Evidence
2 The plaintiff, the Deputy Commissioner of Taxation (the Commissioner), relied on two affidavits made by Aris Zafiriou, each sworn on 26 November 2018. Mr Zafiriou is an Executive Level Officer in the Australian Public Service, employed at the Australian Taxation Office (ATO) as Director, Significant Debt Management. Mr Zafiriou gave the following evidence.
3 In early 2014, a task force, led by the ATO, became aware of Zu Neng Shi (also known as Scott Shi) and his associated companies who were involved in the meat processing industry. Mr Shi was the head of a large labour hire business that supplied the majority of workers, through various companies, to a number of abattoirs. Mr Shi was not named as a director on ASIC's register, but appeared to be (either himself or through his associates) the controller of all the companies. In July 2015, the taskforce began an intense audit of this group of companies (the Shi Group) and persons associated with it.
4 As a result of this audit, it was determined that the companies in the Shi Group, which include the present defendants, have incurred liabilities, which include:
(a) amounts withheld from the wages of employees pursuant to Div 12 of Pt 2-5 of Sch 1 to the Taxation Administration Act 1953 (Cth) but not remitted (PAYG);
(b) goods and services tax (GST) pursuant to A New Tax System (Goods and Service Tax) Act 1999 (Cth) in relation to labour hire contracts with abattoirs;
(c) superannuation guarantee charges (SGC) pursuant to s 16 of the Superannuation Guarantee (Administration) Act 1992 (Cth) in relation to employees; and
(d) income tax.
5 The defendants are the known active companies in the Shi Group. Many companies in the Shi Group have gone into liquidation or have been deregistered without paying their tax liabilities. The directors of the companies in the group usually changed a short time before each company was wound up or deregistered. The employees of each company in the labour hire contracts with each abattoir were transferred to a new company set up in the Shi Group. Nearly all the money received by companies in the group, not used to pay wages or business expenses, was withdrawn by Mr Shi or his associates. There are usually several companies in the Shi Group in operation at any one time, with some companies having contracts with abattoirs to supply workers and other companies using their bank accounts to pay workers.
6 An audit team investigated all known companies within the Shi Group for the period 1 July 2009 to 30 June 2017 (the audit team). This was taken as an indicative time period only. Not all companies in the group operated during the entire period. The audit group determined the taxation liabilities of those Shi Group companies that held a current registration with ASIC as at 30 June 2017. An estimate of tax liabilities was determined in respect of those companies that had been placed into liquidation or which had been deregistered prior to 30 June 2017.
7 So far as the defendants are concerned, the investigation has revealed significant shortfalls in the income tax, net GST, PAYG and SGC payable by them. Following the audit, the total primary tax liability of each defendant has been determined as follows:
(a) Ausmart Services Pty Ltd - $1,200,070.48;
(b) Ezyrol Trading Pty Ltd - $12,105,872.90;
(c) Gamma One Pty Ltd - $8,805,357.11 (on the assumption that it is providing services and not one or more of the other defendants);
(d) Goyx Pty Ltd - $1,327,424.91;
(e) Mondex Group Pty Ltd - $7,507,902.09;
(f) Newing Glacier Pty Ltd - $5,549,274.06;
(g) Rocube Holding Pty Ltd - $1,004,549.89; and
(h) Spark Labour Solutions Pty Ltd - $219,472.23.
8 Notices of assessment in relation to income tax, GST and administrative penalties were issued in respect of the defendants on 26 November 2018. At the time of the hearing, these notices had not been served. PAYG withholding liabilities and SGC liabilities have not been assessed. However, estimate notices were issued in relation to each defendant on 26 November 2018. Once again, at the time of the hearing, these notices had not been served.
9 As I have noted, a large number of companies in the Shi Group have gone into liquidation or been deregistered without paying their taxation liabilities. The total primary tax shortfall that has been calculated is $83,811,754.58. When this sum is taken with the primary tax liabilities assessed or estimated in respect of the defendants, it will be appreciated that the unpaid primary tax liabilities of the Shi Group exceed $121 million.
10 The audit team determined that many of the labour hire companies in the Shi Group treated their workers as contractors, rather than as employees. This had a number of tax consequences. In particular, although the companies withheld PAYG withholding amounts, with minor exceptions the companies did not remit any PAYG withholding amounts to the ATO. Further, the companies did not comply with the obligations of employers under the Superannuation Guarantee (Administration) Act 1992 (Cth). As a consequence, they became liable for superannuation guarantee charge shortfalls, which they did not pay. Further, the companies lodged Business Activity Statements (BAS) in which they claimed GST input credits equivalent to 1/11 of the wages they paid to the employees. However, as none of the employees were registered for GST, no GST was in fact invoiced to the companies by the employees or paid by the employees to the ATO. This caused the companies to receive refunds for GST that they never paid.
11 The audit team also determined that the labour hire companies were either under-paying, or not paying GST at all, on the fees they received from abattoirs. The money flowing into many of the Shi Group companies' bank accounts far exceeded any income declared in tax returns, even after deductions were allowed for obvious expenses such as wages.
12 Most of the companies in the Shi Group did not lodge tax returns at all or did not lodge them for all income years. Many did not lodge BAS at all or did not lodge them for all quarters. Where tax returns or activity statements were lodged, they were generally found to have understated income and GST payable, while over-claiming GST input credits.
13 Initially, the labour hire companies operated on a "standalone" basis in which the same company that entered into a labour hire contract with an abattoir would pay wages to the workers pursuant to that contract. However, in about 2014, the companies changed to a tiered structure in which the companies that had entered into labour hire contracts (head companies) with abattoirs no longer directly paid wages to most of the workers provided under the contract. Instead, the head companies began transferring funds from their bank accounts to one or more other companies in the Shi Group (payer companies) that then used those funds to pay the workers. The head companies provided payslips to the workers indicating that they were the employer companies.
14 Analysis of the companies' bank statements, AUSTRAC records and other documents indicates that the wound up or deregistered companies in the Shi Group had their assets stripped prior to liquidation or deregistration. In particular, the analysis shows that funds in the companies' bank accounts that were not used to pay wages or other business expenses were transferred to other companies in the Shi Group, or were withdrawn or transferred offshore for the benefit of Mr Shi, his relatives and associates. The audit team undertook a comprehensive analysis of the bank statements of relevant individuals and companies. This showed a number of significant cash withdrawals from ATMs at locations that included casinos, such as Star City Casino (Star City) and other gambling locations. The majority of the cash withdrawals made at ATMs from the Shi Group companies' accounts were made at or in the vicinity of Star City. Mr Shi was a diamond member of Star City, and regularly gambled there. He also had a spouse card which he gave to a long-term employee, Jiong (Jane) Xue. This enabled Ms Xue to invite associates of the labour hire group to the casino as guests. The Commissioner relied on this as evidence of Mr Shi profiting personally from the funds of the companies in the Shi Group.
15 Mr Shi (or one of his close relatives or associates) was also a signatory (in most cases, the sole signatory) to the Shi Group company bank accounts. He was able to make or direct withdrawals in cash from ATMs, as well as cashing cheques and transferring funds offshore. Investigations undertaken with respect to the bank accounts show that they were all accessed by Internet users from the IP Address subscriber account of Scottwell International Pty Ltd (Scottwell). Scottwell carries on a meat-exporting business and is the administrative head company of the Shi Group, although it does not itself supply labour hire. For various periods since its incorporation up to 1 July 2017, Mr Shi was Scottwell's sole director and shareholder. On 1 July 2017, Mr Shi ceased to be the sole director and shareholder, and was replaced by Qun Yang, a Chinese national. Qun Yang lists his primary business and residential address as 47A Rodd Street, Birrong, New South Wales. This is the same primary business and residential address listed by Mr Shi in his income tax return for the year ended 30 June 2017. The evidence discloses the Shi Group companies whose accounts were accessed by IP Addresses traced to Scottwell. These include all the defendants other than Rocube Holding Pty Ltd.
16 In the income years ending 30 June 2010 to 30 June 2016 inclusive, the evidence shows that a total of $4,078,130.84 in cash cheques were drawn on bank accounts of companies in the Shi Group; a total of $150,086.93 in EFTPOS withdrawals were drawn from bank accounts of companies in the Shi Group; and a total of $2,007,879.60 was drawn in cash through ATMs from bank accounts of companies in the Shi Group.
17 In addition, a number of payments were made through Money Chain Foreign Exchange (Money Chain), a business specialising in providing remittance services/foreign exchange trading services for Chinese around the world. In the income years ending 30 June 2010 to 30 June 2016 inclusive, the audit team identified at least $28,699,047 in overseas funds transferred through Money Chain to overseas accounts of Mr Shi, his relatives and companies suspected to be under his control in China. The audit team formed the belief that Mr Shi provided to Money Chain a list of names and personal details of former employees of companies in the Shi Group, which Money Chain then used for this purpose. The audit team formed the view that the funds transferred to Money Chain by the Shi Group companies was not for the purpose of purchasing overseas goods. This view was supported by records held by the Australian Customs Service. Taking into account the Money Chain transfers, and other direct transfers, the Commissioner believes that, in the period 30 June 2010 to 30 June 2016, more than $43.1 million has been remitted overseas by companies in the Shi Group at Mr Shi's direction. Mr Zafiriou detailed some of the income determined at audit as being withdrawn for Mr Shi's personal benefit or for the benefit of others at his direction.
18 As I have noted above, in cases where a company in the Shi Group is wound up or deregistered, the employees of that company are transferred to another company in the group. Payments due to the wound-up company under contracts with abattoirs and meat processing facilities are generally redirected to another company in the group. Mr Zafiriou gave evidence that the multi-tier fund flows of the Shi Group appeared to be a haphazard and ad hoc method of paying wages from whichever company in the Shi Group has sufficient funds. Mr Zafiriou said that the general pattern, across the Shi Group, is that a head company contracts with an abattoir to provide labour and transfers large amounts to other companies in the group, particularly intermediary companies. The intermediary companies in turn transfer almost all of their purported contract income to payer companies. The funds which are transferred to the payer companies are sometimes not used to pay the wages of the workers of the relevant head company but instead are used to pay the workers for another head company. He said, however, that there is a single controlling mind behind the companies - which is Mr Shi.
19 Mr Zafiriou said that there is a history of companies in the Shi Group not complying with their tax reporting obligations and subsequently being placed into administration or liquidation owing substantial taxation debts. The routine de-registration of the payer companies, and regular transfer of labour hire contracts between Shi Group companies shows that there is a history of "phoenix" activity within the group.
20 Taken at face value, the evidence reveals systematic and deliberate non-compliance of companies in the Shi Group, including the defendants, with various taxation obligations. The evidence also reveals "phoenix" activity. There is a justifiable lack of confidence in the administration of the companies' affairs and a risk to the public interest, both in terms of a risk that employee entitlements will not be paid and a risk to the revenue, which warrants protection by the appointment of a liquidator.