Loan Market Group Pty Ltd v Chief Commissioner of State Revenue; Loan Market Pty Ltd v Chief Commissioner of State Revenue

Supreme Court of NSW|2024-09-06|Before: Richmond J

Solicitors: PwC (Plaintiffs) Crown Solicitor's Office (Defendant) File Number(s): 2020/00027826 and 2020/00212582 Publication restriction: Nil

JUDGMENT

This judgment deals with the issues which, by agreement of the parties, were left outstanding by my decision in Loan Market Group Pty Ltd & Anor v Chief Commissioner of State Revenue [2024] NSWSC 390 (the Judgment). These are (a) the plaintiffs' claim for a remission or reduction of penalty tax; (b) the plaintiffs' claim for a remission of the premium component of interest on unpaid primary tax; and (c) costs. Terms defined in the Judgment have the same meaning in these reasons (unless separately defined in these reasons).

Agreed facts as to primary tax, penalty and interest

The table below sets out for each financial year in the Relevant Period: (1) the commission paid by LML (via LMG) to Assessed Brokers which is taxable wages as a result of the Judgment and the May Orders; (2) the payroll tax payable under the reassessments dated 7 and 8 January 2020 issued to LMG; (3) the payroll tax payable under the assessments dated 11 June 2020 issued to LML; (4) the payroll tax payable as a result of the Judgment and the May Orders (excluding penalties and interest): Year (1) (2) (3) (4) Taxable commission Primary Tax payable under LMG reassessments Primary Tax payable under LML reassessments Primary Tax payable under Judgment and May Orders 2012 3,919,947.64 511,941.61 365,829.40 213,637.15 2013 3,385,650.81 464,700.19 324,451.58 184,517.97 2014 3,388,026.93 478,845.34 323,573.86 184,647.47 2015 3,649,963.88 535,759.34 330,107.21 198,923.03 2016 3,282,015.96 546,110.93 350,513.16 178,869.87 2017 3,365,021.81 584,920.52 367,813.43 183,393.69 2018 3,119,721.01 661,821.34 362,305.48 170,024.80 TOTAL 24,110,348.04 3,784,099.27 2,424,594.12 1,314,013.97

Penalty tax has been imposed for the 2012 to 2016 financial years only. Taking into account the reduction in primary tax as a result of the Judgment and the Commissioner's acceptance that s 29(1) of the TAA applies to reduce penalty tax from 25% to 20%, if there were no further remission of penalty tax the resulting aggregate penalty amount would be $192,119.10 calculated as follows: Year Primary tax Penalty tax at 20% 2012 213,637.15 42,727.43 2013 184,517.97 36,903.59 2014 184,647.47 36,929.49 2015 198,923.03 39,784.61 2016 178,869.87 35,773.97 2017 183,393.69 - 2018 170,024.80 - TOTAL 1,314,013.97 192,119.10

On or around 27 November 2018, LMG entered into an instalment arrangement for the payment of debt with Revenue NSW which required LMG to make payments in monthly instalments (instalment plan). The first instalment plan was issued on 30 November 2018 for a period of 12 months.
On 29 June 2020 in a letter from the Crown Solicitor's Office to Pricewaterhouse Coopers (PwC), the solicitors for the plaintiffs, it was confirmed that the instalment plan relates to the payroll and penalty tax liability of LMG and LML.
Revenue NSW requires that instalment plans be renewed after every 6 or 12 months. The instalment plans have been duly renewed at or around the time of each previous instalment plan concluding.
As at 15 August 2024, LMG had paid $2,320,000 over the course of its instalment plans to reduce the amounts of primary tax, interest and penalty assessed to LMG and LML. It is apparent that even if there is no reduction in penalty or interest, LMG has made a significant overpayment in respect of LML's liability to primary tax, penalty and interest.
The table below sets out the calculation of the premium component and market component of interest if there were no remission of interest on the basis that: 1. primary tax in respect of commission payments, as a result of the Judgment, is as set out in paragraph 4 above; 2. penalty tax is as set out in paragraph 5 above; 3. progressive repayments made under the instalment plans are allocated to the payment of debts in the following sequence: 1. all primary tax within the 2012 financial year, then the 2013 financial year, then the 2014 financial year and so on up to the 2018 financial year; 2. all penalty tax and interest within the 2012 financial year, then the 2013 financial year, then the 2014 financial year and so on up to the 2018 financial year; 1. in respect of the financial years 2012 to 2016: 1. interest on unpaid primary tax is calculated by applying the market rate component of interest (only); 2. no interest is applied in respect of outstanding penalty tax; 1. in respect of the financial years 2017 to 2018: 1. interest on unpaid primary tax is calculated by applying the market rate component and premium component of interest; 2. penalty tax is not imposed; 1. in respect of all years, due to COVID-19 (coronavirus) relief measures, no interest is charged during the periods: 1. 4 May 2020 to 31 January 2021; and 2. 9 August 2021 to 1 April 2022. Year Interest Premium component interest Market rate component interest 2012 33,367.48 - 33,367.48 2013 24,493.18 - 24,493.18 2014 20,380.88 - 20,380.88 2015 16,978.20 - 16,978.20 2016 11,471.09 - 11,471.09 2017 56,264.21 47,944.10 8,320.11 2018 36,027.47 31,293.59 4,733.88 TOTAL 198,982.51 79,237.69 119,744.82

Factual background

LMG and its subsidiaries including LML (the LM Group) paid payroll tax in New South Wales throughout the Relevant Period in respect of its employees. It did not pay payroll tax in respect of commission payments made by LML, via LMG, to mortgage brokers who were parties to broker agreements with LML.
Ms Jodie Usher was the payroll manager for the LM Group. She reported to Ms Nicole Glen who at the relevant times was General Manager Finance and from August 2014 Chief Financial Officer of LMG. Both of them were at all material times based in Queensland. Ms Glen had primary responsibility for LM Group's compliance with its payroll tax obligations during the Relevant Period.
In view of the submissions made by the parties on the issues concerning reduction or remission of penalty and interest, it is necessary to refer in some detail to the history of the LM Group's treatment of its potential payroll tax liability on payments of commission to brokers.

Payroll tax advice received by the LM Group in 2009

In early to mid-2009, Ms Glen asked Allens Arthur Robinson (Allens) to provide advice to the LM Group regarding its potential liability for payroll tax in relation to commission payments made to its brokers. The context appears to have been the introduction in Queensland on 1 July 2008 of 'relevant contract' provisions into the Payroll Tax Act 1971 (Qld) in order to harmonise the Queensland legislation with that in New South Wales and Victoria to enhance consistency: Payroll Tax (Harmonisation) Amendment Act 2008 (Qld), s 18.
On 8 July 2009, Allens provided advice in writing (Allens 1) in relation to an agreement between LML then called REVA Broking Pty Ltd, and a Broker titled 'Introducer Agreement - Lead/Referral Scheme', in which Allens advised about the possibility that payroll tax was payable. Allens 1 was stated to be in draft to provide discussion points for a forthcoming meeting, and included the following: 3. Advice … (b) Basically, payroll tax will be imposed in respect of commissions paid by REVA to Brokers unless the Broker carries on a business and employs or engages at least one other person (or where the Broker is a company there are two such people) to help perform the work they are engaged to perform under the relevant Broker Agreement. This does not include clerical work or work of a solely administrative nature but means work that the Broker must perform in order to derive commissions (ie. introducing Clients to Lenders). … (f) There is another exemption which we believe should apply (based on the facts as we understand them) but which we expect the Commissioner would not accept. Specifically, a Broker is providing its services to the general public because, by their very nature, loan origination services require Brokers to be acting for two different parties at the same time. It would be somewhat artificial for the Commissioner to try to split those services into two different types of services one being provided to REVA and the other to Clients. … (i) However, as the exemption is dependent upon the Commissioner being 'satisfied', we recommend that a ruling be obtained before taking this approach (as we expect the Commissioner would disagree with our view). This is because, on its face, the services Brokers provide to REVA are different (albeit superficially) to the services Brokers provide to Clients. In other words, it is arguable that the services provided to REVA are in the nature of obtaining applications for finance from Clients whereas the services provided to clients involve helping them find finance on the best available terms (ie Brokers are not providing the same services to the public).
A more detailed memorandum attached to the advice dealt at some length with the 'services to the public exemption' discussed at (f) above and said it 'arguably' applied and while explaining the argument went on to explain Allens' concern that the contrary argument would be successful.
In summary, Allens' advice was that payroll tax would be payable in respect of commissions paid to brokers under the Introducer Agreement referred to unless either the 'two person' exemption in s 32(2)(c)(iii) or the 'services to the public' exemption in s 32(2)(b)(iv) of the Payroll Tax Act 2007 (NSW) (the Act) applied, and the view expressed that each could apply (although in the former, subject to the qualification in (b) above, and in relation to the latter, noting that the Commissioner was likely to disagree and recommending that a ruling be obtained). The advice also suggested some alternative structures which could reduce the LM Group's payroll tax risk, but it appears that these were not followed.
Following Allens 1, Allens provided further advice to the LM Group. None of those advices qualified the views expressed in Allens 1. On 4 August 2009 and 9 September 2009, Allens provided advice in respect of restructuring options to assist the payroll tax position.
On 16 October 2009, Allens provided further written advice in which Allens referred to a request received from Ms Glen for 'preliminary views on whether the Queensland payroll tax position would be improved if [LMG's] mortgage origination business was restructured so that brokers entered into franchise agreements'. Allens advised the payroll tax position situation would not be altered by adopting a franchise agreement, assuming the actual terms of the franchise agreement had a similar effect as the current contractual arrangements with brokers.
Ms Glen deposed that the issues raised by the advice provided by Allens effectively remained on hold due to the changes happening in the LM Group business in that period, including adapting to changes brought about by the National Consumer Credit Protection Act 2009 (Cth) which took effect from 1 July 2010 and also absorbing the new broker business acquired in that period (including Xinc). She deposed that the period following 2009 was dominated by the work done to build the 'Loan Market' brand and consolidating the LM Group's business model to account for the various newly acquired businesses.

Reengagement of Allens to provide payroll tax advice in 2013

In the second half of 2013, Ms Glen spoke to and met with Allens to revisit the issue of payroll tax on broker payments.
On 27 August 2013, Allens provided advice in writing to Ms Glen that its brokers were independent contractors and then on 11 September 2013, Allens provided advice in writing to Ms Glen regarding the payroll tax implications of a draft broker agreement called 'Introducer Agreement - Lead Referral Scheme'. This advice, which was stated to be in draft, included the following: 2. Wages and Relevant Contract Employers Ignoring for a moment any potential exemptions that might apply to the Draft Broker Agreements (which would take them out of the payroll tax net altogether), payroll tax can only be payable on amounts paid under a relevant contract that are deemed to be wages. The broker agreements we received in 2009 required REVA and eMOCA to pay mortgage brokers fees for the work that they performed in referring to REVA and eMOCA applications by clients for lending products. The risk identified in our Previous Advices was that these fees could be deemed to be wages for the services provided by the mortgage brokers. However, if the Draft Broker Agreement only provides for services to be provided by Loan Market, with no amount payable by the mortgage brokers for those services, there is no amount that can be deemed by the relevant contract rules to be wages. As a consequence, Loan Market should not be liable to pay payroll tax in relation to its arrangements with mortgage brokers.
On 30 September 2013, Allens provided a follow-up advice in writing proposing the relevant changes to be made to the draft 'Introducer Agreement - Lead Referral Scheme' to support the analysis in the advice referred to in the previous paragraph.
Ms Glen has not been able to locate a final version of the draft advice of 11 September 2013. It seems likely that it was not finalised because it was overtaken by Ms Glen giving instructions to Allens to brief Brendan Sullivan SC to provide advice to the LM Group on whether payroll tax was payable on the broker payments. A brief was sent to Mr Sullivan on 13 November 2013 and records Allens' view as follows: Instructing solicitors consider that the Broker Agreement should not create a payroll tax liability in Queensland or New South Wales for Loan Market Group (or any other entity in the Loan Market Group of companies) because the arrangements with the Brokers do not involve the Brokers providing any services to Loan Market Group, but rather, that Loan Market Group alone provides services to Brokers.
The 'Broker Agreement' referred to is described in the brief as a 'Draft Broker Agreement between REVA Broking Pty Ltd and Brokers', which is included as an attachment. While copies of the attachments to the brief cannot now be located, Ms Glen believes it was the draft Introducer Agreement - Lead Referral Scheme dated 17 October 2013, which incorporated the comments made by Allens on 30 September 2013.
On 27 November 2013, Mr Sullivan provided a draft memorandum of advice (draft opinion) in which he discussed the terms of the Introducer Agreement - Lead Referral Scheme and considered whether the arrangements between LML and Brokers would give rise to a relevant contract under the NSW and Queensland payroll tax legislation. In summary, the draft opinion states that the question whether the 'relevant contract' provisions will apply turns on whether there is a contract under which a person supplies to REVA services for or in connection with the performance of work. He was in agreement with Allens that the express terms of the Broker Agreements did not involve the brokers providing any services to REVA. However, the extended definition of 'contract' had the consequence that the issue as to the existence of a relevant contract would not be answered solely by reference to the terms of the Broker Agreement. The draft opinion continued: In particular, it may be argued by the revenue authorities that the suggested basis for the Support Payments in clause 4.2, namely "recognition" that action taken by the Broker has the consequence that a related company of REVA becomes entitled to receive commissions, does not provide an adequate commercial basis or explanation for the making of the Support Payments. They will be payments in substantial amounts which will be closely tied to the commission payments made to eMOCA. It may be suggest [sic] that "recognition" suggests no conventional legal basis for the making of the payments, and that the real basis is the existence of an arrangement, which although not express should be implied, under which the Broker supplies services to REVA in relation to the marketing of Loan Products to customers. Emphasis may be placed on the fact that neither eMOCA nor REVA themselves undertake marketing to the Customers. It may be suggested that the critical marketing activities are carried out by the Brokers, and that they do not undertake those activities merely so that their efforts can be "recognised". Rather they do so by way of marketing the Loan Products to Customers, and by engaging in that marketing they are providing services in relation to the performance of work, for which they are remunerated. In my view those would be arguable propositions that could be advanced by the revenue authorities, and propositions which are likely to have reasonable prospects of success…
The draft opinion referred to the exemptions in s 32(2) of the Act (and the equivalent provisions in the Queensland legislation) and noted that if there was a relevant contract it would be open to brokers to satisfy one of paragraph (i), (ii) or (iii) of s 32(2)(c) of the Act depending on the factual circumstances of that broker. A handwritten file note of a solicitor at Allens dated December 2013, indicates that on an unspecified date in December 2013, that solicitor made a telephone call to Ms Glen. The file note includes statements that senior counsel had been approached 'but he basically came from position of how OSR would treat this', that 'OSR will say [client] tried to get around this but that impliedly still arrangement for services', and 'OSR likely to take view that payroll tax payable'.
A handwritten file note of the same Allens' solicitor dated 17 January 2014 indicates that on 17 January 2014, the solicitor received a telephone call from Ms Glen. The file note includes statements that 'Understand position that counsel takes'; 'But, Sam [White] still wants to meet with the guy to hear first-hand'; 'Might close off the issue' and 'Want to get counsel to understand further'.
On 11 March 2014, representatives of Allens and LM Group (including Mr White and Ms Glen) met with Mr Sullivan to discuss his draft opinion. A file note of the meeting on 11 March 2014, includes the following: Brendan commenced by explaining that his opinion was issued in draft and that it was not intended to represent his final views on the payroll tax issues. The purpose of the opinion was to highlight a potential issue regarding the implication that there could be an arrangement for the provision of service by brokers to [LML]. This was despite the absence of any express provision providing for such services. The reason for Brendan's concern was because the marketing services that eMOCA was required to provide to funders might be considered to only be able to be discharged through the activities of the brokers and that this was a service that the brokers provided… Brendan also acknowledged that it might appear that he was 'barking at shadows' but he still considered it to be a sleeper issue and that in some point in time the Loan Market Group might be forced to face this issue. Brendan stated that, although the draft opinion did not deal with the law regarding the implication of terms into contracts, he noted that a term would not generally be implied where there was an express provision to the contrary. It therefore seemed prudent to try to negative the payroll risk by including an express clause in the contracts with brokers providing that brokers do not provide any services to [LML]. Although this type of express clause could not entirely rule out the payroll tax risks, it would certainly help address any suggestion that a revenue office might make that there is such an implied arrangement for the provision of services.
On 20 March 2014, Allens sent to Mr Sullivan a 'Supplementary Brief to Advise', in which Allens referred to Mr Sullivan's draft opinion in the following terms: You have provided a draft memorandum of advice in which you outline a risk that a revenue office would have reasonable prospects of successfully arguing that, despite the terms of the Broker Agreement, there is an implied arrangement between Loan Market Group and Brokers for the supply by Brokers to REVA of services for or in relation to the performance of work. In these circumstances, there would be a relevant contract for payroll tax purposes unless one of the relevant exception provisions is satisfied.
The supplementary brief enclosed a new form of agreement between LML and brokers entitled 'Loan Market Mortgage Broker Agreement' (Broker Agreement) which was described in the brief as a 'franchise agreement'. The brief also recorded the commercial reasons why the LM Group were proposing to enter into a franchise arrangement with their brokers and noted cl 3.4 of the Broker Agreement enclosed with the brief provided that the arrangements between the parties did not involve the supply of services by the broker to LML, on the recommendation made by Mr Sullivan in the conference on 11 March 2014. The brief also recorded Allens' views as follows: Instructing solicitors remain of the view that the arrangements between Brokers and Loan Market Group should not create a payroll tax liability in Queensland or New south Wales for any entity in the Loan Market Group, notwithstanding any differences between the terms and conditions of the Broker Agreement and the Franchise Agreement. This is on the basis that the arrangements with the Brokers do not involve the Brokers providing any services to Loan Market Group. Instead, Brokers supply services to their Customers and, in turn, Loan Market Group supplies services to Brokers.
On 27 March 2014, Mr Sullivan provided a markup of the proposed Broker Agreement containing some suggested amendments and comments. This form of Broker Agreement is substantially similar to that eventually adopted by the LM Group from 1 July 2014 and which was the subject of consideration in the Judgment.
On 25 July 2014, Mr Sullivan provided a revised draft of his opinion and then on 9 September 2014 a final version of the opinion (Opinion) in materially the same terms. Each noted that the proposed form of the Broker Agreement did not expressly provide for a supply of services of the brokers to LML, and to the contrary included a cl 2.5 in the following terms (which was a revised version of cl 3.4 of the agreement referred to at [31] above): 2.5 The Business involves the Broker supplying services to Customers and Approved Financiers relating to the preparation and submission of Applications. The Broker is not required to supply, and will not supply, services of any kind to Loan Market.
The Opinion, like the draft sent on 25 July 2014, identified the question whether the Broker Agreement gave rise to a relevant contract under s 32(1)(a) of the Act as turning on whether there was a contract (as defined) under which the broker supplies services to LML or another entity, relevantly eMOCA. Mr Sullivan concluded that: 1. There was no supply of services to LML given the terms of the Broker Agreement including cl 2.5 which precluded the implication as part of the Broker Agreement of a term to the effect that the services of brokers are supplied to LML. 2. The better view was that LML would not be entering into an agreement or arrangement for the supply of the brokers' services to eMOCA, and on the basis of the present state of the authorities his view was that the issue would more likely than not be resolved in favour of eMOCA. 3. As a practical matter, it is clear that revenue authorities in the various States are not reluctant to assess and to litigate issues in relation to deeming provisions which, like these, are designed to bring non-employment situations within the payroll tax net. Consequently, it would not be surprising if the NSW and Queensland authorities asserted that the relevant contract provisions applied in respect of the present arrangements, and it would be a matter of some practical importance to be able to establish, where possible, the application of one or more of the exception provisions.
The discussion of the exception provisions was similar to that in the draft opinion. The Opinion also noted that 'the relevant contractor provisions cast a very wide and imprecise net. Those who wish not to be caught by them should ensure that their arrangements come within the exception provisions. …'
In summary, Mr Sullivan advised LML that the better view was that the Broker Agreements did not constitute a relevant contract between the Assessed Brokers and LML, or eMOCA. The Commissioner drew attention to the fact that the Opinion highlighted the risk of the Commissioner contending that the relevant contract provisions did apply to the Broker Agreements and for that reason it would be a matter of practical importance to establish where possible that one of the exceptions to a relevant contract applied to Assessed Brokers. However, notwithstanding these qualifications, Mr Sullivan's advice was that LML should succeed in any dispute with the Commissioner as to whether the Broker Agreements to implement the franchise model would be relevant contracts. The advice placed some emphasis on the presence of cl 2.5 of the Broker Agreement. At the hearing before me, LML referred to cl 2.5 but accepted it was not conclusive of the question whether or not the brokers provide services to LML (T21, T259). Nevertheless, it is significant for present purposes because it was a basis for the reasoned conclusion in the Opinion as to why LML's position that no payroll tax was payable should prevail.
On and from 1 July 2014, the LM Group formally adopted a franchise model with the brokers in its network using the new form of Broker Agreement on which Mr Sullivan had advised. The evidence of Mr White and Ms Glen is that between May and December 2014, signed versions of the new Broker Agreement were obtained from all of LML's brokers. Hence by December 2014, the Broker Agreement was the governing agreement with the Assessed Brokers.
Ms Glen, who was the person with primary responsibility in the Relevant Period for seeing that LM Group obtained the advice it needed to comply with its tax obligations, deposed that her view at the time the advice was received from Mr Sullivan was that while the issue was a complex one, the LM Group was in a 'fairly strong position' with respect to any potential liability for payroll tax on commission payments made to third party brokers.

The commencement of a payroll tax audit in 2015

The Commissioner commenced a payroll tax investigation into LMG on 7 October 2015 and requested further information from LMG on 16 December 2015. Some time after receiving the request for information, LM Group sought assistance from Allens in responding to the Commissioner's request.
On 21 January 2016, Allens prepared a draft response for the LM Group. While the covering email from Allens stated that, 'as you know there is a real risk that the relevant contract rules can apply to broker payments', I do not regard this as a qualification to the advice previously provided by either Allens or Mr Sullivan. This is because the email goes on to say: However, unless and until OSR specifically states to you that broker payments are subject to payroll tax, the preferable approach is to proceed on the basis that we do not consider there to be a payroll tax issue because the services in this case are provided by the aggregator to the broker (not the other way around as brokers only provide services to their clients).
The clear recommendation to LM Group was that it should continue to adopt the position that no payroll tax was payable on the commission payments. It may be inferred that this recommendation was based on the view that, until the Commissioner stated his position that payroll tax was payable the LM Group was entitled to continue to act on the previous advice provided by Allens and senior counsel.
The draft response contended that there was no payroll tax issue because the services are provided by the aggregator to the broker and not the other way around, as brokers only provide services to their clients. The response was updated on 27 January 2016 and submitted on 28 January 2016.
Allens continued to assist the LM Group with the Commissioner's investigations until approximately August 2016. LM Group then sought further advice on the payroll tax issue from Herbert Smith Freehills (HSF). On 31 October 2016, HSF issued a document marked 'DRAFT Advice' to LMG, which included the following summary: Summary In our view, LMG is liable for payroll tax in New South Wales in respect of commissions paid by LM to brokers under the "relevant contract" provisions of the Payroll Tax Act 2007 (NSW) (the Act), unless two or more persons carry on the business of that broker (the "two person exemption").
HSF advised the LM Group that they had reached the view that the brokers provide services to LML in the course of LML's business, notwithstanding the cl 2.5 of the Broker Agreement, stating that: The clause referred to above does not accurately describe the practical reality of the relationship between the parties when the agreement is read as a whole. We also understand that, for all practical purposes, the relationship between brokers and LM has not materially changed since the introduction of the latest broker agreement in 2014. In light of this, it would be difficult to contend that brokers have not provided services to LM since 2014 even though they did provide services prior to 2014.
On 3 November 2016, the LM Group received advice from a solicitor, Jon Denovan of Gadens. Mr Denovan sent through a discussion note regarding payroll tax liability of aggregators. The note stated: There is a risk that aggregators and broker companies are liable for pay-roll tax on commissions paid to brokers. Obviously, this is a huge contingent liability and it is essential steps are taken to remove or reduce this risk. … The risk is real, and so we encourage action now.
Mr Denovan attended an LM Group board meeting on 3 November 2016 to discuss the payroll tax position.
It may be noted that the tax 'advices' referred to in [43]-[45] above were received in the 2017 financial year and hence after the liability to the penalty issue here arose.
On 9 November 2016, representatives of the LM Group and the Commissioner met, and the Commissioner's representatives told the LM Group that their circumstances were considered indistinguishable from Bridges Financial Services Pty Ltd v Chief Commissioner of State Revenue (2005) 222 ALR 599; [2005] NSWSC 788.
On 1 December 2016, Ms Glen wrote to the Commissioner's representative disputing the correctness of what the LM Group understood to be the Commissioner's position.
On 9 December 2016, the Commissioner's representative sent an email to Ms Glen and notified the LM Group that the Commissioner had determined that the 'relevant contractor provisions apply'. The email attached a reconciliation of the payments to brokers which were regarded as assessable and then continued: Under the Taxation Administration Act 1996, any failure to pay the correct amount of Payroll Tax when it falls due is a tax default and is generally subject to interest and penalty. Where a tax default occurs section 26 of the TAA provides that the taxpayer is liable to pay penalty tax in addition to the amount of tax unpaid. Section 27 of the Taxation Administration Act 1996 (TAA) provides that the base amount of penalty tax imposed is 25%. Penalty will be included once the assessments are issued along with applicable Market rate of interest in accordance with Part 5 of the TAA. Can you kindly confirm whether you agree with the attached wage figures on or before Friday, 16 December 2016, as a reassessment will be issued on Monday, 19 December 2016. Objections: If you disagree with any part of this determination you may lodge an objection [once the assessment is issued]. You will need to lodge the objection within 60 days of the issue date of the assessments, pursuant to section 86 of the TAA.
On 10 January 2017, Revenue NSW requested further information from LMG.
On 26 January 2017, PwC wrote to Revenue NSW to inform Revenue NSW that LMG had engaged PwC to assist LMG in respect of Revenue NSW's investigation, noting that Revenue NSW had not provided to date any statement of the relevant facts or legal analysis on which it relied, and requesting the opportunity to make further submissions to Revenue NSW on the question whether tax was payable. PwC's letter added: In the meantime, we note from Rani's email below to Nicole Glen that she has requested certain calculation details pertaining to payments made to brokers during the period of review. Although a considerable amount of work has been undertaken by Loan Market, we are still working through the various details. I have advised my client that the provision of any calculations at this stage is premature until the meeting to discuss Loan Market's business model and the threshold issue (ie. whether the relevant contract provisions apply from a legal perspective) has taken place. I am sure you will appreciate that embarking on an unnecessary exercise is in neither parties' interest at this time. However, if there are any internal or legal reasons which require you to issue assessments by a particular date, please let me know immediately, in which case we would need to work closely with you to accommodate the timetable. The calculations are very complex, and are preliminary at this stage because we would need to discuss and agree the fundamental principles for each exemption with the OSR, including the 'engaging others' exemption, which may require the obtaining of additional evidence which is very time consuming. I would also ask that you provide us with the information which you have been provided by other government agencies as you have built this information into your calculations which we are required to respond to.
On 9 April 2018, PwC supplied to Revenue NSW detailed submissions on the factual circumstances relevant to Revenue NSW's investigation of the LM Group's payroll tax compliance and a legal analysis in support of its position that no payroll tax was payable.
On 2 May 2018, Revenue NSW requested from PwC copies of certain Lender Agreements which PwC supplied on 25 May 2018.
On 21 September 2018, Revenue NSW sent an email to PwC stating that 'the investigation of Loan Market Group Pty Ltd is now completed and below is our determination and explanation'. The email added the findings in respect of the years ended 30 June 2012 to 30 June 2016 as follows: Financial year Total no. brokers (contractors) Total no. of exempt brokers (contractors) Total no. of liable brokers (contractors) % of total brokers liable Total Payroll Tax liability 2012 333 254 79 23.7 $631,157.03 2013 336 258 78 23.2 $611,301.50 2014 341 254 87 25.5 $660,379.87 2015 349 257 92 26.4 $765,130.21 2016 354 262 92 26 $836,157.33 Total Average 25% $3,504,125.94

The assessments

On 24 September 2018, the Commissioner issued assessments to LMG for payroll tax in respect of commission payments to the Assessed Brokers for the 2012 to 2016 financial years and on 17 January 2019, the Commissioner issued assessments to LMG for the 2017 and 2018 financial years (LMG Assessments). The LMG Assessments included assessments of payroll tax, interest on outstanding payroll tax (at market rate for the 2012 to 2016 financial year on 24 September 2018, and at market and premium rate for the 2017 and 2018 financial years) and penalty tax imposed at 25% (for the 2012 to 2016 financial years only).
On 23 November 2018 and 1 May 2019, LMG objected to the LMG Assessments. By letter dated 28 November 2019, the Commissioner partly allowed LMG's objections. On 7 and 8 January 2020, the Commissioner issued reassessments to LMG to give effect to his objection determination (LMG Reassessments).
On 28 January 2020, LMG by summons commenced a review in this Court pursuant to s 97 of the TAA (LMG Proceedings).
On 12 June 2020, the Commissioner issued assessments dated 11 June 2020 to LML for the Relevant Period which included payroll tax on the same commission payments to the Assessed Brokers which were the subject of the reassessments issued to LMG (LML Assessments). These new assessments came about because the Commissioner had realised that LML was the party to the agreements with brokers rather than LMG. As the plaintiffs submitted, this is something which they had previously made known to the Commissioner by an email sent on 29 March 2019 (ie. before the objection to the LMG Assessments was determined).
On 25 June 2020, LML objected to the LML Assessments and on 17 July 2020, the Commissioner disallowed the objection noting that LMG and LML were members of a payroll tax group for the Relevant Period under s 70 of the Act and consequently under s 81 of the Act were jointly and severally liable for payroll tax on payments made to the Assessed Brokers and supported the LMG Reassessments on this basis.
On 20 July 2020, LML by summons commenced a review in this Court pursuant to s 97 of the TAA (LML Proceedings).
On 21 July 2020, orders were made by the Court consolidating the LMG Proceedings and LML Proceedings.
On 3 August 2020, LMG and LML filed a summons giving effect to the consolidation order.

Relevant statutory provisions

Part 5 of the TAA deals with interest and penalty tax. Section 21(1) imposes a liability to pay interest on the amount of tax unpaid in the event of a 'tax default' and provides as follows: If a tax default occurs, the taxpayer is liable to pay interest on the amount of tax unpaid calculated on a daily basis from the end of the last day for payment until the day it is paid at the interest rate from time to time applying under this Division.
The expression 'tax default' is defined in s 3(1) of the TAA to mean 'a failure by a taxpayer to pay, in accordance with a taxation law, the whole or part of tax that the taxpayer is liable to pay'.
The amount of interest is set by s 22 of the TAA as the sum of the market rate component and the premium component. The premium component is 8% per annum: s 22(3) TAA.
Section 26(1) of the TAA imposes a liability to pay penalty tax on the tax unpaid in the event of a 'tax default' and provides as follows: If a tax default occurs, the taxpayer is liable to pay penalty tax in addition to the amount of tax unpaid.
By s 27(1)(a) the relevant amount of penalty tax in respect of the tax defaults in this case was 25% of the amount of tax unpaid (subject to the other provisions of Division 2 of Part 5).
The abovementioned provisions have the effect that a taxpayer is prima facie liable to pay interest and penalty tax at the rates set by the TAA. The evident policy underlying the provisions reflects the fact that the TAA treats taxpayers who pay all of their tax liabilities on time different to taxpayers who do not pay their tax on time. The difference is that interest and penalty tax are applicable, subject to potential reduction pursuant to other provisions within Part 5 of the TAA. In other words, whilst there are various provisions by which reductions (or additions) may be made, the starting point is the prima facie amounts set by the TAA are applicable.
In relation to interest, it may be remitted under s 25 of the TAA.
The text of s 25 of the TAA was amended with effect from 1 February 2024. The version prior to 1 February 2024 was as follows: The Chief Commissioner may, in such circumstances as the Chief Commissioner considers appropriate, remit the market rate component or the premium component of interest, or both, by any amount.
The present version of s 25 is as follows: (1) The Chief Commissioner may remit interest. (2) The Chief Commissioner may issue guidelines setting out how interest must be remitted under this division. (3) If guidelines are issued, interest must be remitted only in accordance with the guidelines. (4) The imposition or remission of penalty tax is not relevant to the imposition or remission of interest.
No guidelines have yet been issued under s 25(2). In the absence of any guidelines relevant to the current version of s 25 having been issued, the amendments as yet make no practical difference: Golden Age and Hannas Rocks Pty Ltd v Chief Commissioner of State Revenue [2024] NSWSC 249 at [23]-[24] (save for s 25(4)).
In relation to penalty tax, ss 27(3)(a), 29 and 33 provide for circumstances where penalty tax may, or must in the case of s 29, be reduced. Those provisions provide as follows: 27 Amount of penalty tax (3) The Chief Commissioner may determine that no penalty tax is payable in respect of a tax default if the Chief Commissioner is satisfied that- (a) the taxpayer (or a person acting on behalf of a taxpayer) took reasonable care to comply with the taxation law … 29 Reduction in penalty tax for disclosure during investigation (1) The amount of penalty tax determined under section 27 is to be reduced by 20% if, after the Chief Commissioner informs the taxpayer that an investigation relating to the taxpayer is to be carried out and before it is completed, the taxpayer discloses to the Chief Commissioner, in writing, sufficient information to enable the nature and extent of the tax default to be determined. (2) This section does not apply in respect of information disclosed by a taxpayer if the taxpayer is registered under a taxation law and - (a) the tax default involved a failure to lodge a return as required under that taxation law, or (b) the tax default involved a failure to pay tax by the date required under that taxation law. 33 Remission of penalty tax (1) The Chief Commissioner may, in such circumstances as the Chief Commissioner considers appropriate, remit penalty tax by any amount.

LML's tax defaults

The imposition of interest by s 21 of the TAA and penalty tax by s 26(1) of the TAA arise in the circumstances of a 'tax default' occurring. A 'tax default' is defined by s 3 of the TAA to mean 'a failure by a taxpayer to pay, in accordance with a taxation law, the whole or part of tax that the taxpayer is liable to pay'.
In the present case, the relevant taxation law is the Act. In the case of LML the relevant tax defaults are the failure by LML to pay, in accordance with the Act, payroll tax in respect of the commissions paid by LML to the Assessed Brokers, which constituted taxable wages within the meaning of s 10 of the Act. By s 9 of the Act, LML was liable to pay payroll tax on the taxable wages (a) within 7 days after the end of the month in which those wages were paid or payable, other than the month of June, and (b) within 28 days after the end of the month of June in relation to taxable wages paid or payable in the month of June.
The Act implements a self-assessment regime under which an employer who is liable to pay payroll tax will become registered as an employer and lodge returns calculating the amount of taxable wages paid or payable. An employer who is not already registered must apply for registration as an employer within seven days of the end of any month in which the employer pays or is liable to pay wages of more than the 'weekly threshold amount' per week (s 86(1), (2)). An employer who is registered or required to be registered must lodge a return within seven days of the end of each month (except June, when the period is 21 days) (s 87(1)). The amount of payroll tax an employer is required to pay in respect of a particular month (or other period) is based on the return of wages in accordance with the formula in Schedule 2, Part 2, cll 2 and 3: Chief Commissioner of State Revenue v Smeaton Grange Holdings Pty Ltd (2017) 106 ATR 151; [2017] NSWCA 184 at [125] per Sackville AJA.
The relevant tax default(s) for the purposes of ss 21 and 26 of the TAA in this case were LML's failures to pay payroll tax in respect of the commissions paid by LML to the Assessed Brokers which constituted taxable wages in accordance with s 9 of the Act. In that respect LML committed tax defaults in respect of the Relevant Period by failing to include the relevant taxable wages in its monthly returns from July 2011 to July 2018.
A consequence of LML's tax defaults is that LMG became jointly and severally liable to pay payroll tax to the Chief Commissioner in respect of those amounts pursuant to s 81(1) of the Act: Fyna Projects Pty Ltd v Chief Commissioner of State Revenue (2018) 99 NSWLR 673; [2018] NSWCA 331 at [33]-[35].
As a consequence of s 45(2A) of the TAA the Commissioner was entitled to issue assessments to LMG for the payroll tax payable by LML for which LMG was jointly and severally liable under s 81(1) of the Act. Section 45(2A) provides: The Chief Commissioner may issue a notice of assessment of the liability of a person to pay any tax and related charges for which the person is jointly and severally liable with another person under a taxation law, even if a notice of assessment has already been issued to the other person.

Issues

The issues remaining for determination (following the concession made by the Commissioner referred to at [3] above) are: 1. Whether the penalty for the 2014 to 2016 financial years should be reduced to nil under s 27(3)(a) of the TAA. 2. Whether all or part of any remaining penalty for the 2012 to 2016 financial years should be remitted in whole or part under s 33 of the TAA. 3. Whether the premium component of the interest otherwise payable in respect of the 2017 and 2018 financial years should be remitted in whole or part under s 25 of the TAA. 4. The appropriate order as to the costs of the proceedings.

Issue 1: Reduction of penalty under s 27(3)(a) of the TAA

Relevant principles

Under s 27(3)(a), the Commissioner can determine that no penalty tax is payable in respect of a tax default if satisfied that the taxpayer (or a person acting on behalf of the taxpayer) took reasonable care to comply with the taxation laws. It is not in dispute that the Court can, on this review proceeding, form the state of satisfaction required by s 27(3)(a): Tasty Chicks Pty Ltd v Chief Commissioner of State Revenue (2011) 245 CLR 446; [2011] HCA 41 at [18]-[22]; TAA s 101(1).
Section 27(3)(a) requires the question whether the taxpayer took reasonable care to be determined at the time of the relevant tax default or defaults: Adams Bidco Pty Ltd v Chief Commissioner of State Revenue [2019] NSWSC 702 at [109]-[111].
The relevant tax defaults occurred on the failure by LML to include commission payments to the Assessed Brokers in the Relevant Period in its monthly returns from July 2011 to July 2018. As the plaintiffs' claim for a reduction in penalty tax under s 27(1)(a) is made only for the 2014 to 2016 financial years, the question whether the plaintiffs took reasonable care to comply with the taxation law needs to be assessed as at the dates for lodgement of LML's monthly returns for the period from July 2013 to June 2016 as they are the dates on which the relevant tax defaults for the 2014 to 2016 financial years occurred.
Whether the taxpayer has taken reasonable care to comply with the taxation law turns on whether the taxpayer has exercised the care that a reasonable person would be likely to have exercised in the circumstances of the taxpayer, and while this involves an objective standard, it also considers the subjective circumstances of the taxpayer: FCT v Traviati (2012) 205 FCR 136; [2012] FCA 546 at [36] and [70].
In Bayton Cleaning Company Pty Ltd v Chief Commissioner of State Revenue; International Hotel Services Pty Ltd v Same [2019] NSWSC 657, Ward CJ in Eq (as her Honour then was) at [114] and [297] accepted the following statement in Qualweld Australia Pty Ltd v Chief Commissioner of State Revenue [2014] NSWCATAD 227 at [95] as to the concept of reasonable care in this context: In each case, it is essentially a question of fact whether the taxpayer has taken reasonable care in attending to its tax obligations. Factors that would indicate that a taxpayer took reasonable care include reasonable attempts to comply with the tax law, reasonable professional and other inquiries to ensure compliance, reliance on professional advice or on official published views of the tax law. Factors which indicate that a taxpayer failed to take reasonable care include oversight or forgetfulness to meet with obligations, failure to maintain adequate records and procedures to prevent errors from occurring, not seeking professional advice and errors in complying with the law.

Submissions

The plaintiffs submitted that the Court should find that LML (and LMG) took reasonable care to comply with the taxation law for the entirety of the period from September 2013 to 30 June 2018 (T30). This was because on 11 September 2013 Allens gave advice to Ms Glen which supported the preparation of payroll tax returns on the basis that commissions paid to brokers did not give rise to liability for payroll tax. They followed this up by seeking advice from senior counsel. (Although s 27(3)(a) is relied on for only for the 2014 to 2016 financial years, I took this submission in so far as it applies to the balance of the Relevant Period as relevant to remission of the premium interest.)
The plaintiffs submitted that it remained reasonable for them to continue relying on both the Allens' advice and senior counsel's Opinion as the basis for preparation of their payroll tax returns even after the Commissioner commenced the audit in 2015 and HSF provided draft advice in October 2016. First, the plaintiffs were advised by Allens in January 2016 to proceed during the payroll tax audit by the Commissioner on the basis that there is no payroll tax issue because brokers only provide services to their clients. Second, the mere fact that HSF and Gadens expressed a contrary view to that of Allens and senior counsel in the Opinion did not make it unreasonable for the plaintiffs to continue adopting the position that no payroll tax was payable based on those earlier advices, in particular because the Opinion was given by a highly experienced tax expert.
The Commissioner submitted that the plaintiffs could not be said to have taken reasonable care to comply with the Act in the period from 1 July 2011 to 30 June 2014. This is because the advice from Allens and senior counsel in the Opinion related only to the new Broker Agreement implemented from 1 July 2014. In relation to the earlier period, the relevant advice received by the plaintiffs was that provided by Allens in 2009 which was to the effect that payroll tax would be imposed in respect of commissions paid to Assessed Brokers under the agreement with brokers unless the 'two person' exemption in s 32(2)(c) of the Act applied. Throughout the period from 2009 until June 2014, the LM Group received advice to the effect that payroll tax was likely to be payable.
The Commissioner submitted that the plaintiffs have not established that LML took reasonable care to comply with the Act in respect of commissions paid to Assessed Brokers in the period 1 July 2014 to 30 June 2016. First, the LM Group had no final advice from Allens or senior counsel until the Opinion was provided on 9 September 2014, the earlier advices having been in draft only. Second, the plaintiffs could not rely upon the Opinion to support their position in relation to payments made under the agreements in place before the Broker Agreement was implemented from May to December 2014, as the Opinion only related to the new Broker Agreement and not the previous agreements. Third, in so far as Broker Agreements entered into from May to December 2014 are concerned, the Opinion made it clear there remained a real risk that the LM Group was liable to payroll tax, and this was confirmed by the warnings given by Allens to the LM Group in January 2016 that there was a real risk that it was liable for payroll tax.

Consideration

As noted earlier this issue only arises for 2014 to 2016 financial years (and more specifically for the period from September 2013 to June 2016 in light of the submission noted at [82] above).
In my view, LML took reasonable care to comply with the taxation law in relation to commission payments to the Assessed Brokers in the period from 1 December 2014 to 30 June 2016. First, by December 2014 LML had fully implemented the franchise model, so that from December 2014 all the payments to the Assessed Brokers were made under Broker Agreements for which LML sought and obtained advice from both Allens and senior counsel to the effect that no payroll tax should be payable. While Mr Sullivan's opinion was expressed in terms of the 'better view', this was an opinion that LML was more likely than not to succeed in any dispute with the Commissioner. Mr Sullivan is (and was at the relevant time) a highly respected and very experienced senior counsel in revenue matters, including payroll tax, who gave a well-reasoned opinion in support of his conclusion. Having sought and obtained that advice it was in my view entirely appropriate, and reasonable, for LML to act on it by not including the commission payments to Assessed Brokers in its monthly returns for the period December 2014 to June 2016.
Second, until November 2015, there was no indication from the Commissioner that he took a contrary view. LM Group was advised by Allens and senior counsel that there was a risk that the Commissioner would do so, but while the Commissioner commenced the audit in October 2015, it was not until 9 November 2016 that the Commissioner's representatives indicated what the Commissioner's view was (over one year later). In circumstances where Allens had advised LM Group that it should continue with its current practice based on the senior counsel's advice 'unless and until OSR specifically states to you that broker payments are subject to payroll tax', in my view it was reasonable for continue that practice despite the commencement of the audit.
Third, although Ms Glen does not say in her affidavit evidence that she relied on senior counsel's advice, as the Commissioner pointed out in his submissions, I am satisfied that she (and her senior colleagues at LML) did so. In particular, she and other senior executives at LML (including Mr White) attended a conference with Mr Sullivan before he provided his opinion in order to understand his views. The fact that Mr Sullivan's views were not unqualified reflects the fact, which is not in dispute, that the operation of the 'relevant contract' provisions in the Act to the circumstances of the present case is complex. In circumstances where the application of the taxation law to the facts of the taxpayer's circumstances is complex, a reasonable person will be likely to seek advice from a tax practitioner expert in the area as to whether their position is likely to prevail in the event of a dispute, and that is what occurred in the present case in respect of the implementation of the franchise model from December 2014. The mere fact that the advice disclosed that there were risks both of a dispute with the Commissioner and that payroll tax might be payable does not in my view detract from the conclusion that, prior to being put on notice of what the Commissioner's position actually was, LML did take reasonable care to comply with the Act by the steps which it took to obtain advice to determine what its liability was and then to act on that advice.
In my view, the circumstances of the present case are very different from the matters which in Adams Bidco at [113]-[119] led to Ward CJ in Eq (as her Honour then was) to conclude that the taxpayer in that case had failed to take reasonable care to comply with the taxation law.
Accordingly, I am satisfied that the plaintiffs have discharged their onus of proof in respect of the penalty tax for commission payments to the Assessed Brokers in the period from 1 December 2014 to 30 June 2016.
I am not persuaded that the plaintiffs have established that they took reasonable care for the period from July 2013 to November 2014. In that period, LML had a number of different agreements in place with brokers. The advice of Allens and senior counsel in the period from September 2013 to September 2014 was addressed to a new form of broker agreement to implement the franchise model and not to the various agreements already in place. While the plaintiffs had received some advice from Allens in July 2009, it was significantly qualified and contained the recommendation that LML seek a ruling from the Commissioner which was never done.

Relevant principles

Section 33 of the TAA confers on the Commissioner (and on the Court standing in the place of the Commissioner under s 101) a broad discretionary power which is not subject to any limit: Chief Commissioner of State Revenue v Downer EDI Engineering Pty Ltd (2020) 103 NSWLR 772; [2020] NSWCA 126 at [149]-[151].
In the case of an unconfined discretionary power of this nature, the considerations which are relevant to its exercise are determined by reference to the subject matter, scope and purpose of the relevant statute, including the particular provision conferring the discretion: see the authorities cited in Golden Age at [100].
In Bayton, Ward CJ in Eq (as her Honour then was) declined to exercise the discretion in s 33 of the TAA on the facts of that case noting that the taxpayer had failed to take reasonable care to comply with the taxation law. Her Honour said (at [301]): …as to the application for remission under s 33 of the Administration Act the general discretion to remit, I do not consider that this general discretion should be exercised where there has been a finding that reasonable care has not been established and in the absence of some special circumstance to warrant the exercise of the discretion notwithstanding the absence of a finding of reasonable care.
In Downer EDI, Bathurst CJ at [150] referred to those remarks with apparent approval, and noted that approaching the matter in that way was a matter of discretion not power.

Submissions

The plaintiffs submitted that the Court should exercise the discretion under s 33 to remit in full the penalty tax remaining after any reduction under s 27(3)(a) for the 2012 to 2016 financial years for essentially five reasons: 1. The application of the relevant contract provisions in the Act to the circumstances of the LM Group was complex and difficult. 2. In recognition of this the LM Group took advice on the issue from highly reputable solicitors and senior counsel specialising in taxation. That the issue was complex and difficult is borne out by the varying interpretations offered by the lawyers who provided advice to LM Group in the period from 2009 to 2016. 3. It is common ground that the brokers are independent contractors and, in those circumstances, the application of the relevant contract provisions to the broker agreements may be seen as a harsh outcome for LML: see Judgment at [207]. 4. On re-engaging with Allens in late 2013, it gave 'robust' advice that payroll tax was not payable. The advice was confirmed by senior counsel. While Mr Sullivan's advice was not finalised until September 2014, the LM Group was entitled to rely on the advice of Allens in the interim. The situation of the LM Group is quite different from the advice received by the taxpayer in Adams Bidco which was essentially that its prospects of success were low: Adams Bidco at [22]-[26], [31]-[36] and [113]. 5. The LM Group dealt with the Commissioner in the course of its audit in a responsive and compliant manner but in circumstances where the plaintiffs were justifiably entitled to believe that they fell outside the scope of the relevant contract provisions. The LM Group should not be penalised for having adopted a justifiable, but ultimately erroneous interpretation of the relevant contract provisions.
The Commissioner submitted that the Court should reject the application for remission for three reasons: 1. The plaintiffs had failed to take reasonable care to comply with their payroll tax obligations. 2. The plaintiffs have pointed to no special circumstances to warrant the exercise of the discretion. The mere fact that the provisions are complex and difficult is not sufficient, particularly as there is no evidence that the plaintiffs believed that they fell outside the scope of the relevant contract provisions other than immediately after the Opinion was provided in September 2014. Further, the last substantive advice the plaintiffs received was that of HSF to the effect that they were liable for payroll tax. Notwithstanding that advice, the plaintiffs made no attempt to lodge payroll tax returns including the amounts paid to brokers until assessments were issued. 3. The mere fact that the plaintiffs cooperated with the Commissioner during the audit is not of itself sufficient to warrant the remission of penalty tax: Bayton at [300]-[301].

Consideration

In light of the conclusion reached above that the plaintiffs exercised reasonable care in relation to compliance with their payroll tax obligations in relation to the Broker Agreements from December 2014 to June 2016, the issue of remission under s 33 only arises in relation to the period from 1 July 2011 to December 2014 during which there were a number of different versions of the broker agreement in place with the Assessed Brokers.
In my view, none of the matters raised by the plaintiffs warrant the remission of the penalty relating to the payroll tax arising from commission payments in that period. The fact that the application of the relevant contract provisions to the LM Group's circumstances was complex and difficult is not itself a reason for remitting the penalty. Nor is the fact that the application of the law to the LM Group may appear harsh -that is a matter for Parliament to correct by amending the legislation, and is ameliorated to some degree by the exemption provisions.
I do not accept that the fact that the LM Group took advice from reputable legal advisors, which it did, is a basis for a remission of the penalty for the period prior to December 2014. The focus of the advice provided by Allens and then senior counsel in the period from September 2013 to September 2014 was the payroll tax liability in respect of the new Broker Agreement to implement the franchise model and not the other pre-existing broker agreements. The only advice put into evidence that relates to those pre-existing agreements was that provided by Allens in 2009 and it was sufficiently qualified to indicate that the likely outcome was that payroll tax would be payable. Indeed, the focus of the legal advice in the period from September 2013 to September 2014 was in revising the broker agreement in order to avoid that outcome for the future.
The impression I have formed from a consideration of the evidence of the LM Group's approach to the payroll tax issue prior to the implementation of the new Broker Agreement in late 2014 was that the LM Group accepted, and was prepared to take, the risk that payroll tax was payable. In these circumstances, there is no basis for a remission of the relevant penalty.

Relevant principles

This issue relates only to the premium component of interest for payroll tax payable for the 2017 and 2018 financial years and concerns a liability arising monthly from July 2016 to June 2018. The relevant principles in applying the discretion conferred by s 25 of the TAA were discussed by me in Golden Age at [99]-[109]. As noted there, it has been accepted that the four criteria stated by the appeal panel in Chief Commissioner State Revenue v Incise Technologies Pty Ltd (2004) 56 ATR 82; [2004] NSWADTAP 19, although not exhaustive, are relevant and appropriate matters for consideration, which are: (1) All principal tax that is owing and not in dispute has been fully paid. (2) There has been cooperation by the taxpayer in providing relevant information to the Commissioner so as to enable the Commissioner to issue assessments. (3) Such cooperation has occurred prior to any investigation being commenced by the Commissioner, or, at the very least, within a reasonable time after the request for information had been made by the Commissioner, and (4) There has been no wilful default by the taxpayer in not paying tax on time.
I made some observations on the approach to these criteria in Golden Age at [105]-[109]. The parties did not take issue with what is said there.

Submissions

The plaintiffs submitted that each of the four criteria stated in Incise Technologies were satisfied. All primary tax has been fully paid, as noted earlier, and LMG entered into and complied with the payment plans required by the Commissioner for the payment of the tax resulting from the assessments issued to the plaintiffs. Second, the LM Group cooperated with the Commissioner to enable the issue of assessments. Third, that cooperation occurred in a timely manner.
As to the fourth matter, the plaintiffs submitted that there has been no wilful default by the taxpayer in failing to pay the primary tax on time. The premium interest, which relates only to the 2017 and 2018 financial years, is penal in nature, and similar considerations apply to it as to the penalty for the earlier period. The payroll tax returns were lodged consistently with the advice received from Allens and then senior counsel over the period from September 2013 to September 2014. The LM Group was entitled to continue to rely on this advice despite the contrary views expressed first by HSF and then by Gadens. The LMG Assessments were not issued until September 2018 as to which there was a genuine dispute as to liability, and the interpretation of the law adopted by the plaintiffs was at the very least objectively reasonably arguable given the advice received from Allens and from senior counsel. Further, the plaintiffs co-operated in good faith with the Commissioner's audit at all times. These matters all indicate that there was no wilful default in the sense of consciousness of the breach or reckless indifference as to whether there will be a breach of the taxation law: Golden Age at [108].
The Commissioner did not take issue with the plaintiff's contention that the first three Incise Technologies criteria are satisfied. Rather, the Commissioner submitted that LM Group was in wilful default of its obligations with respect to payroll tax in the 2017 and 2018 financial years. This is because the LM Group was receiving warnings and advice from both its own lawyers and the Commissioner that payroll tax was payable. Reference is made to the events set out at [39]-[50] above. The advice provided by HSF on 31 October 2016 is of particular importance because from the time this advice was received, if not earlier, the plaintiffs should have lodged monthly payroll tax returns recording the commissions paid to Assessed Brokers as taxable wages and then sought a refund of tax (together with interest) if it succeeded in an objection or on a review. By doing so, the LM Group would have avoided the imposition of any interest incurred by reason of the failure to pay payroll tax on subsequent due dates: cf Chief Commissioner of State Revenue v E Group Security Pty Ltd (No 2) [2022] NSWCA 259 at [107].

Consideration

The payroll tax liability in the 2017 and 2018 financial years relates to commission payments under the Broker Agreements to which the advice provided by senior counsel in the Opinion applied. As indicated earlier, in my opinion, the plaintiffs took reasonable care in obtaining that advice and then acting on it in lodging their payroll tax returns from December 2014 to June 2016.
In my view, the plaintiffs continued to exercise reasonable care in the manner in which the payroll tax returns were lodged from that time until assessments were issued by the Commissioner in September 2018. The mere fact that the Commissioner was conducting an audit was not, of itself, a basis for concluding that the advice provided by senior counsel was wrong. Allens had advised the LM Group in January 2016 to continue lodging its payroll tax returns without including the commission payments to brokers. While HSF provided draft advice to the LM Group on 31 October 2016 that payroll tax was payable on the commission payments, it was not unreasonable for the LM Group to consider that its position that payroll tax was not payable was correct, supported as it was by senior counsel's advice.
Did the position change when Ms Glen was informed by the Commissioner on 9 December 2016 that the Commissioner considered that payroll tax was payable and that returns should be lodged?
The email of 9 December 2016 stated the Commissioner's view that payroll tax was payable, drew the attention of LM Group to the consequences of that decision, and stated that 'a reassessment will be issued on Monday, 19 December 2016'. However, notwithstanding this email, no assessments were issued for the 2012 to 2016 financial years until 24 September 2018, approximately 21 months later and after the end of the 2018 financial year. There is no suggestion in the evidence that the delay was caused by the LM Group or its adviser, PwC. Rather, there was an ongoing dialogue between LM Group, represented by PwC, and the Commissioner's representatives on the question whether payroll tax was payable and if it was, the calculation of the liability. PwC put forward detailed submissions in support of LM Group's position, both on the threshold question and the exemption question. It may be inferred that the Commissioner delayed in issuing assessments because he recognised that the issue was complex particularly because even if the threshold question was determined in his favour, the exemption question raised a number of issues and factual questions, some of which required evidence from third parties (the brokers) who were not within LM Group's control.
The LM group was entitled to consider that the audit was ongoing, and they were still in a process of engagement with the Commissioner as to whether and to what extent payroll tax was payable, in circumstances where the LM Group had a respectable and reasonably arguable position that payroll tax for the 2017 and 2018 financial years was not payable based on Allens' advice and the Opinion. The tax default in the 2017 and 2018 financial years was not wilful, in the sense of a consciousness of the default or a reckless indifference to whether there would be a default.
Putting the matter more broadly, bearing in mind that the Incise Technologies criteria are not exhaustive and that the premium component is designed to punish culpable conduct, it is necessary to consider whether the failure to pay the tax liability on time is due to the culpable (ie blameworthy) conduct of the LM Group. I do not consider that the LM Group is culpable for the delay in payment of the tax for the 2017 and 2018 financial years, in light of the matters referred to above and the fact that it complied promptly with the Commissioner's requirements during the audit and entered into and complied with a payment plan for payment of the tax liability once assessments were issued in September 2018. The plaintiffs have provided an explanation for the delay in payment being the reasonable steps taken by the LM group to engage with the Commissioner during the audit and to comply the taxation law.
In my view the plaintiffs have discharged their onus of proof that remission of the premium component under s 25 of the TAA is warranted.

Relevant principles

The Court has a discretion to determine by whom, to whom and to what extent costs are to be paid, although in the exercise of this discretion, costs will ordinarily follow the event unless it appears to the Court that some other order should be made: Civil Procedure Act 2005 (NSW), s 98(1); Uniform Civil Procedure Rules 2005 (NSW), r 42.1. The 'event' may be characterised in more than one way, but generally refers to the result of the claim or counter claim, as the case may be, and may be understood as referring to the practical result of a particular claim: Doppstadt Australia Pty Ltd v Lovick & Son Developments Pty Ltd (No 2) [2014] NSWCA 219 at [15].
However, where there are multiple issues in a case and there has been a mixed outcome, it may be appropriate, in the exercise of the discretion as to costs, to apportion costs as between those issues. In Ryde Developments Pty Ltd v The Property Investors Alliance Pty Ltd (No 2) [2018] NSWCA 40 at [6]-[7], Beazley P, Payne JA and Barrett AJA noted that in general such exercise will be carried out on a relatively broad brush basis, and set out a number of propositions taken from earlier decisions regarding the question of apportionment, of which the following are presently relevant: 1. Where there are multiple issues in a case the Court generally does not attempt to differentiate between the issues on which a party was successful and those on which it failed. Unless a particular issue or group of issues is clearly dominant or separable, it will ordinarily be appropriate to award the costs of the proceedings to the successful party without attempting to differentiate between those particular issues on which it was successful and those on which it failed; 2. In relation to trials it has been said that it may be appropriate to deprive a successful party of costs or a portion of the costs if the matters upon which that party was unsuccessful took up a significant part of the trial, either by way of evidence or argument. 3. Whether an order contrary to the general rule that costs follow the event should be made depends on the circumstances of the case viewed against the wide discretionary powers of the court, which powers should be liberally construed. 4. A separable issue can relate to 'any disputed question of fact or law' before a court on which a party fails, notwithstanding that they are otherwise successful in terms of the ultimate outcome of the matter. 5. Where there is a mixed outcome in proceedings, the question of apportionment is very much a matter of discretion and mathematical precision is illusory. The exercise of the discretion depends upon matters of impression and evaluation.
In McInnes v Rheem Australia Pty Ltd [2021] NSWCA 89 at [33], Gleeson JA (Bell P, Payne JA agreeing) adopted the following statement by Young J in Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (No 3) (1998) 30 ACSR 20 at 24 as to the possible approaches to apportioning costs: … the court may, though it is a matter of discretion, conclude that in all the circumstances a successful party should pay the costs in respect of an issue on which that party has failed or when one looks at the matter globally the successful party should pay some of the costs or alternatively have that party's costs reduced because although the party has been successful overall, it would be unfair to allow that person to get the whole of his or her costs: see Rosniak v GIO (1997) 41 NSWLR 608 , 615.
It is also important to bear in mind that underlying both the general rule that costs follow the event, and the qualifications to that rule, is the idea that costs should be paid in a way that is fair, having regard to what the court considers to be the responsibility of each party for the incurring of the costs: Commonwealth of Australia v Gretton [2008] NSWCA 117 at [121] per Hodgson JA (with whom Mason P agreed).

Submissions

The plaintiffs submitted first that LMG should never have been assessed leading to wasted costs, and it is entitled to its costs of the LMG proceedings until the time the consolidation order was made on 3 August 2020. Second, the plaintiffs should receive their costs of the consolidated proceedings because they had been successful in reducing the amount of payroll tax payable in each financial year in the Relevant Period by a significant amount and to that extent had been successful in the 'event'. Third, the pre-trial preparation involved detailed and complex evidence which was necessary for the issues to be properly determined, and there were concessions along the way agreed to by the plaintiffs (eg. as to labour content for the 'two person exemption' and categorisation of brokers) which reduced the issues which ultimately needed to be determined. Fourth, there were wasted costs in the conduct of the hearing due in part to the need for the Commissioner to retain new senior counsel shortly before the hearing. Fifth, while LML did not succeed on the threshold question of whether the broker agreements were 'relevant contracts' under s 32 of the Act, it is not possible in the determination of costs to sever the issues between that question and the 'exemption question' because the questions of fact and law were interwoven and the evidence of each of the witnesses (particularly Mr White) overlapped on the threshold question and the exemption question. There was no proper basis for apportioning any of the plaintiffs' costs of the proceedings.
The Commissioner submitted that in the context of proceedings challenging tax assessments the Courts have ordered the plaintiffs pay a portion of the Commissioner's costs in cases where the plaintiffs have argued that no tax is payable, lost on most of the issues in dispute, but succeeded in reducing the amount payable: eg. Southern Cross Community Healthcare Pty Ltd v Chief Commissioner of State Revenue (No 2) [2021] NSWSC 1538 (taxpayer ordered to pay 60% of the Commissioner's costs) and Orica Ltd v Commissioner of Taxation (No 2) [2010] FCA 336 (taxpayer ordered to pay 90% of the Commissioner's costs). The Commissioner submitted that whilst the plaintiffs have demonstrated that the assessments were excessive, the plaintiffs' primary contention was that no payroll tax was payable by them, and this contention occupied the dominant proportion of the proceedings and was the principal factual and legal issue in the proceedings. All witnesses were cross-examined on that issue and the two principal witnesses, Mr White and Ms Glen, were cross-examined for about a day and a half. The resolution of that issue also required a detailed factual enquiry regarding the nature of LML's business which required consideration of the contractual documents, financial arrangements between the parties and the services provided by LML. The Commissioner succeeded on seven out of the 10 issues, and one of those issues was the principal issue in the proceeding which occupied the greatest proportion of the Court's time. The Commissioner submitted that the appropriate order was that the plaintiff's pay 80% of the Commissioner's costs.

Consideration

While the plaintiffs were successful in establishing that the assessments issued by the Commissioner for payroll tax on commission payments to brokers in the Relevant Period were excessive, I do not regard the excessiveness of the assessments as the relevant 'event' in the circumstances of this case. The proceedings were conducted on the basis that the liability of the plaintiffs was to be determined by reference to the answers given by the Court to questions agreed by the parties. By the time of the hearing, the parties had agreed that there were 10 questions requiring determination. Of these, the threshold question was clearly dominant, and was the question which took up a significant amount of time both at the hearing and in preparation of the evidence and submissions. The plaintiffs' claim was that it had no liability because the threshold question should be determined in their favour, whereas the Commissioner's claim was that LML's liability was the amount assessed under the LML Assessments. The practical result was that the Commissioner partially succeeded in his claim and established that a significant payroll tax liability existed (some $1.3 million). However, while the Commissioner was successful to that extent, he did not succeed on all issues and the usual rule that costs follow the event is displaced. The appropriate course in the exercise of the discretion as to costs is to treat this as a case involving a mixed outcome and to apportion costs. Approaching the matter in this way is not inconsistent with the approach commonly taken to costs where the revenue is partially successful in defending an assessment (see eg the decisions referred to by the Commissioner set out in the previous paragraph).
If I am wrong in that approach, and the plaintiffs are to be regarded as the successful party, it is still in my view appropriate to apportion costs in the exercise of the discretion because there has been a mixed outcome and the threshold question on which the Commissioner succeeded was dominant and separable from the other issues.
In my view the appropriate order that results in costs being paid in a way that is fair having regard to the responsibility of each party for the incurring of costs is that the plaintiffs pay 60% of the Commissioner's costs of the proceedings.
First, the parties accept that it is not possible realistically to apportion the costs of the proceedings by reference to the costs attributable to each issue. Bearing in mind that the question of apportionment is a matter of discretion, and that mathematical precision is not possible, the appropriate course in my view is for the costs recovered by the Commissioner to be reduced by the application of a discount (see [122] above). A guide as to the extent of the discount is provided by the fact that the result of the proceedings is that the primary tax has been reduced by a significant amount and the plaintiffs have had partial success in reducing penalty tax and premium interest. Of most significance is the reduction in primary tax, which is 65% by reference to the LMG Reassessments, and 45% by reference to the LML Assessments. The parties did not explain in their submissions, and the evidence does not disclose, the reason for the difference between the total primary tax under the assessments issued to LMG and LML, but it appears that in the consolidated proceedings the Commissioner was defending the LML Assessments not the LMG Reassessments and hence the reduction in primary tax by reference to the LML Assessments is a better guide. I will address the costs of the LMG proceedings separately below.
Second, the Commissioner succeeded on the threshold question, and most of the other questions. The bulk of the evidence and submissions was directed to those questions on which he succeeded. However, there was clearly an overlap in that some of the evidence (including that of Mr White) went to both the threshold question and the exemption questions.
Third, while the plaintiffs had a disproportionate evidentiary burden that is a function of the burden of proof which they bear under s 100(3) of the TAA to show that the assessments are excessive. I do not regard this as a matter affecting the apportionment of costs.
Fourth, I do not consider that any lack of efficiency in the conduct of the hearing by the Commissioner should impact significantly on the exercise of the costs discretion and I have no evidence on which to properly assess any costs thrown away by reason of that matter.
However, I do accept the plaintiffs' submission that there has been some wastage of costs due to the Commissioner first issuing the LMG Assessments and then after the determination of the objection and the commencement of the LMG proceedings, raising new assessments against LML in respect of the same underlying liability. While the assessments issued to LMG can be supported under s 45(2A) of the TAA by the fact that LMG is jointly and severally liable for the tax liability of LML, it is clear that the LMG assessments were issued before the LML Assessments due to a misunderstanding by the Commissioner as to which entity contracted with the Assessed Brokers.
Had the Commissioner properly appreciated that LML was the relevant contracting party in late 2019 (which was apparent to him from information provided during the audit), there is no reason to think that the LMG Assessments would have been issued and the LMG proceedings would not have been necessary. This resulted in a wastage of costs, in that LMG incurred unnecessary costs from having two sets of proceedings for what was in reality the determination of LML's payroll tax liability, for which the plaintiffs were not responsible. In my view, consistently with the purpose of a costs order noted at [123] above and the overriding purpose stated in s 56(1) and (2) of the Civil Procedure Act 2005 (NSW), the Commissioner should bear the burden of costs occasioned by the two sets of assessments and proceedings for one liability.
Accordingly, the Commissioner should pay the plaintiffs' costs of the LMG Proceedings in the period to 21 July 2020 thrown away by reason of the Commissioner issuing the LML Assessments which were the subject of review in the LML Proceedings. I will limit this order to costs thrown away because there may be some costs of the LMG proceedings which, on a costs assessment, it can be shown led to the plaintiffs' saving costs which would in any event have been incurred for the LML Proceedings. I will also limit the costs order in favour of the Commissioner to 60% of his costs of the proceedings from 21 July 2020.

Conclusion

The plaintiffs provided a form of final orders subject to the determination of the outstanding issues dealt with above, on which the Commissioner made submissions at the hearing. In light of the above reasons, in my view the appropriate orders are as set out below.
The plaintiffs sought an order that the Court make the relevant reassessments and an order for payment of a sum by way of a refund of amount overpaid plus interest. However, the usual order in cases of this kind under s 101 of the TAA is that the matter is remitted to the Commissioner for him to make the appropriate assessments. In this case, the plaintiffs will be entitled to a refund, but the precise amount will be subject to calculation taking into account the effect of these reasons. It is not necessary to include an order for repayment of that amount or for interest thereon as this is dealt with by s 104 and s 105 of the TAA. The Commissioner is best placed to make the relevant calculations. I have included liberty to apply in case there is a dispute over the amount payable or something which I have overlooked.
Accordingly, the Court will make the following orders: 1. The assessments issued to Loan Market Group Pty Ltd ('LMG') for the 2012 to 2018 financial years dated 7 and 8 January 2020 be revoked. 2. The assessments issued to Loan Market Pty Ltd ('LML') for the 2012 to 2018 financial years dated 11 June 2020 be revoked. 3. The matter be remitted to the defendant to make reassessments of the liability of LML for payroll tax for the 2012 to 2018 financial years in accordance with column (4) of the table at [4] of these reasons. 4. The penalty tax and the premium component of interest on the primary tax under the revoked assessments referred to in orders (1) and (2) be reduced to the extent set out in these reasons. 5. Subject to order (6), the plaintiffs to pay 60% of the defendant's costs of the consolidated proceedings (2020/00027826 and 2020/00212582) from 21 July 2020, as agreed or assessed. 6. The defendant to pay LMG's costs of the LMG proceedings number 2020/00027826 up to 21 July 2020 thrown away by reason of the defendant issuing new assessments to LML which were the subject of the review in the LML proceedings number 2020/00212582, as agreed or assessed. 7. Liberty to apply.

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: 04 November 2024

Pay-roll Tax (Harmonisation) Amendment Act 2008(Qld)

Payroll Tax (Harmonisation) Amendment Act 2008(Qld)

(2020) 103 NSWLR 772

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