YZDZ and Commissioner of Taxation (Taxation)
[2025] ARTA 73
•31 January 2025
YZDZ and Commissioner of Taxation (Taxation) [2025] ARTA 73 (31 January 2025)
Applicant/s: YZDZ
Respondent: Commissioner of Taxation
Tribunal Number: 2023/4000
Tribunal:Senior Member Jane Lye
Place:Brisbane
Date:31 January 2025
Decision:The Tribunal affirms the decision under review.
.....................[SGD]..............................
Senior Member Lye
Catchwords
TAXATION – CASH FLOW BOOST – eligibility for cash flow boost – pay as you go withholding (PAYGW) – corporate entity supporting medical specialist – whether applicant and or associates or agents entered into or carried out a scheme or part of a scheme for the sole or dominant purpose of increasing its entitlement to cash flow boost – decision affirmed
Legislation
Administrative Review Tribunal Act (2024) (Cth), ss 9, 52
A New Tax System (Goods and Services Tax) Act 1999 (Cth), s 165-10(2)(a)
Boosting Cash Flow for Employers (Coronavirus Economic Response Package) Act 2020 (Cth), ss 4(1), 5(1)(a)(i), 5(1)(g), 6(1)(e), 7, 9, 10
Income Tax Assessment Act 1936 (Cth), Division 7A, Part IVA
Taxation Administration Act 1953 (Cth), ss 14ZZE, 14ZZJ(2), 14ZZK
Cases
Allied Pastoral Holdings Pty Ltd v Federal Commissioner of Taxation (1983) 13 ATR 825
Commissioner of Taxation v Hart (2004) 217 CLR 216
Commissioner of Taxation (Cth) v Spotless Services Pty Ltd (1996) 186 CLR 404
Danmark Pty Lt v Federal Commissioner of Taxation (1944) 7 ATD 333
Federal Commissioner of Taxation v Cassaniti [2018] FCAFC 212
Maloney v Commissioner for Railways (NSW) (1978) 52 ALJR 292; 18 ALR 147Twin Rivers Developments Pty Limited and Commissioner of Taxation(Taxation) [2022] AATA 887
VNBM and Commissioner of Taxation [2021] AATA 1626
Secondary Materials
Explanatory Memorandum - Boosting Cash Flow for Employers (Coronavirus Economic Response Package) Bill 2020Taxation Ruling IT2503 - Income Tax: Incorporation of Medical and Other Professional Practices (partially withdrawn)
Statement of Reasons
PART A – INTRODUCTION AND BACKGROUND
Early in 2020, following the declaration of the coronavirus pandemic (COVID-19), the Australian Government introduced a measure, known as Cash Flow Boost. The measure was intended to support small and medium sized businesses to manage their cashflow and to retain employees by providing payments calculated on their PAYG withholdings (PAYGW) reported to the Australian Taxation Office (ATO).
Eligibility for the Cash Flow Boost was subject to a specific integrity rule designed to defeat artificial or contrived arrangements to obtain or increase the payments.[1]
[1] Explanatory Memorandum to the Cash Flow Boost (the Boosting Cash Flow for Employers (Coronavirus Economic Response Package) Bill 2020 at [3.33] (the EM).
On 21 October 2022,the Commissioner of Taxation (the Commissioner) decided YZDZ (the Applicant) had engaged in an unlawful scheme or part of a scheme for the sole or dominant purpose of increasing its payment. He disallowed that payment (the Cash Flow Boost amount).
The Applicant objected to the Commissioner’s decision and when that objection was unsuccessful it sought review of the Commissioner’s objection decision[2] and reinstatement of its payment of $93,704.
[2] Exhibit R1, T2 at p 1.
Transition to the Administrative Review Tribunal
YZDZ’s application for review was lodged on 5 June 2023 with the Administrative Appeals Tribunal (AAT) and was heard on 23 and 24 October 2024.
On 14 October 2024, the Administrative Appeals Tribunal (AAT) became the Administrative Review Tribunal (the Tribunal). Under the transitional provisions in the Administrative Review Tribunal (Consequential and Transitional Provisions No. 1) Act 2024 (the Transitional Act), proceedings in the AAT that were not finalised before 14 October 2024 are to be continued and finalised by the Tribunal. Anything done in relation to the proceeding before 14 October 2024 is taken to have been done by the Tribunal. finalise any aspect of the review not already completed by the AAT. This decision and statement of reasons is made by the Tribunal.
The decision which is the subject of this application
The decision which is the subject of this application is the Commissioner’s Objection Decision dated 13 April 2023 to disentitle the Applicant to Cashflow Boost claimed for the tax periods ending 31 March 2020 and 30 June 2020 (the relevant quarters) because it (or its associate or agent) entered into, or carried out a scheme for the sole or dominant purpose of increasing the amount of the Cash Flow Boost to which it was entitled (the scheme issue).
The Commissioner does not dispute that the Applicant was an eligible business which would otherwise have qualified for a Cash Flow Boost amount. Consequently, the only issue the Tribunal needs to decide is the scheme issue.
The Applicant’s burden of proof
Before the Tribunal, the Applicant has the burden of proving that the Commissioner’s Objection Decision should not have been made or should have been made differently.[3]
[3] Section 14ZZK of the Taxation Administration Act 1953 (TAA 53).
This requires the Applicant to establish the facts necessary to displace the Commissioner’s decision. [4] In practical terms, it means the Applicant must convince the Tribunal that it is more probable than not that neither the Applicant nor any associate or agent of the Applicant entered into or carried out a scheme or part of a scheme for the sole or dominant purpose of increasing the amount of the Applicant’s Cash Flow Boost.
[4] Danmark Pty Lt v Federal Commissioner of Taxation (1944) 7 ATD 333 at 336
In discharging its burden, the Applicant is not required to conclusively establish another sole or another dominant purpose existed for the alleged scheme or part of a scheme. As his Honour, Justice Steward observed when describing the taxpayer’s onus in Federal Commissioner of Taxation v Cassaniti,[5] with reference to the words of Hunt J in Allied Pastoral Holdings Pty Ltd v Federal Commissioner of Taxation[6]:
The direction given to a jury in civil cases aptly describes that onus by reference to a pair of scales and to the arguments of each party being placed at each end. As Hunt J said in Allied Pastoral:
“ … if the plaintiff succeeds … in weighing down those scales ever so slightly in his favour then he has discharged the burden he carries … ”
[5] (2018) 266 FCR 385; (2018) 109 ATR 119 at [88] (Cassaniti).
[6] [1983] 1 NSWLR 1.
In hearing and determining this application, I am required to pursue the objectives set out in s 9 of the Administrative Review Tribunal Act2024 (the ART Act). These include the obligation to provide a mechanism for review that is fair and just, is accessible and responsive to the diverse needs of parties and promotes public trust and confidence in the Tribunal.
In discharging its obligation, the Tribunal is not bound by the rules of evidence but may inform itself on any matter as it sees fit.[7] I accept the Tribunal nonetheless has an obligation to approach fact finding relying upon material and evidence which is probative and so should still be guided by the rules of evidence in its task.[8]
[7] Section 52 of the ART Act.
[8] Sullivan v Civil Aviation Safety Authority (2014) 226 FCR 555, (2014) 141 ALD 540 at [97] per Flick and Perry JJ.
With that in mind, in this decision:
(a)where I have drawn any inference adverse to the Applicant in respect of a failure to lead evidence, I have identified the reasons for that inference;[9] and
(b)I am mindful that:
(i)the Applicant is not required to call all material witnesses and produce all material documents to support its position;
(ii)the Applicant is not automatically required to corroborate its evidence with documentary records but it is prudent that it do so where possible; and
(iii)I may accept the evidence of the Applicant’s witnesses in this proceeding if I find their evidence to be truthful.[10]
Statutory Framework
[9] In accordance with the rule in Jones v Dunkel (1959) 101 CLR 298.
[10] Cassaniti at [88].
The Cash Flow Boost Act
Sections 5, 6, 7, 9 and 10 of the Boosting Cash Flow for Employers (Coronavirus Economic Response Package) Act 2020 (Cth) (the Act) are linked to this decision,[11] but to summarise:
(a) section 5 provides for entitlement to Cash Flow Boost for the months of March, April, May, and June 2020/ the quarters ending 31 March 2020 and 30 June 2020 (CFB1);
(b) section 6 provides for entitlement to Cash Flow Boost for the months of June, July, August, and September 2020/ the quarters ending 30 June 2020 and 30 September 2020 (CFB2);
(c) section 7 sets out the basis upon which CFB1 and CFB2 are to be calculated;
(d) section 9 provides for recovery of overpayments of Cash Flow Boost by the Commissioner; and
(e) section 10 provides for the application of the general interest charge to an overpayment.
[11] The Act, ss 5, 6, 7, 9, 10.
Eligibility for the Cash Flow Boost
An employer is eligible for Cash Flow Boost if the requirements in s 5(1)(a)(i) of the Act are met. That is to say, an eligible business, accounting for GST quarterly, which was required to deduct PAYGW from wages paid to an employee/s for the relevant quarter/s would be eligible for the Cash Flow Boost.
The anti-avoidance provisions in the Act
Sections 5(1)(g) and 6(1)(e) of the Act operate to disentitle an otherwise eligible business from receipt of Cash Flow Boost. Section 5(1)(g) relevantly includes the following:
(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.
The term ‘scheme’ is defined in s 4 of the Act to correspond with the meaning in s 165-10(2) of the New Tax System (Goods and Services Tax) Act (1999) (the GST Act) which states:
A scheme is:
(a)any arrangement, agreement, understanding, promise or undertaking:
(i)whether it is express or implied; or
(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.
This definition gives the term ‘scheme’ in ss 5(1)(g) and 6(1)(e) of the Act broad application. Further guidance as to the meaning of the term ‘scheme’ may be taken from case law referring to the term as it applies to the general anti-avoidance provisions in Part IVA of the Income Tax Assessment Act (1936) (ITAA 36). In respect of that provision, Federal Commissioner v Hart, Justices Gummow and Hayne observed:[12] ‘Th[e] definition is very broad. It encompasses not only a series of steps which together can be said to constitute a 'scheme' or a 'plan' but also (by its reference to 'action' in the singular) the taking of but one step’.
[12] [2004] HCA 26; 217 CLR 216; 206 ALR 207; 2004 ATC 4599; 55 ATR 712 at [43] (FCR v Hart).
In ss 5(1)(g) and 6(1)(e), the term ‘sole’ is self-evident, while the term ‘dominant’ refers to the ‘ruling, prevailing or most influential purpose’.[13]
Differences between ss 5(1)(g) and 6(1)(e) and the general anti-avoidance provisions in ITAA 36
[13] Commissioner of Taxation (Cth) v Spotless Services Pty Ltd (1996) 186 CLR 404, at 416.
As the AAT observed in the case of VNBM v Commissioner of Taxation,[14] the most significant difference between ss 5(1)(g) and 6(1)(e) and the general tax avoidance provisions in Part IVA of ITAA 36 is that ss 5(1)(g) and 6(1)(e) expressly permit consideration of the subjective purpose for which the alleged scheme or part of the scheme was entered into by the Applicant or ‘any associate or agent’ of the Applicant. In contrast, under Part IVA of ITAA 36, the taxpayer’s subjective intention (even if it involves an intention to avoid tax) is not relevant so long as the scheme engaged in is otherwise objectively defensible.
[14] VNBM and Commissioner of Taxation (Taxation) [2021] AATA 1626 at [19-23] (VNBM). See also Twin Rivers Developments Pty Limited and Commissioner of Taxation (Taxation) [2022] AATA 887 at [12] (Twin Rivers).
As the AAT has also previously found, while ss 5(1)(g) and 6(1)(e) permit evidence of subjective intention, consideration of objective facts or circumstances is also permitted where these assist to determine subjective intent.[15]
[15] VNBM at [25-27].
There are three other important matters to note in respect of ss 5(1)(g) and 6(1)(e) of the Act. First, they explicitly and specifically refer to conduct relating to both ‘a scheme’ as well as ‘part of a scheme’. This means, the Tribunal can reach a state of satisfaction about the application of s 5(1)(g) of the Act based on a finding about the purpose for which parts of the scheme were entered into.[16]
[16] VNBM at [66].
Second, ss 5(1)(g) and 6(1)(e) will, if met, disentitle a taxpayer from any payment of Cash Flow Boost. This means that, the Applicant cannot argue that it would have been entitled to a lower Cash Flow Boost amount on the basis that the alleged scheme had not been entered into. [17]
[17] VNBM at [28].
Third, while this case was argued without distinction between the relevant tax quarters (March and June 2020), it is open to the Tribunal to reach different conclusions about each of them.[18]
[18] Twin Rivers.
How was Cash Flow Boost generally calculated?
The process can be summarised as follows:
(a)businesses qualifying for the payment were entitled to receive between a minimum of $20,000 to maximum of $100,000 in cash flow boost amounts by lodging their business activity statements (BAS) for the 2020 March to September Quarters;
(b)for the March 2020 quarter the eligible business was entitled to the greater of $10,000 or the withholding period total capped at $50,000;
(c)for the June 2020 quarter, eligible businesses were entitled to the entity’s withholding period total for the period, reduced to the extent the sum of the cash flow boost for the March 2020 quarter and June 2020 quarter does not exceed $50,000;
(d)businesses eligible for CFB1, were generally automatically entitled to CFB2 for the 2020 June and September quarters; and
(e)CFB2 was dependent on the businesses withholding for the September quarter but was equal to the first cash flow boost amount.
The resulting cash flow boosts were effectively a credit to eligible businesses for the PAYGW from employee wages for the relevant periods. In that sense, there was nothing an eligible business ‘needed to do’ to qualify.
In this proceeding, the Applicant is an employer with only one employee and is a corporate vehicle through which a medical practitioner operates their business. Nonetheless, it still qualified to receive a Cash Flow Boost amount.[19]
[19] Applicant’s closing submissions at [8].
The Applicant’s Cash Flow Boost amount
On 26 April 2020, the Applicant lodged its 2020 March Quarter Business Activity Statement (BAS) with a PAYGW amount of $15,184.
On 21 July 2020, the Applicant lodged its 2020 June quarter BAS with a PAYGW amount of $31,668.
The Applicant’s lodgements for the 2020 March and June quarters, meant its total entitlement for CFB1 and CBF2 was calculated as $93,704 out of a maximum possible benefit of $100,000.
The Commissioner calculated that the PAYGW amounts the Applicant reported for the 2020 March and June quarters represented a significant increase in its PAYGW as compared to its historical reported amounts, which the Commissioner contended had averaged $3,078 between 2014 to 2019. Given the apparent discrepancy, he decided to audit the Applicant.[20]
[20] Exhibit R1, T2 at [47-48].
The key individuals and entities in this proceeding
This proceeding was conducted in private at the Applicant’s request.[21] Consistent with the operation of s 14ZZJ(2) of TAA 53, the full names of the individuals and entities associated with the Applicant are not disclosed in these reasons, including where they appear in quotations.
[21] Section 14ZZE TAA 53.
The roles of the key entities and individuals relevant to this proceeding, are described below.
The Applicant is a company. Dr S is its sole director and shareholder.[22] The Applicant exists for the sole purpose of supporting Dr S in the conduct of her specialist medical practice, and its income is primarily generated by patient fees generated by Dr S. These fees are either paid directly by patients or via Medicare or a combination of both. Dr S and another colleague (Dr C) also engage in sub-tenancy arrangements for their share of the Medical Rooms (the Rooms) for which some income is also earned by the Applicant.[23]
[22] Exhibit A2, Affidavit of Dr S, sworn on 3 November 2023 at [1] (the first S affidavit).
[23] The first S affidavit at [47] and [58].
The Applicant’s primary monthly expenses are amounts paid to Dr S as salary, the monthly service fees it pays to a Service Company (for the use of the Rooms and other services provided such as administrative staff) and (to a lesser extent) insurance and professional membership costs.
Dr S is a practising medical specialist in endocrinology. Since mid-2016, Dr S has operated an independent specialist medical practice, sharing the Rooms and services primarily with five colleagues (referred to collectively as the Doctors).
Mr D is married to Dr S and is a chartered accountant. He worked for a top tier accounting firm for more than 15 years and has worked as an Australian Public Servant in a financial field since late 2018.[24] He worked on COVID related measures from April 2020.[25]
[24] Exhibit A6, Affidavit of Mr D, sworn 3 November 2024 at [1-7] (the first D affidavit).
[25] In reaching my decision, I have not had regard to Mr D’s experience or knowledge arising from his work on COVID related measures and did not understand the Commissioner to submit that I should do so.
Mr D has managed the Applicant’s bookkeeping on a daily basis since 2015, [26] including preparing and lodging the Applicant’s BAS, calculating the amounts the Applicant periodically pays to Dr S as salary and advising Dr S when to make salary payments to herself and to pay other expenses of the Applicant (including the service fees). Mr D receives no remuneration for this work.[27]
[26] First D affidavit at [11].
[27] First S affidavit at [57] and [64-65].
Dr S relies on Mr D to determine the amounts the Applicant should pay her as salary and the timing of those payments.[28]
[28] First S affidavit at [68].
In March and April 2020, Mr D provided extensive advice and assistance to Dr S and the Doctors in negotiating a reduction to their monthly service fees paid to the Service Company. This assistance was provided informally, because Mr D did not hold any formal role or position in respect of the Applicant or the Service Company.
Mr C is a chartered accountant who operates an accountancy practice.
Mr C undertakes end of financial year work for both the Applicant and Dr S and her associated superannuation entities and for the relevant periods lodged the Applicant’s income tax returns.[29] Mr C (together with his colleague, P) assisted to prepare a submission and appeared for the Applicant before the Australian Taxation Office (ATO) General Anti-Avoidance Rule (GAAR) Panel during the audit. He also assisted Mr D and Dr S to respond to a request by the GAAR Panel for further information (the GAAR Panel Response).[30]
[29] Exhibit A5, Affidavit of Mr C, sworn 4 July 2024 at [2] (the C affidavit).
[30] Exhibit R1, T9; Transcript of proceedings on 23 and 24 October, page 72 line 5 to page 73 line 1 (Transcript)
The Service Company was incorporated to provide services to support the Doctors in their specialist medical practices. Each of the Doctors was and continues to be a director of the Service Company.
Dr S owns 16.67% of the shares in the Service Company.
Since around 11 August 2016, the Applicant and the Service Company have operated under a Services Agreement[31] which provides services to the Applicant such as use of the Medical Rooms, administrative services, nursing services and IT support and hardware in return for a monthly services fee.[32]
[31] Exhibit R1, T22.
[32] The First S affidavit at [12].
The service fees paid by the Applicant (on behalf of Dr S) and Mr C’s entity (on his behalf), account for almost 50% of the total service revenue earned by the Service Company.[33]
[33] Exhibit R1, T2 at [85].
The Unit Trust was established by the Doctors. The Doctors each have self-managed superannuation funds which own units in the Unit Trust.
The Unit Trust owns the Medical Rooms and leases them to the Service Company for the use of the Doctors.
The Property Company operates as trustee of the Unit Trust.
Dr C is one of the Doctors. Dr S and Dr C practice in the same field under a joint practice name and so jointly rent space in the Medical Rooms (Room Sessions). They then sublet any unused Room Sessions to other doctors.
Grant Thornton provides accounting advice and support to the Service Company and the Unit Trust. In consultation with the Doctors, it calculates the monthly service fees to be charged to each doctor for each financial year and assists with the annual ‘true-up’ of the service fees at the end of each financial year. The ‘true-up’ reconciles the actual costs and each Doctor’s actual use of the services with the amounts agreed at the beginning of the year. Each doctor either pays an additional amount or receives a refund of the service fees following the ‘true-up’.[34]
[34] First S affidavit at [41]-[46].
PART B - THE SCHEME ALLEGED BY THE COMMISSIONER
Before the Tribunal,[35] the Commissioner contended that the alleged scheme comprised the following six steps:
[35] The Respondent gave notice to the Applicant, following the hearing that he proposed to address a scheme in this form and the Applicant’s closing submissions were directed to a scheme of this form. Applicant’s closing submissions dated 31 October 2024 at [2] and Respondent’s closing submissions dated 31 October at [21]-[26].
1.The Applicant’s additional $22,000 wage payment made to Dr S on 30 March 2020 (journalled retrospectively to 18 January 2020).
2.The transfer of $14,000 on 1 April 2020 into the Applicant’s bank account which was described in the Applicant’s bank account as ‘loan to business’ and in the Applicant’s general journal as ‘loan to cover rental expenses during COVID’.
3.The $33,000 of wages paid by the Applicant to Dr S on 6 April 2020;
4.The reduction, on 22 April 2020, of the Service Company’s April service fee from $12,802 (payable in February and March 2020) to $4,955.
5.The Applicant’s failure to pay the Service Company’s March service fee in accordance with the terms of the Services Agreement and prior to making the first, additional $22,000 payment to Dr S on 30 March 2020.
6.The payment of wages on a monthly basis (which is to say, in the usual way) in the following amounts:
i.$11,000 on 14 February 2020;
ii.$12,500 on 18 March 2020;
iii.$17,000 on 22 April 2020;
iv.$15,000 on 18 May 2020; and
v.$17,130 on 15 June 2020.
The Applicant acknowledges that each of the transactions associated with these six steps occurred. However, it disputes the application of the anti-avoidance provision, which is to say, it disputes they were carried out for the sole or dominant purpose of increasing the Applicant’s Cash Flow Boost.
However, the Applicant does not dispute that:
(a)the scheme alleged by the Commissioner is capable of meeting the definition of a ‘scheme’ as defined in s 165 of the GST Act;[36]
(b)for the purpose of s 5(1)(g) of the Act, both Dr S (as the sole director of the Applicant and the person who controlled its bank account) and Mr D, as the person who had daily access to its accounts and the bank account feed and managed the finances of the Applicant on a daily basis) are eligible associates or agents of the Applicant; and
(c)the Commissioner is entitled to submit that only some steps (the operative steps) are to be considered in assessing whether the requisite sole or dominant purpose existed, I should have regard to those parts of the scheme identified in steps 1, 2, 3 and 5.[37]
[36] As per FCR v Hart.
[37] Section 5(1)(g) of the Act permits consideration of purpose in respect of ‘the scheme’ or ‘parts of the scheme’. See VBNM at [30 and 66].
To summarise, the Commissioner’s position: [38]
(a)he submits that the steps of the alleged scheme, when viewed together, reveal that Dr S and Mr D engaged on behalf of the Applicant in a series of related transactions between 30 March 2020 and the end of April 2020 which caused monies to circulate (in a round robin fashion) between the Applicant and their joint bank account before being returned to Dr S as salary, resulting in higher PAYGW than the Applicant had historically reported;
(b)he contends that steps 1, 2, 3 and 5 of the scheme were undertaken for the dominant purpose of increasing the Applicant’s PAYGW for the March and June quarters, so as to increase the Applicant’s entitlement to both the first and the second cash flow boost (which was calculated based on those two quarters);
(c)he contends that step 6 of the alleged scheme provides context to steps 1 to 5, but all steps identified in the scheme necessarily work together and must be considered together when considering the application or the anti-avoidance provision in s 5(1)(g) of the Act which in turn requires consideration of the sole or dominant purpose test; and
(d)he concedes that without steps 1, 2, 3 and 5, the balance of the steps identified in the alleged scheme would not offend s 5(1)(g) of the Act.[39]
[38] These contentions are drawn from Part III, Section B of the Respondent’s closing submissions.
[39] Respondent’s closing submissions at [26].
By these submissions, I understand the Commissioner’s position to be that the necessary subjective purpose need only be established for these parts of the alleged scheme but that without any of these 4 steps being satisfied, the requirements of s 5(1)(g) of the Act would not be satisfied.
In light of this contention, both parties confined their closing submissions to addressing those four steps and I have applied the same focus in these reasons.
The Applicant’s case – sole or dominant purpose[40]
[40] These contentions are drawn from the Applicant’s closing submissions, see for example [2, 3, 5, 7 ,36, 40 and 46-8].
The Applicant contends that the evidence it has presented to the Tribunal displaces the purpose the Commissioner has contended for each of steps 1, 2, 3 and 5 in the scheme.
Specifically, the Applicant contends that the following factors jointly operate to exclude a dominant purpose of increasing the cash flow boost amount:
(a)Dr S’ desire during late March and April 2020 to have cash in her hands rather than in the Applicant’s bank account, in case the business failed;
(b)Mr D’s desire to improve the balance of the couple’s offset account by paying salary to Dr S;
(c)Dr S and Mr D’s desire to prepare for the landscaping project bills they anticipated having to pay in 2020; and
(d)Mr D’s awareness of the need for the Applicant to comply with Income Tax Ruling (IT 2503) – Income tax: Incorporation of medical and other professional practices.
The Applicant also contends that the following considerations are relevant to my consideration of the operative steps in the scheme:
(a)in respect of any salary paid to Dr S, the nature of the Cash Flow Boost measure, the relationship between the Applicant and Dr S was such that the benefit of any Cash Flow Boost amount in Dr S’ hands ahead of the end of financial year was dwarfed by the future increases in income tax liability which Dr S incurred each time she was paid a salary;
(b)decisions were being made during a period of financial uncertainty which existed at the relevant time given the impact of the COVID-19 measures, and Dr S and Mr D’s anticipation of a reduction of at least 66% of the Applicant’s pre-COVID income; and
(c)the Act would not achieve its purpose if an eligible business were not able to make decisions that were influenced in some way by the availability of Cash Flow Boost payments. In this way, the Applicant submits that evidence Mr D gave to the Tribunal of his anticipation of the Cash Flow Boost amounts should not be taken as evidence of a purpose to increase the Cash Flow Boost amounts.
PART C - THE CHRONOLOGY OF RELEVANT EVENTS AND EVALUATION OF THE STEPS IN THE SCHEME
I have examined in chronological order the background and facts relevant to the steps in the alleged scheme as well as each of the steps. A chronological approach allows consideration of purposes attributable to each step in the context of the surrounding facts as they were understood at that point in time and guards against the application of impermissible hindsight reasoning.[41]
2014 – March 2020 (Dr S’ medical practice and the Applicant’s operations)[42]
[41] Maloney v Commissioner for Railways (NSW)(1978) 52 ALJR 292 per Barwick CJ at 292-293; 18 ALR 147.
[42] The facts in this section are taken from the first S affidavit including annexures 1-5 and the first D affidavit and are understood not to be controversial.
Prior to March 2020, Dr S rarely bulk billed her patients which is to say, Dr S usually charged patients fees above the Medicare rate for her services (a ‘gap fee’).
As at March 2020, the Service Company employed nine individuals to run the practice for the Doctors (including a Practice Manager). Staff of the Service Company processed payments for Dr S’ appointments with patients. This included the processing of any fees with Medicare benefits being logged and refunded to the patient, while their total payment (Medicare portion, plus gap fee) was processed and paid into the Applicant’s bank account.
The salary payment process
Prior to March 2020, the process by which the Applicant usually paid salary to Dr S involved Mr D checking the balance of the Applicant’s bank account via the bank feed in the accounting program (XERO) and calculating the amount of salary considering any expenses needing to be paid or anticipated and GST and PAYGW. The amount to be paid was designed to leave a reasonable ‘buffer’ in the account for unforeseen expenses. Dr S would then perform the actual salary payment on advice from Mr D as she had control of the Applicant’s bank account.[43]
[43] The first S affidavit at [64-68] and the first D affidavit at [26-34].
Dr S is a highly educated medical professional and the sole director of the Applicant but is not a qualified accountant. She told the Tribunal and I accept, that she relies heavily on Mr D for advice about the financial affairs of the company. She openly acknowledged that she did not understand to a detailed degree exactly how Mr D calculates all the amounts the Applicant pays to her. Despite this, I am satisfied that she understood the amounts Mr D would normally propose were the difference between the money in the business account and the total amount the Applicant needed to retain in the account to pay its expenses.[44]
[44] First S affidavit at [66(a)].
Relevance of IT 2503
Both Dr S[45] and Mr D[46] stated that they were aware that the Commissioner required Dr S to be paid a salary or wage and not dividends. They also referred to the tax requirement that excess funds not be left in the Applicant’s bank account. Mr D told the Tribunal that the Applicant had a ‘longstanding practice’ of distributing excess funds.[47]
[45] First S affidavit at [65].
[46] First D affidavit at [26-30].
[47] Applicant’s closing submissions at [20 to 23] and first D affidavit at [26 to 30].
In his evidence, Mr D referred to and relied upon IT 2503, which he contended supported this longstanding practice. Paragraph [12] of the Ruling relevantly states:
a practice company that makes little or no attempt to distribute the whole of its income to the professional person by way of salary prior to the end of its financial year, or retains income in the company, will not be taken to have made a bona fide attempt to comply with the guidelines. [emphasis added]
Under cross examination, Mr D acknowledged and I accept that while this Ruling provides relevant guidance for the preparation of the Applicant’s end of each financial year accounting, it did not necessarily require the Applicant’s bank account to be cleared of excess funds each time salary was paid to Dr S during the relevant period.[48] This was corroborated by the Applicant’s own evidence about how salary was calculated and also by the Applicant’s acknowledgement to the GAAR Panel in 2022 that some money always needed to be retained so the Applicant could meet its expenses. [49]
[48] First D affidavit, annexure 3 and T:130: [31-39].
[49] Exhibit R1, T18.
Accordingly, I find that while IT 2503 was relevant to management of the Applicant’s accounts and created end of financial year obligations, it did not create any immediate obligation or imperative in the period from late March and April 2020 for excess funds to be paid out of the Applicant’s bank account.
The pattern of salary payments
The Commissioner contended that despite three periods of maternity leave, there was a relatively consistent historical pattern to Dr S’ salary payments prior to March 2020.[50] At the hearing, Dr S and Mr D both initially resisted the proposition but ultimately accepted there was some regularity to the payments.[51]
[50] Respondent's closing submissions at [28].
[51] Transcript, page 31 lines 26 to 29, page 87 lines 36 to 45.
The Applicant had appeared before the GAAR Panel in 2022. Following that appearance, the GAAR Panel requested the Applicant provide the GAAR Panel Response, which was in evidence before the Tribunal.[52] There was dispute between the Applicant’s witnesses as to who prepared the GAAR Panel Response but ultimately, I accept Mr C’s evidence[53] that it was drafted by Mr D. Regardless of the drafter, it was co-signed by Dr S and Mr D. In the GAAR Panel Response, the Applicant told the Panel and I accept that there was some regularity as to the timing and size of the salary payments of payments mid-month and usually in the range of $10,000-$11,000. [54]
79. The Applicant conceded in closing submissions that prior to March 2020 there was (under normal circumstances), ‘a regularity in the wage payments as a function of the nature of the Applicant’s business’.[55] However, it did not concede that the relevant period in this proceeding represents ‘normal circumstances’.
[52] Exhibit R1, T9.
[53] Transcript, page 72 line 40 to page 73 line 1.
[54] Exhibit R1, T9.
[55] Applicant’s closing submissions at [62]. First S affidavit, annexure 79.
Based on Dr S and Mr D’s response to the GAAR Panel as well as the corroborating documentary evidence in the form of the general ledger and the bank statements which record the various salary payments,[56] I find that prior to March 2020, there existed a well-established practice between Mr D and Dr S to ensure the Applicant usually paid Dr S each month in the middle of the month in amounts which usually were in the order of $10,000-$11,000.
[56] Exhibit R1, T10.
In making this finding, I accept that prior to March 2020 this historical practice was occasionally disturbed for a specific reason (for example, a mortgage payment or maternity leave).
2016-2020 – calculation of monthly service fees and payment to the Service Company
The monthly service fee the Applicant paid to the Service Company was normally its biggest expense.[57]
[57] Transcript of proceedings on 23 and 24 October 2024, page 83 lines 14 to 16.
The Services Agreement between the Service Company and the Applicant was in evidence before the Tribunal.[58] Clause 6 of the Services Agreement provided for:
(a)the Applicant to pay a monthly service fee in consideration for its share of services to be provided by the Service Company;
(b)the Service Company to invoice the Applicant for the charge by invoice or in some other manner as agreed; and
(c)the Applicant to pay the monthly payment ‘at the end of each month of the term of this Agreement’.
[58] Exhibit R1, T22, Annexure C.
Clause 13 of the Services Agreement provided for immediate termination of the Services Agreement (among other reasons) should a serious breach by the Applicant remain unrectified for 7 days following receipt of a notice from the Service Company calling for rectification.[59]
[59] Exhibit R1, T22, Annexure C.
While the Applicant and the Service Company were not completely independent of each other (Dr S was a director of both entities and also had interests in both), the company was not controlled by Dr S or the Applicant. The Services Agreement was an agreed and binding document which existed to regulate the conduct of the Doctors and the Service Company and I have had regard to clauses 6 and 13 of the Services Agreement in assessing the steps in the scheme and particularly step 6.
The Applicant’s witnesses described the usual process for calculating and reconciling the Applicant’s monthly service fee owed to the Service Company. It was uncontroversial that at each year’s annual general meeting, Grant Thornton would propose, and the Doctors would agree, both the monthly fees for the coming year and the true-up’ (reconciliation) of the prior years’ fees, resulting in either a payment by or refund to the Doctors.[60]
[60] Exhibit R1, T22, clause 6(a)(i). The Services Agreement provided for the reconciliation of the service fee after the end of each financial year. See also the First S affidavit at [36-46] which describes the process.
Dr S’ evidence suggests and I accept that prior to 2020, the date of any true-up refund or invoice tended to vary from year to year which is to say it was not received in the same month each year.[61]
[61] First S affidavit at [43].
The 2018 financial year - the Applicant’s loan to Dr S and Mr D
Division 7A of ITAA 36 operates to treat unrepaid amounts lent by a private company to a shareholder or their associate as assessable income of the shareholder.[62] Division 7A was referred to by Dr S, Mr D and Mr C in their evidence before the Tribunal.
[62] Federal Register of Legislation - Income Tax Assessment Act 1936 – simplified outline of Division 7A.
In February or March 2018, the Applicant loaned the amount of $12,909.71 to Dr S, apparently to assist with the couple’s purchase of their home.[63] This loan would have given rise to a Division 7A issue for the Applicant for the 2018 financial year, if not resolved.
[63] Exhibit R1, T9 at 4(a) and 4(b).
Mr C was responsible for preparing the Applicant’s tax return and other financial records for the 2018 financial year. He told the Tribunal[64] and I accept he had a clear recollection of a conversation with Mr D about both Division 7A of ITAA 36 and the loan to Dr S in the 2018 financial year. He could not recall the exact detail of that conversation, but stated it was his usual practice to identify (in the relevant financial year) ‘a debit loan that’s got a Division 7A application and that can’t be retained on the accounts’. Mr C recalled this conversation took place at the time the reports were being prepared for that financial year and confirmed those reports had been lodged on time.
[64] Transcript, page 75 lines 4 to 38.
The Applicant’s financial statements for the 2018 financial year were in evidence and recorded the resulting offset by Mr C for the loan amount.[65]
[65] Transcript, page 75 lines 37 to 38; First S affidavit, annexure 29.
The 2018 loan is discussed in more detail below because the Applicant contends it is relevant to the $14,000 payment on 1 April 2020.
November and December 2019
On 4 November 2019, Dr S returned to work from maternity leave and recommenced part time hours as a medical specialist in her practice.
In December 2019, Dr S and Mr D sought a quote for a renovation and landscaping project at their home (the landscaping project). That project is discussed in more detail, below because the Applicant contends it is relevant to the steps taken in late March and early April 2020.
January 2020
In January 2020, the Applicant did not pay the ‘normal’ mid-month salary to Dr S because there were insufficient funds in its account.[66]
[66] First S affidavit at [96] and annexure 68 which shows the balance of the Applicant’s bank account as at 15 January 2020 was just $12,412.00 and following payment of the monthly service fee on 24 January 2020 was just $3,545.95; First D affidavit at [51]; see also T19 at [20].
On 30 January 2020, the World Health Organisation declared COVID-19 a ‘Public Health Emergency of International Concern’.
During December 2019 and January 2020, Mr D engaged informally with Grant Thornton about the calculation of the 2019 ‘true-up’. [67] I say ‘informally’ because I accept that while Mr D undertook bookkeeping for the Applicant, he did not hold any official role. The timing of the 2019 ‘true-up’ payment is relevant to events on 30 March 2020 and is discussed in more detail below.
[67] Exhibit A7, Affidavit of Mr D, affirmed on 11 December 2023, annexures 34, 36 and 37 (the Second D affidavit).
STEP 6(i) – the 14 February 2020 salary payment
On 14 February 2020, the Applicant paid Dr S a salary payment of $11,000, gross. It was similar in its size and timing to the historical pattern of payments I have mentioned.
Early to mid-March 2020
On 4 March 2020, the Service Company invoiced the Applicant for the March 2020 monthly service fee ($14,082.30 gross/$12,802 net). The Applicant was required under clause 6 of the Services Agreement to pay that fee by 31 March 2020.
The draft quote for the landscaping project
On 10 March 2020, Dr S and Mr D received a draft quote from Brisbane Landscape Konstruction (BLK) for the landscaping project. Dr S told the Tribunal she had safety concerns about the pool deck at the couple’s home which made this work a priority.[68]
[68] First S affidavit at [94(b)].
The draft quote from BLK refers to the client’s brief, ‘Client is looking to tidy up around the pool area and create a more functional space’.[69] It referred to ‘removal of existing decking pool to expose the concrete slab installed under slab’ but did not mention safety concerns or issues. The draft quote was expressed to expire on 9 April 2020.
[69] Exhibit R1, T16; first S affidavit annexure 36.
The draft quote estimated the cost of the landscaping project to be around $37,000 – a significant amount. It was not clear from their evidence when Dr S and Mr D formally committed to the works proposed by BLK or when the work actually commenced. In cross examination, Mr D said he recalled a contract being signed and a deposit being paid in April 2020,[70] but no contract was in evidence and there was also no evidence of the deposit being paid.
[70] Transcript, page 96 lines 45 to 47.
I have assumed in the absence of any such records that they would not have placed the deposit as being paid or the works as commencing in March or early April 2020.
Consistent with this assumption, Dr S conceded that as at 30 March 2020, there were no outstanding amounts due for the project.[71] This evidence was further corroborated by an incomplete bundle of invoices she exhibited to her first affidavit. These disclosed and I accept that the landscaping project was undertaken in 2020. I find from the available evidence and specifically the invoices, that it likely commenced on or around May 2020 with completion in mid-July 2020.[72] This postdates the events in late March and early April 2020.
[71] Transcript, page 53 line 1 to page 54 line 1.
[72] First S affidavit, annexure 36.
The declaration of COVID -19 and the Government’s response
On 12 March 2020, the Commonwealth Government announced the Cash Flow Boost Measure.
Dr S told the Tribunal that it was on or around 16 March 2020 that she first discussed COVID-19 with Mr D but could not recall the exact date they first discussed the Cash Flow Boost Measure.[73]
[73] Transcript, page 30 lines 1 to 28. First S affidavit at [84-5].
On 18 and 22 March 2020, travel and movement restrictions and closures of various services and businesses were announced in Australia.
On 20 March 2020, the Commonwealth Government announced the JobKeeper Measure.
Mr D recalled from mid to late March 2020 he and Dr S were discussing how they might decrease the Applicant’s expenses in light of COVID-19. This prompted Dr D to review the Applicant’s expenses. From that review, he identified that ‘the main expenses were the service fee and the amounts [the Applicant] paid to [Dr S] as wages.[74]
[74] First D affidavit at [36].
STEP 6(II) - The 18 March 2020 salary payment to Dr S
On 18 March 2020, the Applicant paid Dr S a salary of $12,500 gross. The timing and amount of this salary payment was also consistent with the historical pattern of salary payments.
Following this payment, the Applicant’s bank account balance was $19,842.13. The March service fee ($14,082.30 gross/$12,802 net) remained unpaid at this time.
Late March 2020
On 25 March 2020, Grant Thornton sent an email to the Doctors informing them that the calculations for the 2019 ‘true-up’ were finalised. Dr S forwarded this email to Mr D. [75]
[75] Second D affidavit, annexure 37.
On 28 March 2020, Mr D recommended the Doctors delay actioning the 2019 ‘true-up’ refunds.[76] Despite this recommendation, the Applicant’s 2019 ‘true-up’ refund was credited to its bank account two days later, on 30 March 2020 in the amount of $14,022. [77]
[76] First D affidavit, annexure 6.
[77] First S affidavit, annexure 10 at p 314.
The Doctors meet to discuss a possible reduction in the monthly service fees
Dr S told the Tribunal that she became seriously concerned about COVID-19 and its impact on her family and her medical practice in late March 2020.[78] Her colleague, Dr C, was also concerned about the viability of his medical practice at this time. On 23 March 2020, he sent an email to Mr D which stated in part: [79]
‘...what do we consider as breaking point (when do we shut shop) if there is a pattern of income declining with a progressive shut down of life. When do we have a point where we stop working?’
[78] First S affidavit at [75].
[79] Exhibit A4, Affidavit of Dr C, affirmed on 11 December 2023, annexure 3 (the Dr C affidavit).
On 23 March 2020, Dr S sent an email to the Doctors proposing they meet to discuss how they might reduce costs in light of COVID-19 and the resulting restrictions. That email was drafted by Mr D with some input from Dr S.[80] She offered:[81]
‘If we think we do want to consider the idea of trying to reduce costs in the business [Mr D] has offered to do the initial leg work ("run the numbers" as he says) to determine what that would mean.’
[80] Applicant’s closing submissions at [28]; Transcript, page 32 lines 8 to 19, page 90 lines 30 to 36, page 92 lines 15 to 18.
[81] First S affidavit, annexure 33.
The evidence suggests and I accept that the initiative for the proposed fee reduction came from Mr D and Dr S. It was not suggested the idea for the proposed fee reduction came directly from Mr D’s detailed examination of the Applicant’s expenses (starting in mid-March 2020). However I infer, without any criticism, that Mr D’s analysis of the Service Company’s position, and his identification of the service fee as the Applicant’s biggest expense each month would have focussed his attention on this issue.
The Doctors appeared to rely heavily on the work done by Mr D and Dr S to progress the proposed fee reduction. For example, one Doctor sent an email on 24 March 2020 saying, ‘I am glad we have [Mr D] to give the numbers a cold hard look. It is very sobering’.[82] Dr C also sent an email to Mr D on 31 March 2020 saying, ‘We are truly blessed having you thinking this through, [Dr S and Mr D]’.[83]
[82] First S affidavit, annexure 33.
[83] Dr C affidavit, annexure 6.
On the evening of 25 March 2020, the Doctors met to discuss the matter. Mr D also attended that meeting. No minutes were taken. Dr S told the Tribunal that she and the Doctors discussed their concerns about their practices’ ability to remain solvent.[84]
[84] First S affidavit at [88].
Dr C independently had done some rough calculations and told the Tribunal that he had estimated he would go broke in four weeks if the service fee were not reduced.[85] He recalled telling the other Doctors words to the effect that ‘unless the service fee was reduced, I was going to go bust’.[86]
[85] Dr C affidavit at [30].
[86] Dr C affidavit at [34].
Despite these concerns, the Doctors did not immediately agree to a reduction to the service fee. Instead, they agreed that Mr D would prepare a document showing options for the Service Company to reduce expenses, with a view to the monthly service fee being reduced.
On 28 March 2020, Mr D sent the Doctors a spreadsheet he had prepared (V.1). V.1 could be manipulated but was presented to the Doctors proposing a sliding scale of fee reductions, 18%-41% for the Applicant, resulting in an overall discount of 38%.[87] V.1 also proposed a rent reduction to 20% of the original rental fee[88] and a reduction in the markups on wages and superannuation from 30% to zero.[89] The fee reduction was proposed to operate from April 2020. [90]
[87] First S affidavit, annexure 37. First D affidavit, annexure 6.
[88] First D affidavit at [44] and annexure 6.
[89] Transcript, page 94 lines 35 to 36.
[90] Transcript, page 41 lines 25 to 46, page 42 lines 1 to 12.
Under cross examination, Dr S conceded that the proposed fee reduction for the Applicant in V.1 was small (a reduction from $12,802 (net) per month to $10,483 (net) per month, for April 2020). She told the Tribunal that she hoped for a larger reduction. This is unsurprising because Dr S and Mr D both also told the Tribunal they anticipated a significant reduction in her practice income.[91]
[91] Transcript, page 37 lines 1 to 43, page 32 lines 17 to 18, lines 24 to 33.
Given the outcome of the Doctors’ meeting, the scope of V.1 and the anticipated downturn, I am satisfied as at 30 March 2020, there was no agreement by the Doctors (tentative or otherwise) to reduce the service fees from April 2020. That said, I accept a fee reduction was under consideration.
On 31 March 2020, Mr D emailed the Doctors to update them about the announcement of JobKeeper on 30 March 2020.[92] I cannot ascertain from the available evidence whether that announcement increased Dr S and Mr D’s optimism about the likelihood of agreement between the Doctors for reduction of the service fee. I do note that a later version of the spreadsheet (V.2) incorporated the JobKeeper savings but it was V.1 which was discussed at the next meeting of the Doctors (1 April 2020).[93]
[92] First D affidavit, annexure 7 and [47].
[93] First S affidavit, annexure, 32.
Dr S’ concerns and expectations as at the end of March
Dr S told the Tribunal and I accept that she held the following concerns by the end of March 2020: [94]
(a) her own and her family’s health; and
(b) the financial impact on her medical practice and specifically:
i.the anticipated sharp decline in income from 23 March 2020;
ii.whether the Applicant would be able to pay the monthly service fee, if patient fees decreased; and
iii.how the Doctors could continue to pay the staff.
[94] First S affidavit at [76]-[77].
In terms of her practice, Dr S told the Tribunal:
‘I was worried that…. [the Applicant] would not be able to pay the service fee if the patient fees decreased, and I would not be able to keep [the Applicant] afloat.
The Genie records show that by 23 March 2020:
(a) around 25% to 30% of my patients had cancelled appointments;
(b)around 50% to 70% of the remaining patients changed to telehealth appointments; and
(c) new patient referrals were significantly lower.’[95]
[95] First S affidavit at [76(b)-77].
This evidence underpins a very important assumption by Dr S and Mr D that the Applicant’s income would reduce,[96] by at least two thirds to 33% of pre-COVID levels.[97] That assumption was reinforced by the fact that at by end of March 2020, Dr S moved almost exclusively to telehealth appointments, which were bulk-billed.[98] These appointments were less lucrative than face to face appointments as there was no gap fee, contributing to Dr S and Mr D’s anticipation of a significant decline in income. While I accept Mr D’s evidence that with the benefit of hindsight, the transition to telehealth appointments proved to be ‘smoother’ than expected,[99] as at the end of March and beginning of April 2020 its ultimate impact could not be assessed.
[96] Transcript, page 38 lines 15-17.
[97] Transcript, page 32 lines 17 to 18 and 24 to 33.
[98] First S affidavit at [92].
[99] Transcript, page 125 lines 1 to 10.
It is unsurprising given these circumstances, that Dr S told the Tribunal her ‘major concern’ as at the end of March 2020 was the financial viability of the Applicant.[100] I also accept that, in light of Dr C’s comments at the meeting on 25 March 2020, the question of the Applicant’s solvency would have been on her mind.[101]
[100] Transcript, page 32 lines 31 to 36.
[101] Exhibit R2, Applicant’s Statement of Facts, Issues and Contentions (SFIC).
Also on her mind were the ongoing negotiations occurring around reduction of the service fees – the Applicant’s biggest expense, aside from her salary. As I have already noted it is unsurprising that, Dr S hoped that a lower figure might ultimately be agreed.[102] This reinforces my view that as far as Dr S was concerned, there was no agreement between the Doctors as at end of March 2020 because it would have been on the terms in V.1 which were not satisfactory to her.
[102] Transcript, page 37, lines 7 to 39.
Dr S’ subsequent contention about preferring to have money in her hands
Despite these significant concerns about her company, Dr S told the Tribunal (without disavowing her prior evidence) that during this period of uncertainty when she ‘wasn’t sure if my company was going to survive’, she ‘did not want to leave money in the company’.[103]
[103] Transcript, page 59 lines 16 to 19.
As will be seen, this contention was central to the Applicant’s contentions about the purpose/s for the steps taken in late March and early April 2020. The Applicant has submitted that the Tribunal should accept Dr S’ evidence on this point. In fleshing out the proposition, the Applicant points out that as at end of March 2020, Dr S had just returned from maternity leave, that Dr S and Mr D were likely concerned about their personal financial situation and these concerns corroborated Dr S’ desire to have money in her hands.[104]
[104] Applicant’s closing submissions at [30].
The Commissioner submits this contention runs contrary to the uncertainties caused at the time due to the COVID-19 restrictions and does not make sense in light of Dr S’ evidence about her concerns as at the end of March 2020.[105]
[105] Respondent’s closing submissions at [42(b)]
I have considered the evidence carefully but cannot accept Dr S’ contention for the reasons which follow. First, it directly conflicted with other evidence Dr S gave to the Tribunal. Objectively, Dr S’ concerns about the company and COVID would also suggest she and Mr D would have ensured as best they could in late March and early April 2020 that the Applicant had as much money as possible in its account.
Second and adding to the weight of the first reason, were the Applicant’s known and anticipated expenses at the time. As at end of March 2020, the March service fee remained unpaid and the Applicant faced a significant further service fee for end of April 2020 (based on the projection in V.1). These created a need to retain funds in the Applicant’s bank account.
Third, Dr S’ contention was contrary the way in which the Tribunal had been told the Applicant was managed and Dr S’ salary had always been calculated (ie., to always first ensure enough money was left to meet the Applicant’s expenses and to leave an appropriate buffer).
That approach had been emphasised in the Applicant’s original submission to the GAAR Panel in 2022:[106]
[the Applicant] is a special purpose entity or a conduit to obtain the limited liability opportunity. If it is personal services income then that should not be sheltered at the corporate tax rate, but wages cannot be paid unless there is cash. However, there is always a need to retain some money in the company for expenses. Paying out all the cash in the company would have left the company in a tenuous position. [emphasis added]
[106] Exhibit R1, T18.
Fourth and despite the Applicant’s submission, there was no evidence before the Tribunal which suggested that the couple were generally in any personal financial difficulty as at end of March 2020 that could explain the need or desire for an urgent injection of funds from the Applicant. To the contrary, the couple appeared to have a healthy bank balance as at end of March 2020.[107] I have addressed the landscaping project below.
[107] First S affidavit at annexure 39.
Finally, Dr S was the sole director of the Applicant. I cannot accept that she would have acted in a way which would put her company at risk and she conceded as much under cross examination.[108] It is reasonable to assume in such circumstances she would take appropriate steps to ensure there was money in the Applicant’s account to meet its expenses ie., to ensure its solvency.
[108] Transcript, page 59 lines 5 to 39.
The relevance of the landscaping project to the contention
The Applicant also submitted[109] that while the evidence does not suggest that the cost of the landscaping project was immediately due and payable, as at late March or early April 2020, it does show Dr S and Mr D were expecting to pay more than $37,000 for the landscaping project in the near future. As such it argues they would have taken steps to ensure they were in a position financially to meet those expenses.
[109] Applicant’s closing submissions at [34].
This, the Applicant submits, lends further support to the contention that in the period of 30 March 2020 to 6 April 2020, Dr S and Mr D would have preferred any excess funds in the Applicant to be paid from its bank account to Dr S as wages.
It was not disputed that the landscaping project was ultimately undertaken in 2020 and I have found this likely occurred in or around May 2020. However, I am not persuaded by the Applicant’s submission that it was an operative concern in terms of the steps taken in March and April 2020. First, and despite the Applicant’s carefully worded submission on this issue, there was no evidence that there were any costs to be paid as at end of March or early April 2020. Dr S confirmed under cross examination there was no personal matter requiring payment as at either 30 March 2020 or 6 April 2020.[110]
[110] Transcript, page 52 line 41 to page 54 line 2.
Second, as I have noted, the couple’s personal bank account recorded a significant balance during this period[111] which negates the suggestion that they needed an immediate injection of funds from the Applicant as at end of March 2020.
[111] First S affidavit, annexure 39.
Third, this submission is contradicted by the external circumstances which existed as at end of March 2020. In those circumstances, and given Dr S’ concerns about her company, it does not make sense that Dr S or Mr D would prefer to extract income from the Applicant to prepare for invoices which we anticipated to arrive at some (unidentified) point in the future, rather than prioritise expenses which were known or anticipated.
Having considered the evidence relating to the landscaping project, I do not accept that project was an operative concern for Dr S and Mr D as at end of March or early April 2020 and that it drove or contributed to their desire to have money in Dr S’ hands.
Having considered all the evidence, I accept and find that Dr S’ major concern and priority at this time was (as she stated in her affidavit) doing what she could to allow the Applicant to survive and pay its expenses. I do not accept that she prioritised or preferred to extract money from the Applicant so that it was in her hands.
I find that as at end from late March and April 2020, Dr S’ priority and preference was not to have funds in her hands wherever possible. Instead, her primary concern was to ensure that the Applicant could continue to pay its expenses in light of the financial uncertainty and anticipated reduction in income from her medical practice of at least 66%.
Payment of the 2019 ‘True-up’ to the Applicant on 30 March 2020
Mr D told the Tribunal it was not regular for the Applicant to receive a true-up amount of $14,000 from the service company.
Much was made at the hearing of the possible unexpected nature of this payment on 30 March 2020 given Mr D’s recommendation on 28 March 2020 that it be delayed. The Applicant did not lead any evidence to show whether Mr D’s recommendation was communicated to the staff of the Service Company. Nor did it disclose who instructed the payment to be made.[112]
[112] Second D affidavit at [11-12].
Dr S told the Tribunal that she or one of the Doctors would be expected to tell the Practice Manager if there was an agreement to delay the invoice.[113] Dr S did not recall telling the Practice Manager to delay that particular invoice.[114] She did recall speaking to Mr D about the payment having been received but could not recall whether he expressed any surprise given his advice to the Doctors that it should be delayed.[115]
[113] Transcript, page 34 lines 30 to 40.
[114] Transcript, page 35 lines 22 to 27.
[115] Transcript, page 35 lines 36 to 37.
In any event, Mr D told the Tribunal that on 29 March 2020, he ‘knew it was coming’ but didn’t precisely know the ‘true-up’ refund would be paid into the Applicant’s bank account on 30 March 2020.[116] As I have already noted, the email chain annexed to his second affidavit confirms that between December 2019 and 24 March 2020, Mr D engaged directly with Grant Thornton on behalf of the Applicant about the 2019 ‘true-up’.[117]
[116] Transcript, page 95 line 42 to page 96 line 5.
[117] Second D affidavit, annexures 34, 36 and 37.
Mr D told the Tribunal he could not recall whether the timing for the ‘true-up’ payment was discussed when he spoke with Grant Thornton. A copy of the ‘true-up’ spreadsheet for the 2019 financial year was in evidence before the Tribunal,[118] as well as the emails to and from Grant Thornton in December 2019 and January 2020. These suggest (and Mr D certainly did not deny) that he was apprised of Grant Thornton’s progress on the ‘true-up’ calculations, including the reason the finalisation took some time. Mr D then received a copy of the Grant Thornton email to the Doctors on 25 March 2020 which explained that delay in detail and advised the amounts were finalised (attaching the final amounts).[119]
[118] First S affidavit, annexure 26.
[119] Second D affidavit, annexure 37.
Despite this, in 2022 Mr D and Dr S told the GAAR Panel that they expected the refund to be paid in January 2020. They offered the following perplexing explanation for what had occurred:[120]
To confirm, [the Applicant] was advised in January that there was likely to be a true-up payment made to [the Applicant] (and the other doctors). As the amount was expected to be paid it would have provided cash to allow the January wages to be paid. However, as the amount was not actually received in January, it ended up not being ‘booked’ in that period. The final FY2019 true-up amount was advised to all doctors by email from Grant Thornton on 4 March 2020.
[120] Exhibit R1, T18.
This submission does not correlate with Mr D’s evidence to the Tribunal and the contemporaneous records (the emails) on which I prefer to rely. Those emails do not suggest any basis for Mr D to have expected the 2019 ‘true-up’ to be paid in January 2020 and further they demonstrate that he was apprised of its timing. This accords with his evidence that he ‘knew it was coming’.
It is reasonable to assume that both Dr S and Mr D would have known payment of the refund was imminent once the Grant Thornton email was received on 25 March 2020, because as Mr D told the Tribunal, the usual process was that once calculations were finalised it would be paid.[121] Consequently, in the very least Mr D had a few days’ notice of the payment, which postdated the announcement of the Cash Flow Boost measure. As he told the Tribunal, he knew it was imminent but could not have controlled precisely when it ’hit the Applicant’s account’.
[121] Second D affidavit at [7-8].
These observations are significant both in the timeline and because the Applicant submits I should find this payment represented excess funds, appropriate to distribute. In all the circumstances, I cannot accept that submission. This is because:
(a)I have rejected Dr S’ contention that it was her preference or priority to distribute funds, particularly when the Applicant had expenses to pay;
(b)the payment was well anticipated, even though the precise timing of receipt into the Applicant’s account may not have been controlled;
(c)Mr D’s evidence was that it was his practice before each recommendation for payment of salary, to first consider expenses which needed to be paid; and
(d)at the time the payment was received, there was a significant expense requiring payment – the March service fee. It was due the following day – 31 March 2020.
Accordingly, I find that Mr D had no firm basis to expect in January 2020 that the 2019 ‘true-up’ refund would be paid that month. I also find that from 25 March 2020, both Dr S and Mr D had a reasonable expectation that the refund was imminent. Mr D would not necessarily have been able to predict exactly when the refund would be credited to the Applicant’s bank account but expected it to arrive imminently.
STEP 1 of the Scheme - the 30 March ‘extraordinary’ salary payment, journalled to January 2020
On 30 March 2020, the same day the 2019 ‘true-up’ refund was received into the Applicant’s bank account, the Applicant paid Dr S an additional March salary payment of $22,000 gross (net $13,901).
The Applicant’s evidence and contentions
The Applicant submitted that:
(a)the contention that payment of the additional wage on 30 March 2020 was based on receipt of ‘unexpected funds’ in the form of the 2019 ‘true-up’, is logical and entirely consistent with Dr S’ and Mr D’s evidence that there was a strong preference that excess funds in the Applicant’s bank account were distributed.[122] It pointed out that the net salary is ‘broadly similar to the true-up refund received the same day’ and there was no evidence that anyone passed Mr D’s email recommending delay of the refund to the Practice Manager for the Service Company;[123]
(b)at the time Dr S had just returned from maternity leave and so Dr S and Mr D were likely concerned about their personal financial situation and this corresponds with Dr S’ desire to have money in her hands;
(c)Mr D was aware of the need to comply with IT 2503 which fed into the desire to pay ‘excess funds’ to Dr S;
(d)Dr S and Mr D anticipated expenses arising from the landscaping project. Without suggesting any of these were due to be paid as at 30 March 2020, Dr S and Mr D would have in the circumstances not wanted to wait until they were due to have money set aside.
(e)Mr D had a stated desire to have money in the offset account to assist with the couple’s mortgage;
(f)Dr S and Mr D would have been aware of the Cash Flow Boost measure and its likely impact, for the purposes of calculating the 30 March 2020 salary payment to Dr S, but this of itself does not justify a dominant adverse purpose finding;[124]
(g)the announcement of JobKeeper would have led to increased optimism for Dr S and Mr D that the Service Company would be able to reduce fees, while conceding that as at 30 March 2020 there was still some uncertainty around what would happen in that regard;[125] and
(h)as at 30 March 2020, Dr S and Mr D expected the Applicant’s income to decrease to around 33% of pre-COVID levels.[126] Dr S and Mr D would have expected or hoped for some reduction in the April service fee and without being able to predict the final figure, had an expectation ‘that it would be proportionate to the expected decrease in the Applicant’s income’ rather than the precise figures in V.1 which (because it could be adjusted) was ‘effectively a sophisticated calculator’ for the Doctors to use.[127]
[122] Applicant’s closing submissions at [39].
[123] Applicant’s closing submissions at [37] and [39].
[124] Applicant’s closing submissions at [40].
[125] Applicant’s closing submissions at [43].
[126] Applicant’s closing submissions at [41].
[127] Applicant’s closing submissions at [42] and [44].
The Tribunal was presented with a large body of evidence from the Applicant about this payment.
Dr S and Mr D had initially told the GAAR Panel in 2022:[128]
The $22,000 (net cash paid of $13,901 after PAYGW of $8,099) was made up of what was considered to be accumulated income from normal operations plus the true up contribution amount ($12,747).
The normal operating income amount had been ‘carried forward’ due to the true up payment not being received until 30 March. [emphasis added]
[128] Exhibit R1, T18.
Dr S told the Tribunal that the 30 March 2020 salary payment was made following consultation with Mr D because as at 30 March 2020, the balance of the Applicant’s bank account was $38,502.71 and by this date, she anticipated a reduction in the service fee for April 2020. She also stated that she wanted the maximum amount of available cash in her name as soon as possible given the economic outlook; and because she and Mr D anticipated having to pay for the landscaping project. [129]
[129] First S affidavit at [94].
When cross examined, Dr S did not contest that the 30 March 2020 salary payment was ‘extraordinary’.[130] She also conceded that at the time:[131]
(a)the March 2020 service fee (due by 31 March 2020) was unpaid;
(b)she still anticipated a significant decline in her practice income (of at least 66%);[132]
(c)there was no agreement between the Doctors about the April service fee reduction;
(a)the service fee reduction which was being discussed at the time was only to $10,483 (net). Despite this, she hoped that a lower figure would ultimately be agreed but did not know with certainty what the Applicant’s expected expenses were going to be for April 2020; and
(b)there was no immediate need to pay for the landscaping project,[133] there was a balance of around $37,000 in the couple’s offset account[134] and there was no other extraordinary expense at that time which necessitated payment of the extraordinary salary.[135]
[130] See for example, Transcript, page 42 line 44; page 51 line 32; page 54 lines 10, 39 and 45 and page 56 lines 39 and 46.
[131] Transcript, page 35 line 38.
[132] Transcript, page 32 lines 3 to 36.
[133] Transcript, page 56 lines 41 to 43.
[134] Transcript, page 56 lines 38 to 39.
[135] Transcript, page 56 lines 45-46.
Mr D had calculated the payment and recommended it to Dr S. He told the Tribunal that he looked at the accounts (XERO and the bank feed) and realised the funds were available.[136] In recommending the additional payment, he stated he was adopting his usual practice of paying out excess funds. He also stated that saw an advantage to having these funds (the additional wages sitting in the couple’s offset account (to reduce the daily balance of their mortgage),[137] and further that he anticipated that in light of the Cash Flow Boost announcement, that the Applicant would effectively not need to pay PAYG withholding on the amount (ie that amount could be diverted to other expenses of the Applicant).
[136] Transcript, page 120 lines 45 to 46.
[137] Transcript, page 117 lines 10 to 13.
Under cross examination, Mr D denied that he recommended the payment to maximise the Applicant’s PAYGW for the quarter.[138] He was asked but could not explain why the March 2020 service fee had not been paid on 30 March 2020 instead of the salary payment (even though it was due).[139]
Mr D’s contention about the balance of the offset account
[138] Transcript, page 120 lines 25 to 29.
[139] Transcript, page 111 lines 5-6.
Mr D’s particular contention about his desire to have funds sitting in the couple’s offset account to assist with their mortgage appears to have been mentioned for the first time in his first affidavit before the Tribunal.[140] He said it was a factor he tended to consider when calculating wage payments to Dr S.[141]
[140] It does not, for example, appear to have been raised in the Applicant’s Notice of Objection see Exhibit R1, T23.
[141] First D affidavit at 34(f).
However, under cross examination, Mr D acknowledged he had not paid salary to ensure monies were placed into the offset account at other times because it ‘just gets too complicated’.[142] This did not explain why he was suddenly motivated to do so on 30 March 2020.
[142] Transcript page 118 lines15 to 16.
The contemporaneous bank records showed that the couple’s offset account already had a healthy balance prior to the 30 March 2020 salary payment.[143] That same record reveals that just two days later, Mr D instructed Dr S to pay $14,000 to the Applicant from the same account. Neither of these records explains Mr D’s sudden motivation on this single occasion to preserve or improve the balance of the offset account.
[143] First S affidavit, annexure 39.
Dr S was the person who physically gave effect to the salary payment. She acknowledged under cross examination that she could not simply use the Applicant’s account as a ‘personal bank account’ to pull money out and then put it back in.[144] This does not suggest that she would be readily inclined to use a salary payment on 30 March 2020 to offset the couple’s offset account for just two days, particularly, given her major concern about the Applicant at the time.
[144] Transcript page 48 lines 30 to 33.
The Applicant submitted that Mr D’s contention that he wanted the money in the offset account is logical, given the implications for the Applicant, including from Division 7A of ITAA 36.
The problem with this submission is that Mr D had told the Tribunal that as at 1 April 2020, he had no prior experience with or understanding of Division 7A.[145] In any event, Division 7A issues (like IT 2503, which Mr D well understood) were relevant for end of financial year (three months away at that time).
[145] Transcript, page 106 lines 40 to 43.
In all the circumstances, I was not persuaded that this was an operative factor in Mr D’s considerations as at 30 March and early April 2020 and in particular that it was an operative factor in the 30 March 2020 salary payment.
The Commissioner’s contentions about the 30 March salary payment
The Commissioner submitted[146] that the 30 March 2020 salary payment provided a strong indication of an intention which it imputed to Mr D to increase the cash flow boost for the following reasons:
[146] Respondent’s closing submissions at [42].
(a)its timing, occurring as it did after the announcement of the Cash Flow Boost measure and on the final day of the March 2020 quarter: a significant date for calculation of entitlement to the first cash flow boost;
(b)the size of the payment, which was ‘approximately double’ the size of any previous wages payment to Dr S;
(c)the fact that it was the second salary payment that month;
(d)the journalling of the payment to January 2020 to which the Commissioner attributes a desire to conceal it;
(e)the associated delay in payment of the March service fee;
(f)the context in which the payment was made, occurring in the context of the other periodic payments listed at step 6 in the period February to June 2020, which reinforces the description of the payment as ‘extraordinary’;[147]
(g)close examination of the Applicant’s bank account which suggests that after the additional wage payment, it would have been left with a balance of $3,574 at the end of March 2020, had it not been for the receipt of the 2019 ‘true-up’ refund on 30 March 2020. Further, had the Applicant paid the March 2020 service fee by the end of March 2020 (as required by the Services Agreement), the balance of the Applicant’s account (even with the 2019 ‘true up’ refund) would have been only $3,513.80;
(h)the Applicant faced paying both the March service fee and most of the April service fee (based on V.1) meaning the 30 March 2020 salary payment potentially reduced the buffer in the Applicant’s account to just $1,000;[148]
(i)examination of Dr S and Mr D’s other bank accounts which were before the Tribunal, collectively suggested they were not experiencing financial difficulties as at the end of March 2020;[149] and
(j)the surrounding circumstances, where Dr S was paid a significant and additional salary payment in circumstances where both Dr S and Mr D anticipated the Applicant’s income would decline by at least 66% and Dr S had told the Tribunal she was very concerned about the financial viability of her practice and the Applicant’s ability to pay its expenses. The Commissioner also pointed to the anticipated April service fee as relevant.
[147] Respondent’s closing submissions at [24].
[148] Respondent’s closing submissions at [42].
[149] First S affidavit, annexure 39 at p 1101.
Consideration of the Applicant’s evidence about the 30 March salary payment
I have made findings in respect of IT 2503, the landscaping project, Dr S’ alleged preference to have excess funds in her hands and Mr D’s purported preference to place money in the couple’s offset account. I have not accepted that any of these factors were operative considerations as at 30 March 2020 and therefore cannot accept they were jointly or severally operative considerations in respect of the 30 March 2020 salary payment.
I also have not accepted that the payment resulted from unexpected funds and have noted elsewhere that the couple’s bank balance was already healthy at this point in time.
I am unable to assess whether there was any increased level of optimism arising from the JobKeeper announcement.
I otherwise cannot accept that there was any agreement between the Doctors at this time to reduce the service fees and in any event, the current proposal was V.1 which offered a small reduction to the Applicant for April 2020.
I do have concerns as to Mr D’s ‘awareness of the Cash Flow Boost measure’ when calculating the 30 March salary payment. I will address these concerns in more detail when discussing the 6 April 2020 salary payment (below).
Ultimately, I was not persuaded by the Applicant’s evidence about this payment and was not satisfied of any of the factors identified by the Applicant displaces the Commissioner’s attributed dominant purpose for the payment. It follows that the Applicant has not discharged its onus in respect of the reasons for the 30 March 2020 salary payment.
The journalling by Mr D of the payment to January 2020
It appears that during the audit, the Commissioner discovered Mr D had journalled the 30 March 2020 salary payment to January 2020 and queried it.[150]
[150] Exhibit R1, T20 at pp 351-2.
Mr D acknowledged that he was responsible for the journalling of the payment to January 2020.[151]
[151] First D affidavit at [50]-[51].
The Commissioner contended there was no credible explanation for the journalling of the payment to January 2020 other than to ‘cloak the 30 March 2020 salary payment’ with an appearance of the Applicant having already decided to pay the amount before the announcement of the Cash Flow Boost measure.[152]
[152] Exhibit R2, Respondent’s Statement of Facts, Issues and Contentions (SFIC) at [96].
He submits the second issue the Applicant refers to does not arise for consideration unless it can displace that contention. I will address that second issue below.
I would agree that the Applicant’s first submission is not supported by its own evidence and do not accept it. The Applicant’s contemporaneous bank records suggest that the March services fee could have been paid on either 31 March 2020 or 1 April 2020 (ie prior to and without the assistance of the $14,000 payment).[195] Mr D’s own evidence is also contrary to this submission.[196]
STEPS 3 & 5 in the scheme - The late payment of the March service fee and salary payment to Dr S
[195] First S affidavit, annexure 29.
[196] Transcript, page 118 lines 33 to 39.
The late payment of the March service fee
On 6 April 2020, the Applicant paid the overdue March 2020 service fee of $14,082.20 gross.
The Applicant led little evidence to explain the delay in payment of the March service fee. It was addressed briefly by Mr D in his first and second affidavits.[197] The Applicant has submitted that a likely explanation for the delay in paying the March service fee was the fact that there was uncertainty as to when the service fee reduction would commence. By this I understand the Applicant to be referring to a possible reduction of the March service fee because I assume it would not wish to breach clause 6.1(b) of the Services Agreement and so recognised the fee needed to be paid.
[197] First D affidavit [60(e)], second D affidavit at [41(a)].
I cannot accept that the March service fee was part of the negotiations between the Doctors for reduction in the service fees. The evidence before the Tribunal was that the Doctors were always considering a fee reduction commencing April 2020. Both V.1[198] and V.2[199] proposed a commencement from April 2020. Dr S also conceded in cross examination that the commencement date was April 2020, and not March 2020. On the evidence, there was no basis at any point in time, for the Applicant to hope that the March service fee would be reduced.
[198] First S affidavit, annexure 37.
[199] First S affidavit, annexure 38.
The Applicant also submits that objectively, nothing turns on the Applicant’s failure to pay the March service fee by the due date and notes the balance of funds in the Applicant’s account following payment of the 30 March 2020 salary meant the March service fee potentially could have been paid in March 2020. It its Statement of Facts, Issues and Contentions, the Applicant also submits ‘there are many examples of this having occurred in the past, having nothing to do with Covid or cash flow boost payments’.[200]
[200] Applicant’s SFIC at [10] and [166].
There was no evidence before the Tribunal to provide context for these prior examples so I could not assess them.
The Commissioner contends the deferral of the March service fee potentially created a fact or illusion of a substantial cash surplus at the end of March 2020 to justify the extraordinary 30 March 2020 payment.[201] He submits that if the 2019 ‘true-up’ payment had not been paid and the Applicant had paid the March service fee on time, the Applicant would have been reduced to a cash deficit by 31 March 2020.[202]
[201] Respondent’s SFIC at [79].
[202] Respondent’s SFIC at [84].
He further contends that it was the delay in payment of the March service fee which permitted the 30 March 2020 salary payment and that together with the 6 April 2020 salary payment, this payment was facilitated on 6 April 2020 by the injection of funds via the $14,000 payment on 1 April 2020.
The first of the Commissioner’s submissions is speculative and the ‘but for’ analysis applies impermissible hindsight reasoning. In any event, I have found there was an expectation that the ‘true-up’ payment was imminent.
I am satisfied the second, proposition however applies an appropriate prospective lens. I understand the Commissioner to be contending here that purpose for the $14,000 was not both payment of the March service fee and the 6 April 2020 but instead that the steps in the scheme worked interactively and so the steps taken from 30 March 2020 ‘facilitated’ the late payment of the March service fee as well as the 6 April 2020 salary payment. I have addressed it below in the context of the 6 April salary payment.
Ultimately facts demonstrate that there were sufficient funds to pay the March service fee by the due date and prior to the 6 April 2020 salary payment, and the Services Agreement obliged payment to be made by end of each month. So the question is, why was this not done? Unfortunately, the Applicant was unable to answer to this question[203] and I am therefore not persuaded by the evidence and submissions it has led on this issue.
[203] Transcript, page 110 line 40 to page 111, line 6.
I find that the Applicant has not discharged its onus in respect of the late payment of the March service fee.
The 6 April salary payment
On the same day, the Applicant paid Dr S salary in the amount of $33,000 gross/$19,722 net.
The 6 April 2020 salary payment was the first of two salary payments to Dr S in that month. It did not follow the usual pattern for payment of salary to Dr S both in its timing and its size. Dr S conceded it was also properly characterised as ‘extraordinary’.[204]
[204] See for example Transcript, page 54 lines 10 and 39 to 46 and page 57 lines 5 to 10.
The 6 April 2020 salary payment left the Applicant with a smaller balance in its account (buffer) than was usually calculated by Mr D when making recommendations to Dr S for payment of salary.[205]
[205] First D affidavit at [34(e)].
The Applicant contended that Mr D had provided a detailed explanation to the Tribunal about how the salary was calculated and referred to Mr D’s preference for money to be in the couple’s offset account. It also submitted that the payment was explicable because Dr S[206] thought the reduction in the April service fee was likely to be agreed by the Doctors and so it would be lower and wanted maximum cash in her name as soon as possible given the pessimistic economic outlook and the landscaping project.
[206] First S affidavit at [108].
The Commissioner contended that the 6 April 2020 salary payment was anomalous in timing and amount, was not based on any identifiable need and was paid at a time when a significant reduction in the Applicant’s income was predicted and occurred prior to the agreement on the April fee reduction.[207] He maintained that this payment was only made possible by the injection of funds resulting from the $14,000 payment.
The Applicant’s evidence about the 6 April salary payment
[207] Respondent’s closing submissions at [63-64].
The Applicant’s evidence about this payment changed over time. Dr S and Mr D had told the GAAR Panel in 2022: [208]
The $33,000 wages amount for the beginning of April was only actually $19,727 as the remaining $13,273 was the PAYGW “liability”. This amount was made up of the PAYGW no longer being required to be remitted for March ($15,184) plus patient income and the funds available from the loan repayment ($14,000). As stated above, after the wages payment [the Applicant] still retained a cash balance of $12,556 which was considered appropriate for unforeseen expenditure or unexpected revenue reduction given that discussions with [the Service Company] were well advanced to reduce the monthly ‘rent’. As noted previously, [the Applicant’s] two major expenses are rent and wages. The two major expenses account for approximately 87% of the total expenditure of [the Applicant].
As indicated above, the two payments were able to be made while still maintaining a level of cash funds for operations. The additional $33,000 (net $19,727) amount would not have been able to be paid if there was still a PAYGW amount to be remitted as that would have place additional cash needs of $13,273 on the business. Hence the ability to pay the additional wages was itself a function of the CFB concessions. Without the $22,000 and the $33,000 wage payments being made [the Applicant’s] retained cash balance would have been $76,458 on 6 April.
[208] Exhibit R1, T18.
Mr D explained in his first affidavit how he calculated the 6 April 2020 salary payment. That explanation was broadly consistent with the GAAR Panel response. However, under cross examination, Mr D conceded that explanation was (with the benefit of hindsight) incorrect and that the description of the amounts paid as multiples of the historical salary amounts of $11,000 was ‘misleading’ as it was just a coincidence.[209] The Applicant submitted that the notion of a significance in any such multiples was erroneous as historically, the amounts paid to Dr S tended to vary. There was no adequate explanation for the change in position.
[209] Transcript, page 124 lines 4 to 24.
Mr D also conceded under cross examination that the resulting ‘buffer’ in the Applicant’s account on 6 April 2020 following this payment was only $3,393.23 - a smaller buffer than he was normally prepared to work with. When asked why, he told the Tribunal he likely anticipated that the Applicant would receive further income before the April 2022 service fee was required to be paid.[210]
[210] Second D affidavit at [41(c)].
This evidence from Mr D was speculative and applied some level of hindsight reasoning. It was also inconsistent with his prior explanation of how salary was historically calculated and also did not accord with the couple’s expectation of a significant decrease in the Applicant’s income as well as Dr S’ major concern about the Applicant’s ability to meet its expenses. In such circumstances, I am not persuaded by it.
Mr D also conceded:
(a)the 6 April 2020 salary payment and the payment of the March service fee on the same day were only possible considering the $14,000 payment on 1 April 2020;[211]
(b)as he calculated the 6 April 2020 salary payment, he was aware that the overdue March service fee still had not been paid but could not explain why it had not been paid.[212]
(c)he journalled the 6 April 2020 salary payment to April (ie., he journalled it differently to the 30 March 2020 salary payment);[213]
(d)(with some reservation) that it might have made commercial sense to await the agreement between the Doctors before paying the 6 April 2020 salary payment;[214]
(e)his stated intention of recommending this payment to place money in the couple’s offset account as soon as possible to help reduce their mortgage balance, was not consistent with his prior conduct (for example in February 2020 when there was excess money in the Applicant’s account); and
(f)while he continued to expect that the April 2020 service fee would be reduced, as at 6 April 2020, he acknowledged no agreement had been reached between the Doctors.[215]
[211] Transcript, page 114, lines 42 to 44.
[212] Transcript, page 110, line 40 to page 111, line 6.
[213] Transcript, page 115, line 1 to page 116, line 47.
[214] Transcript, page 125, lines 38 to 47.
[215] Transcript, page 125, lines 22 to 28 and 44 to 47.
Dr S stated that in making the salary payment, she assumed lower expenses for the Applicant for April 2020, including the service fee and she wanted the maximum amount of cash in her own name as soon as possible given the ‘pessimistic economic outlook and so we could pay for the landscaping work that was being carried out’;[216]
[216] First S affidavit at [108].
Dr S conceded that the effect of the 30 March and the 6 April salary payments combined was that over the course of just two weeks she had paid herself a net amount of approximately $33,500.[217] She also conceded that there was no immediate personal need for this salary payment (including for the landscaping project); [218]
[217] Transcript, page 59, lines 5 to 9.
[218] Transcript, page 56 lines 25 to 28.
Despite this, and her major concern about the Applicant’s financial viability, Dr S maintained that it made more sense for this money to be in her hands than in the Applicant’s bank account.[219] For the reasons I have already given, I do not accept that this was her priority.
The Applicant’s contemplation of the Cash Flow Boost amount
[219] Transcript, page 59, lines 30 to 39.
Dr S and Mr D both seemed to have the anticipated cash flow boost in mind when calculating/approving the 6 April 2020 salary payment.
Under cross examination, Dr S told the Tribunal:[220]
R’s Counsel: Now, on 6 April [the Applicant] paid you another extraordinary wage of a gross amount of $33,000?
Dr S: Yes.
R’s Counsel: How did that come about?
Dr S: So, at that point we were clear on the reduction in expenses. And the true-up payment had obviously been made in between. And we’re also aware with the cash flow boost that the PAYG withholding would not be required. So there was funds in there to pay that wage.
R’s Counsel: So part of the reason why you paid that wage is because you knew that you wouldn’t have to remit the tax – that is, [the Applicant] would not have to remit the tax to the Commissioner of Taxation, is that right?
Dr S: As part of a cash flow boost, yes.
[220] Transcript, page 46, lines 7 to 18.
Mr D also referred to his awareness of the measure when calculating the payment.[221]
[221] First D affidavit at [60(c)].
the Applicant submits the Act would not achieve its purpose if an eligible business were not able to make decisions that were influenced in some way by the availability of cash flow boost payments. It submits that the evidence Mr D gave of his anticipation of the Cash Flow Boost amounts when calculating salary is not evidence of a purpose to increase those Cash Flow Boost amounts. It also submits that Dr S, in her evidence was not admitting the measure was the dominant reason for the 6 April 2020 salary payment. [222]
[222] Applicant’s closing submissions at [80].
I am not persuaded by this submission.
First, while I accept that Dr S was not paid a regular salary, the evidence before the Tribunal pointed to an historic pattern of salary payments as well as a consistent process for calculation of her salary roughly mid-month each month. This was based on periodic expenses which also followed a regular pattern. In such circumstances, it is not clear to me what decisions Mr D and/or Dr S needed to make in response to the measure in circumstances when an eligible business was not required to take significant action to qualify for the Cash Flow Boost.
Second, the evidence suggests Mr D, when calculating the proposed salary payments, factored in the anticipated an elevated Cash Flow Boost. This could explain Mr D’s tolerance for the low buffer he applied in early April 2020 (lower than he would usually tolerate).
The Applicant’s total PAYGW for the purposes of CFB1 was $46,852. This was used to calculate its CFB2 amount (also $46,852). This meant the Applicant’s total claim was $93,704. The maximum total CFB that could have been payable under the Act would have been $100,000. The Applicant’s salary history prior to announcement of the Cash Flow Boost measure[223] suggests this was a significant increase in its PAYGW as compared to its historical reported amounts.
[223] Exhibit R1, T2 at [77]. The Commissioner examined the history of the Applicant’s salary payments and reported on them in his Objection Decision.
The evidence of Dr S and Mr D tends to support the contention that the Applicant took deliberate steps to increase its salary payments post the announcement of the measure by a combination of injection of funds and temporary constraint of its ability to pay expenses in order to produce additional salary payments in order to increase its Cash Flow Boost amount.
There is further logic to this reasoning, when one considers that those enhanced cash flow boost amounts would have assisted the Applicant financially in circumstances (existing as at 30 March and 6 April 2020) where the major concern was the ability of the Applicant to meet its expenses given the substantial reduction to its income which was anticipated and its current and future expenses. Among those was the April service fee – not yet reduced.
Evaluation of the Applicant’s evidence about the 6 April 2020 salary payment
I have already made findings about the following factors identified by Dr S and Mr D – the landscaping project, Dr S’ contention about her preference to have cash in her hands and Mr D’s desire to have money in the couple’s offset account. I am not satisfied these could not either individually or collectively have displaced the relevant purpose contended for by the Commissioner.
In respect of the fee reduction, as at 6 April 2020, objectively, Dr S and Mr D, while continuing to hope a service fee reduction would be agreed, still faced the risk of having to pay the full service fee by end of April 2020, if agreement could not be reached by the Doctors. Dr C’s evidence suggests the matter was by no means settled or even tentatively agreed as at 6 April 2020.[224]
[224] Dr C affidavit at [50].
The pre-existing concern about the anticipated reduction in the Applicant’s income remained relevant as at 6 April 2020. There was no evidence before the Tribunal which suggested that that anticipated downturn had been reassessed between 30 March 2020 and 6 April 2020 or that Dr S’ original concerns had otherwise eased. To the contrary, Dr S told the Tribunal that she continued to hope that the Doctors would agree a significant reduction in the April service fee. I accept that Dr S continued to anticipate a significant reduction in her practice income and this created further risk to the Applicant’s ability to pay the monthly service fee.
In all these circumstances, the 6 April 2020 salary payment does not make any commercial sense. To the contrary, looking at the circumstances prospectively, it left the Applicant in a difficult financial position. In such circumstances, Mr D’s answer that he thought the Applicant was likely to be able to earn income to address such a small buffer, is not persuasive.
The more reasonable explanation based on the evidence is that the Applicant, with the benefit of the $14,000 loan took steps and generated an additional salary payment to increase its cash flow boost in the hope that a substantially reduced April service fee would be agreed before it had to be paid.
Under cross examination, Mr D disavowed his prior evidence (both the GAAR Panel Response and part of his affidavit evidence) in respect of this salary payment without a reasonable explanation for those prior inconsistent statements. In such circumstances, I decided I could not safely rely upon Mr D’s other evidence about this payment without independent corroboration of that evidence.
I do accept (and this is corroborated by the Applicant’s bank records) that it would not have been possible to both make this salary payment and pay the March service fee, without the $14,000 loan to the Applicant. However when looking at the purpose behind the $14,000 payment, I am persuaded on the evidence that it can be explained as enabling the 6 April 2020 salary payment, to enhance the Applicant’s cash flow boost payment. This is because, the Applicant’s bank account balance as at 30 March 2020 would have permitted payment of the March service fee without the $14,000 payment which needed to be paid but would not have also supported the 6 April 2020 salary payment. This finding addresses the Applicant’s second submission about the $14,000 payment
In light of these matters, I am not satisfied that the applicant has discharged its obligation as to purpose for the 6 April 2020 salary payment.
The 21 April 2020 meeting of the doctors
On 21 April 2020, the doctors met again to discuss the proposed reduction in monthly service fees among other matters. By this time, Mr D had prepared and circulated another version of the spreadsheet.
As I have said, I accept Dr C ‘s evidence was that as at this date, there was not necessarily unanimity between the Doctors about how to proceed, but he expressed the firm view to the Doctors that the service fee needed to be reduced and that if it was not reduced he was going to go broke.[225] I consider it to be corroborated by the email exchanges between the Doctors and Dr S between 22 and 30 April 2020.
[225] Dr C affidavit at [50].
The 22 April 2020 communication from Dr S to the Doctors
On 22 April 2020, Dr S circulated a summary of the meeting on 21 April 2020 and asked each Doctor to ‘reply by email to record their agreement to the matters identified in the email’.[226] The reduction proposed for the Applicant for April was from $12,802 to $5,362.
STEP 6(iii) in the scheme - The 22 April 2020 salary payment by the Applicant to Dr S and payment of the April service fee and further
[226] Dr C affidavit, annexure 13.
On 22 April 2020, and prior to securing responses from all the Doctors to the proposed reduction, the Applicant paid the April 2020 service fee in the amount of $5,450.50 gross/$4,955 net.
On the same day, and just 16 days after the 6 April 2020 salary payment, the Applicant paid Dr S a further salary of $17,000 gross ($9,009 net).[227]
[227] Transcript, page 116 lines 19 to 23. R1, T-Documents, T9 at page 110.
After these two payments, the Applicant’s bank account balance was $6,338.75.[228] The 22 April 2020 salary payment would have been difficult to support absent the payment of a significantly reduced April service fee.
[228] R1, T9 at p 110.
In light of the 6 April 2020 and 22 April salary payments, Dr S was paid total salary of $50,000 gross ($28,731 net) for the month of April.
STEP 4 in the scheme - The 30 April 2020 agreement to reduce the April service fee
Between 22 April 2020 and 30 April 2020, the Doctors all responded to Dr S’s email of 22 April 2020 proposing the reduction to the April 2020 service fee. By 30 April 2020, all had agreed to the arrangements proposed, including the rent reduction.[229]
[229] See for example, first S affidavit, annexures 47-53.
I am satisfied based on the evidence that the final agreement to reduce the service fee was reached on or around 30 April 2020 when all the Doctors had communicated their agreement to the final terms. In this regard, I note that my finding (which concurs with the Applicant’s submission)[230] differs from the way in which step 4 of the scheme has been expressed, but do not consider that to be a material issue.
[230] Applicant’s closing submissions at [76].
I find that the Doctors reached an agreement to reduce the monthly service fees paid to the Service Company on or around 30 April 2020.
May and June 2020
STEPS 6(iv) & (v) in the scheme – payment of salaries
It is not disputed that in May and June 2020, the Applicant reverted to paying Dr S once per month around the middle of each month. Two payments occurred:[231]
(a) $15,000 on 18 May 2020; and
(b) $17,130 on 15 June 2020.
[231] Second D affidavit at annexure 32, pp 292 and 299.
For completeness, it should be acknowledged that Dr S was unable to explain to the Tribunal why, despite a large balance of funds in the Applicant’s account in May 2020, she did not pay herself a further extraordinary salary payment (as had occurred in March and April 2020). [232]
[232] Transcript, page 54 lines 29 to 34.
Joint factors
The Applicant contends that together, the four personal factors it identified in evidence operated to exclude an operative purpose of increasing the cash flow boost, namely:
(a)Dr S’ desire to have cash in hand rather than in the Applicant, in case the business failed;
(b)Mr D’s desire to improve the balance of the couple’s offset account;
(c)Dr S and Mr D’s desire to prepare for the landscaping project bills they anticipated having to pay; and
(d)Mr D’s awareness of the need for the Applicant to comply with Income Tax Ruling IT 2503.
The Applicant’s task was to displace the alleged dominant ie., influential purpose of increasing the Applicant’s Cash Flow Boost amount. I have made findings on each of these factors and am not persuaded that any of them were operative considerations for the key steps in the scheme. It follows that I am also not persuaded that they could have collectively had the effect for which the Applicant contends.
The different periods
The Commissioner acknowledges that it is open to the Tribunal in this proceeding to find the Applicant has satisfied the onus in respect to the March 2020 quarter but not the June 2020 quarter. While I accept the correctness of this submission, the issue does not arise in the present case.
Conclusion
The decision which was the subject of this application was the Commissioner’s Objection Decision that the Applicant was not eligible for the initial Cash Flow Boost for the tax periods ended 31 March 2020 and 30 June 2020.
The basis for that decision was that the Applicant did not satisfy the integrity rule for a Cash Flow Boost payment in s 5(1)(g) of the Act because, it or its associate or agent carried out a scheme or part of a scheme for the sole or dominate purpose of increasing the amount of Cash Flow Boost payments to which it was entitled.
The Commissioner alleged that the operative parts of the scheme were steps 1, 2, 3 and 5 of the Scheme alleged by the Commissioner, as set out at paragraph 53 above.
I have found that the Applicant has not discharged its onus in respect of steps 1, 2, 3 or 5 of the scheme alleged by the Commissioner. That is to say, I am not satisfied in light of the evidence presented that the Applicant (or its associate or agent) did not carry out those part of a scheme identified in steps 1, 2, 3 or 5 for the sole or dominate purpose of increasing the amount of Cash Flow Boost payments to which it was entitled.
Consequently, the Applicant has not discharged the burden of proving the Commissioner’s decision to deny payment of the Cash Flow Boost amount to the Applicant for the March 2020 and June 2020 quarter should not have been made or should have been made differently.
Accordingly, the Commissioner’s Objection Decision is affirmed.
Date(s) of hearing: 23 and 24 October 2024 Date final submissions received: 31 October 2024 Solicitors for the Applicant: Cooper Grace Ward Solicitors for the Respondent: Hall & Wilcox
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