AEW Engineering Pty Ltd v Chief Commissioner of State Revenue

Material relied on by the parties

1. In support of its application, AEW relied on the material it had provided to the Chief Commissioner in support of its objection to his 10 October 2017 decision. This material was contained in the s 58 bundles of documents filed and served by the Chief Commissioner (EX R1, R2 and R3). AEW also relied on the material it provided to the Chief commissioner following the September 2018 mediation. This material was contained in a further bundle of documents filed and served by the Chief Commissioner (Ex R4).
2. Written submissions were filed and served by both parties prior to the hearing and subsequent to the hearing.
3. Gary and his brother, David Wells (David), a director and shareholder of AllEng both gave oral evidence at the hearing and they were cross-examined by counsel for the respondent, Mr G Stapleton.

The Companies

1. The factual background to the three entities the subject of this application are not disputed.

AEW

1. In the 1950's, Alan, the father of Garry and David, started an engineering business as a sole trader. On 1 July 2006, this sole trader business was incorporated under the name AEW Engineering Pty Ltd (AEW) with Alan being the sole director and shareholder. Alan has remained the sole director and shareholder of AEW. Alan is now 91 years of age, but has remained involved in the business of AEW and AllEng.
2. David is the General Manager of AEW and has held that position for some time, including during the relevant payroll tax years.
3. AEW manufactures quite specific spare parts and components for use within industrial machinery. It employs machinists who operate computer-controlled equipment such as lathes, borers and mills to produce precision parts. During the relevant years, AEW had about 18 employees.
4. Since 1998, AEW has operated its business from premises adjacent to those from which AllEng has and continues to operate. The premises are located in Lambton, which is a northern suburb of Newcastle.
5. Alan owns the land on which the AEW and AllEng premises are built and AEW and AllEng each pay rent to Alan.
6. AEW's main customers have been Tomago Aluminium (65%) and Moly-Cop (25%). Prior to 1998, AEW supplied its products directly to Tomago. However, since that time AEW became one of several secondary suppliers to Tomago through a newly negotiated purchasing/procurement agreement between Tomago and AllEng under which AllEng is a prime vendor to Tomago.
7. AEW also supplies spare parts and components to AllEng and derives 32.25% of its income from such supplies.

AllEng

1. In 1986, Alan went into partnership with his son-in-law, Alan Muldowney, and set up a steel fabrication business, AllEng. This was a business opportunity that Alan's son-in-law had identified.
2. In 1988, when Alan's daughter and Alan Muldowney divorced, David purchased Alan Muldowney's share in the business. On 1 July 2006, the business was incorporated with Alan and David becoming the directors and equal shareholders in the company.
3. The company, AllEng, undertakes metal fabrication which involves cutting, welding, pressing, grinding and fabricating steel to produce things like walkways, handrails, structural steel, frames and welding refurbishments.
4. As noted above, AllEng has always operated its business from premises located in Lambton on land owned by Alan. AEW's premises are adjacent to it.
5. Mr Jay Hitchcock is the General Manager of AllEng. He is remunerated by way of salary and bonus, which is calculated on the profitability of the business.
6. AllEng employs boilermakers and fitters. During the relevant group tax years the company had about 35 employees.
7. About 9 years ago, AllEng commenced operating from additional premises located at Tomago. The David Wells Family Trust owns the Tomago land and AllEng pays rent to the Trust.
8. AllEng's main customer is Tomago Aluminium (90%).
9. As noted above, in 1998 AllEng became a prime vendor for Tomago after Tomago had approached AllEng, AEW and its other suppliers with a new and streamlined procurement/purchasing system. The new system involved the selection, by Tomago, from tenders submitted by its suppliers, of a prime vendor and a number of secondary vendors. AllEng as a selected prime vendor entered into a new procurement agreement with Tomago (Tomago procurement agreement).
10. Under the new Tomago procurement agreement with vendors, all orders placed by Tomago went to the prime vendor, who completed the order, including identifying the appropriate supplier under the terms of the Tomago procurement agreement. In some cases the appropriate supplier will be the prime vendor, but in others it will be a secondary supplier as determined by the prime vendor. The prime vendor invoices Tomago for the services or parts supplied in accordance with the Tomago order, including any service or part that is supplied by the secondary supplier.
11. A list of services and parts (including prices) is regularly negotiated between the prime vendor and secondary supplier.
12. On being invoiced Tomago pays the prime vendor the invoiced amount and the prime vendor is responsible for paying the secondary suppliers for the amount they had invoiced for the services or parts they had supplied as part of the order.
13. AllEng also supplies products it makes to AEW. It derives 3.3% of its income from these supplies.
14. AllEng and AEW use the same email domain name 'alleng.com.au'.

Hagwell as trustee for WFT

1. Hagwell was incorporated in 1995 and Gary and his wife Emma are the directors and equal shareholders of that company. Prior to 2005, Hagwell was used for business purposes of Emma and Garry that were unrelated to AEW or AllEng.
2. In 2005, Emma and Gary established the WFT, a discretionary trust. The beneficiaries of the WFT was broadly defined in cl 1A of the Trust Deed and included the named beneficiaries in the Schedule to the Deed (i.e. Emma, Garry and their three children) and the grandparents, parents, brothers and sisters of those named in the Schedule. Hagwell, which at that time had become an empty non-operating company, was appointed as trustee of WFT.
3. From around 2005, Emma and Gary utilised the WFT as a business entity through which they carried on a number of businesses and consultancy services unrelated to the businesses of AEW and AllEng.
4. In August 2011, WFT entered into a service agreement with AEW for the supply of financial management and payroll services. WFT entered a separate service agreement, in similar terms, with AllEng. Prior to this, Mr Marco D Li (Mr Li) of Hunter Accounting Services, the account for AEW and AllEng had provided these services. While Mr Li of Hunter Accounting Services no longer provided financial and payroll services to AEW and AllEng he continued to provide all other accounting services to those entities and their directors.
5. In 2012, Emma and Gary decided to relocate from Wagg Wagga to Newcastle for family reasons. From around that time, Gary, on behalf of WFT, provided financial management and payroll service to AEW and AllEng. He worked from an office at the AllEng premises and spent about half a day a week providing these services to AEW and one day a week in providing these services to AllEng. During the relevant years Gary was employed as the CEO of the Nature Conservation Trust of NSW and the WFT was not engaged in any business activity other than the services it provided to AEW and AllEng.

The grouping

1. While not disputed, it is convenient to briefly set out the basis on which the three entities, AEW, AllEng and Hagwell atf WFT were grouped under Division 2 of Part 5 of the PTA.
2. AEW and Hagwell atf WFT made up a group (group 1), because Alan had a controlling interest in each entity. That controlling interest arose because of Alan's controlling interest in AEW as a shareholder and director (s 72(2)(c)(i) and (e)) and his beneficial interest, as a beneficiary of the WFT discretionary trust, which under 72(6) of the PTA is taken, for the purpose of Part 5, to be a beneficiary in respect of more than 50% of the value of the interests in the trust. This gave Alan a controlling interest in WFT (s 72(2)(g)).
3. AllEng and Hagwell atf WFT made up another group (group 2), because Alan and David had a controlling interest in each entity. That controlling interest arose because of Alan and David's controlling interest in AllEng as shareholders and directors (s 72(2)(c)(i) and (e)) and their beneficial interest, as a beneficiary of the WFT discretionary trust that was taken to be a controlling interest in WFT under s 72(2)(g) and 72(6) of the PTA.
4. As Hagwell atf WFT was a member of group 1 and group 2, s 74 of the PTA subsumed these two smaller groups into one larger group.
5. Hence, AEW and AllEng became grouped together by the operation of s 72(6) of the PTA and Alan and David were taken to have a controlling interest in WFT, the trustee of which was Hagwell.
6. Subsequent to the issuing of the assessments the subject of this application, Alan and David, made irrevocable declarations excluding themselves as beneficiaries of the WFT. On 12 September 2018, the applicant obtained a private ruling from the Chief Commissioner that from 1 July 2018 the three entities do not constitute a group.

Section 79 - applicable legal principles

1. As noted above, s 79(1) of the PTA gives the Chief Commissioner (or the Tribunal on review) a discretion to determine that 'a person who would, but for the determination, be a member of a group is not a member of the group.'
2. The only circumstances in which the Chief Commissioner (or the Tribunal) can exercise that discretion is prescribed in s 79(2) of the PTA, namely where the Chief Commissioner (or the Tribunal on review) is satisfied that the business carried on by that person - 'is carried on independently of, and is not connected with the carrying on of, a business carried on by any other member of that group.'
3. The criteria to which the Chief Commissioner (or the Tribunal on review) is to have regard is also prescribed in s 79(2) of the PTA and in summary they are as follows: 1. the nature and degree of ownership and control of the businesses; 2. the nature of the businesses; and 3. any other matter the Chief Commissioner considers relevant.
4. In Lombard Farms Pty Ltd v CCSR [2013] NSWADTAP 42, at [50], the Appeal Panel of the former Administrative Decisions Tribunal explained: "50 Section 79(2) requires the trier of fact to determine whether, having regard to the nature of connections between group businesses it can, nevertheless be said, that the businesses are independent and not connected. Ultimately, this will be a question of judgement based on facts objectively determined. It is not the case that any connection between businesses will disentitle an applicant from degrouping. The connection must be material and not insignificant or inconsequential… We agree with this approach because it directs the focus to the "carrying on" of the business: to be relevant, the connection must affect the business in some real or practical sense. 51 To say that there can be absolutely no connection between the businesses sets the bar too high. The question is one of fact and degree: Network Clothing Company v Commissioner of State Revenue [2007] VCAT 2492 at [34]. To disentitle an applicant to de-grouping, the connection must be meaningful in a commercial sense and not immaterial or inconsequential to the carrying on of the businesses. Adopting the words of GT Pagone, Presiding Member (as his Honour then was) in Triline at [25] there must be a finding of substantial absence of connection and substantial independence between the businesses, to warrant the exercise of the discretion.
5. At [55] to [56], the Appeal Panel also referred to the Chief Commissioner's revenue ruling No PTA031 as follows: 55 Whilst not binding on the Tribunal, it is relevant that the Respondent's ruling Revenue Ruling No. PTA031 (the Ruling) supports the position we have just outlined. Despite articulating the test in terms of a business being carried on independently and not connected with another business with the group, the Ruling indicates that the test is one of fact and degree. It states: The purpose of this Revenue Ruling is to explain the exclusion discretion available under section 79, including the matters the Chief Commissioner takes into account in exercising the discretion. ... The Chief Commissioner must be satisfied that: · there is not a continuous course of active and significant relationship, in a business or commercial sense, between the carrying on of the applicant's business and the carrying on of businesses conducted by every other member of the group, and · the connections which do exist are no more than casual, irregular or occasional occurrences. 56 In relation to matters to be taken into account, the Ruling identifies several factors, each prefaced with the words "the nature and extent" or "the degree" or "the extent". 57 Finally, the Ruling concludes: None of the matters listed above are determinative in isolation from the other matters listed, nor are they an exhaustive list of the relevant issues. Each case will be considered on the basis of all of the relevant facts and circumstances
6. The Appeal Panel's construction and application of s 79(2) of the PTA was followed in Boston Sales and Marketing Pty Ltd (supra) at [31] and Chief Commissioner of State Revenue v Seovic Civil Engineering Pty Ltd [2014] NSWCATAP 94 at [32].

Consideration

1. It is convenient to deal with the evidence and the submissions of the parties under the same headings set out in their closing submissions.

Internal financial management

1. The evidence is that since August 2011, there has been no change in the monthly fee AEW and AllEng pay to WFT for the financial and payroll services it provides. These services have at all times been provided by Gary, on behalf of WFT, and include the management of all financial transactions entered into by each company, which includes reporting on these. In this regard Gary controls payments of all invoices, wages, super, utilities, business services and rent paid for by AEW and AllEng and he does so as a signatory to the AEW and AllEng bank accounts. David and Alan are also signatories to the AEW and AllEng bank accounts. However, Jay Hitchcock, the General Manager of AllEng, is not a signatory to any bank accounts.
2. While the agreements between WFT and AEW and AllEng do not specify on what days and at what hourly rate WFT will provided its services, Gary's evidence is that he spends about one to one and a half days a week at an office on the AllEng premises in managing the financial and payroll transactions of both entities and he brings his own computer to do this. He also attends the six monthly reviews of the financial position of AEW and AllEng with the directors and their accountant, Mr Li.
3. The evidence is that Gary implements the decisions of David and Alan, made in their capacity as directors of AEW and AllEng and their accountant Mr Marco D Li.
4. Gary uses the domain name of the entities when sending remittances to suppliers.
5. It was the oral evidence of David that he did not get involved in payroll for AEW or AllEng. He also said that he did not know what the expenses were for AEW or AllEng. He said Gary did this. David also said that while he was the final decision maker in regard to the AllEng Enterprise Bargaining Agreement with staff, Gary was involved in the groundwork for such an agreement and the negotiation thereof.
6. In regard to the lack of an increase for the services WFT provided to each entity, it was the evidence of Gary that over time he had introduced a number of efficiencies. For example, employee superannuation was originally all done manually, which took time because there were 15 different superannuation funds into which payments were to be made. He said this was now all automated through MYOB, which he purchased. Another example was the quarterly BAS for each company - this was also now automated. Consequently, Gary now spends less time undertaking the tasks WFT is engaged to do.
7. Gary, on behalf of AEW contends, that the services WFT provided to AEW and AllEng during the relevant payroll tax period are no more than what was provided for in the 2011 written agreements between WFT and AEW and WFT and AllEng. That is, the services provided by WFT did not evidence a connection between AEW and AllEng other than the implementation of the 2011 agreement WFT had entered into with each company separately.
8. It was asserted that each agreement was a simple contract for services in which an agreed output was expressed as to what was to be provided by the contactor, WFT. Gary went on to submit that each agreement had been entered into at arms' length for services that are: essentially functional administrative activities undertaken by every business but are not "meaningful to the carrying on of the business" of either AEW or AllEng.
9. In this regard Gary noted the total cost of the services WFT provided to AEW represented 2% of its annual turnover and in the case of AllEng it was 1.2% of its annual turnover.
10. The Chief Commissioner did not suggest that the agreements between WFT and AEW and WFT and AllEng were other than genuine. However, he contended that the agreements were such that Alan and David, as directors of AEW and AllEng, had in effect delegated the day-to-day responsibility for the financial management of their companies to Gary. That is, in all material respects, Gary was: '"an insourced" (familial) financial controller', from which it must be inferred that there were material commercial benefits to the group, or the services would have been outsourced back to Hunter Accounting Services. It was submitted that while AEW and AllEng had benefited from Gary's efficiency contributions, WFT had also benefited, as Gary was no longer required to work the same number of hours.
11. Gary, on behalf of AEW, submitted that this was called 'productivity improvement' and rejected the Chief Commissioner's contention that there was a 'material commercial benefits to the group' as a result of the internal financial management of the group.

Lessor/Lessee Arrangements

1. The evidence is that there is no written lease agreement between Alan and AEW in regard to the premises from which AEW operates its business. The same applies to the adjacent premises from which AllEng operates its business. While both AEW and AllEng pay rent to Alan each month the amount of rent paid by AEW and AllEng has not changed since 2012.
2. The evidence is that, in regard to the Lambton premises, AEW pays a monthly rent of $5,500 (inc GST) and AllEng pays a monthly rent of $8,800 (inc GST) to Alan as lessor. Gary's evidence was that these payments formed Alan's superannuation.
3. It is not exactly clear how the amount of rent (i.e. occupancy costs) were determined. It would appear to have been determined by Alan, based on the recommendation of his accountant, Mr Li. In his oral evidence, David said he had not been privy to how the amount of rent was determined for each entity, but he assumed that it had been based on the cost of the buildings (i.e. the premises), which have now been paid off.
4. Similarly, It would appear that, initially, the amount of rent AllEng was to pay the David Wells Family Trust for the Tomago premises was also determined by the David, on the recommendation Mr Li.
5. It was the oral evidence of David that he believed that the rent paid by AllEng for the use of the Tomago premises was market rent. He said that the rent was a figure that represented the loan that AEW had advanced to purchase the property. He agreed that, in the 9 years AllEng had operated from the premises, there had been no rent increase and had there been an increase, he would in effect have agreed to an increase in rent to himself. David also agreed that the rent today was on the low side to what market rent would be.
6. Gary, on behalf of AEW, acknowledged that the lease rate established between the lessor and the lessee 'may obviously' have an impact on the cost of the individual businesses. However, he went on to contend that this alone did not create a material connection between AEW and AllEng.
7. Gary submitted that the different rates of rent paid by AEW and AllEng in regard to the Lambton premises were reflective of the AEW business occupying 40% of the land and AllEng business occupying about 60%. He also submitted that, given the quantum of rent paid, it was inconsequential that the rental rates had been decided by both the lessor and director of the lessee company. In this regard Gary noted that the rent paid by AEW amounted to 2.6% of the company's annual turnover and was therefore immaterial to the operation of its business. The same applied to AllEng whose rent amounted to 4.4% of the company's annual turnover.
8. Gary, on behalf of AEW, agreed that there were financial benefits to both the lessor and the lessee from the leasing arrangement. However, to the extent these benefits were obtained by the individual landlords, they were not a party to these proceedings. To the extent the individual lessee businesses benefited, this, he submitted did not create a material connection between AEW and AllEng as a consequence of the lease agreement.
9. The Chief Commissioner, on the other hand, submitted that the leasing arrangement was not on arms' length terms. In this regard, it was submitted that the occupancy cost (i.e. rent amount) of AllEng and AEW was based on an entirely closed loop of decision-making which necessarily connected the two companies by: 1. being situated next to each other on the same consolidated block of land owned by one of the two directors and shareholders; 2. being subject to decisions of Alan and David about whether the rent will increase for either or both on the recommendation of the accountant of the families and companies'; and 3. neither being susceptible, together or separately, to market forces.
10. The Chief Commissioner also submitted that a similar closed loop of decision making in regard to rent applied to the AllEng premises at Tomogo, where David, as director of the lessor is also a director of the lessee, which put him in total control.
11. The Chief Commissioner contends that the lease arrangements between the lessors, who are also directors of the lessees of the premises from which their respective businesses operate forms an unequivocal connection between AEW and AllEng. That is, the lease arrangements have a material effect on the ability of the directors of AEW and AllEng to manage the companies together without concern about the effects of any rising costs, landlord negotiations, changes in market rates of rent and or vacancy levels on either or both of AEW or AllEng.

Inter-company financial transactions

1. The Chief Commissioner contends that the evidence discloses six inter-company transactions during the relevant tax years. There is no dispute about the transactions themselves, what is disputed is whether they evidence a connection between the businesses and affect the businesses in a real or practical sense.
2. The first inter-company financial transactions are the agreements between AEW and AllEng for Hagwell's atf WFT internal accounting services. Each agreement is in exactly the same terms, with the same commencement date and setting out what WFT agreed to do and what each entity would agree to do. Each agreement is a little over one page in length.
3. The Chief Commissioner contends that the agreements lack the usual commercial terms for the provision of accounting services in that the agreement did not contain an estimate of the number of hours to be worked, an hourly rate or annual CPI increases, or at least a review opportunity. The Chief Commissioner contends that this is so because of the close nature of the relationship between Gary and AEW and AllEng.
4. Gary, on behalf of AEW, reiterated that each agreement with Hagwell atf WFT was at arms' length and that the lack of increase in fees was due to efficiencies that had been implemented.
5. The second inter-company financial transaction is the payment by AEW of a portion of David's AEW's salary from the AEW bank account into the AllEng bank account to pay off part of David's loan from AllEng. That loan was paid to David in his capacity as a director of AllEng. It is the contention of the Chief Commissioner that this is an unusual transaction in that: 1. David is not a director of AEW, but can cause the company to make this payment on his behalf instead of him receiving the income himself and paying the loan himself; and 2. Gary implementing the transfer on a monthly basis, by recording the debit from David's salary and then credit the amount to David's loan account with AllEng.
6. Gary, on behalf of AEW, submitted that this transaction was simply an accounting process following a long-standing practice established on the advice of Mr Li, the company's accountant. That is, it was not an inter-company transaction, but one that any employee can do by directing his or her employer to pay part of his or her salary to another person.
7. The third inter-company transaction is the monthly fee that AllEng receives from AEW in regard to the shared IT services and a cleaning service provided by a third party. In this regard, the Chief Commissioner pointed out that it was AllEng who contracted, under a single contract with the third party, for these services, which, on the evidence was done to create efficiencies for both entities.
8. Gary, on behalf of AEW, submitted that as the amount charged by AllEng and paid by AEW for these services only represented 0.3% of AEW's annual turnover and did not amount to a material connection between the businesses of AEW and AllEng. Not did it affect the businesses of each entity in a real and practical sense.
9. The fourth inter-company transaction was the $100,000 loan that AEW made to AllEng on 21 October 2016. The evidence is that the loan was an interest free loan and made so that AllEng could avoid breaking a term deposit. The loan was re-paid on 1 August 2017.
10. Gary, on behalf of AEW, submitted that this was a short-term loan provided on the advice of the account for the companies, Mr Li. It was the only loan provided between the companies during the relevant tax years and hence it was an irregular occurrence.
11. The Chief Commissioner submitted that the loan was not made on arms' length terms. It was a loan made unilaterally by Alan, as a director of both companies, and for which there was no written board minute or agreement. Nor did the loan appear in the financial statement of either company for the year ended 30 June 2017.
12. The Chief Commissioner noted that the loan created a benefit for AllEng (avoiding a loss interest) and was a cost to AEW (losing interest on it as a deposit), which would not be an arrangement available to two independent companies. The Chief Commissioner went on to contend that the reason it could occur in this case was because: … [the] credit to AllEng and debit to AEW is a benefit to the family as a whole. That is because the businesses are inherently inter-connected and mutually inclusive of one another.
13. The fifth inter-company transaction is the Tomago procurement agreement and those between AEW and AllEng.
14. As noted above, 90% of AllEng's turnover is derived from Tomago and 65% of AEW's turnover is derived from Tomago and AllEng derived 3.3% of its income from supplies it made to AEW and AEW derived 32.2% of its income from supplies it made to AllEng.
15. The Chief Commissioner contended that the shared benefits and common interests in the continuation of the Tomago supply agreement causes AEW and AllEng to have a real and meaningful connection in a commercial sense. This was particularly so when the number of secondary suppliers AllEng, as a prime vendor, could turn to was reduced to two, AEW and another secondary supplier.
16. Gary, on behalf of AEW, contended that the Tomago supply agreement was not of the making of AEW and AllEng - it was based entirely on the initiative of Tomago so as to save costs.
17. Gary, on behalf of AEW, also agreed that where a company within a payroll group earns almost half or more of its income from another company within that group this would amount to a material connection and evidence of a lack of independence. However, in this case, as AEW earned less than 1/3rd of its income from AllEng there is no material commercial connection between AEW and AllEng. In support of this proposition, he cited the following remarks of Senior Member Block in Boston Sales (supra), at [42]: 42 … [When] one company earns almost half or more of its income from one other company that is a material connection in a material commercial sense and evidence of lack of independence.
18. The final inter-company financial transaction identified by the Chief Commissioner is the personal advice the companies' accountant gives to David and his wife, Suzie, in regard to their personal financial affairs. This includes advice on how Suzie can achieve the optimum super contributions to her personally as a part-time administrator.
19. It is not disputed that Suzie is paid more in super contributions than her salary. It was the evidence of Gary that this was done on the advice of the companies' accountant. In his evidence, David said he believed that Suzie would be paid super and he agreed she was probably paid more in super than in her salary. This he said would have been based on advice from the accountant.
20. The Chief Commissioner noted that David, as director of AllEng can cause this to happen by giving instructions to Gary for the making of the payments and while David was vague and unfamiliar about what actually happens, he knows that Gary makes sure the payments are made. The Chief Commissioner contended that this implies a significant level of influence David, as General Manager of AEW and director of AllEng, has over the combined family business unit. It was also submitted that it implies a significant level of autonomy and trust being placed in Gary to give effect to the family's remuneration arrangements.

Inter-company management

1. Gary, on behalf of AEW, contends that the businesses of AEW, AllEng and WFT are managed and operated independently and there is no inter-company management.
2. The Chief Commissioner, on the other hand, submits the inter-company management is established by the following: 1. David is the General Manager of AEW and Jay Hitchcock is the General Manager of AllEng, yet Jay Hitchcock is not a signatory any bank accounts, but David and Gary are. Gary also pays all costs on behalf of AEW and AllEng; 2. David, as a director of AllEng, is involved in all statutory decisions required of directors and all major commercial decisions. He is consulted about increases in the workforce of AllEng and is a key constituent of the AllEng team that negotiates and decides on the ultimate outcome in the Enterprise Bargaining Agreement with AllEng's employees; 3. David is responsible for approving any changes in lease terms and rent increases payable by AllEng to his father, Alan (re Lambton premises) and his own super fund (re Tomago premises); 4. Alan is a director of AllEng and the sole director of AEW and the sole director of AEW and is involved in all statutory decisions required of a director for each company. He is also responsible for any changes in lease terms and rent increases payable by AllEng to himself (re Lambton premises) and David's superfund (re the Tomago premises) and rent increases payable by AEW to himself; 5. David will speak to Jay Hitchcock on an almost daily basis about supplies between AllEng and AEW. Alan will call on Jay Hitchcock about twice a week to keep in touch; 6. David, Alan, Jay Hitchcock and Gary all meet with the companies' accountant on a monthly basis, for a review of the financial performance of the business; 7. David personally takes invoices issued by AEW to Gary so that they can be loaded into MYOB and issued to clients. David also uses the AEW email address in all correspondence from him, on behalf of AEW and AllEng, to AllEng and third parties, including Tomago for whom AllEng is the prime vendor; 8. David earns more than his father in their capacity as a director of AllEng, yet the oral evidence of David is that this pay difference does not reflect that there is any difference in their respective contributions; and 9. Alan in his capacity as a director of AllEng and AEW approved the October 2016 $1000,000 loan from AEW to AES.

Other considerations

1. The Chief Commissioner submitted that the following matters, when considered together with the other matters identified above, also represent a connection in a meaningful, material and consequential sense between the businesses carried on by AEW and AllEng in that they: 1. share a common postal address and common PO Box, 2. share a common accountant; and 3. are insured by the same workers compensation insurer.
2. Gary, on behalf of AEW, pointed out that the AllEng and AEW businesses each have their own procurement staff, who independently source goods and services as required by their respective business. They also have different energy suppliers, business software, telecommunication utilities and phone numbers. The Chief Commissioner submitted that these matters did not, in the circumstances, 'disconnect' the entities.

Consideration

1. As noted above, whether a determination can and should be made under s 79(1) of the PTA is subject to the overriding constraints imposed by s 79(2) of that Act. These are the only matters the Chief Commissioner (or in this case, the Tribunal) can and must have regard to in determining whether the discretion should be exercised. That is, in order to exercise the s 79(1) discretion the Chief Commissioner (or in this case the Tribunal) must be satisfied that a business is 'carried on independently of and is not connected with the carrying on of a business carried on by any other member of the group'. As noted by the Tribunal in Toveety Maintenance Services Pty Limited v The Chief Commissioner of State Revenue [2015] NSWCATAD 137, at [45], these words require a two pronged approach as follows:: 45 … [First], the Applicant needs to demonstrate to the satisfaction of the Respondent (or on review this Tribunal) that it carries its business independently of the business carried on by other members of the group …. Secondly, the Applicant needs to demonstrate to the satisfaction of the Respondent (or on review this Tribunal) that it carries on its business in a manner which is not connected with the business carried on by other members of the group …: Mead Packaging (Aust) Pty Limited v Commissioner of Payroll Tax (NSW ) 78 ATC 4164(relating to an earlier version of the legislation which was in similar but different terms).
2. In deciding whether a business is 'carried on independently of and is not connected with the carrying on of a business carried on by any other member of the group', regard is to be had to the nature and degree of ownership and control of the business, the nature of the businesses and any other matter the Chief Commissioner considers relevant.
3. Control of each entity in the group, as identified in their shareholding and directorships, is not disputed. However, the question is, who in effect has control of the businesses of the entities. While AEW and AllEng have different General Managers, in my opinion, the evidence, objectively assessed, is that David and Alan are in effect in control of the affairs of both entities. I agree with the Chief Commissioner that the evidence establishes a closed loop of decision making for both entities in that David and Alan approve all accounts, resolve to pay all dividends, decide on inter-company loans and how they should be accounted for, passed all necessary statutory resolutions and controlled the company bank accounts.
4. In controlling the affairs of both companies Alan and David delegated full responsibility of the internal financial management of each entity to Gary, including being a signatory to the bank accounts of each entity. That is, I am satisfied that Garry is in effect 'an insourced (familial) financial controller.'
5. I agree that the terms of the written WFT agreement with AEW and AllEng is in simple terms. However, when objectively assessed, I agree with the Chief Commissioner that it lacks commercial reality in that they did not identify how the monthly fee had been determined (e.g. hours worked) and as with the rent agreements there has been no change in the amount paid since 2011. It is accepted that efficiencies were introduced in the financial management of each entity, but this does not explain the basis on which the monthly fee was determined and why there has been no change.
6. Nor, do I accept that the services provided by WFT were not meaningful to the carrying on of the businesses of AEW and AllEng because the fees represented such a small proportion of the annual turnover of each entity. The tasks WFT had agreed to undertake formed an essential part of each business and in this regard I note that the tasks identified in each agreement was exactly the same. They were tasks that had been previously undertaken in-house, in part, and the Mr Li the account for both entities. This could have occurred again at any time, but as noted by the Chief Commissioner, on the evidence, the only reason this has not occurred is because there were material commercial benefits to the group as a whole in the services provided by Gary, on behalf of WFT.
7. I make a similar finding in regard to the rent agreements between the lessor directors and shareholders, who were also directors and shareholders of the lessee entity. In this regard, I agree with the Chief Commissioner that on the evidence (including the evidence of David) is that rent agreements were not reached at arms' length, but have in effect been mutually beneficial to Alan and David as lessors and the controller or effective controller of the businesses carried on by AEW and AllEng. Had it been otherwise, there would have been a written lease, some evidence of market rent at the time rent was determined and provision for rent reviews.
8. Again, the fact that rent represented a relatively small proportion of the annual turnover of each entity, does not, in my view, mean that the carrying on of the business of AEW is not connected in a material way to the carrying on of the business of AllEng. In my opinion, the evidence indicates otherwise.
9. Hence, I agree with the Chief Commissioner, having regard to the nature and degree of ownership and control of the entities within the group they were in fact connected in a number of respects that included inter-company financial transactions and inter-company management as identified above. While AEW contended that these were either consistent with usual arms' length transactions, inconsequential, an irregular occurrence or not material, in my view, this is not supported by an objective assessment of the evidence.
10. I accepted that the nature of the business of AEW and AllEng differs to that of WFT. But this alone does not satisfy the s 79(2) test: Boston Sales and Marketing (supra), at [23].
11. As I have noted, the financial management services provided WTF is an arrangement that is beneficial to the group as a whole, where Gary was in effect an the 'familial financial controller' of both entities implementing the decisions of David and Alan, including those that were made at the recommendation of their company and family accountant, Mr Li. If this was not so, it would have been out sourced on commercial terms.
12. While the AEW and AllEng businesses manufacture different products and use differently skilled trades men and women, the evidence is that they complement each other because the products of each can be employed in the products of the other. This means they have and can source products they require for their own manufacturing from the other, even on arms' length terms. They are located next to each other, which underpin such supplies. Their location also underpins their supply of products to Tomago under the procurement agreement.
13. The Tomago procurement agreement is a source of considerable revenue for AEW and AllEng. Even though the agreement was an initiative of Tomago to save costs, an attraction in making AllEng a prime vendor and AEW a secondary supplier was undoubtedly the fact that the AEW and AllEng businesses were being carried on next to each other and that the AllEng business also carried on business from premises next to or near Tomago itself.
14. I agree with the Chief Commissioner that the evidence is that it is very much in the commercial interests of each entity in the group, Alan, David and Gary that they continue in the business of supplying products to Tomago through the procurement agreement. That is, there are shared benefits and common interests in the continuation of that agreement which means that AEW, AllEng and WFT businesses each had a real and meaningful connection in a commercial sense in regard to that agreement.
15. Having regard to the nature and degree of ownership and control of the businesses in the group, the nature of the businesses and the matters raised by the Chief Commissioner, I am not satisfied that AEW has established that its business is carried out independently of the business carried on by AllEng. On the contrary, I am satisfied that it carries on its business in a manner which is connected with the business carried on by AllEng and that connection is not insignificant or inconsequential, but affected the business of both entities in a real and practical sense.
16. Accordingly, I am not satisfied that AEW has discharged its onus that the discretion in s 79(1) of the PTA be exercised.

Conclusion

1. For the reasons set out above, I find that the correct and preferred decision is to decline to exercise the discretion in s 79(1) of the PTA and de-group the entities. Hence, I make an order that 1. The decision of the Chief Commissioner, made on 10 October 2017, is confirmed.

I hereby certify that this is a true and accurate record of the reasons for decision of the Civil and Administrative Tribunal of New South Wales. Registrar DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 12 December 2019