Wrexgold Pty Ltd ATF the Timely No2 Trust and Commissioner of Taxation

[2006] AATA 192

Administrative

Appeals

Tribunal

 

DECISION AND REASONS FOR DECISION [2006] AATA 192

ADMINISTRATIVE APPEALS TRIBUNAL      )

)          No QT2005/184

TAXATION APPEALS  DIVISION		)
Re		WREXGOLD PTY LTD ATF THE TIMELY No2 TRUST

Applicant

And COMMISSIONER OF TAXATION

Respondent

WRITTEN REASONS FOR DECISION

Tribunal Deputy President P E Hack SC and Mr S C Fisher, Member  

Date24 February 2006

PlaceBrisbane

Decision The Tribunal sets aside the objection decision under review.

..............................................

Deputy President

CATCHWORDS

TAXATION – employee superannuation – objection decision – service company arrangement – insufficient superannuation contributions – employees were not employed by the applicant during the relevant period

Integrated Computer Services Pty Ltd v Digital Equipment Corporation (Australia)(1988) 5 BPR 11,110 at 11,117

WRITTEN REASONS FOR DECISION

3 March 2006 Deputy President P E Hack SC and Mr S C Fisher, Member   

1.This matter was heard on 14 February 2006 and 24 February 2006. At the conclusion of the hearing on 24 February 2006 we made a decision setting aside the respondent’s objection decision. What follows are our reasons for adopting that course.

2.The applicant, Wrexgold Pty Ltd (Wrexgold) was incorporated in May 1996. It was taken “off the shelf” on 2 July 1996 by three accountants, Mr Denis O’Brien, Mr Maurizio Pizzato and Mr James Wingate. On that day each of those persons was appointed to be a director of Wrexgold. Mr Wingate remained a director until 31 May 2004; the other two continue as directors. Each of the three was and is members of Wrexgold.

3.Wrexgold acted at all material times as the trustee of the Timely No. 2 Trust. In that capacity it functioned as a service company for the accountancy practice of Mr Wingate and for the separate accountancy practice of O’Brien Pizzato & Graff, a practice carried on by Mr O’Brien Mr Pizzato and Mrs Sharyn Graff.

4.We are concerned in these proceedings with the activities of Wrexgold in the year ended 30 June 2002. The question in issue is whether in that year Wrexgold employed three people - Ms Rachel Leung, Ms Jodie Phomsouvahn and Ms Verena Cheah. We will describe them as “the relevant employees”.

5.These matters arise because of the obligation on the part of employers, enforced by the respondent Commissioner, to provide a minimum level of Superannuation Support for all employees. Those employers that do not make the minimum contributions to the employees’ superannuation funds are required to lodge a Superannuation Guarantee statement with the respondent and pay the superannuation guarantee charge to the respondent by 14 August each year in respect of the year ended the preceding 30 June. An interest component and an administration component are also prescribed.

6.On 10 December 2004 the respondent, after conducting an audit, made an assessment of superannuation guarantee charge payable by Wrexgold. That assessment identified that Wrexgold had six employees with a shortfall, that is, employees in respect of whom insufficient superannuation contributions had been made. Wrexgold objected to that assessment within time. The respondent was partially satisfied by further material supplied by Wrexgold and, on 29 June 2005, made an amended assessment. That amended assessment was made up of shortfalls in relation to the relevant employees in an amount of $4,191.90, an interest component of $1,418.48 and an administrative penalty of $140.00 making a total of $5,750.38.

7.None of these matters are in issue. The critical issue is whether the relevant employees were the employees of Wrexgold during the year ended 30 June 2002.

8.The respondent came to the conclusion that they were because when they lodged income tax returns for the 2002 year each of them showed the receipt of income by way of wages paid by Wrexgold. But Wrexgold says that it did not employ these people. It says instead they were employed by Mr Wingate or an entity connected with him.

9.The evidence of Mr Pizzato, who we accept as an honest and accurate witness, was that Wrexgold acted as the service company for both practices up to the introduction of GST on 1 July 2000. There was no formal documented service agreement between Wrexgold and the two practices; rather, the practice was that a margin was added to the costs incurred by the separate entities and the entities reimbursed Wrexgold for the costs plus the margin.

10.According to Mr Pizzato, as the time for the introduction of GST arrived it appeared that Wrexgold would have increasing difficulty in having Mr Wingate meet his obligations. He said, and we accept, that the arrangement were by Wrexgold acted as the service company for Mr Wingate’s practice was terminated orally. To be fair, his evidence on the point was not precise but we would not expect him to have a precise recollection. In finding that that occurred we take comfort from the fact that the accounting records of Wrexgold thereafter were compiled on the basis that Wrexgold was no longer acting as a company providing services to Mr Wingate. In that regard exhibit 5 which shows the profit loss accounts of Wrexgold for both the 2000 and 2001 income years shows that in 2000 Wrexgold received service fees of $157,373.59 from Mr Wingate (and $536,325.86 in respect of the O’Brien, Pizzato and Graff practice) and in the year ending 30 June 2001 it received fees from Mr Wingate at $2,608.21 and $600,520.36 from O’Brien, Pizzato and Graff.

11.We take the view, having regard to the evidence, that the arrangements whereby Wrexgold acted as the service entity and employer for both practices came to an end on 30 June 2000. In reaching that conclusion we bear in mind the oft-quoted remarks of McHugh JA (Hope and Mahoney JJA concurring) in Integrated Computer Services Pty Ltd v Digital Equipment Corporation (Australia)(1988) 5 BPR 11,110 at 11,117 where his Honour said,

“It is often difficult to fit a commercial arrangement into the common lawyers’ analysis of a contractual arrangement. Commercial discussions are often too unrefined to fit easily into the slots of ‘offer’, ‘acceptance’, ‘consideration’ and ‘intention to create a legal relationship’ which are the benchmarks of the contract of classical theory. … Nevertheless, a contract may be inferred from the acts and conduct of parties as well as or in the absence of their words: Empirnall Holdings Pty Ltd v Machon Paul Partners Pty Ltd … The question in this class of case is whether the conduct of the parties viewed in the light of the surrounding circumstances shows a tacit understanding or agreement.”

In our view it is equally applicable to have regard to the conduct of the parties viewed in the light of the surrounding circumstances to determine whether, as Wrexgold contends, the earlier contractual arrangements had come to an end.

12.According to Mr Pizzato in the course of various discussions with Mr Wingate around the middle of 2000 express reference was made to the employees who were Mr Wingate’s employees, that is, employees who reported to Mr Wingate and were accountable to him. It is undoubtedly the case that no formal notice of termination of employment was given by Wrexgold to these employees (who appear to have included Ms Leung) however we are satisfied on the evidence that this is what in fact occurred. We do not regard the absence of notice from Wrexgold to the employees as a bar to concluding, as we do, that they were no longer employees of Wrexgold. In the circumstances of this case, where the employees undertook work solely in Mr Wingate’s practice and at his direction, it was open to Wrexgold to rely upon Mr Wingate to provide the employees with notice of the altered arrangements.

13.After the termination of these arrangements it remained the case that from time to time Mr Wingate drew cheques on the account of Wrexgold using a cheque book that remained in his possession. As we have already noted Mr Wingate remained a director of Wrexgold until 31 May 2004. Mr Pizzato explained the practice of Mr Wingate continuing to draw cheques by reference to the fact that initially Mr Wingate was entitled to draw amounts by way of earnings up to 30 June 2000.

14.Mr Neil Allen gave evidence that he was the bookkeeper/accountant involved of the maintenance of the accounting functions of Wrexgold. What he said was that from the time when he commenced that employment in about October 2000 up to and during the year ending 30 June 2002 there were occasions, he thought on average 3 a week, when Mr Wingate drew cheques on Wrexgold’s account. On most occasions these drawings were made against deposits that had been made to the Wrexgold account by Mr Wingate. On other occasions where a matching deposit had not been made Mr Allen would take the matter up with Mr Wingate and obtain funds for him. The arrangement of which Mr Allen and Mr Pizzato spoke seems to us more to be in the nature of a treasury or banking function by Wrexgold.

15.However the critical feature concerns the status of the three relevant employees. The totality of the evidence on the applicant’s side which we accept is that they were not employees of Wrexgold.

16.What there is, in support of the respondent’s case, are two features. First there is the existence of the PAYG payment summaries. Then there is the fact, as is accepted by Wrexgold, that some amounts of superannuation were paid in the name of Wrexgold on behalf of two of the relevant employees.

17.As to the first of these issues the respondent’s reliance upon PAYG payment summaries was diminished by Mr. Wingate’s acknowledgment that he executed these documents without any authority on the part of Wrexgold so to do. It was accepted by Mr Aftanas who appeared for the respondent that it was Mr Wingate who effected payment to these employees. These arrangements seemed to have been undertaken by Mr Wingate without the knowledge or consent of the other directors of Wrexgold. Certainly on the evidence of Mr Pizzato and Mr O’Brien the earlier arrangements were no longer in place and entirely separate arrangement had been affected with affect from July 2000.

18.We note as well that in July, August and September 2001 superannuation contributions were made in the name of Wrexgold to Sunsuper on behalf of Ms Leung and Ms Phomsouvahn. A total of $592.80 was paid on behalf of the former and an amount of $312.90 on behalf of the later. Mr Allen says of these payments that Mr Wingate requested that payments be made by Wrexgold on behalf of those persons and supplied a cheque when that was done.

19.Having regard to the evidence it seems to us that the relevant employees were not at the relevant time the employees of Wrexgold. They were at all times employees under the control of Mr Wingate. It is unnecessary for us to determine who was the employer of the relevant employees – it is sufficient for present purposes for us to determine that they were not employed by Wrexgold.

20.It follows that the objection by Wrexgold should be upheld in full and the amended assessment set aside.

I certify that the 20 preceding paragraphs are a true copy of the reasons for the decision herein of Deputy President P E Hack SC and S C Fisher, Member

Signed:         .....................................................................................
           Lynne Stalley, Acting Administrative Assistant

Date/s of Hearing  14 & 24 February 2006
Date of Decision  24 February 2006
Written reasons for Decision                      03 March 2006
The Applicant was represented by           Mr M Pizzato and Mrs S Graff          
The Respondent was represented by      Mr S Aftanas