Starr Partners Pty Ltd v Chief Commissioner of State Revenue

NCAT Administrative and Equal Opportunity|2014-03-18|Before: John J

A Gerard (Counsel for the Respondent ) Deloitte Tax Services Pty Ltd (Agent for the Applicant) Crown Solicitor's Office (Respondent) File Number(s): 1360037

Background 1This matter commenced in the Administrative Decisions Tribunal (ADT) in 2013 in accordance with the then Administrative Decisions Tribunal Act 1997("ADT Act") (now the Administrative Decisions Review Act 1997 ("ADR Act")). The matter was heard by me in the Civil and Administrative Tribunal ("Tribunal") in accordance with the Civil and Administrative Tribunal Act 2013 ("CAT Act") following the merger of the ADT into the Tribunal. 2As a result of an audit the Respondent ("the Chief Commissioner") determined that the Applicant and the following persons: (1)Starr Team Properties Pty Ltd ("Starr Team "); (2)Terry Sargent Real Estate Pty Ltd ("Terry Sargent"); (3)Home Maker Mortgages Pty Ltd ("Home Mortgages"); (4)John J Starr trading/as Bracken ("JJ Starr"); (5)Meurant Properties Pty Ltd ("Meurant"); and (6)Hidiho Pty Ltd ("Hidiho") collectively called "the Starr Group", were grouped for payroll tax purposes and issued amended Payroll Tax Assessment Notices for the financial years ending 30 June 2007 to 30 June 2011 inclusive (the "Relevant Period ") increasing the payroll tax payable by several members of the Starr Group. 3Subsequently on: (1)1 December 2011 the Applicant objected to the amended assessments and requested that the Chief Commissioner exercise power available to him under s79 of the Payroll Tax Act 2007 ("the 2007 Act") to de-group the entities comprising the Starr Group from 1 July 2007 to 30 November 2011. This would have resulted in a lower aggregate payroll tax liability for the Starr Group. (2)28 December 2011 the Chief Commissioner informed the Applicant that the objection would be dealt with as an application for exclusion at first instance. (3)27 June 2012 the Chief Commissioner disallowed the application for exclusion. (4)27 August 2012 the Applicant objected to the decision not to de-group the Applicant, Starr Team, Terry Sargent and Home Mortgages from the Starr Group. (5)15 March 2013 the Chief Commissioner disallowed the objection ("the Decision"). (6)10 May 2013 the Applicant applied to the ADT to review the Decision. Powers of Tribunal on review 4On a review the Tribunal may affirm vary or set aside the Decision and make orders as to costs or otherwise, s101(1) of the Taxation Administration Act 1996 ("the TA Act"), s63 ADR Act and s60 CAT Act. The law 5For the period 1 July 2006 to 30 June 2007 the relevant legislation was the Pay-roll Tax Act 1971 ("the 1971 Act") now repealed and from 1 July 2007 the relevant legislation is the Payroll Tax Act 2007 ("the 2007 Act") (collectively "the payroll tax legislation"). For the 2007 year Part 10A of the TA Act provided for grouping of employers. Since 1 July 2007 these provisions are found in Part 5 of the 2007 Act. 6Payroll tax is a tax on employers in respect of New South Wales wages paid to employees during each financial year. The words "employer", "wages" and "employee" are defined in the payroll tax legislation and are not in dispute. 7If total wages paid by an employer during a financial year are below the statutory payroll tax threshold for that year then no payroll tax is payable by that employer. However if employers are part of a group for payroll tax purposes, then only a single threshold deduction applies to the whole group rather than each member of the group benefiting from a separate threshold deduction. 8Below are excerpts from the payroll tax legislation setting out the relevant power of the Chief Commissioner to determine that a taxpayer which is a member of a group may be excluded from that group and some constraints on that power. 9Pay-roll Tax Act 1971 Part 4A Grouping provisions "16B Exclusion of persons from groups (1)The Chief Commissioner may, by order in writing, determine that a person who would, but for the determination, be a member of a group is not a member of the group. Note. Section 16C sets out the circumstances in which a determination may be made under this section. 16C Grounds for excluding persons from group (3)The Chief Commissioner must not make a determination under section 16B unless satisfied that the business carried on by the person the subject of the determination has been continuously carried on, and will continue to be carried on, substantially independently of the other members of the group. (4)In determining whether a person carries on business substantially independently of the other member or members of a group, the Chief Commissioner is to have regard to the nature and degree of ownership or control of the business of each member of the group, the nature of each of those businesses and any other matter that the Chief Commissioner considers relevant." 10Payroll Tax Act 2007 Part 5 Grouping of Employers "74 Smaller groups subsumed by larger groups (1)If a person is a member of 2 or more groups, the members of all the groups together constitute a group. (2)If 2 or more members of a group have together a controlling interest in a business (within the meaning of section 72), all the members of the group and the person or persons who carry on the business together constitute a group.Section 79 (Exclusion of persons from groups) allows the Chief Commissioner, for payroll tax purposes, to exclude persons from a group constituted under this section in certain circumstances." "79 Exclusion of persons from groups (1)The Chief Commissioner may, by order in writing, determine that a person who would, but for the determination, be a member of a group is not a member of the group. (2)The Chief Commissioner may only make such a determination if satisfied, having regard to the nature and degree of ownership and control of the businesses, the nature of the businesses and any other matters the Chief Commissioner considers relevant, that a business carried on by the person, is carried on independently of, and is not connected with the carrying on of, a business carried on by any other member of that group. (4)This section extends to a group constituted by reason of section 74 (Smaller groups subsumed by larger groups)." The Applicant's Case 11The Application for Review filed by the Applicant stated "The reasons for seeking a review of the decision are: We are of the belief that the members of the Starr Partners Pty Ltd payroll tax group are operating independently of and are not substantially connected to the other members of the payroll tax group." 12At the hearing the Applicant relied on 2 letters from Deloitte Private Pty Ltd ("Deloitte ") to the Crown Solicitor's Office, respectively dated 23 August 2013 and 31 January 2014 and oral submissions by Mr Heyes who appeared by leave for the Applicant and informally for each other member of the Starr Group. The letters are referred to below as "the August letter" and "the January letter". Annexed to the August letter were copies of documents purporting to be Starr Partners Pty Ltd Directors' Meeting Minutes. 13The focus of the Applicant's case is set out at the foot of the August letter, "the business of each member of the (Starr Group) is carried on independently to the remaining members of the group and that there is no substantial connection between the carrying on of these businesses." 14Mr Heyes provided no written submissions to the Tribunal. He orally submitted: (1)There were no shared resources, no common employees and no shared customers or suppliers between any of the businesses carried on by the Starr Group ("the Businesses") during the Relevant Period. (2)Each of the Businesses operates independently of each other Business and has its own management team which is independent of each other Business. (3)Other than Meurant and Hidiho, which are not employing entities, the other members of the Starr Group should be de-grouped.

The Respondent's Case 15The Respondent's case is set out in written submissions filed with the ADT on 2 October 2013 (RS1) and further submissions filed with the Tribunal on 28 February 2014 (RS2). The case is that there is no onus on the Respondent to show that the decision not to de-group was correct. The onus is on the Applicant to prove, on the balance of probabilities, by way of admissible and probative evidence, that each member of the Starr Group carried on their business independently and not connected with the carrying on of a business carried on by any other member of the Starr Group, RS2 at [28] - [30]. 16The Respondent relies on documents filed pursuant to section 58 of the then ADT Act contained in a tabbed volume of 494 pages, affidavits sworn 28 November 2013 and 28 February 2014 by Kimberly Lorna McKee; exhibit KM1 to Kimberly Lorna McKee's second affidavit; an affidavit affirmed 28 February 2014 by Emma Smytheman, the written submissions RS1 and RS2; a bundle of authorities handed up during the hearing, and oral submissions by Mr Gerard. 17The Respondent submits that although the Applicant has the onus of proving its case it has filed no direct witness evidence. Accordingly the Respondent opposes the Applicant relying on any assertion of fact "for which there is no evidence in admissible form supporting the assertions", RS2 at [34]. 18The Respondent also submits in RS2: 75. "The material that is available to the Tribunal demonstrates many circumstances where the practical ability to control the various businesses has been exercised, such that the connections in management between the various businesses has resulted in connectedness between the carrying on of the businesses". "76. In the context of the above, based on the material before the Tribunal, the Tribunal would not be satisfied the Applicant(s) have discharged the onus of proof to establish that each business in the Starr Group is carried on independently of and is not connected with the carrying on of each other business carried on by any other member of the group."

Initial grouping 19The audit report of the Office of State Revenue found (page 21 of the s58 documents) that: (1)JJ Star, Terry Sargent, Hidiho and Meurant constituted a payroll tax group from 1July 2006 to 2 June 2009; (2)Starr Team, the Applicant and Home Maker constituted a payroll tax group from 2July 2006 to 2 June 2007; and (3)all members of the Starr Group constituted a payroll tax group from 3 June 2007 to 30 June 2011. 20Mr Heyes conceded this initial grouping and the parties agree that, in accordance with s74 of the 2007 Act, there were two un-subsumed payroll tax groups from 1 July 2006 to June 2009 and a single subsumed payroll tax group from 3 June 2009. Mr Heyes did not submit that this difference in grouping affected the Chief Commissioner's decision not to exclude any member of the Starr Group from its grouping with any other member at any time during the Relevant Period.

Issues 21The dispute concerns the payroll tax liability of the Starr Group in respect of the Relevant Period. The issue for this Tribunal revolves around sections 16B and 16C of the 1971 Act and s79 of the 2007 Act, and the decision of the Respondent not to de-group any member of the Starr Group from any other member.

Onus of proof 22Section 100(3) of the TA Act states "The applicant has the onus of proving the applicant's case in an application for review." The Applicant made no submissions in relation to the onus of proof. The Respondent's relevant submissions are referred to at [15], [17] and [18] above. 23The requisite standard of proof in reviews by the Tribunal is the "balance of probabilities" Cornish Investments Pty Limited v Chief Commissioner of State Revenue (RD) [2013] NSWADTAP 25 ("Cornish") at [31] and B & L Linings Pty Ltd v Chief Commissioner of State Revenue [2008] NSWCA 187, (2008) 74 NSWLR 481 ("B & L Linings") at [104]. 24In order for the Applicant to succeed it is necessary for it to establish the facts on which it relies, to show that: (1)For the year ending 30 June 2007 this Tribunal, in place of the Chief Commissioner, is satisfied that each Business has been continuously carried on, and will continue to be carried on, substantially independently of the other Business, s16C(3) of the 1971 Act, and that the Tribunal is to have regard to the nature and degree of ownership or control of each Business, the nature of each of those Businesses and any other matter that the Tribunal considers relevant, s16C(4) of the 1971 Act. (2)For the years ending 30 June 2008 to 30 June 2011 inclusive, this Tribunal, in place of the Chief Commissioner, is satisfied, having regard to the nature and degree of ownership and control of the Businesses, the nature of the Businesses and any other matters the Tribunal considers relevant, that each Business is carried on independently of, and is not connected with the carrying on of, any other Business, s79(2) of the 2007 Act. 25Each of the Deloitte letters commenced with the words "We refer to the above matter and provide additional supporting evidence...". Each of the letters contained submissions and assertions of fact. Except to the extent that some assertions in the Deloitte letters were corroborated by evidence tendered by the Respondent, and attached to the August letter were documents purporting to be minutes of directors' meetings of the Applicant between February 2008 and December 2010, those assertions are dealt with as submissions unsupported by evidence. 26Mr Gerard for the Respondent did not object to the tender of the documents purporting to be minutes of the Applicant as business records notwithstanding the lack of verification of the documents by any person who might reasonably be supposed to have had personal knowledge of the documents. However Mr Heyes, for the Applicant, did not refer to the minutes during the hearing except to inform the Tribunal that they had been provided because of a previous request by the Chief Commissioner for voluntary production of certain documents. 27During the hearing Mr Heyes informed the Tribunal that the Applicant did not intend providing any evidence in support of its case. 28It may be appropriate at this point to indicate the importance of evidence to the Applicant's case. As noted above, the onus lies on the Applicant to prove its case on the balance of probabilities. Neither the ADT, before which these proceedings were commenced, nor this Tribunal before which the proceedings were heard, are bound by the rules of evidence and both tribunals are required "to act with as little formality as the circumstances of the case permit and according to equity, good conscience and the substantial merits of the case without regard to technicalities or legal forms" s73 ADT Act and s38 CAT Act. However this does not mean that the Tribunal will accept as true, assertions of fact without any evidence from any person who might be expected to have personal knowledge of the relevant facts.

Nature of businesses 29The Tribunal is required to have regard to the nature of the Businesses. The August letter states that the Applicant is "the franchisor for a number of real estate businesses". The January letter describes the "main business operations" of members of the Starr Group as "lead franchisor for a number of real estate agencies", "real estate agent operating in the East Gosford area", "horse racing, breeding and cattle breeding", "real estate agent operating in the Blacktown area", "previously operated as a mortgage provider. No longer operates as a mortgage provider but solely to collect trailing commissions" and two instances of "commercial property holder". Two of the businesses described above are also described as having their main business operations being "selling real estate and managing rental properties". Mr Heyes' oral submissions did not add to these descriptions. 30The statements in the preceding paragraph may be correct. However other than as set out below the Applicant provided no evidence to support the statements nor evidence as to the independence or lack of connection of each Business from each other Business.

Ownership and control of businesses 31The Tribunal is also required to have regard to the nature and degree of ownership and control of each Business, s16C(4) of the 1971 Act and s79(2) of the 2007 Act. The s58 documents contain details of directorship and shareholding of the corporate members of the Starr Group at tabs 17(c) and (e). The Applicant did not challenge these details and made no submissions concerning substantial shareholding in any relevant company. 32Mr John James Starr ("Mr John Starr") is personally a member of the Starr Group, and either directly or indirectly (through John J Starr (Real Estate Pty Ltd of which he was the sole shareholder) held 100% of the shares in Meurant and Hidiho, 90% of the shares in Terry Sargent, over 21% of the shares in Starr Team and 20% of the shares in Home Mortgages throughout the Relevant Period. He also held over 42% of the shares in the Applicant to 2 June 2009 and over 51% for the remainder of the Relevant Period. Mr John Starr is also either the sole director or one of several directors of all corporate members of the Starr Group. 33The August letter asserted that the role of Mr John Starr "as a shareholder and director" of companies in the Starr Group "is purely passive in nature and (he) has no involvement in the day to day decisions" of businesses other than Meurant and Hidiho which are not employing entities. The Applicant provided no evidence to support this assertion. 34The August letter contained the following statements at page 3: (1)In relation to the Applicant "Mr John Starr did not have an active involvement in this business other than attending board meetings as a matter of good governance." (2) "Apart from Meurant Properties and Hidiho (which are not employing entities), Mr John Starr has not had an active involvement in the day to day business operations for more than 5 years in the other businesses (sic). Rather he provides an advisory and mentoring role as a board member. His role as a shareholder and director of these companies is purely passive in nature and (he) has no involvement in the day to day decisions of these businesses." 35No evidence is provided in support of the asserted facts although documents stated to be copies of minutes of "officers" meetings of the Applicant from February 2008 to December 2010 were annexed to the August letter, albeit described in the letter as "minutes of board meetings" of the Applicant. 36The minutes show that Mr John Starr attended 28 of 30 meetings held during the period. Those minutes include, at the following dates: (1)11 February 2008 at item 0926 a reference to Mr John Starr phoning lawyers seeking advice on a claim for costs. (2)12 May 2008 at item 0945 Mr John Starr is to meet with a named person after the next "Principals Meeting". (3)10 June 2008 at item 0948 Mr John Starr briefed the board on issues concerning two franchises including the East Gosford franchise. (The franchise agreement at tab 12(u) in the s58 documents states the Franchise Business conducted by Starr Team operates under the business name "Starr Partners - East Gosford".) At item 0953 Mr John Starr discussed results from visits of mystery shoppers. At item 0954 Mr John Starr is to negotiate a settlement with what appears to be a franchisee. (4)13 October 2008 at item 0968 Mr John Starr spoke on the need for checklists to form part of the Starr Partners Sales System. At item 0969 Mr John Starr discussed complaints concerning a lack of page numbers in the Homes Pictorial. At item 0970 Mr John Starr referred to complaints about selection criteria for Salesperson of the Year. (5)20 September 2009 at 1008 Mr John Starr proposed that the Applicant extend a short term loan to Starr Team in the amount of $30,000. (6)12 October 2009 at item 1035 Mr John Starr briefed the board on visits to the Camden Office and the Padstow Office, Mr John Starr raised an issue regarding co-listing procedures. (7)9 November 2009 at item 1040 Mr John Starr raised concerns with the correctness of certain statistics. At item 1041 Mr John Starr proposed that the loan to Starr Team Properties be repaid "$10,000 upfront and $5000 per month until paid. All agreed". 37The above items are not the only references in the minutes to Mr John Starr's involvement in the Applicant's business. The minutes do not satisfy me that Mr John Starr did not, throughout the Relevant Period, have an active involvement in that business and in the franchise businesses of the Applicant's franchisees, including Starr Team and Terry Sargent. 38The information in tab17(e), to which Mr Heyes did not object, does not evidence a lack of a connection between each Business carried on by corporate members of the Starr Group or by Mr John Starr with each other Business during the Relevant Period nor evidence that the Businesses were carried on independently of each other. 39The Applicant asserted that each Business was managed on a day-to-day basis by a separate management team. The August letter at page 3 states "The respective management teams make all decision(s) regarding the day to day business operations and all decisions are made independently of each business without consideration of the other group members. With the exception of the commercial franchise arrangement, there are no other dealings between the entities." 40Mr Heyes conceded that there was no evidence before the Tribunal as how the Businesses were managed. Accordingly I am not satisfied that the submission that the day to day management of the Businesses were independent of each other, is correct. 41Mr Heyes submitted that the reference to control of the Businesses, to which the Tribunal must have regard, in determining the extent of independence of the Businesses and their lack of connection does not mean the theoretical control of a company's affairs by its board of directors. Rather it means actual day to day control of each company's business operations. 42In Denham Constructions Pty Ltd v Chief Commissioner of State Revenue (1998) 40 ATR 416 ("Denham Constructions") Studdert J rejected an appeal against a decision of the Chief Commissioner not to de-group members of a payroll tax group under the 1971 Act. A submission was made on behalf of the payroll tax group to the effect that the concept of control of a business meant day to day management and was not to be viewed at directors' level in relation to the former s16H of the 1971 Act. At the relevant time s16H(1), the equivalent of the present s79(1) and (2) of the 2007 Act, stated: "Where the Chief Commissioner is satisfied, having regard to the nature and degree of ownership or control of the businesses, the nature of the businesses and any other matters that the Chief Commissioner considers relevant, that businesses carried on by members of a group are carried on substantially independently of, and are not substantially connected with, the carrying on of a business or businesses of another member or other members of the group, the Chief Commissioner may, by order in writing served on those first mentioned members, exclude them from that group." 43Studdert J said at point 20 on page 425 that counsel for the members of the group "was unable to refer to authority that management ought to be viewed in the narrow sense for which he contended, and I am not attracted to this submission to that effect." 44Mr Heyes was unable to provide any authority in support of his like submission. I note that the payroll tax legislation refers to ownership and control of businesses, not ownership and management of day to day business operations. I am not satisfied that control of a business in the context of either s16C(4) of the 1971 Act or s79(2) of the 2007 Act means control by employed managers rather than control by the directors of the company which owns the business. In relation to the corporate members of the Starr Group there is no evidence before the Tribunal as to the constitution of any such company nor of any shareholders' agreement nor any agreement under which any manager is employed or contract detailing the powers and responsibilities of those managers. I reject Mr Heyes submission. 45The August letter asserts at page 4 - "each individual board of directors requires unanimous approval over the strategic direction of each business and each board operates independently without consideration for other members of the group." This assertion of fact may or may not be correct. None of the documents referred to in the preceding paragraph nor any other document or evidence by any of the directors of any of the companies was produced to the Tribunal in support of the assertion and it Is not supported by the minutes which were in evidence. I am not satisfied that the assertion is correct. 46It is not disputed that Mr John Starr is personally a member of the Starr Group and was throughout the Relevant Period either the sole director or one of the directors of every corporate member of the Starr Group, other than Home Mortgages after October 2008, tab 17(e) in the s58 documents. Tab17(e) also shows that each of Messrs Phillip Patrick Starr, Rodney James Cartledge and Ronald Stanley Edwards were directors of Starr Team, Home Mortgages and the Applicant from the commencement of the Relevant Period until at least March 2009; while Robert Mark Hurley was a director of Starr Team and Home Mortgages throughout the Relevant Period and a director of the Applicant for the whole of the Relevant Period other than October 2008 to December 2009. Mr Heyes' submission that the corporate members of the Starr Group had different directors is true to the extent that some other persons were also directors of some Starr Group corporate members at certain times. However the evidence before the Tribunal is that there is a substantial commonality of directors among the Starr Group companies. To that extent it is similar to the commonality of directorship of the companies in Denham Constructions, per Studdert J at pages 424 and 425.

Independence of businesses 47Both the Deloitte letters referred to a statement by the Chief Commissioner in the reasons for the 15 March 2013 determination: "With respect to the first limb' criterion of business `independence', having reviewed all the evidence available, there may be some weight to the argument that the Remaining Entities are carried on substantially independently of any other member in the group, due to minimal sharing of resources, lack of financial interdependencies and trade between the relevant businesses." 48The August letter stated "We have therefore not considered the 'first limb' of the criterion as this condition does not appear to be in dispute." The January letter stated that it "provided additional supporting evidence...to support this position". However the January letter provided submissions and asserted facts without either affidavit evidence or business records to support the alleged facts. Nor was there any statement to the effect that Mr Heyes, who is both the signatory to the January letter (on behalf of Deloitte Tax Services Pty Ltd) and the agent who appeared by leave for the Applicant at the hearing, had any personal knowledge of the facts he asserted in the letter. 49The January letter concluded "we concur with the Respondent's determination of 15 March 2013 that there is sufficient weight available that the relevant entities are carried on substantially independently of any other member in the group.." This was not the wording used by the Respondent. The Respondent actually concluded "it is considered that the same common directors of the businesses are the persons ultimately carrying on those businesses and effective managerial control rests with them. It cannot be accepted that the decisions concerning the carrying on of the business of one of the Relevant Entities are made completely independently of the carrying on of the other businesses" and the Chief Commissioner disallowed the objection.

Franchise agreement 50At tab 12(u) in the s58 documents is a franchise agreement made between the Applicant as franchisor, Star Team as franchisee and Mr Paul Anthony Starr as Nominated Representative of the franchisee. Another franchise agreement is at tab 12(v) made between the Applicant as franchisor, Terry Sargent as franchisee and Mr John Starr as Nominated Representative of the franchisee. The parties inform me, and I accept, that the 2 franchise agreements are substantially identical other than for differences such as the identity of the franchisees, their Nominated Representatives, and their areas of operation. 51Mr Heyes submitted that the businesses of the franchisees are independent of the franchisor and that clauses 8.1, 10.1, 15.10 and 37.1 of the franchise agreements evidence that independence. 52The January letter stated that the franchise fees obtained by the Applicant from franchisees who were members of the Starr Group were 13%-15% of the total franchise fees received by the Applicant during the Relevant Period. Mr Heyes submitted that the franchise fee expenses of members of the Starr Group were a small proportion of the income received by the franchisees and therefore not important. 53I deal with each of those submissions commencing with the franchise fees. The financial statements of the Applicant for the 2007 to 2010 financial years are at tabs 12(a) to (c) of the s58 documents and show income from franchise fees exceeding $500,000 in each of those financial years. 54The evidence is that the franchise fee expense of Starr Team for the 2008 to 2010 financial years ranged from $28,582 to $30,462 while its income ranged from $1,481,521 to $1,609,573, tabs 12(d) and (e) of the s58 documents. However the franchise agreement at tab 12(u) states at item 5 in its schedule that the start date of the franchise is 1 January 2011, the franchise service fee will be 4% of gross sales revenue up to $1,750,000 and thereafter 3% of that revenue to $2,250,000 and will be a minimum of $40,000 plus GST affective 1 July 2010 and the maximum of $85,000 plus GST effective 1 July 2010. No financial reports for 2011 were in evidence. 55Mr Heyes submitted that the franchise fee expense incurred by Terry Sargent during the financial years 2007 to 2010 is set out in the s58 documents at tabs 12(k) and (m) and comprised only a small proportion of the total income of Terry Sargent during the Relevant Period and accordingly the franchise agreement was not important. The evidence is that the franchise fee expense for the 2007 to 2010 years ranged from $24,445 to $29,428 while the income of Terry Sargent's businesses ranged from $1,347,787 to $2,028,550. I accept Mr Heyes's submission that the expense was small in proportion to the income of the company in those years. 56There is no evidence, including no expert opinion, before the Tribunal to the effect that a small expense incurred in operating a business necessarily means that the benefits obtained by the expense are not important to the business. There is also no evidence that a substantial proportion of the income of either Terry Sargent or Star Team was not derived from the franchise businesses nor did Mr Heyes make any submissions to that effect. 57Mr Heyes submitted that the franchise agreements located in the section 58 documents were the relevant agreements throughout the Relevant Period. It may be that those agreements renewed or replaced pre-existing franchise agreements although the Applicant provided no evidence to this effect. However it is appropriate to consider whether specific clauses which Mr Heyes submitted evidence independence between the businesses of the franchisor and the respective franchisees do evidence such independence. Those clauses are reproduced below: 58Mr Heyes submitted that clause 8.1 shows that the franchisee controls its own staff. Clause 8.1 is: "8.1 The Franchisee shall ensure that all staff while working in connection with the Franchised Business at all times shall: (a)wear such uniforms and nametags of such design and colour as may be specified by the Franchisor from time to time; (b)wear the uniforms, protective coverings and nametags strictly in accordance with the Franchisor's requirements from time to time, (c)present a neat and clean appearance; (d)render confident and courteous service to the Clients of the Franchised Business; and (e)be appropriately qualified and appointed in accordance with the Manual and guidelines prescribed by the Franchisor." 59I find that clause 8.1 does not show that the franchisee controls its own staff. It shows that the franchisee has a contractual obligation to the franchisor to ensure that the uniforms and nametags of the staff and their qualifications and appointments are in accordance with the franchisor's requirements. There is also a contractual obligation by the franchisee to the franchisor to ensure that the appearance of the franchisee's staff and the service they render to clients of the Franchise Business are in accordance with the franchise agreement. 60Mr Heyes submitted that clause 10.1 shows that the Nominated Representative is appointed by the franchisee. Clause 10.1 is: "10.1 The Franchisee acknowledges that the Nominated Representative shall be the individual with whom the Franchisor shall be entitled to deal to the exclusion of any other persons. The Nominated Representative shall have full and unfettered power to negotiate, agreed, transact on behalf of and bind the Franchisee." 61This clause does not indicate who appoints the Nominated Representative. The Nominated Representative is, according to clause 1.1, "the individual named in item 3 of the Schedule" who has been agreed to between the parties prior to the franchise agreement being signed. I also note that clause 10.2 provides that the franchisee shall not change the Nominated Representative without the prior written consent of the Franchisor, which consent will not be unreasonably withheld. Clause 10.2 also requires that any: "replacement Nominated Representative shall, at the cost of the Franchisee, undertake all induction and training prescribed by the Franchisor, prior to the replacement Nominated Representative commencing as the Nominated Representative." 62Mr Heyes submitted that clause 15.10 shows the independence of the franchisee and franchisor. Clause 15.10 is: "15.10 The Franchisee and the Principals shall at all times during the period of this Agreement, any renewal: (a)use their best efforts to operate the Franchised Business in a professional manner, (b)use their best efforts to maximise the revenue potential, goodwill and operational efficiencies of the Franchised Business, and (c)devote their full time and attention to the conduct of the Franchised Business, and (d)must not operate or be involved in any way in any business activity which is or may be detrimental in any way to the conduct of the Franchised Business unless otherwise agreed to in writing by the Franchisor." 63The clause requires the franchisee and the Principals (described in clause 1.1 as the parties named in Item 2 of the Schedule) to work full-time in the best interest of the Franchised Business and not do anything detrimental to that business without the written consent of the franchisor. To my mind the clause does not show the independence of the businesses of the franchisee and franchisor. 64Mr Heyes submitted that clause 37.1 shows that the franchisee and franchisor are independent contracting parties. Clause 37.1 is: "37.1 The parties acknowledge that they are independent contracting parties and no relationship of partnership agency or employment exists between the parties other than as expressly set out in this Agreement." 65I accept Mr Heyes' submission that the intent of the clause is to acknowledge that the franchisor and franchisee are independent contracting parties. However the clause does not show that the businesses are conducted independently or are not connected and must be read in the context of the remainder of the agreement of which it is part. 66It may well be that the above clauses selected by Mr Heyes from the franchise agreement are relatively normal for commercial franchise agreements. Contrary to Mr Heyes' submission, they do not provide evidence which satisfies me that the businesses of the franchisor and each respective franchisee are independent. Rather the clauses indicate an ongoing commercial relationship between franchisor and franchisee, albeit at relatively small expense in franchise fees to each franchisee during the years in which financial information is before the Tribunal, and provide evidence that franchisor, the Applicant, may exercise substantial control over the franchised business operations of the franchisees, both of whom are members of the Starr Group.

Loans 67At [16] in RS2 the Respondent referred to a loan from Terry Sargent (of which Mr John Starr was sole director) to John J Starr (Real Estate) Pty Ltd ("Starr Real Estate") (of which Mr John Starr was sole director and sole shareholder) ("Terry Sargent loan"). Throughout the Relevant Period Starr Real Estate held 90% of the shares in Terry Sargent. 68The January letter states at page 3 "Any loans which were provided were provided under standard commercial arrangements any loans provided would not be considered substantial when compared to the fair market value of the assets owned by the respective entities." Mr Heyes conceded that no evidence as to the terms of the Terry Sargent loan was before the Tribunal. 69The Terry Sargent loan is referred to in the financial records at tab 12 as $689,502 on 30 June 2008 rising to $804,503 by 30 June 2010. The balance sheet and notes to the financial statements of Terry Sargent as at 30 June 2010 at tab 12(k) show these amounts as a loan to "JS (Real Estate) P/L (Unsecured)" being a non-current asset The balance sheet of Terry Sargent as at 30 June 2010 shows total assets of $1,268,752 and net assets of $360,962. If the balance sheet is accurate the loan comprises over half the total assets of Terry Sargent. It is noted that an explanatory letter to the Chief Commissioner, prepared by Deloitte Tax Services Pty Ltd, accompanied the objection of 27 August 2012. That letter stated at page 4, in responding to the Chief Commissioner's comments concerning the size of loans in comparison to relevant assets or liabilities, "the value of assets have been recorded at historical values in the balance sheets provided rather than fair market value". This may well be the case however the Applicant has not produced evidence of any relevant market value at any date in support of its submission concerning the relationship between loans and assets. 70The lack of evidence as to loans between Businesses and the terms of the loans does not satisfy me as to the independence of the Businesses nor a lack of connection in the manner the Businesses were carried on.

Reference to authorities 71Mr Heyes sought to distinguish the Starr Group from Denham Constructions by reference to certain facts in Denham Constructions. Mr Heyes submitted that the distinction was that in Denham Constructions the same person was a director of several companies in a group but the boards of the corporate members of the Starr Group had different directors. As noted at [46] above there are undisputed details of commonality of directors of some of the corporate members of the Starr Group. I reject Mr Heyes' submission. 72Lombard Farms Pty Ltd v Chief Commissioner of State Revenue [2013] NSWADT 17 involved an application to review a decision of the Chief Commissioner not to make a determination under s79(1). The ADT held at first instance that s79(2) requires that in order for a determination order to be made there needs to be complete independence of, and a complete absence of any connection between the person seeking de-grouping and the other member or members of the group [35]. The decision of the ADT was successfully appealed in Lombard Farms Pty Ltd v Chief Commissioner of State Revenue [2013] NSWADTAP 42 ("Lombard Farms"). 73Mr Heyes referred to the decision of the Appeal Panel in Lombard Farms. As I understand Mr Heyes submission, in seeking to construe s79(2) so as to empower the Chief Commissioner to make a s79(1) determination in favour of the Applicant, Mr Heyes relied on paragraphs [42] and [43] in the Appeal Panel decision. At [42] it was stated that the (narrow) construction arrived at by the Judicial Member would lead to an absurd result because s79(2) would have no work to do, and at [43]: "Plainly s79(2) of the Act must anticipate and tolerate some connection between the group members because otherwise they would not be grouped in the first place." 74The Appeal Panel considered the terms of s79(2) and said at [45] "It is not any connection that will disentitle the Appellant from being de-grouped. It must be a connection in relation to the carrying on of the business" and at [48] "When one focuses on the fact that the test in s79(2) directs an enquiry to the carrying on of the businesses and not simply any connection between group members, one can see that there may be work for s79(2) to do. However, if the most casual connection in the carrying on of businesses is sufficient to disentitle an applicant from degrouping, then the scope of s 79 is extremely narrow." The Appeal Panel then said at [49] "We reject the submission that the construction adopted by the Judicial Member led to an absurd result." I find that the arguments in [42] and [43] which Mr Heyes relied on and attributed to the Appeal Panel, were submissions by the Appellant which were rejected by the Appeal Panel. 75The franchise agreements, the Terry Sargent loan, the commonality of directors and Mr John Starr's involvement in the business of the Applicant as evidenced by the minutes produced by the Applicant do not assist the Applicant in satisfying its onus to prove the Businesses are carried on independently and are not connected with the carrying on or each other Business. 76Submissions were made on behalf of the Applicant to the effect that there is no sharing of resources and no common employees between the Businesses, each entity uses separate accounting systems, payroll systems and different external accountants, there are no shared customers or suppliers between any of the Businesses and each Business has separate bank accounts at different branches with different signatories. (January letter page 2). These submissions are not dissimilar to evidence adduced in Denham Constructions at pages 420-421. However the Applicant's submissions have not been supported by evidence. Accordingly I am not satisfied that the submissions are factually accurate. 77Mr Hayes submitted that prior to the investigation by the Chief Commissioner there had not previously been a dispute between the Starr Group and the Chief Commissioner. I find that this submission, which was not supported by authority or evidence, nor by any reason as to why it should be taken into account by the Tribunal, is not relevant to these proceedings. 78Mr Heyes declined to make any submissions in relation to the period prior to 30 June 2007 that is, the whole of the 2007 financial year during which period the provisions of the 1971 Act applied. 79The difficulty for the Applicant in this matter has, from the outset, been the failure to place evidence before the Tribunal to support its submissions. In these proceedings it is not for the Applicant to make unsupported submissions and for the Respondent to prove that the decision to be reviewed is correct. The Applicant has the onus of proving its case.

Decision 80Having regard to the above findings on the material before me, the Applicant has not satisfied me that it is more likely than not that the businesses carried on by the members of the Starr Group are carried on independently of each other and that there is no connection between the carrying on of the businesses. Accordingly I am not satisfied that the decision of the Chief Commissioner under review is incorrect. 81The correct and preferable decision of this Tribunal is that the decision of the Chief Commissioner under review is affirmed. I hereby certify that this is a true and accurate record of the reasons for decision of the Civil and Administrative Tribunal of New South Wales. Registrar DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 28 April 2014

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