Toveety Maintenance Services Pty Limited v The Chief Commissioner of State Revenue

The Applicant

1. The Applicant was registered on 14 June 2007 and trades using the name Howard Recycling Services
2. John Howard was the sole director from inception until 19 March 2013 and since then he and his wife Jodie have been the only 2 directors of the company.
3. At all relevant times the shares in the Applicant have been held as to 25% each by John, Jodie, Mark and Cassandra Howard.
4. The business carried on by the Applicant is described in its Company Tax Returns as the hire of construction machinery.
5. The principal place of business is an address in Morrisset NSW and its postal address is a box office number in Wyee NSW. Its registered office is at its accountant's office in the city of Sydney.
6. It shares a common telephone number with Howard Haulage.

Haulage

1. Howard Haulage was registered on 3 November 2008.
2. At all relevant times John Howard has been the sole director of the company and he and his wife Jodie own the shares in the company equally.
3. The business of the company is described in documents provided to the Tribunal as the provision of reliable, cost efficient road transport service and the transport of heavy haulage wide loads over size and over height freight throughout Australia.
4. The registered and postal addresses for the company are the same as those for the Applicant. There appears to be no listed principal palace of business address.

Haulage Assets Pty Limited (Assets)

1. Assets was registered on 25 November 2010.
2. From inception to 19 March 2013, John Howard was the only director and since then he and his wife Jodie have been the only 2 directors of the company. John and his wife Jodie own all the shares in the company equally.

Howard Machinery Hire Pty Limited (Machinery)

1. Howard Machinery was registered on 30 June 2005.
2. From 28 June 2007 to 19 March 2013 John Howard was the sole director of the company. Since then Jodie Howard has been the sole director of the company.
3. The principal place of business of the company is the same as that of the Applicant.

Loans/Guarantees etc between the Companies

1. The Financial Reports of the companies involved are often inconsistent and do not seem to fully explain the loan arrangements in place between the parties.
2. Nonetheless they do indicate that there is a pattern of substantial inter-company loans and other financial arrangements of significance. The accounts reveal the following static outstanding amounts as inter-company loans either secured or unsecured: LOAN AMOUNT YEAR TO 30 JUNE a Haulage to Applicant $24,830 2010 b Haulage to Applicant $80,198 2010 c Applicant to Haulage $271,338 2011 d Machinery to Applicant $358,759 2012 e Applicant to Haulage $791,244 2013 f Applicant to Haulage $777,117 2013 g Applicant to Machinery $436,484 2011 h Applicant to Machinery $436,542 2010 i Applicant to Machinery $50,849 2013 j Applicant to Machinery $350,849 2013 k Machinery to Haulage $385,759 2012 l Haulage to Machinery $604,012 2013 m Assets top Applicant $344,850 2013 n Assets to Haulage $58,194 2013

1. The Loans from the Applicant to Haulage arose at least in part as a result of the need to comply with Division 7A of the Income Tax Assessment Act 1936.
2. There were in place a series of Loan Agreements between

• Haulage as Lender and the Applicant as Borrower dated 1 July 2009;
• The Applicant as Lender and Haulage as Borrower dated 1July 2011; and
• The Applicant as Lender and Machinery as Borrower dated 1 July 2010 each allowing the Borrower to call for an advance of a sum up to $1,500,000. Repayment in each case was within 5 years from the date of the Loan Agreement. In each case the Loan Agreement was signed by John Howard on behalf of both the Lender and the Borrower.

Lease and Rental Arrangements between the Companies

1. The various Financial Reports for Haulage and Machinery indicate that, aside from equipment hire which is not currently relevant, those companies paid no rent for the premises each occupied in the 3 years to 30 June 2011, 2012 and 2013.
2. The Applicant occupied premises in Morrisett NSW which it used as its principal place of business and it appears that that property was owned by John and Jodie Howard. The Applicant paid what appears to be a commercial rent under that lease.
3. It also appears to be the case that the Applicant pays the rent in respect of the commercial premises occupied by Haulage, Machinery and Assets.
4. Finally in this context Assets was a substantial borrower from third party lenders and in 2011 entered into 2 separate borrowings both for the purpose of acquiring a trailer as follows: 1. Loan from St George Bank Queensland; 2. Loan from Commonwealth Bank of Australia.
5. In respect of both loans security was provided in the form of guarantees by each of Haulage, Machinery, John Howard and Jodie Howard.

Common Business Carried on by the Companies

1. Three items in the Financial Records indicate that there were some significant intra group business dealings:

• In the 2013 year Haulage records an expense of $356,048 as equipment hire from Machinery;
• In the same year Haulage records the sum of $215,636 as a cost of sale "Hire- Haulage Assets";
• In the same year, Machinery records revenue of $576,119 ( out of total revenue for that year of $750,548) as income from the Applicant, Haulage and Assets.

1. Further, on 30 June 2012, Machinery sent an invoice to the Applicant for $152,407 for "Hire Trucks and Equipment" and on 30 June 2013, the Applicant sent an invoice to Haulage in the amount of $261,000 for "Hire of Plant and Equipment and Labour".

ISSUE

1. The sole issue for determination in this case is whether the Respondent has correctly decided not to exercise his discretion under s 79(1) of the Act so as to exclude the Applicant and Haulage from the group.

THE APPLICANT'S POSITION

1. The Applicant contends that s.79 (1) of the Act should be exercised in its favour so as to exclude the Applicant and Haulage from the group. In support of this contention the Applicant asserts in particular that:

• The Applicant and Haulage operate separate and distinct businesses with separate customers and suppliers;
• The Applicant and Haulage carry on business from different locations and do not have shared resources or equipment;
• John Howard runs Haulage and makes its decisions independently;
• Jodie Howard and Mark Howard run the Applicant and make decisions independently;
• There is no trade between the companies in question other than loans made to each other at commercial rates largely because they were unable to obtain commercial funding;
• While on paper it appears that Haulage and the Applicant share office space the reality is that the Applicant runs its business from the site at the Delta Electricity Power Station;
• Since early November 2008 when Haulage was established, John Howard has concentrated all his efforts on Haulage and Jodie Howard has concentrated all her efforts on the Applicant. Jodie Howard is now the sole director of the Applicant so as to more accurately reflect the reality of the current situation.

THE RESPONDENT'S POSITION

1. The Respondent contends that the onus is on the Applicant to establish its case to the civil standard and that it has failed to do so. In so concluding the Respondent focuses on the following aspects:

• The significant financial interconnectedness between the entities including the various loan and guarantee arrangements;
• The business dealings between the entities;
• The rent arrangements between the entities.

THE LEGISLATION

1. The key statutory provision in dispute in this case is section 79 of the Act which is worth quoting in full.
2. Section 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. 3. The Chief Commissioner cannot exclude a person from a group if the person is a body corporate that, by reason of section 50 of the Corporations Act 2001 of the Commonwealth, is related to another body corporate that is a member of that group. 4. This section extends to a group constituted by reason of section 74 (Smaller groups subsumed by larger groups). 5. A determination can be expressed to take effect on a date that is earlier than the date the determination. 6. The Chief Commissioner may by order in writing revoke a determination that applies in respect of a person if satisfied that the circumstances in which a determination may be made do not apply to the person. 7. The revocation of a determination can be expressed to take effect on a date that is earlier than the date of the determination.

THE APPROACH TO THE LEGISLATION

1. It appears to be common ground between the parties that the primary grouping provisions apply. In other words, the Applicant and the Respondent agree that there is a "group" under section 69 of the Act and that the Applicant and Haulage constitute that group. It is not necessary for me to then review those primary provisions and I also accept that a group exists for the purposes of the Act and I do not propose to consider that issue any further.
2. Having reached that point, it is for the Applicant to show that a determination should be made pursuant to s. 79(1) of the Act. The onus in this respect is on the Applicant to establish that the Applicant carried on its business independently and not connected with the carrying on of a business carried on by Haulage: Starr Partners Pty Limited v Chief Commisioner of State Revenue (2014) NSWCATAD 51 at 24
3. Whether a determination can and should be made under s.79(1) is subject to the overriding constraints imposed by s.79(2) - in particular that the Respondent (and on a review this Tribunal) can only make such a determination if satisfied that a business is "carried on independently of and is not connected with the carrying on of a business carried on by any other member of the group".
4. These words clearly require a two pronged approach. First, the Applicant needs to demonstrate to the satisfaction of the Respondent (or on review this Tribunal) that it carries its business independently of the business carried on by other members of the group most notably Haulage. Secondly, the Applicant needs to demonstrate to the satisfaction of the Respondent (or on review this Tribunal) that it carries on its business in a manner which is not connected with the business carried on by other members of the group most notably Haulage: Mead Packaging (Aust) Pty Limited v Commissioner of Payroll Tax (NSW ) 78 ATC 4164 (relating to an earlier version of the legislation which was in similar but different terms)
5. In deciding whether it is so satisfied the Respondent (or on review this Tribunal) must have regard to three matters, namely:

• 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.

CONSIDERATION

1. Having considered in detail the relevant facts and the structure of the legislation with particular attention being given to s.79(2) of the Act, it seems to the Tribunal that the following matters are critical as they go to independence and connectedness between the relevant companies.
2. First, there is the objective matter that in its tax returns for all relevant years the Applicant has disclosed that its main business activity was "the hire of construction machinery". Further, in this regard, as has been noted above, the Applicant sent an invoice to Haulage for $261,000 for "Hire of Plant and Equipment and Labour". Thus it seems that the businesses carried on by the Applicant and by Haulage are not as different to one another as the Applicant asserts. The hire of machinery seems to be a part of both businesses and it is difficult to sustain the argument that the businesses are as different and as segregated as the Applicant suggests.
3. Quite frankly this in any event may not be as critical an issue as the Applicant suggests - the legislation does not say that there is to be no grouping if the businesses are different in nature and indeed in Starr Partners and in Boston Sales and Marketing Pty Limited v Chief Commissioner of State Revenue 2014 NSW CATAD 139 ( Boston Sales), two recent decisions of this Tribunal, the different nature of the businesses involved in each case did not result in the Tribunal concluding that the relevant determination in each case should not be made.
4. Second, ownership and control of the companies in question has throughout the years in question been around John and to a lesser extent Jodie Howard. For example, John owns 50% of each of Haulage and Assets and 25 % of the Applicant as does Jodie. John has been a director of all four companies and remains a director to this day of 3 of them. Jodie is a director of all the companies other than Haulage. This is a significant level of common shareholding and directorship and this clearly is relevant : Denham Constructions Pty Ltd v Chief Commissioner of State Revenue (1998) 40 ATR 416
5. Third, although not strictly relevant it seems to me that even looking to the day to day control of the companies, there is no hard evidence to support the suggestion that day to day control is exercised by different persons such that it might be concluded that the companies operate independently. It is true that Jodie Howard gave evidence to the effect that she and her husband operated different companies and acted independently of one another but there was precious little in the way of hard evidence to support that assertion. In any event it is not at all clear that that is directly relevant.
6. Fourth, the level and extent of the inter-company loans was significant. Further, such loans were made in circumstances where, by the parties own acknowledgement, commercial lenders would not have lent. That of itself supports the view that there was a significant degree of dependence by one company on the other, at the very least for financial support.
7. Further, there was a fairly unsophisticated arrangement in place to between the Applicant and Haulage under which one of them could require the other to advance a sum of up to $1.5m and this could be triggered it seems by mere demand.
8. This type of arrangement must suggest strong dependence and connectedness between the companies. If one called on the other for funds of $1.5m, the way the documents read, the party on whom the demand is made was obliged to comply even if it had no funds with which to do so. This type of generally non-commercial arrangement can only be controlled, if control on both sides rests with the same person or both sides cooperate to ensure that demands are only made where the other side has the financial ability to make the payment. Either way it underscores the fact that there is either common control or a lack of real independence.
9. In this respect there are a plethora of authorities which recognise the relevance and importance of inter-group loans on the question of independence and connectedness: Conrad Linings Pty Limited v Chief Commissioner of State Revenue 2014 NSWSC 1020 at 54 and Lombard Farms Pty Ltd v The Chief Commissioner of State Revenue 2013 NSWADT 17.
10. Finally, in regard to financial arrangements it is relevant that there are numerous guarantees being provided by group members to other group members for no consideration. For example, Assets has taken out substantial loans from third party commercial lenders and these loans have been guaranteed by the Applicant and Haulage as well as by John and Jodie Howard. I understand that this may have been a requirement of the lender in question but that is no answer to the conundrum facing the Applicant in putting the argument that the parties in question are acting independently and are not connected in the sense referred to in the Act. Indeed the fact that a guarantee is so readily made available without question and without charge suggests that the parties were anything but independent and unconnected.
11. Fourth, there is the matter of what I might describe as the in-house lease arrangement that persists in relation to the Morrisett property. If I understand this correctly from the evidence made available, the property is owned by John and Jodie Howard, is leased by the Applicant who pays the rent and is occupied as commercial premises by Haulage, Assets and Machinery.
12. That type of arrangement may be more common that one might expect and apart from the accounting and tax issues which it may raise, there would ordinarily be no problem with such a situation. The difficulty here however is that the Applicant is trying to argue that there is genuine independence and a lack of connectedness between the Applicant and Haulage in particular and between the businesses they carry on. This becomes an almost impossible proposition to maintain in the face of a lease arrangement in which the rent for the premises which Haulage occupies is paid for by the Applicant. This situation is not improved by the fact that the rent is paid it seems to the 2 people who themselves have total control of Haulage and partial control of the Applicant.
13. Fifth, the level and extent of trade within the group but most particular between the Applicant and Haulage is not inconsequential. It clearly has relevance in the context of the independence and connectedness between the parties: Boston Sales
14. Finally, it should be mentioned that the services of Mr Ison are paid by Haulage but he apparently provides services to both the Applicant and Haulage. Again such an arrangement is most likely not uncommon with group enterprises but it is problematic in this case where the Applicant is contending that there is genuine independence and a lack of connectedness between the businesses carried on.

Conclusion

1. Overall the weight of the objective evidence points strongly to the conclusion that the businesses were not carried on independently and without connection.
2. The decision under review is affirmed. I hereby certify that this is a true and accurate record of the reasons for decision of the Civil and Administrative Tribunal of New South Wales. Registrar DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 03 July 2015