Headwear Pty Ltd v Chief Commissioner of State Revenue

NCAT Administrative and Equal Opportunity|2015-03-16

Background

It is common ground that payroll tax is a tax payable by an employer whose taxable wages (as defined) exceed a statutory threshold. Part 5 of the Payroll Tax Act 2007 (the Act) provides that certain employers may be grouped together. If so, a single threshold applies to the aggregate taxable wages paid by all group members rather than each member enjoying that threshold.
The Applicant submitted that the Chief Commissioner should have exercised a discretion in s. 79 of the Act to exclude the Applicant from a group formed with three other employers (sometimes called the Headwear Group or the group in this decision). The Applicant referred to Revenue Ruling PTA 031, issued by the Chief Commissioner, which states that the discretion may be exercised "to avoid anomalies which may arise from the strict application of the grouping provision".
The Applicant applied to this Tribunal for a review of the Chief Commissioner's disallowance of its objection to his decision not to degroup the Applicant and the other employers under s. 79 of the Act in respect of the 2008 to 2011 tax years (the Relevant Period).
The Applicant trades as trustee for a partnership and mainly carries on business in New South Wales (the NSW business).
The other employers are: 1. Duwan Pty Ltd as trustee for The Barblett Trust (the WA business); 2. 055 698 149 Pty Ltd as trustee of the Headwear Stockists Unit Trust (the Victorian business); and 3. the Applicant as trustee for a partnership trading under the name "Headwear Stockists (QLD)" (the Queensland business).

Material before the Tribunal

The Applicant relied on: 1. a statement by each of Peter James Barblett made 22 October 2014 and Michael John Smith made 23 October 2014. Both Mr Barblett and Mr Smith also gave oral evidence; 2. pages 19-105 attached to the Applicant's submissions dated 23 October 2014 (AS) and pages 13-16 attached to the Applicant's submissions in reply dated 9 January 2015 (ASR); and 3. AS, ASR and oral submissions by Mr Di Iorio.
The Respondent relied on: 1. the bundle of documents produced under s. 58 of the ADR Act and an affidavit by Holy Morgan affirmed 27 November 2014; and 2. written submissions by the Respondent dated 28 November 2014 (RS) and oral submissions by Mr Rider.
References below to documents by page number refer to pages from the s. 58 documents unless otherwise stated. A bundle of documents were exhibited to Ms Morgan's affidavit. Where reference is made to those documents they are referred to as being in HM1.

Issue

To paraphrase White J at [5] in Conrad Linings Pty Limited v Chief Commissioner of State Revenue [2014] NSWSC 1020 the issue for determination is whether the Tribunal, standing in the shoes of the Chief Commissioner, should exercise the discretion in s. 79 of the Act to exclude the Applicant as a member of the group.

Onus

The onus in this matter lies on the Applicant (s. 100(3) of the TA Act). The onus is to be satisfied on the balance of probabilities B & L Linings Pty Ltd & anor v Chief Commissioner of State Revenue [2008] NSWCA 187 at [104].

The law

Section 79, the provision of the Act which enables the avoidance of anomalies, relevantly provided: 79 Exclusion of persons from groups (l) 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. … … (5) A determination can be expressed to take effect on a date that is earlier than the date of the determination. … (7) The revocation of a determination can be expressed to take effect on a date that is earlier than the date of the determination.
The Respondent submitted at [49] in RS that the relevant statutory question to be answered by the Tribunal was set out in Boston Sales and Marketing Pty Limited v Chief Commissioner of State Revenue [2014] NSWCATAD 139 where Block SM said at [20]: "It is important to note that the only statutory question which requires an answer is as to whether 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, the Chief Commissioner (or, Tribunal in this instance) is to have regard to: (1) to the nature and degree of ownership and control; (2) the nature of the businesses; and (3) any other matter considered relevant"
The Respondent submitted at [56] and [57] in RS that in accordance with Conrad Linings and the facts regarding the Applicant the following matters were relevant: 1. substantial commonality of ownership; 2. intra-group loans; 3. same place of business; 4. intra-group provision of administrative services; 5. the nature of the business. 6. the businesses of all group members used the same: 1. website; 2. bookkeeping and stock ordering functions; 3. internal stock codes; 4. invoicing format; 5. "Headwear Professionals" branding; 6. contact person for stock orders from China (Peter Barblett); and 7. external accountants and registered office; 1. the WA business financed the businesses of the other group members through substantial loans and retained earnings and received significant interest, distribution and consulting payments from them; 2. the Applicant and the WA business shared the same WA postal address; 3. the Applicant's contact person for FBT purposes was Peter Barblett; and 4. Peter Barblett signed the Applicant's FBT returns as "employer".
The Applicant submitted that the NSW business is a small business, each of the Headwear businesses is independently operated with separate staff, premises, banking facilities, lease arrangements, infrastructure and customers and, except for common ownership they have no economic dependence on each other.

Ownership and control

The parties agreed that (RS [11] - [15]): 11. During the Tax Years: Peter Barblett owned 35% of the shares in the Applicant, with MB Smith owning 20%, RB Peterson owning 15% and RA Brandsma, IP Crockett and TB Shu11 each owning 10%12 b. the directors of the Applicant were Peter Barblett, RB Peterson, RA Brandsma and MB Smith13; and c. the New South Wales and Queensland businesses had a local management team. 12 Until 2008, trusts associated with the shareholders in the Applicant had interests in the partnership in the same proportions as their shares in the Applicant15. 13 From 2008, the ownership in respect of the Queensland business slightly changed, with a trust associated with Joseph Potts acquiring a 20% interest in the partnership and the other partners' interests slightly decreasing16. The interests in the partnership in respect of the NSW business did not change at this time. 14 In 2010, TB Shu died and his interests in the NSW and Queensland partnerships were acquired by the trusts associated with Peter Barblett and MB Smith. Summary of ownership and control of businesses 15. During the Tax Years: a. Peter and Suzanne Barblett owned and controlled the WA business; b. Peter Barblett, RB Peterson and RA Brandsma controlled the board of the business entities in NSW, Victoria and Queensland; and c. trusts associated with these individuals and IP Crockett held 70% or more of the interests in the businesses in NSW, Victoria and Queensland
I observe that in Boston Sales and Marketing Block SM said at [26]: Control of a corporation is to be determined by shareholdings in the corporation and control at directorial level: Crusher Holdings Pty Ltd v Commissioner of Taxes [1994] NTSC 82; see also Denham Constructions Pty Ltd v Chief Commissioner of State Revenue (1998) 40 ATR 416. The practical ability to control and influence is also a consideration: Commissioner of Stamps v Garrett F Hunter Pty Ltd, Meldrick House Pty Ltd and Geoffrey S Vercoe Pty Ltd (1997) 69 SASR 275.

Nature of businesses

The parties agreed that throughout the Relevant Period the group businesses in all states imported and sold headwear manufactured in China by the same factory.
Financial statements of the Barblett Trust are in evidence for each financial year during the Relevant Period. During each year the statements show that the Barblett Trust received income from the sale of stock. The statements also show that in each year the Barblett Trust received consulting income, distributions and interest from several headwear businesses including each business in the Headwear Group as well as income during most of the Relevant Period from Headwear USA and Headwear Canada.
The Advisers informed the Chief Commissioner that income shown as "consulting income" was income derived by the Barblett Trust from the provision of services being "preparation of other financial information" and "processing of stock ordering with the Chinese factory" (page 11 in HM1).
In each relevant year the majority of the non-current assets of the Barblett Trust were described as "receivables" and the majority of the "receivables" were retained earnings derived from the NSW business, the Queensland business and the Victorian business.
It is common ground that the Barblett Trust was the major equity owner in each of the NSW business, the Queensland business and the Victorian business. Mr Barblett was at all relevant times a director of the company carrying on each such business as well as being a director of the trustee of the Barblett Trust.
Mr Barblett's evidence was that "The core business in W.A. is the importation and distribution of headwear to the W.A. market." Having regard to the information in the financial statements of the Barblett Trust it seems to me that it is more likely than not that the Barblett Trust is not only engaged in the business of the importation and distribution of headwear to the WA market but is also engaged in the business of investing in and deriving income from Headwear businesses including the NSW business, the Queensland business and the Victorian business as well as Headwear businesses overseas.
The investment business carried on by the Barblett Trust in addition to its business of importing and distributing headwear does not by itself prevent a determination under s. 79(2). However the connection between the NSW business and the investment business carried on by the Barblett Trust is a matter to be considered.

Other matters for consideration

Set out below are a number of matters raised in submissions in respect of which evidence was led before the Tribunal or the Applicant conceded were factually correct and which I considered in making my decision. There is some unavoidable overlap in some of the categories of matters.

Accountants and registered office

The Applicant conceded that before, throughout and after the Relevant Period all group businesses used the same Advisers to prepare their financial statements and the address of those Advisers was the registered office of all group employers.
I observe that the Advisers acted for the Applicant in respect of the relevant payroll tax investigations, prepared the Applicant's degrouping application, its objection to the Respondent's decision not to degroup and its evidence and submissions in these proceedings. The same Advisers prepared the financial statements of the other group businesses in evidence in these proceedings.

Degrouping in Victoria and Western Australia

At pages 37 - 42 attached to AS the Applicant produced evidence that: 1. on 20 June 2013 the WA business was granted an exclusion from grouping with Victorian business, the Queensland business and the NSW business from 1 July 2007 to 30 June 2012; 2. on 3 December 2001 and 1 August 2006 the Victorian Commissioner exercised his discretion not to group the Victorian business with other headwear businesses including the NSW business for periods up to 30 June 2005.
The Applicant submitted that the Chief Commissioner on 17 June 2011 had advised the Applicant that it was not then liable for payroll tax and that the investigation was finalised. The Applicant submitted that the discretions exercised in Victoria and Western Australia were equivalent to the exercise of the discretion under s. 79 of the Act.
No evidence was produced as to relevant legislation in Victoria or Western Australia at the time concessions were granted in favour of the Victorian business and the WA business nor were the documents and information supplied to the Commissioners in those states in evidence in these proceedings.
In any event, decisions of statutory authorities in Victoria and Western Australia are not binding on this Tribunal nor is an earlier decision of the Chief Commissioner in New South Wales. It is for this Tribunal to determine on the evidence before it whether or not the correct and preferable decision is that the s. 79 determination could or should be exercised in favour of the Applicant for the tax years during the Relevant Period.

Stock acquisition and stock codes

The Applicant described its business (at page 22) as "printed headwear wholesale". The Applicant conceded that before, throughout, and after the Relevant Period all group businesses imported and sold headwear manufactured in China by the same factory.
The Applicant submitted at page 32 in the annexures to AS; Each business undertakes the purchase of stock independently of the other businesses. The only connection is that Eileen Cusack forwards the stock orders to China in the appropriate format.
The uncontested evidence is that Eileen Cusack is an employee of the WA business. All Headwear Businesses provide stock order information to Ms Cusack. She formats the orders, returns them to the relevant businesses for approval and after approval the orders are sent by the WA business to the Chinese factory. None of the Headwear Businesses order any stock independently of the WA business although, according to Mr Barblett they are free to do so.
Mr Smith said the correspondence with China is standardised so as to minimise errors in ordering stock. He said that costs are not saved by formatting the Applicant's own orders. The problem was how to deal with China. He did not wish an external company to be involved in the ordering as that would be a disaster. The Headwear businesses needed one voice to the factory from which they purchased all their stock. The contact person was either Mr Barblett or Ms Cusack.
Mr Barblett's evidence was that the WA business provided a communication and formatting support service for orders and discussion with the Chinese factory. He acknowledged that all the Headwear businesses obtain stock from the same factory. In his written statement Mr Barblett said: We have found through experience that this is a very effective way of reducing communication errors and errors in general. The benefits and potential cost savings we have been able to achieve are significant as mistakes are one of the things that kill businesses like these. An error on an order could potentially cost thousands of dollars.
Mr Barblett acknowledged that there had been no calculation of the benefits to the Applicant from using the services of the WA business in relation to stock.
I find that the connection between the Applicant and the WA business in relation to stock ordering and other communications with the manufacturer may be of significant benefit to the Applicant's business.
Mr Smith said that any queries from the Chinese factory in relation to stock ordered by the Applicant are dealt with by him. Somewhat contradicting himself, Mr Smith also said that Mr Barblett or Ms Cusack are the contacts for all Headwear group businesses, including the Applicant's business, with that factory.
Mr Smith's evidence was that he is totally responsible for all aspects of the Applicant's business including stock control and ordering and purchasing of stock. At no stage does he have to consult with other directors or other Headwear business on any of these matters. In relation to new products the NSW business procedure was that he would choose the products, obtain samples and visit the Chinese factory with Mr Barblett.
Mr Smith said that he had full power to manage the business and that the power had been given to him by the other directors. No record had been made of the decision and there was no written agreement. This evidence should be contrasted with the Applicant's evidence in relation to the 2000 agreement, the 2011 agreement and the Deed of Rectification. Mr Smith appears to have been a signatory to each of those documents.
Mr Barblett gave evidence that before all Headwear group businesses forwarded orders to China through the WA business a problem had occurred with the New Zealand Headwear business. The problem occurred because people from Headwear New Zealand used their own words in communications to the Chinese factory. He said the change of words changed the meaning of the communication. His evidence was that it was necessary for all Headwear companies, including New Zealand and the United Kingdom, to send orders to the Chinese factory through the WA business so as to ensure that the format and wording of orders was unambiguous.
I find that the sole manufacturer of stock for Headwear companies globally throughout the Relevant Period is a single Chinese factory. I find that Mr Barblett is a director of all group members, and a person who is in a position of substantial influence in relation to all group businesses, in terms of marketing, contact with potential customers through the common website, the provision of financial assistance and control of equity. It was Mr Barblett's evidence that it was of substantial importance to the success of all group members including the Applicant that all communications between the factory on the one hand and all Headwear companies globally, including the group members in Australia, be through the WA business which Mr Barblett and his wife controlled.
The Respondent placed some importance on all HG members using the same stock codes. However as the parties are agreed that all stock was purchased from a single factory and as the uncontested evidence from Mr Barblett was that the stock codes originated in that factory I regard this issue as inconsequential to the statutory question.

Provision of services to the Applicant by the WA business

Mr Smith said it was cost-effective for Headwear W.A. to provide the Applicant with bookkeeping services including preparation of cash books, bank reconciliations and other compliance requirements such as Business Activity Statements. He said an administration fee of $15,000 was charged for this work; the fee was determined by Mr Barblett on a "cost-recovery" basis; and the fee had been increased once in 15 years. Mr Smith also said the administration fee paid to Headwear W.A. was "far more cost-effective for us than having a full-time accountant in our business". However Mr Smith conceded that he had not considered engaging a part-time accountant nor had he considered contracting the work to another accounting firm or another bookkeeper. Mr Smith's statement at [8] was that he had 32 years' experience in the headwear industry in operations, administration and manufacturing sectors.
I find it highly implausible that a businessman of Mr Smith's stated experience would not consider an alternate source for the supply of ongoing administrative and bookkeeping services over a 15 year period without the strong likelihood that there was a substantial connection between the business supplying the services and the NSW business. The evidence before me does not support Mr Smith's statement that the Applicant's business is "run independently of all the other Headwear businesses", including the WA business, for each tax year within the Relevant Period.
Mr Barblett's evidence was that the fee charged by the WA business to the Applicant in relation to the services provided by the WA business was determined historically on a cost recovery basis. It was last reconsidered some two years previously, otherwise it was considered every five years or thereabouts.

Invoice stationery

The Applicant was requested to provide a copy of an example of an invoice issued by each member of the Headwear Group during the Relevant Period. None being available, the Applicant provided a copy of two invoices issued by each member, one dated December 2012 and the other dated November 2014 (HM1 at Tab 5). I observe that each invoice is identical in format and appears to bear the same watermark.
The Respondent submitted that this is further evidence of an interconnection in relation to the business carried on by each member of the Headwear Group. I find it unlikely that all members of the Headwear Group used the same stationery source for their invoices and used identical invoice formats without some communication between them and possibly some central purchasing arrangement. No evidence was provided in relation to the design of invoices or the sourcing of stationery.

Competition between Headwear Businesses

Mr Barblett was asked whether the group members competed against each other. He said that it was not allowed to restrict competition between them. He gave an example of competition between the group members by saying that the WA business deals in several states with a subsidiary of a company situated in Western Australia. He also referred to a transaction in which both Headwear VIC and Headwear NSW bid through the Victorian distributor for a sale contract.
This is somewhat at variance with the evidence from Mr Smith which was that the Applicant is only involved in sales in New South Wales and the ACT. It does not compete for business in the other states and the businesses in the other states do not compete with the Applicant in New South Wales and the ACT. Mr Smith did say that the Applicant had on occasions supplied stock to Headwear QLD.
Mr Smith said that his written evidence at [7] "Our type of business is an extremely competitive one in the promotional product market…" referred to competition against non-"Headwear" businesses, not against group members.

Directors' and shareholders' meetings and resolutions and minutes of the Applicant.

Mr Smith's evidence was that throughout the Relevant Period there were four directors of the Applicant including himself and Mr Barblett. The only meetings which took place were between himself and Mr Barblett. He did not meet with the other directors.
Mr Smith said he discusses what is happening in the New South Wales market with Mr Barblett.
Mr Smith also said that no minutes were recorded of directors' meetings. He acknowledged that he was not aware of what he called the "small print" statutory duties of directors.
Mr Barblett said that he spoke to the other directors individually, not together, and that once a year he signed the minutes. He also said the Applicant's minutes are prepared by the Advisers.
Mr Di Iorio said the only board minutes prepared for the Applicant were the annual minutes to the effect that the Applicant was not insolvent.
The solicitors for the Respondent wrote to the Advisers on 15 October 2014 and requested, among other information, a copy of all minutes of board meetings, all directors' resolutions, all minutes of any general meeting of shareholders and all shareholders' resolutions for each group member for the Relevant Period (pages 1 and 2 of HM1
The Advisers replied on 7 November 2014 with some information but did not produce any minutes or copies of resolutions for any group member. Instead they replied (page 5 of HM1): please appreciate that the Headwear businesses operate as independent small businesses and do not have, nor have they ever needed the formal processes, procedures, etc often associated with larger businesses.
When asked about his duties as a director of the Applicant, Mr Barblett said that he helps prepare the Applicant's accounts. I note that the evidence is that such work is carried out by Mr Barblett on behalf of the Barblett Trust for which service the Barblett Trust charges the Applicant a fee.
Mr Barblett said that the other directors had said that Mr Smith could run the Applicant's business. I observe that this decision and the 2000 agreement, the 2011 agreement, the QLD agreement and the Deed of Rectification all apparently occurred without any recorded directors' meetings or resolutions.

Financial connections between the Applicant and the WA business

The evidence is that the Barblett Trust provided an unsecured interest free $120,000 loan in 2000 to assist the NSW business to start operations. The loan was repaid during the 2010 financial year.
The financial statements of the Barblett Trust and the Applicant in the s. 58 documents show a loan from the Barblett Trust to the Applicant of $390,765 as at 30 June in each year in the Relevant Period. The evidence is that there was no loan agreement and no security was provided. The interest rate charged was 13% per annum for over 10 years and remained at that rate at the date of the hearing in March 2015. Mr Smith conceded it was an excessive rate of interest and he had not sought an alternate source of finance. He said the interest rate was determined by Mr Barblett. Mr Barblett said the interest rate was determined at arm's length some years previously and related to his cost of borrowing in order to provide the finance. There is no evidence of the cost of borrowing by the Barblett Trust when the sum of $390,765 was originally provided to the Applicant. However I observe that the financial statements of the Barblett Trust show total interest expenses of $105 for the four years of the Relevant Period.
The Applicant submitted that loans totalling $510,000 in 2008 - 2009 ($120,000 and $390,765) were not significant to the existence of the Applicant's business as the accounts were healthy and good profits were shown. The Applicant referred to the decision of Gzell J in Tasty Chicks Pty Ltd & Ors v Chief Commissioner of State Revenue [2009] NSWSC 1007 at [131] to [141] and submitted that inter entity loans were not significant. I observe that what His Honour relevantly said at [133] was: the Chief Commissioner relies on the inter entity loans….The loans were made occasionally in comparatively small amounts and usually repaid within a year
I observe that the interest bearing loan of $390,765 comprised more than half of the current liabilities of the Applicant on 30 June in each year during the Relevant Period (pages 705 and 723). I find that the loan(s) from the Barblett Trust to the Applicant were not comparatively small in relation to other liabilities of the Applicant nor were they repaid over a lengthy period nor is there any objective evidence that the interest rate charged on the $390,765 loan was not excessive at any time during the Relevant Period.

Marketing

Mr Smith said that all Headwear group businesses use the "Headwear" professional brand for their stock.
The Applicant conceded that throughout the Relevant Period "the Headwear Group of Companies had a single website, www.headwear.com.au, for all its international and Australian operations" (RS [17]). Mr Smith's statement at [7] was to the effect that cost saving ideas are required all the time because of the extremely competitive nature of the business. "Some of the ways we achieve this are through the shared catalogue and website, as well as doing large tradeshows together each year and sharing the costs."
In his oral evidence Mr Smith said that the various Headwear businesses work together to achieve savings.
Mr Barblett was asked about the method set out in the Headwear group website for potential purchasers from group members to contact a group business. His said all contacts made through the website were dealt with by the WA business. It would vet the queries and only pass enquiries to the other group businesses if the WA business approved the enquirer. Mr Barblett was asked the basis for the vetting and he said it was done in order to keep the state Headwear businesses happy. He said that, in accordance with their rules, the Headwear businesses would only sell to approved resellers and would refuse to sell to others. Mr Barblett said that the rule was set by an advisor and that all Australian Headwear businesses followed the rule.
It seems to me that if the Headwear businesses were independent small businesses without formal processes and procedures (page 5 of HM1) it is unlikely that they would have (binding) rules such as that referred to above, established by an external advisor.

Role of Mr Barblett

The parties agreed that during the Relevant Period Mr Barblett was the contact person for FBT purposes for the Applicant and signed the Applicant's FBT returns. He was also a signatory to the Applicant's bank account and paid the FBT and BAS liabilities of the Applicant.
Mr Barblett's name appears as contact person for all stock orders from group members to the Chinese factory.
Mr Smith said that Mr Barblett had no contact with the day-to-day business of the Applicant. He also said, in relation to the distribution of profits among the partners who own the NSW business, that he would ask Mr Barblett before making any distribution. No written record was kept of distribution decisions.
Mr Smith was asked about his remuneration. He said that if he wanted an increase he would ask Mr Barbtlett. The last change in his remuneration was about three years before the hearing of this matter and the previous change was about three years before that. Mr Smith said that Mr Barblett had agreed with the changes he had requested.
Mr Barblett said he spends very little time visiting the Applicant's office.
Mr Di Iorio submitted that Mr Barblett had no knowledge of the Applicant's customers. Whether or not this is correct, it does not of itself show that Mr Barblett did not throughout the Relevant Period have substantial influence in the manner in which the Applicant carried on important aspects of its business.
Mr Barblett's oral evidence was that bookkeeping and compliance functions were provided to the Applicant by the WA business. His written evidence was that he provided bookkeeping services to Headwear companies worldwide, for a commercial fee, and only if they chose to engage us (him). This function involved receiving a weekly cheque and bank listing from each business, from which he prepared a cashbook and a bank reconciliation. This work took about 30 minutes per week for each company. He was also engaged to attend to compliance requirements such as preparing Business Activity Statements. He assisted each business in compiling cashbook data for the external accountants so that half and full year accounts could be produced.
Information required for the preparation of income tax returns would be sent by the Applicant to Mr Barblett who would then forward relevant data to the Advisers to enable them to prepare relevant returns on behalf of the Applicant.
Mr Smith said that when the Chinese factory invoiced the Applicant, he would approve payment and Mr Barblett, being a signatory to the Applicant's bank account, would pay the bill.

Further submissions for the Applicant

In his closing submissions Mr Di Iorio asserted that the business of the Applicant, the sale of headwear to corporate and retail customers, was minor in comparison to that of the WA Business. He also submitted that less than .5% of the WA businesses gross income related to the services provided by Headwear WA to the Applicant. Any connection between the two businesses was insubstantial and there was no material or commercial connection.
Whether or not the Applicant's business activities comprise a small percentage of that of the WA business is not the statutory test. Similarly, whether the charge by the WA business for services to the NSW business is a small percentage of the WA business's income is not by itself the test. As the Court of Appeal held in Chief Commissioner of State Revenue v Tasty Chicks Pty Ltd [2012] NSWCA 181 at [56] the statutory test: directs attention to the conduct of the activities of that business and its inter-relationship, if any, with the conduct of the activities of the businesses of the other members of the group
Mr Di Iorio submitted that there was a valid cost sharing reason for the use of a common website. I do not doubt the validity of the cost sharing reason. However I reject the submission to the effect that a valid commercial reason for a particular marketing strategy demonstrates a substantial independence and lack of commercial connection between the Applicant's business and the other businesses which joined together in the use of that common strategy.
Mr Di Iorio's submission that the Australian Headwear businesses compete in the same market and that there is no agreement on boundaries is supported by Mr Barblett's evidence but is contradicted by Mr Smith's evidence.
I find that the evidence that the Barblett Trust charged the Applicant what Mr Barblett said was an arm's-length fee for services and an arm's-length interest rate does not constitute evidence that there was no commercial connection between the WA business and that of the Applicant. There was no comparative evidence as to the likely cost to the Applicant of obtaining the services or finance elsewhere. Mr Smith's evidence was that the interest rate was excessive.
The evidence is that Mr Barblett and his wife effectively own 100% of the Western Australian business, through which flow all orders for stock by the Applicant. The owner of the WA business is both the largest equity owner in the Applicant's business and the major creditor of the Applicant. Mr Barblett is personally involved in the accounts of the Applicant's business, is a signatory to the bank account(s) of the Applicant, is a director of both the Applicant and the WA business operator, accompanies Mr Smith on his visits to the Applicant's sole stock supplier and is closely involved in determining Mr Smith's remuneration from the Applicant. These facts when considered together do not provide evidence of a substantial independence and lack of commercial connection between the Applicant's business and the Western Australian business.
Mr Di Iorio submitted that the 2011 agreement and the Deed of Rectification demonstrated that the Applicant provided all relevant management service functions to the NSW business and that those functions had been carried out by Mr Smith since 5 January 2000. Those documents would have had more weight if they had been entered into before the commencement of the dispute between the Applicant and the Chief Commissioner and if there was evidence of no substantial commercial connections between the NSW business and the other group businesses, particularly the WA business.
Mr Di Iorio referred to the decision of the Appeal Panel at [52] and [53] in Chief Commissioner of State Revenue v Seovic Civil Engineering Pty Ltd [2014] NSWCATAP 94. In that matter the Appeal Panel allowed an appeal from a decision in which the Tribunal had overturned a decision of the Chief Commissioner not to determine that the applicant was grouped with two other employers. The Appeal Panel found that one company, Exell, provided a significant proportion of the workforce of both other companies in the group and provided the majority if not the whole of the administration and day to day management staff. At [53] the Appeal Panel said that it was difficult to see how without the staff provided by Exell the other businesses would have functioned. It was not a case of "a passing, infrequent or random connection. It is material and goes to the heart of the carrying on of the businesses of" the other two companies."
Mr Di Iorio also referred to the Seovic appeal decision at [56] that Exell was in a commercial position to influence business decisions of the other two companies and each of those companies were in a commercial position to influence the business of Exell through continued custom. The Appeal Panel said "In these circumstances, it can be said that the carrying on of the businesses of each of (the other two companies) was connected to Exell's carrying on of its business. Accordingly, a statutory precondition to exclude a member from a group (absence of connection) is not met."
Mr Di Iorio submitted that matters such as the involvement of Mr Barblett in compliance issues, form filling and the common web site were not material connections in the Seovic sense. He emphasised that the businesses had separate customers, staff and locations and submitted that unless the very existence of the Applicant's business depended on the WA business then the Chief Commissioner, and in these proceedings the Tribunal, should exercise the s. 79 discretion and determine that the Applicant was not a member of the Headwear Group.
The finding in relation to the critical importance of commercial positions in Seovic was sufficient for the Appeal Panel to find that a statutory precondition was not met. However the absence of such a finding does not necessarily mean that the exclusion determination must be made. That is not how the statutory test operates.
Mr Di Iorio submitted that the decision in Boston Sales and Marketing was relevant to these proceedings. He referred to [22] in relation to the issue of substantial ownership and control which did not satisfy the statutory test while contract fees which represented from 44% to 53% of recorded income in relevant years was held to show a connection in a material, commercial, practical and meaningful sense. Mr Di Iorio submitted that this proportion of income is far greater than the income derived by the WA business from the Applicant.
I observe that Boston Sales and Marketing also held at [22] that certain factors considered on their own do not satisfy the statutory test: 22. …the fact that the same person owns and controls all of a group's members does not mean, a fortiori, that the relevant businesses are not carried on independently and are unconnected and therefore does not prevent a determination if that is so in fact. Equally, that the nature of businesses in the group are different does not answer the question whether the relevant businesses are not carried on independently and are unconnected.
The importance of considering the overall nature of the connections between businesses was dealt with in Seovic at [30] - [32]: "30Recently, the Appeal Panel of the former Administrative Decisions Tribunal summarised the operation of the test in Lombard Farms at [50] and [51] as follows: 50 Section 79(2) requires the trier of fact to determine whether, having regard to the nature of the connections between group businesses, it can nevertheless be said that the businesses are independent and not connected. Ultimately, this will be a question of judgment 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. This is the approach that was adopted in the Victorian authorities referred to above: see Triline at [19], [22] and [30] and GTS Industries at [38]. 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 degrouping, 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 Trilineat [25] there must be a finding of substantial absence of connection and substantial independence between the businesses, to warrant the exercise of the discretion. 31The parties to this appeal accepted that the foregoing accurately reflected the statutory test. 32Section 79 focuses attention on the nature of interconnections between group businesses, the nature of the businesses and other relevant matters. The Chief Commissioner must turn his mind to the "carrying on" of the businesses. In order to be relevant to s 79 of the Act, the interconnection must affect group members' businesses in some real or practical sense. Read in context, the expressions "independently of" and "not connected with" are somewhat elastic and depend on the nature and degree of the connections and the type of businesses. To be disentitled from exclusion from a group, there must be a real or meaningful connection, in a commercial sense and not an immaterial, inconsequential or passing connection between the carrying on of the businesses. The reference to a substantial connection in Lombard Farms at [51] is to be read in that context: meaning material and not necessarily large or weighty.

Decision

Several of the matters which the Respondent submitted evidenced a lack of substantial independence and a substantial connection between the business of the Applicant and the businesses of one or more of the other group businesses such as the businesses using the same external advisers, sharing the same postal address and the business operators having the same registered office may of themselves be inconsequential.
However in order to answer the statutory question it is necessary to consider those matters in conjunction with other potentially relevant matters including the role played by Mr Barblett in the business activities of both the Applicant and the WA business, the supply of all stock to all group members from a single factory with exclusive communications through the WA business; the role of Ms Cusack and Mr Barblett in communications with that factory; the financial connections between the Applicant and the Barblett Trust; Mr Smith's failure to consider alternate sources of stock, funding and providers of administrative and accounting services; group marketing and the Headwear Group website; the communication process for potential clients of the Headwear Group; and the use of the same "Headwear" branding by all group members.
Having regard to the material before the Tribunal I find that the Applicant has not discharged its onus of satisfying me on the balance of probability that for any tax year during the Relevant Period the business of the Applicant was carried on independently of and was not connected with the carrying on of each other group business. Accordingly the correct and preferable decision of the Tribunal is that the decision under review is affirmed. 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: 10 August 2015

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