'the gear'Liquid Rock Constructions Pty Ltd v Commissioner of State Revenue [2011] VCAT 2164 | Case summary | Zoe

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Liquid Rock Constructions Pty Ltd v Commissioner of State Revenue

[2011] VCAT 2164

Victorian Civil and Administrative Tribunal|2011-11-15

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General information, not legal advice.

At a glance

Source facts

Court

Victorian Civil and Administrative Tribunal

Decision date

2011-11-15

Source

Original judgment source is linked above.

Judgment (128 paragraphs)

[1]

The applicant Liquid Rock Constructions Pty Ltd was incorporated in Victoria on 12 October 2001.
The principals of Liquid Rock Constructions Pty Ltd to which I will refer as LRC are Mr Pat Malone and Mr Bruno De Spirito. According to Mr Malone, he and Mr De Spirito decided to go into a concreting business together in or around 2003. That business is and was conducted by LRC. The evidence does not disclose what activity LRC engaged in from its incorporation from 2001 to 2003. Perhaps Mr Malone's recollection of 2003 as the start of his business endeavours with Mr De Spirito is inaccurate.
Around this time, that is at the beginning of the new millennium, Mr Malone met Mr John Gogas who is a qualified carpenter. LRC's concreting business necessarily required the provision of formwork. For work at ground level such as house slabs which was LRC's initial business minimal formwork is required and concreters can provide it themselves. Where the work entails pouring for multi-storey structures, qualified carpenters specialising in formwork are a necessary part of the project. Mr Malone whether on his own account or through LRC was engaged in a multi-storey project in Brunswick known as the Octagon which represented a departure for him. He had previously been involved only in ground level pours such as house slabs. The company which was to provide the formwork services for the Octagon project, a sub-contractor to Mr Malone or his company, pulled out at the last minute because of an internal dispute. Mr Malone whose contract entailed heavy liquidated damages for delay found that contractors asked to step in at the last minute to deal with the formwork quoted unreasonably high prices. He made contact with the principal of the failed sub-contractor, Mr Gogas and asked him what was necessary to enable Mr Gogas to carry out the subcontract work. Mr Malone said that Mr Gogas said his problems were financial. Mr Malone said that he made contact with his bank, and committed to some personal guarantees. A formwork contractor required fairly elaborate equipment which Mr Malone referred to as . Mr Malone said he arranged to purchase for Mr Gogas. This equipment is now owned by SBM Concrete Industries Pty Ltd. It was incorporated on 10 December 2002. Until 27 November 2005 Mr Gogas and Mr Malone each owned 50% of the share capital in SBM. On 1 July 2002 another company, Liquid Rock Formwork Pty Ltd (LRF) was incorporated. Until 28 June 2005 Mr Gogas and Mr Malone each owned 50% of the share capital in LRF.

[70]

Mr Furnell who appeared on behalf of LRC submitted that LRC and LRF did not form part of the same group for payroll tax purposes in any year. If contrary to that view they did, they should be degrouped according to the powers in that regard granted by Section 9A of the 1971 Act. He made further submissions as to the issues of penalty and interest to which it may be necessary to turn later in these reasons.
Mr Furnell dealt first with the issue of the inter-use of employees as a ground for grouping. Dealing with Section 9A(1)(d) the provision upon which the Commissioner relied for the purposes of this proceeding, he submitted that this provision operated only if it could be shown that Ms Asvestas, the employee in question, was performing 'duties' for one of the other companies in the group as identified by the Commissioner. It was insufficient, he said, if it appeared that Ms Asvestas, an employee of LRC was for the sake of argument providing services to LRF. More was required. It had to be shown that she was performing 'duties' for this second company.
He referred to the decision of Doyle CJ in Commissioner of Stamps v Garrett F. Hunter Pty Ltd [1997] SASC 6304; (1997) 69 SASR 275. He submitted this decision supported the view that an employee of one company was not performing duties for another company unless the employee was under the direction of the second company when the relevant services were provided. The evidence here, he said, was that Mr De Spirito was opposed to Ms Asvestas, LRC's Office Manager providing any services at all for other companies such as LRF. He reluctantly agreed that on a fee for service basis payable by the other company, for instance LRF to LRC, Ms Asvestas could spend up to 30% of her time working on projects for LRF. Mr Furnell on behalf of the taxpayer said that Ms Asvestas' evidence was that her work for LRF was mainly data input. Whilst on questions relative to the substance of the work she said she referred in the case of LRF to Mr Gogas as its principal, on questions as to when and in what circumstances she might devote her time to LRF projects she was under the direction of Mr Malone and Mr De Spirito as the controllers of LRC. Therefore said Mr Furnell, whilst Ms Asvestas might have supplied services, for instance to LRF she did not perform duties for it.
Next he said it was also necessary, he submitted, that the performance of the duties was carried out 'under, an agreement arrangement or undertaking for the provision of services to' hypothetically LRF. The evidence showed, he submitted, that the understanding between Mr Malone and Mr De Spirito for LRC on the one hand and Mr Gogas for LRF did not oblige LRC to supply Ms Asvestas' services for any particular project. He submitted that according to the evidence it was competent for LRC simply to say to LRF 'no it is inconvenient to make Ms Asvestas' time available' with LRF left with no cause for complaint or redress. In that situation of lack of forward commitment, he submitted, there could be no arrangement of the necessary type said to exist.
Mr Furnell referred to the decision of the Queensland Court of Appeal in Master Wood Pty Ltd v Far North Queensland Electricity Board [1999] 1 QdR 345, 348 where Fryberg J said:

[73]

As to the issue of organisational links between the company, Mr Furnell submitted that insofar as the Commissioner relied on Section 9A(1C)(b) it was necessary that the voting power in the share capital of the other company, must for the purposes of the operation of this paragraph be voting power exercised beneficially by the person or persons in question. The paragraph had no application in circumstances where the voting power and share capital was vested in Mr Malone and Ms Leech in a purely fiduciary capacity as trustees of a family trust. To the extent that they held a voting power in for instance LRF that voting power was not to be counted for the purposes of the paragraph because they did not hold it beneficially. He contrasted the language of this paragraph with paragraph (d) in the sub-section which in relation to the capital of a partnership stated expressly that the entitlements in question were to be counted 'whether or not beneficially held' whether in the capital or the income of the partnership. Paragraph (e) also made specific reference to trust beneficiary. The language also stood in contrast to the provisions considered by the Supreme Court and Court of Appeal in the Landrow litigation [2008] VSC 590, [2010] VSCA 197 where the inclusion in the relevant provision of the Duties Act of the word 'beneficially' was regarded as key to the outcome.
Mr Furnell submitted more generally that if too wide a meaning were attributed to this provision, a vast swath of service providing businesses carried on independently of the persons or enterprises with which they dealt would be inappropriately grouped.
As to the de-grouping provisions, Mr Furnell submitted that insofar as the Commissioner's reasoning proceeded from findings of two sub-groups which by virtue of a common member SBM were deemed to form a single group. It would be sufficient for the operation of the de-grouping provisions if either of the sub-groups were in accordance with the de-grouping provisions, appropriate for a de-grouping by elimination of the common member. He submitted, looking at the first sub-group which included LRC and also SBM, it is appropriate to make a finding that SBM's business was carried on independently of and was not connected with the carrying on of LRC's business. The evidence showed he submitted, that SBM's activities were limited to the supply of equipment to LRF and were therefore entirely independent of LRC. He submitted that the approach to the de-grouping discretion should be broadly similar to the one adopted relative to Section 85 of the Duties Act 2000. He referred to Commissioner of State Revenue v STIC (Australia) [2010] VSC 608 at [18] - [19] and Giacomo Pertile v Commissioner of State Revenue [2009] VCAT 2774, [74].

[74]

Mr Young of Counsel appeared on behalf of the Commissioner. He submitted first, that the employers in question were properly grouped for payroll tax purposes as from 1 July 2004. He contended that once the grouping took place it remained in force permanently and was capable of reversal only by the Commissioner's exercising a discretion to de-group under Section 9A(1J) of the Payroll Tax Act 1971 or the corresponding provision of the 2007 Act.
There was no warranty, he submitted, for introducing a requirement that Section 9A(1C)(b) applied only where the right to exercise voting power was exercising beneficially. He submitted it was not in dispute that under the terms of the relevant family trust deed, Mr Malone and Ms Leech were empowered as trustees to exercise the voting power attached to any shares forming part of the trust fund. He said that under the Companies (Acquisition of Shares) Code it had been held that a trustee was competent to exercise the voting power attaching to shares held by the trustee as such. He referred to Hespe v Surfers Paradise Forests Limited (1985) 10 ACLR 182, 191-2 per Carter J of the Supreme Court of Queensland.
As to the issue of what constituted the performance of duties for the purposes of Section 9A(1A)(d) of the 1971 Act, Mr Young noted that in the Hunter case, Doyle CJ found it sufficient for there to be a performance of duties for the purposes of a corresponding statutory provision in South Australia that there was an entitlement on the part of the putative group member to give general direction to the employee in question. It was not necessary, he said, for the employee to be under the specific and detailed direction of the putative group member for this paragraph to operate. Mr Young conceded that the paragraph at this point uses a different phrase, referring to performance of duties rather than merely the provision of services, a phrase used elsewhere in the paragraph and that there must be a material distinction between the two. He submitted however that it was a very fine distinction.

[77]

Their Honours therefore characterised the de-grouping provisions as a discretionary escape clause from the breadth of the primary grouping rules where those rules would operate unreasonably. The same principles apply to such a provision as were considered by the Supreme Court relative to Section 85 of the Duties Act in the STIC case. Mr Young correctly observed that the discretion to de-group is not as much at large as the discretion under Section 85 of the Duties Act. The discretion to de-group is enlivened only by certain specific findings of fact. So much may be conceded but once those findings of fact are made it is a matter of discretion whether to de-group or not.
Suppose hypothetically that two employers entered into a distinct and well defined transaction which had the effect that they became a group under the Payroll Tax Act either 1971 or 2007. Can it be right to think that if a further transaction were entered into which exactly reversed the first one that these employers would be at the mercy of the Commissioner's exercise of discretion to de-group? Mr Young correctly observed that the payroll tax legislation operates on a model of self-assessment. How this observation could be supportive of the view put on this point by the Commissioner is not obvious to me. In his determination as to penalty and interest the Commissioner has in effect faulted LRC for not grouping itself with the other companies by self-assessment. If as clearly it is proper for an employer to self-assess itself into a group, why is it improper for an employer in a hypothetically clear situation to self-assess itself out of a group? No doubt in more debatable circumstances than the ones that I have supposed hypothetically, prudence would dictate that the employer liaise with the Commissioner. Section 86 of the 2007 Act obliges an employer to register for the payment of payroll tax if during any month the employer pays or is liable to pay wages above the threshold. The payment of tax therefore is a month to month proposition. Again, this is inconsistent with the view that subject to an exercise of the Commissioner's discretion grouping is perpetual.
Next I turn to the true construction of Section 9A(1C). There is nothing in the paragraph which restricts its operation to the existence of 50% or more control of voting power on a beneficial basis as distinct from a legal basis. Given that it is accepted the trustees under the relevant trust deeds may exercise the voting power attaching to the relevant shares, there is no reason to restrict the meaning of the paragraph. The use of the phrase in paragraph (d) of the same sub-section in three sub-paragraphs 'whether or not beneficially' is in a different context, namely the ownership of interests in an unincorporated partnership rather than the share capital of a company incorporated under the Corporations Act. Given that different context there is no occasion to draw an inference based on the maxim expressio unius est exclusio alterius.
More generally as Lord Mersey remarked over a century ago:

[80]

The requirement that the voting power in question be exercised in a beneficial and not a fiduciary capacity is not to be found in the paragraph and there is no necessity to read it in. I accept the Commissioner's contentions on that point and reject the taxpayer's contentions.
I reject Mr Furnell's submission that the evidence discloses no agreement arrangement or undertaking for the provision of services in connection with Ms Asvestas' involvement with LRF. The concept of an arrangement which is one of the words used in the relevant part of the paragraph clearly extends beyond what would be an enforceable legal agreement. There are further words of extension to the concept of agreement, arrangement or undertaking in the two sub-paragraphs at the foot of paragraph (d) which speak of arrangements which are merely informal and arrangements which do not make exact specification of the duties involved. The discussions between Mr Malone and Mr De Spirito on the one hand and Mr Gogas on the other, in my view, clearly amounted to an understanding and the understanding was as to the provision of services to be rendered to LRF by LRC's employee Ms Asvestas and potentially her assistance in the LRC office. This in my view satisfies the requirements of the relevant paragraph.
The more difficult issue is whether this understanding was one which led to the performance of 'duties ... in connection with, or in fulfilment of the employer's obligation' under the relevant arrangement. The only authority which might provide guidance on this question is the decision of Doyle CJ in Commissioner of State Duties and Garrett F. Hunter Pty Ltd [1997] SASC 6304; (1997) 69 SASR 275. The employers who had been 'grouped' by the Commissioner were two companies conducting specialist medical practices and a third company acting as trustee which provided services to the specialist medical companies and to a sole practitioner specialist in ear, nose and throat surgery who had no employees. I should quote the section of the South Australian legislation that the Court in Hunter's case was concerned with. It is similar though not identical to the paragraph with which we are concerned.

[93]

To take a hypothetical example, suppose the employers in question were a company providing accountancy services and a company providing gardening services. On a regular basis an employee of the gardening service company attends the premises occupied by the accountancy company, the employee mows the lawn, weeds the flower beds and performs other functions in the garden as requested by the accountancy company's office manager. This is done pursuant to an on-going contract or arrangement between the accountancy company and the gardening company. One would not imagine that this would lead the two companies to be grouped subject only to the Commissioner's discretionary power to de-group. The question would be why? Is there some analytical explanation beyond what Doyle CJ described as 'an element of impression'?
I was initially attracted to the view that the key to this question lay in the concept of 'duties'. An independent contractor might be regarded as supplying services to his employer's customers while remaining an employee of the service providing company where a seconde, to use a neutral term, comes under the detailed direction of the service recipient so that for instance the recipient is entitled not merely to identify the tasks to be performed but the order in which they are to be performed; whether they are to be performed right now or later in the day and so forth. In such a case one has moved from the mere supply of services to the rendering of duty. This distinction was the essence of Mr Furnell's submission on this point. In its full blooded form it will be apparent that this argument was considered by Doyle CJ in Hunter's case and rejected by him. Yet his description of the relationship between the secretary and the specialist medical practice quoted above suggests that His Honour had some general sympathy for the concept but did not find that the line came down on the facts before him in favour of the taxpayer. There are difficulties in simply seeking to apply the reasoning in Hunter's case to the case before me. There seems to be a material distinction between the statute considered in Hunter's case and the one with which I am concerned. The statute in Hunter's case focussed on duties performed:

[100]

In 2001 in Hollis v Vabu [2001] HCA 44; (2001) 207 CLR 21 the High Court adopted a more elaborate and newer test; but this modification of the rule of distinction between contractors and employees post-dated both the 1971 Payroll Tax Act and also the analysis of Doyle CJ in Hunter's case and so may be put to one side.
In my view someone in Ms Asvestas' situation will be regarded as supplying services to LRF in the circumstances described in the evidence. She would not be regarded as performing duties for or in connection with its business unless there is at least some power on the part of LRF to direct her as to the manner of the performance of those alleged duties. The evidence in this case was that it was entirely at the discretion of LRC and its controllers Mr De Spirito and Mr Malone as to whether the particular work would be done and exactly how it would be done, that is, whether immediately, some hours later this afternoon or perhaps only next week. It would be going too far I think to suggest that the relevant paragraph requires a relationship of such a nature that one could regard Ms Asvestas as being not only an employee of LRC but also LRF before the paragraph could operate; but I am clear that the present situation falls outside what is contemplated by the paragraph and stands in contrast with the situation described by Doyle CJ in Hunter's case which was found to fall on the other side of the line.
The result of my conclusions so far is that with respect to the 1971 Act I have upheld the Commissioner's determination to group based on shareholdings for the relevant tax years before 1 July 2007 in application of the 1971 Act. I have rejected any grouping based on the sharing of employees for that period.
Different considerations apply with respect to the last of the tax years in dispute, namely that one commencing on 1 July 2007. Under Section 72(2)(e) of the Payroll Tax Act 2007 similar provisions are made with respect to grouping based on shareholding but whilst under the 1971 Act it was sufficient that one set of persons was regarded as having a controlling interest in another employer if those persons controlled 50% of the voting power the requirements under the quoted provision in the 2007 Act is that control must exist for 'more than 50% of the voting power attached to the voting shares'. The Commissioner in his determination on objection concedes that there can be no grouping based on shareholding. The Commissioner contends however that grouping for this last tax year may be made by reliance on Section 71(3) of the Payroll Tax Act 2007 which is effectively in the same terms as the corresponding provision in Section 9A of the 1971 Act. For the same reasons which led me to reject this basis for grouping under the 1971 Act I reject it under the 2007 Act.
I am fortified in that conclusion by reference to the heading to Section 71 of the 2007 Act 'Groups arising from the use of common employees'. Under Section 36(2A) of the Interpretation of Legislation Act 1984 this heading forms part of the 2007 Act. It reinforces the view that for the relevant sub-section to operate there must be either an employee or an employee-like relationship between the shared employee and both employers.

[101]

Mr Furnell submitted that even if contrary to his primary submission his client was grouped the discretion granted under Section 9A(1J) of the 1971 Act should be exercised so as to de-group.
Mr Furnell's submissions concentrated on the independence and lack of connection between LRC and SBM. Elimination of the common member between the two sub-groups formed by the Commissioner thereby broke up the larger group according to his submission.
Mr Young on behalf of the Commissioner did not accept this premise. He contended that the de-grouping discretion was applicable only to the group as finally formed by the grouping provisions and it was not appropriate to apply the discretion to some intermediate step in the formation of the group as Mr Furnell's submissions would have.
I was told there was no authority on this point and so it is a matter for me to decide unguided by precedent. The discretion to de-group in my view is as the passage from the judgment of the High Court in the Tasty Chicks' case quoted above indicates, a final step. If that is a correct characterisation then this final step can only be taken with respect to the situation which had been reached at the penultimate stage by the application of all the other provisions of the payroll tax legislation, that is, by reference to the group as finally formed under that legislation.
A de-grouping which eliminated SBM from the final group would be of no assistance to this taxpayer. SBM has no payroll so its elimination from the final group gives this taxpayer no relief from payroll tax at all. On my reading of the de-grouping provisions they avail LRC only to the extent that it can de-group LRF. Mr Furnell made no oral submissions to this effect and no doubt for good reason. Given that LRC and LRF in the relevant tax years shared premises, shared staff and claimed on a computer web site to be in effect one organisation with LRC referring to LRF as its 'formworking division' such a contention would be unpromising. LRF derived its work in these years predominately from LRC. Mr Malone's evidence was that in every case it was a matter of LRF being a successful tenderer. In some cases the choice to appoint LRF to do formwork on LRC contracts was made by LRC, on other occasions it was stipulated by the proprietor under the contract. There was no evidence as to how extensive the tender processes that LRF was so often successful in might have been. Mr Malone said that there was a further page in LRC's web site which had not been produced by the Commissioner which showed other formwork contractors with which LRC dealt in the relevant period. He did not produce that missing page and a comment from me to Mr Furnell did not lead to its being produced or it put into evidence.
I accept that there can be many instances where in itself proof that the predominant source of an employer's contracting business is from another employer would not indicate any lack of independence between them. One can think of contracting organisations that predominately derive their business from perhaps a large utility undertaker such as Telstra or in a town or locality where the economy is dominated by a single operator such as a mining company. This sort of pattern of custom in itself and without more does not necessarily destroy the concept of independence between businesses; but when combined with the other matters that are at work here, such as the use of Ms Asvestas and her assistants, the common shareholders, the sharing of premises, the sharing of web site and so forth I am unpersuaded that it is proper to exercise the discretion under Section 9A(1J) of the 1971 Act to de-group.

[115]

In my view this provision is sufficient to render a liability to pay penalty tax before the 2007 amendment accrued liability. Mr Furnell referred to Section 34 of the Act which stipulates the time for the payment of penalty tax as being 'within the period specified for that purpose in a notice of assessment'; but that goes to the time for payment rather than the existence of a liability.
Mr Furnell submitted that if there were power despite his argument based on the amendment to the Taxation Administration Act to impose a penalty tax in the circumstances, it should not be imposed at all because Section 30(3) of the Taxation Administration Act authorised a determination of no penalty tax if the taxpayer 'took reasonable care to comply with the taxation law'. He also referred to the more general discretion given to the Commissioner to remit which was he submitted exercisable by the Tribunal on review. He submitted that the Commissioner reached his assessment only after lengthy investigation and that the reasoning underlying the assessment changed materially over time from the initial assessment to the determination to reject the taxpayer's objection. The taxpayer was, he submitted, a small private company and should be regarded as having exercised reasonable care albeit having fallen into error because of very complex and difficult legislation.
Mr Young on behalf of the Commissioner drew attention to the absence of any indication that this taxpayer had sought advice from any accounting or legal adviser as to payroll tax liability. Given that the payroll tax regime is complex the taking of reasonable care would require, he submitted, a taxpayer in these circumstances to take expert advice if unable to reach a confident conclusion itself as to its liability.
Whilst I am sympathetic to the taxpayer's situation I accept Mr Young's submission that faced with a complex grouping regime which needed to be considered, taking reasonable care necessarily would have required the applicant to obtain some sort of expert advice which it entirely failed to do. Whilst these sorts of considerations are not referred to in the very general discretion to remit company tax given to the Commissioner under Section 35 of the Taxation Administration Act in my view the same considerations should inform a determination under Section 35 and no wholesale remission of penalty tax should be made in this case.
More difficult issues arise in relation to a submission by Mr Furnell that the penalty should be remitted as to 80% in accordance with Section 31(1) of the Taxation Administration Act which provides as follows:

[128]

The Commissioner appealed to the Court of Appeal and their Honours reversed the Supreme Court decision and set aside the Tribunal's determination in favour of the taxpayer. The Court, Gray P, Refshauge and Katzmann JJ felt that since the State and Territory Taxation Administration legislation was not uniform across the nation it was inappropriate for the Chief Justice to have engaged in the comparative analysis which he did. In their Honours' view what had happened in the case of Dataflex was an investigation by the Commissioner in the ordinary sense of that term. This had preceded the disclosure and so there was no entitlement to the remittal of penalty. There was no warrant, they said, for any restriction to the normal meaning of the word 'investigation'. Here, the words in the Victorian statute place clear restrictions on what investigation by the Commissioner will cut off a taxpayer's opportunity to gain an 80% remittal of penalty tax by a voluntary disclosure. Accepting in accordance with the views of the Territory Court of Appeal that what occurred here was an 'investigation' for the purposes of the Victorian Taxation Administration Act in my view the evidence does not disclose that it was an investigation into a known or suspected tax default and Parliament intended that it was only such an investigation rather than any investigation under the Act which would cut off the taxpayer's opportunity to gain relief by voluntary disclosure. I am aware that the taxpayer here bears an onus of proof on objection or review. Sections 98 and 110 of the Taxation Administration Act 1997. Nevertheless what the Commissioner knew and what the Commissioner suspected are matters peculiarly within the knowledge of the Commissioner. The taxpayer here discharges the onus of persuading me that this investigation was not one into a known or suspected tax default by drawing attention to the written record. It is as a matter of logic impossible to do more to prove the negative.
Finally Mr Furnell submitted that interest should be charged to his client on the unpaid tax only at what the Taxation Administration Act 1997 refers to as the 'market rate'. This rate is defined to be linked either to the bank bill rate or a rate published in the Victorian Government Gazette. The rate charged here is the premium rate which entails in accordance with Section 25 of the Taxation Administration Act adding 8 percentum per annum to the market rate. Mr Young on behalf of the Commissioner submitted that there was no basis for remitting interest in this way. The only argument put by Mr Furnell in support of this was to complain that the process of objection and referral was lengthy and that the referral to this Tribunal of his client's objection took about a year instead of the statutory 60 days. Mr Young said a consideration of the written record would offer explanations as to these delays. Neither Counsel took me to the written record in detail. Ultimately I agree with Mr Yong's submission that there is nothing in the Taxation Administration Act which would justify me in relating the interest rate to the timeliness or otherwise of the Commissioner's referral. This element of the applicant's case must therefore be rejected.

Liquid Rock Constructions Pty Ltd v Commissioner of State Revenue

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Judgment (128 paragraphs)

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Legislation Cited (1)

Cases Cited (4)

Liquid Rock Constructions Pty Ltd v Commissioner of State Revenue (Taxation) [2011] VCAT 2164 (15 November 2011)