35 is concerned. The payment by CLK Kitchens discharged the wages obligation owed to the employees of CLK Services and was a payment of the wages. Indeed, the fact that CLK Kitchens was using its credit or financial facilities to discharge the debt supports the conclusion that it was paying the wages.”
Accordingly, CLK Kitchens (and the cases cited there, including Applied Design Development) are directly relevant to how I have approached the resolution of the first issue of whether QST made the payments so as to satisfy CFB eligibility. The analysis is apt to the present matter where it is evident that the Payroll Entity also made the payments for the purpose of discharging the wages debt in relation to work performed by the employees for QST, and the Payroll Entity was authorised to make the payments on behalf of QST. It follows that the Payroll Entity that paid the wages of QST’s employees and that has the obligation to withhold is the relevant entity. The Applicants’ arguments to the effect that CLK Kitchens is distinguishable because CLK Kitchens was a labour hire firm and CLK Kitchens did not remit the PAYGW tax are not material to the analysis.
The Applicants alternatively argued that based on the Commissioner’s argument, the entity that made the actual payment to the individuals as employees is the bank that provided the batching facility and that transferred the wages, and it was the payer under s 12-35 liable to PAYGW tax. Derrington J considered an identical argument in CLK Kitchens and stated at [98] that it is “misconceived” and, further, at [102], it is “unreal and contrary to the ordinary meaning of the words used” in s 12-35 because what the bank is involved in “is the mere mechanical transfer of money or credit. The ability to discharge an obligation arises from the authority of the payer to do so… the transferring bank has no authority to discharge a debt; in this case a wages debt. Its authority is to transfer money.” QST’s submission that the Payroll Entity was, in the alternative, akin to a bank in that the Payroll Entity merely provided the mechanics of breaking up a large, combined wages payment to QST’s employees also ignores the fact that there was a longstanding arrangement between QST and the Payroll Entity. As stated above, the Payroll Entity was authorised to discharge the obligations of QST as regards the payment of wages to QST’s employees. Accordingly, this argument is rejected.
The Applicants separately relied on GSTR 2000/37, a public ruling setting out the Commissioner’s views on GST and agency principles, including specific statutory provisions in the GST Act. The Applicants argued that the Commissioner’s views should be applied in construing s 12-35 on the basis that the payments made by the Payroll Entity should be characterised “as if made by QST”. However, there is no basis for the application of GSTR 2000/37 to the present case as GST is not in issue. Moreover, to the extent that the Applicants sought to advance the proposition that the Payroll Entity acted as an agent and it was QST that actually made the payments, the express words used in the statutory provisions in the CFB Act and the TAA leave no room for the application of agency law. The extracts from the Federal Court decisions in Applied Design Development and CLK Kitchens extracted at [62], [66] and [67] above provide further support, particularly as an entity has a withholding obligation under s 12-35 for payments made to employees “whether of that or another entity”.
In the further alternative, QST argued “[i]t is also possible to argue that the wages payments are constructive payments and have simply been dealt with on Qld Shops trust’s behalf.” This argument is also rejected as there was no evidence to suggest that the employees had given directions to QST to pay their wages payments to the Payroll Entity (and to subsequently pay them) for the purposes of a constructive receipt argument under s 11-5 in Schedule 1 of the TAA, as was alluded to by the Applicants. Section 11-5 covers the situation where an amount will be taken to have been paid to an employee when the employer pays another, at the employee’s direction. The only arrangement of which there was evidence is that QST had an arrangement with the Payroll Entity for it to pay QST’s employees on behalf of QST.
Finally, the Commissioner also relied on other materials, including the Coronavirus Economic Response Package (Payments and Benefits) Rules 2020, which are concerned with eligibility for Jobkeeper stimulus payments. The Commissioner submitted that the COVID-19 economic stimulus legislation including the CFB Act was directed to providing economic support to the entities that demonstrated they have actually paid wages. In light of the conclusions above, it is unnecessary to analyse other statutory provisions.
For the reasons set out above, all of the Applicants have failed to establish that, for the purposes of subparagraph 5(1)(a)(i) of the CFB Act, they made the payments to employees in the Relevant Periods in the manner contemplated in s 12-35 of Schedule 1 of the TAA.
SECOND ISSUE: DO THE INTEGRITY MEASURES APPLY?
Although it is strictly unnecessary for me to address the second issue, namely, whether the integrity measures in paragraphs of 5(1)(g) and 6(1)(e) of the CFB Act apply, which are aimed at preventing entities from entering artificial or contrived arrangements to obtain the CFB, I briefly set out the relevant principles as well as my conclusions.
The abovementioned statutory provisions apply where an entity or its associate or agent entered into or carried out a “scheme” (or part of a “scheme”) for the sole or dominant purpose of creating an entitlement to the CFB or increasing their CFB entitlement. As also set out at [18] above, the broad definition of “scheme” in the GST Act is incorporated. Entities that fail to satisfy the relevant paragraphs with respect to the integrity measures in respect of a particular period are not entitled to any CFB for that period: see, generally as to the integrity measures, VNBM v Federal Commissioner of Taxation [2021] AATA 3579.
Mr Putz stated that he began lodging the BASs for QST in early 2020 when the internal accountant at the Payroll Entity resigned. He stated, as follows:
4. When preparing the March BAS for the Applicant I made a series of errors which were partly due to the BASs previously being prepared by the Applicant's internal accountant & partly due to the working conditions at the time because Melbourne entered Covid lockdown whereby the Applicant's staff & our staff were working from home. This resulted in much confusion & incomplete information.
5. When preparing the BAS I initially omitted the Wages information including PAYG Withholding. This was clearly an error because the Applicant has been remitting PAYG Withholding for years on all BASs.
6. A Week later I realised my mistake & revised the BAS to include the wages & PAYG Withholding that I had previously missed. However in so doing I made an additional mistake in that I entered the quarter's wages & PAYG Withholding rather than just the single month of March - ie. I mistakenly included January & February PAYG Withholding in the March BAS.
…
8. We revised the March BAS ourselves on the 1st October 2021 to reconcile the PAYG Withholding for the 2020 FY to the STP reports that were lodged for the year as part of our normal reconciliations when the 2020 tax returns are prepared.
9. After the final amendment above, the PAYG Withholding for the 6 months ended June 2020 is correct & matches the PAYG Withholding per the STP records for the entity's employees. I note however the gross wages on the March BAS remains incorrect but this has no bearing on the PAYG Withholding amounts remitted or on the Cash Flow Boost amounts entitled to (which are based on only the PAYG Withholding amount).
I find that Mr Putz’s explanations as to the errors as well as to his inability to access reliable records were plausible in all the circumstances. It is uncontroversial that there was confusion and uncertainty caused by the COVID-19 pandemic in early 2020. I accept that Mr Putz was an earnest witness and gave true answers to the questions that he was asked, including accepting responsibility for several mistakes that were made in the BASs lodged for QST.
I disagree with the Commissioner’s contention that there was a “scheme” insofar as QST was concerned consisting of the lodgement by QST of its BASs for the Relevant Periods reporting inflated amounts of wages paid and, correspondingly, increased PAYGW tax. I accept that the reason for the increased wages and PAYGW tax in QST’s BAS in the months following February 2020 were attributable to the new retail store opening which required additional employees and that, aside from the mistakes that were made in its March 2020 BAS, which were later amended, QST continued to report wages and PAYGW tax in accordance with its usual business practice.
In any event, even if there was a “scheme” as defined, I conclude that QST (and/or associates or agents of QST) did not enter into or carry out the scheme or part of the scheme for the sole or dominant purpose of making it entitled to the CFB for the Relevant Periods, or for increasing the amount of the CFB to which it otherwise would have been entitled. In this regard, I was satisfied that QST always reported wages and PAYGW tax including before the CFB announcement and that the multiple discrepancies in the QST’s March 2020 BAS which piqued the Commissioner’s interest were due to consecutive mistakes made by its tax agent in the beginning of the COVID-19 pandemic shutdowns.
In relation to the Other Applicants, their decision to commence reporting wages amounts at label W1 and PAYGW tax at label W2 on their respective BASs shortly after the CFB announcement where there was no prior history of them reporting these amounts puts them in an entirely different position. Their conduct following the CFB announcement constituted a “scheme” as the Other Applicants undertook steps to position themselves by lodging BASs as if they were making payments of wages and PAYGW tax for the sole or dominant purpose of securing the CFB.
The inescapable conclusion, particularly based on the timing of events and the information disclosed in the BASs lodged by the Other Applicants following the CFB announcement is that the Other Applicants (and/or associates or agents of each of them) entered into or carried out the scheme or part of the scheme for the sole or dominant purpose of making each of them entitled to the CFB for the Relevant Periods. No explanation was offered as to the revision by the Payroll Entity of its March 2020 BAS. Nor did the Other Applicants offer explanations as to why they commenced reporting wages and PAYGW tax in their BASs immediately following the CFB announcement, especially as it was revealed they only registered for STP in September 2020.
CONCLUSION
The Other Applicants did not produce sufficiently reliable evidence that they had employees. The Other Applicants also did not make the requisite payments to meet the statutory test in subparagraph 5(1)(a)(i) of the CFB Act. However, even if they had, they would not be entitled to the CFB as the “integrity measures” in paragraph 5(1)(g) of the CFB Act would apply. That is, neither of the two issues for determination by the Tribunal were favourable to the Other Applicants for them to be eligible for the CFB in the Relevant Periods. QST, on the other hand, failed CFB eligibility in the Relevant Periods because it did not satisfy the first issue, namely, of making the payments to meet the statutory test in subparagraph 5(1)(a)(i) of the CFB Act.
DECISION
For the reasons given, the Objection Decisions in respect of each of the Applicants are affirmed.
I certify that the preceding 83 (eighty-three) paragraphs are a true copy of the reasons for the decision herein of Senior Member G Lazanas
.......................................[SGD].................................
Associate
Dated: 15 June 2023
Date(s) of hearing:
22 May 2023
Date final submissions received:
14 June 2023
Advocate for the Applicant:
Mr A McLachlan, ACT NOW Taxation Consultants
Solicitors for the Respondent:
Messrs P Pillay and S Jamieson, ATO Litigation and Legal Services
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