Elanor Operations Pty Ltd v Chief Commissioner of State Revenue

th Plaintiff) Byron Bay Hotel Management Pty Ltd (Sixth Plaintiff) Cradle Mountain Lodge Management Pty Limited (Seventh Plaintiff) Eaglehawk Hotel Management Pty Limited (Eighth Plaintiff) Featherdale Management Pty Limited (Ninth Plaintiff) JCF Management Pty Limited (Tenth Plaintiff) Narrabundah Hotel Management Pty Ltd (Eleventh Plaintiff) Parklands Resort Hotel Management Pty Limited (Twelfth Plaintiff) Pavilion Wagga Wagga Hotel Management Pty Limited (Thirteenth Plaintiff) Port Macquarie Hotel Management Pty Limited (Fourteenth Plaintiff) Tall Trees Hotel Management Pty Limited (Fifteenth Plaintiff) Woollongong Hotel Management Pty Limited (Sixteenth Plaintiff) Chief Commissioner of State Revenue New South Wales (Defendant) Representation: Counsel: C Harris SC with J Stuckey-Clarke (Plaintiffs) S Balafoutis SC with A Byrne

Solicitors: Kennedys (Plaintiffs) NSW Crown Solicitor's Office (Defendant) File Number(s): 2018/00332881 Publication restriction: Nil

Judgment

1. HER HONOUR: Before me for hearing on 26 June 2020 were three separate notices of motion: a notice of motion filed on 20 April 2020 by the plaintiffs in the present proceedings, seeking to set aside certain notices to produce issued to them by the defendant (the Notices to Produce Motion); a notice of motion also filed on 20 April 2020 by the plaintiffs, seeking to set aside certain subpoenas issued by the defendant to subsidiaries of the parent company in the plaintiff group of companies (the Subpoenas Motion); and a notice of motion filed on 19 May 2020 by the defendant, seeking an order for the provision by the plaintiffs of discovery of documents within essentially the same categories identified in the notices to produce the subject of the Notices to Produce Motion (the Discovery Motion).
2. As the Discovery Motion has in effect superseded the notices to produce that had been issued by the defendant (and hence the need for any determination of the Notices to Produce Motion), the hearing before me proceeded by agreement between the parties on the basis that I would deal only with the Discovery Motion and Subpoenas Motion, respectively (T 1.31-45). Moreover, the course of oral argument focussed largely on the Discovery Motion, it being accepted that the categories sought by way of discovery broadly mirrored those sought in the subpoenas the subject of the Subpoenas Motion (and hence at least that the same result would follow on that motion) (T 10.21).
3. For the reasons set out below, I will order the provision of discovery (with some amendments as discussed during the course of oral submissions) as sought by the defendant, and I will dismiss the application to set aside the impugned subpoenas. The Notices to Produce Motion will be dismissed with no order as to costs, it having been superseded by the Discovery Motion as explained above.

Background

1. The underlying dispute between the parties relates to payroll tax notices of assessment issued by the defendant (the Chief Commissioner of Taxation) to the second plaintiff (193 Clarence Hotel Management Pty Limited), a company within a group of companies referred to as the Elanor Investors Group, in respect of the tax years ended 30 June 2015 (TY 2015) and 30 June 2016 (TY 2016).
2. The proceedings (commenced by summons on 30 October 2018) concern the question whether the five groups of corporations referred to in the defendant's assessment letter dated 31 August 2018 should be assessed as one "group" for the payment of payroll tax under Part 5 of the Payroll Tax Act 2007 (NSW) (the Payroll Tax Act). The plaintiffs argue that the defendant ought to have exercised his discretion under s 79 of the Payroll Tax Act to exclude from membership of a single and discrete "group", for the purposes of Division 2 Part 5 of the Payroll Tax Act, the five separate "groups" of companies in question (each of which comprises only entities within the overall Elanor Investors Group).
3. The plaintiffs filed and served an amended summons and an Appeal Statement on 19 July 2019. In response, the defendant filed and served the Defendant's Appeal Statement on 16 August 2019.
4. The parties have also filed their evidence in the substantive proceedings, bar any evidence in reply to be filed by the plaintiff. (Hence the plaintiffs' complaint as to the notices to produce having been issued prematurely, and inconsistently with Practice Note Eq 11 in relation to disclosure, is no longer pressed.)
5. The plaintiffs' affidavit evidence sets out the background, structure and operations of the Elanor Investors Group (see the affidavit sworn 12 February 2020 of Mr Glenn Willis, the chief executive officer and managing director of Elanor Investors Group and sole director of the relevant companies; and the affidavit sworn 12 February 2020 of Mr Symon Simmons, the chief financial officer and company secretary of Elanor Investors Limited (Elanor Investors) and the company secretary of each of the plaintiffs). Those affidavits were tendered by the defendant as exhibits on the present applications, being admitted as evidence for the fact of that to which the deponents have deposed; not for the truth of their contents.
6. In his affidavit sworn 12 February 2020 (Exhibit 3), Mr Simmons deposes that Elanor Investors is an ASX-listed company (see at [1]), with investment interests in a number of different portfolio types including retail property assets, commercial property assets and hotels, tourism and leisure assets (see at [19]). It is, as I understand it, the head company for the entities comprising the Elanor Investors Group.

Plaintiffs' submissions

1. The plaintiffs say that once a company/unit trust structure is "sold off" to a syndicate of investors it operates independently of other such structures developed by Elanor Investors, and that Elanor Investors' subsidiary companies (including Elanor Operations): do not supply each other, or buy from each other; pay no fees, commissions or other payments to each other; have no common employees; are located in different geographic areas; make decisions which have no effect on the other companies; and that the success or failure of one has no influence on, or dependency on, the success or failure of another. It is said that each company pays a commercial arms' length rent to the unit trust which owns the land on which its business operates, the terms of which are negotiated and agreed completely independently of the terms of the leases between the other companies and their unit trusts. (Pausing here, the position of the defendant on the current applications is that the evidence does not establish, and it should not be accepted, that the rent is a "commercial arms' length rent" (see at T 11.48), this at least implicitly being one of the aspects of the matter that the discovery sought by the defendant is aimed at testing. The defendant here wishes to test the level of management and oversight Elanor Operations employees had over the companies (T 13.42).)
2. In their Appeal Statement filed 19 July 2019, the plaintiffs contend (at [33]) that: The businesses in the 5 Groups are operated from different locations, and for different groups of investors. The success or failure of one business does not influence, or depend on, the success or otherwise of another business. The companies do not supply each other, or buy from each other nor do they pay fees, commissions or make any other payments to each other. They do not have common employees. They operate completely independently of one another and unconnected with each other.
3. The plaintiffs say that these structures are owned by completely different groups of investors (albeit that some investors might have interests in more than one such structure), and that all profits are distributed to those particular investors. It is said that in some cases Elanor Investors (or an "Elanor-style" subsidiary of Elanor Investors) is one of the investors, but that its interest is never greater than 49% and is usually much smaller.

Defendant's submissions

1. The defendant contends (in his Appeal Statement filed 16 August 2019 at [39]-[40]) that: relevant entities and trusts within Elanor Investors Group, and the businesses of those entities and trusts (the trustee for each of which was EFML), were, in TY 2015 and TY 2016, controlled and managed by a small number of key executives and managers with a shared strategy and governance framework and shared resources; where companies and assets were owned in part by third parties during TY 2015 or TY 2016, those key executives and managers (including, in particular, Mr Willis) held significant decision-making roles and powers through trusts and entities associated with (and are thereby able relevantly to assert control over) those companies and assets; during TY 2015 and TY 2016, entities within the Elanor Investors Group provided assistance to, and shared resources with, each other, and reporting and decision-making were concerned with, and directed at, the overall performance of the Elanor Investors Group; and that the governing documents of the trusts and entities within the Elanor Investors Group contemplate, and make special allowances for, entities and trustees within the Elanor Investor Group dealing with each other.
2. The defendant contends (at [41] of his Appeal Statement filed 16 August 2019) that, in TY 2015 and TY 2016, there were numerous material connections between the businesses carried on by the plaintiffs; and that those connections were meaningful in a commercial sense, and not immaterial or inconsequential to the carrying on of the businesses.
3. In Section D of the defendant's Appeal Statement filed 16 August 2019, the defendant identifies various factual matters in support of those contentions, including: the "stapling" of entities and trusts; the common directors of those entities and the common corporate trustee of the trusts, EFML (see at [9], [14], [18], [23], [24]); the terms of the constituent and governing documents of the entities and trusts (see at [14], [16], [18], [19], [23], [26], [30]); combined reporting in relation to the entities and trusts (see at [31]); indications in those combined reports that the entities and trusts were controlled and managed by a small group of executives and managers using common resources (see at [32]); and the provision of funding and other benefits and assistance between entities and trusts within the Elanor Investors Group (see at [32]).

Section 79 of the Payroll Tax Act

1. Section 79 of the Payroll Tax Act, relevantly, provides that: (1) The Chief Commissioner may, by order in writing, 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 Chief Commissioner may only make such a determination if satisfied, having regard to the nature and degree of ownership and control of the businesses, the nature of the businesses and any other matters the Chief Commissioner considers relevant, that a business carried on by the 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. …
2. The parties in the present proceedings accept that the issue in the substantive proceedings is as to whether, and to what extent, the business carried on by each plaintiff is carried on in a way that is connected with the carrying on of a business carried on by another plaintiff.
3. That issue falls to be determined having regard to the nature and degree of ownership and control of the businesses, the nature of the business, and any other relevant matters. For the purposes of s 79(2) of the Payroll Tax Act (the pre-condition for the exercise of the power in s 79(1) of the Payroll Tax Act), one asks whether, having regard to the nature of connections between group businesses, it can nevertheless be said that the businesses are independent and not connected; the question being one of fact and degree (see Lombard Farms Pty Ltd v Chief Commissioner of State Revenue [2013] NSWADTAP 42; 96 ATR 315 (Lombard Farms) at [50]-[51]).
4. As the defendant has noted, the control referred to in s 79(2) of the Payroll Tax Act includes both actual control as well as the inherent (or theoretical) ability of the owner of a business to control the business, whether or not actually exercised during the relevant period (the defendant citing Lombard Farms at [63]; and Cessnock Tyres Pty Ltd v Chief Commissioner of State Revenue [2018] NSWCATAP 147 at [68]-[69]).
5. The defendant points out that significant relevant indicia of connectedness between group members include: the existence of common directors; substantial commonality of ownership; intra-group loans; the same place of business; and intra-group provision of administrative services (citing Conrad Linings Pty Limited v Chief Commissioner of State Revenue [2014] NSWSC 1020; (2014) 98 ATR 842 at [51]-[57]).

Documents sought by the defendant

1. The documents sought by the defendant: first, by way of the notices to produce that were issued to the plaintiffs under r 34.1 of the Uniform Civil Procedure Rules 2005 (NSW) (UCPR) and from the subpoenaed parties under the impugned subpoenas, and which are now also sought from the plaintiffs by way of discovery under r 21 of the UCPR, have been narrowed in scope from those initially sought in the notices to produce and subpoenas (and they are proposed to be further narrowed in accordance with the submissions made on the present applications). Broadly speaking, those documents are set out in the schedule to the defendant's submissions on the present applications as follows: 1. The constituent documents (including the constitutions, trust deeds, fund deeds, stapling deeds, and any shareholders agreements) for any of the Relevant Companies or Relevant Trusts. 2. Notices of meeting and minutes of meeting for directors meetings and general meetings for any of the Relevant Companies in the period from 1 July 2014 to 30 June 2016, and board reports provided to directors for those directors meetings. 3. [Disclosure sought by Elanor Operations only] All correspondence (including emails) between employees of Elanor Operations Pty Ltd and any of the following entities (including their employees or consultants) during June and July in the Relevant Period: (a) any of the Relevant Companies; (b) Mantra Management Pty Ltd; (c) Peppers Leisure Pty Ltd; or (d) AAPC Properties Pty Ltd, excluding correspondence enclosing daily flash reports. 4. [Disclosure now sought by Elanor Operations only] With respect to persons employed by Elanor Operations Pty Ltd during any part of the Relevant Period: (a) their contracts of employment; and (b) any other documents which state their job descriptions. 5. Financial statements for the Relevant Companies and Relevant Trusts for the years ending 30 June 2015 and 30 June 2016, including, without limitation, combined financial statements covering any of those companies or trusts. 6. Documents identifying the services to be provided by Elanor Funds Management Limited, during any part of the Relevant Period, to any of the Relevant Companies or Relevant Trusts in exchange for payment of management fees, limited to information memoranda, marketing material and constitutions. 7. Engagement letters for accountants or lawyers who provided services to or for any of the Relevant Companies or Relevant Trusts during the Relevant Period. 8. [This category applies only in the Notices to Produce and in each case refers to a different paragraph of the relevant affidavit] The leases for the leasing arrangements referred to in […] the affidavit of Glenn Norman Willis sworn on 12 February 2020.

Legal Principles

1. As to the principles applicable in relation to an application for discovery, r 21.2(4) of the UCPR requires that the documents sought must be relevant to a fact in issue (see also r 21.1(2) of the UCPR). In Graphite Energy Pty Ltd v Lloyd Energy Systems Pty Ltd [2014] NSWSC 1326, Brereton J, as his Honour then was, said (at [21]-[22]): 21. Aside from necessity, the touchstone for discovery is relevance to a fact in issue in the proceedings. UCPR r 21.2(2) provides that a class of documents must not be specified in more general terms than the Court considers to be justified in the circumstances, and UCPR r 21.2(4) provides that an order for discovery may not be made in respect of a document unless the document is relevant to a fact in issue. … 22. Thus, while r 21.2(1) permits classes of documents to be specified, not only by relevance to one or more facts in issue, but alternatively by description of the nature of the documents and the period within which they were brought into existence or in such other manner as the Court considers appropriate in the circumstances, nonetheless discovery cannot be ordered except in respect of documents that are relevant to a fact in issue. This means that it must always be possible to show a connection between the class and a fact in issue, and where a class is specified in some other manner than by relevance to a fact in issue, it must be apparent that the class so described will capture only documents that are relevant to a fact in issue. For this reason, it is highly preferable that classes be specified by relevance to a fact in issue - unless it is self-evident that the class is a sub-class of documents that relate to a fact in issue.
2. The relevant Practice Note issued in March 2012 makes clear that an order for disclosure of documents will not be made until the parties to the proceedings have served their evidence, unless there are exceptional circumstances necessitating disclosure. Here, as noted earlier, other than evidence in reply, the parties have now served their evidence. The Practice Note also makes clear that there will be no order for disclosure in any proceedings in the Equity Division unless it is necessary for the resolution of the real issues in dispute in the proceedings. (See, in that regard, In the matter of Gerard Cassegrain & Co Pty Ltd [2011] NSWSC 241 at [20]ff.)
3. If compliance with an order for discovery would be too onerous, then limitations may be placed on it (see, for example, Palavi v Radio 2UE Sydney Pty Limited [2011] NSWCA 264 at [101], per Allsop P, as his Honour then was).

Particular categories of documents here sought

1. Turning to the particular categories of documents that have here been sought (and noting that the defendant has, in the schedule annexed to his submissions and also in oral argument, narrowed the scope of what was initially sought under the notices to produce), they are as follows. Category 1 1. The constituent documents (including the constitutions, trust deeds, fund deeds, stapling deeds, and any shareholders agreements) for any of the Relevant Companies or Relevant Trusts.
2. Objection to category 1 (and, similarly, objection to categories 5-7) is now limited to the inclusion of reference to the "Relevant Trusts". There is no opposition to the production of such documents for the Relevant Companies (see T 6.6).
3. The plaintiffs submit that documents relating to the said trusts have no relevance to the issues, or facts in issue, in these proceedings (even allowing for the "relatively broad latitude" that it is acknowledged is given for discovery); and hence they submit that there is no legitimate forensic purpose in the defendant seeking to have them produced.
4. The plaintiffs note that the issue in the proceedings is whether the carrying on of the businesses by corporations in any one of the 5 groups is "connected with" the carrying on of a business by a corporation in another group. As noted above, with limited exceptions it is said that the businesses carried on are hotel businesses (the exceptions being that of Elanor Operations, which it is said is involved in the business of initiating and developing businesses for sale to investors; the ninth plaintiff, which carries on business as the operator of a wildlife park; and the tenth plaintiff, which had previously carried on business as a furniture retailer but which business has now closed).
5. The Relevant Trusts are identified as being the corresponding unit trusts which own the lands on which those businesses (with the exception of Elanor Operations) are or were located. It is said by the plaintiffs that the unit-holders of these trusts are disparate groups of investors who are the beneficial owners of diversely located parcels of the real estate on which the hotel and other businesses operate and that, in those circumstances, there could not be any documentation within the administration of those trusts which would shed any light on the extent to which the businesses conducted on the properties, businesses which the trusts do not own or control, might be carried on in a way that is "connected".

Determination

1. As to the complaint in respect of discovery categories 1, 5, 6 and 7, to the extent that they require provision of documents of the Relevant Trusts, I am satisfied that there is a legitimate forensic purpose of the defendant in seeking the production of documents in relation to the Relevant Trusts. Given that the defendant's position is that the plaintiffs are connected with each other through their relationship to the Relevant Trusts, the requested documents may well throw light on the issues in dispute, and are thus relevant to a fact in issue. In particular, I accept that such documents are likely to be relevant to test the issue as to the degree and nature of the connection between the relevant businesses, for the reasons articulated in oral submissions by Senior Counsel for the defendant. I do not accept that this can be dismissed as a mere "fishing expedition".
2. Nor do I accept that there is any relevant degree of oppression in the requirement to produce the relatively limited documents in categories 1, 5 and 6. While I accept that there may be continuing "logistical difficulties" in the face of the COVID-19 pandemic (and the plaintiff says this will have an impact on the timeframe within which it can produce the documents), this is not enough in itself to make the production of documents oppressive. The production of the requested documents has a legitimate forensic purpose and is relevant to a fact in issue.
3. As to category 7, the objection to which goes beyond the inclusion of reference to "Relevant Trusts", I accept that a specified retainer on a discrete legal issue is or may be unlikely to shed light on the connectedness between the businesses one or more of the relevant corporations but that a general retainer or a succession of related retainers might do so. The limitation suggested by the plaintiffs in the course of argument would adequately address the former issue.
4. As to category 3, I accept the relevance or potential relevance of the document sought. With the limitation to deal with former employees' documents, I consider that it is not oppressive for the documents to be produced.
5. I have reached the same conclusion in relation to category 4. There is a legitimate forensic purpose in seeking documents relating to employees of the other "teams" within Elanor Operations insofar as this may be expected to shed light on the nature and degree of connectedness between the respective businesses.

Conclusion

1. I am therefore satisfied that it is appropriate for discovery to be provided of the documents sought by the defendant (as confined in the schedule and as further confined in the course of oral argument); and that it is not oppressive to require this to be done (provided that sufficient time is allowed for that purpose). I am also satisfied that there is a legitimate forensic purpose to the subpoenas and that it is not oppressive for them to be complied with, to the extent narrowed by reference to the schedule and in oral submissions.
2. I make the following orders: 1. Noting that the notices to produce issued by the defendant to the plaintiff have now been superseded by the application for discovery, dismiss the plaintiffs' notice of motion filed 20 April 2020 (Notices to Produce Motion) with no order as to costs. 2. Dismiss the plaintiffs' notice of motion filed 20 April 2020 to set aside the subpoenas issued to third party subsidiaries of Elanor Investors Limited (Subpoenas Motion) but direct that production of documents in answer to the subpoenas be limited in accordance with the applicable paragraphs of the schedule attached to these reasons and list the matter in the subpoena list on 27 August 2020 for return of the subpoenas and production of subpoenaed documents. 3. Order plaintiffs to provide discovery in accordance with the schedule attached to these reasons by no later than 27 August 2020. 4. Reserve the question of costs of the Subpoenas Motion and Discovery Motion. 5. List the matter for directions on 1 September 2020 at 8.30am.

Schedule of documents required to be produced on discovery and (as applicable) in answer to the subpoenas issued by the defendant Adopting the definitions provided immediately after the following numbered paragraphs and excluding documents already produced as exhibits or annexures to affidavits filed in the proceedings: 1. The constituent documents (including the constitutions, trust deeds, fund deeds, stapling deeds, and any shareholders agreements) for any of the Relevant Companies or Relevant Trusts. 2. Notices of meeting and minutes of meeting for directors meetings and general meetings for any of the Relevant Companies in the period from 1 July 2014 to 30 June 2016, and board reports provided to directors for those directors meetings. 3. [Disclosure now sought by Elanor Operations only] All correspondence (including emails) between employees of Elanor Operations Pty Ltd and any of the following entities (including their employees or consultants) during June and July in the Relevant Period [i.e., June-July 2015 and June 2016]: 1. any of the Relevant Companies; 2. Mantra Management Pty Ltd; 3. Peppers Leisure Pty Ltd; or 4. AAPC Properties Pty Ltd, excluding correspondence enclosing daily flash reports and excluding documents held or retained by former employees or documents on devices used by former employees and not backed up to a central server. 1. [Disclosure now sought by Elanor Operations only] With respect to persons employed by Elanor Operations Pty Ltd during any part of the Relevant Period: 1. their contracts of employment; and 2. any other documents which state their job descriptions 1. Financial statements for the Relevant Companies and Relevant Trusts for the years ending 30 June 2015 and 30 June 2016, including, without limitation, combined financial statements covering any of those companies or trusts. 2. Documents identifying the services to be provided by Elanor Funds Management Limited, during any part of the Relevant Period, to any of the Relevant Companies or Relevant Trusts in exchange for payment of management fees, limited to information memoranda, marketing material and constitutions. 3. Engagement letters for accountants or lawyers who provided services to two or more of the Relevant Companies or Relevant Trusts during the Relevant Period. 4. [This category applies to documents sought in the Notices to Produce and in each case refers to a different paragraph of the relevant affidavit] The leases for the leasing arrangements referred to in […] the affidavit of Glenn Norman Willis sworn on 12 February 2020. Definitions "Relevant Companies" means the following companies: (a) 193 Clarence Hotel Management Pty Ltd (ACN 601 516 821) (b) AAPC Properties Pty Ltd (ACN 065 560 885) (c) Albany Hotel Management Pty Limited (ACN 601 117 202) (d) Bell City Accommodation Management Pty Limited (ACN 602 663 758) (e) Bell City Hotel Management Pty Limited (ACN 602 663 230) (f) Cradle Mountain Lodge Management Pty Limited (ACN 169 805 958) (g) Eaglehawk Hotel Management Pty Limited (ACN 169 309 460) (h) EHAF Management Pty Limited (ACN 609 090 422) (i) Elanor Asset Services Pty Limited (ACN 614 679 622) (j) Elanor Funds Management Limited (ACN 125 903 031) (k) Elanor Investment Holdings Pty Limited (ACN 609 088 931) (l) Elanor Investment Nominees Pty Limited (ACN 602 165 971) (m) Elanor Investors Limited (ACN 169 308 187) (n) Elanor Management Pty Limited (ACN 155 119 538) (o) Elanor Operations Pty Limited (ACN 169 520 218) (p) Featherdale Management Pty Limited (ACN 163 915 008) (q) JCF Management Pty Limited (ACN 155 119 645) (r) Mantra Management Pty Ltd (ACN 107 791 695) (s) Parklands Resort Hotel Management Pty Limited (ACN 610 481 779) (t) Pavilion Wagga Wagga Hotel Management Pty Limited (ACN 610 481 751) (u) Peppers Leisure Pty Ltd (ACN 087 741 599) (v) Port Macquarie Hotel Management Pty Limited (ACN 609 154 476) (w) Tall Trees Hotel Management Pty Limited (ACN 609 154 565) (x) Wiltex Wholesale Pty Ltd (ACN 000 461 245) (y) Wollongong Hotel Management Pty Limited (ACN 167 079 487). "Relevant Period" means the period from 10 October 2014 to 30 June 2016. "Relevant Trusts" means the trusts known as: (a) 193 Clarence Hotel Syndicate (b) Bell City Hotel Syndicate (c) Bell City Accommodation Syndicate (d) Elanor Hospitality and Accommodation Fund. 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: 02 July 2020