PORT AUGUSTA MEDICAL CENTRE PTY LTD v COMMISSIONER OF STATE TAXATION (SA)

Judges: Anderson J
Kelly J

Kourakis J

Court:
Supreme Court of South Australia, Full Court

MEDIA NEUTRAL CITATION: [2012] SASCFC 7

Judgment date: 16 February 2012

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73. Kourakis J

I would dismiss the appeal primarily because the business of the appellant is not substantially independent of, and is substantially connected with, the incorporated medical practices of Dr Bhola and Dr Yeung. The relationship between the appellant and the family trusts of Dr Bhola and Dr Yeung is not as clear, but I am not satisfied that the appellant has shown that its business is not connected to the businesses of those trusts. My reasons follow.

Pay-Roll Tax Act 1971 - Grouping provisions (Part 4(A))

74. Sections 18B to 18H of the Pay-Roll Tax Act 1971 (SA) (the Act) create groups of employers, or business owners, for the purposes of the assessment of payroll tax (the grouping provisions). The grouping provisions amalgamate employer entities by reference to several criteria. Most relevantly to this appeal, s 18D of the Act groups commonly controlled businesses. Section 18I of the Act provides that the Commissioner may exclude a member of a group from it, if the Commissioner is satisfied " that a business carried on by a member of a group is carried on substantially independently of, and is not substantially connected with the carrying on of, a business carried on by any other member of that group. " Relevantly, s 18I of the Act provides as follows:

" 18I Exclusion of persons from groups

• (1) Where the 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 Commissioner considers relevant, that a business carried on by a member of a group is carried on substantially independently of, and is not substantially connected with the carrying on of, a business carried on by any other member of that group , the Commissioner may, by notice in writing served on that first mentioned member, exclude that member from that group.
• (2) The Commissioner cannot exercise the power conferred by subsection (1) so as to exclude a person from a group on and from a date if that person is or was on that date a corporation which, by reason of section 50 of the Corporations Act 2001 of the Commonwealth, to be taken, for the purposes of that Act, to be related to another corporation which is a member of that group.
• (3) Despite any other provision of this Part, a notice under subsection (1) has effect according to its terms on and from the date specified in the notice (being a date that is the date of the notice or before the date of the notice) as the date on and from which the person referred to in the notice is or is to be taken to have been excluded from the group referred to in the notice.

(Underlining added) "

75. To properly construe the critical clause of s 18I of the Act, it is necessary to understand the grouping provisions which provide the context in which the section operates. It is also helpful to consider the historical and fiscal context of the Act.

76. Payroll tax was first levied in Australia by the Commonwealth in 1941 to fund the newly established national child endowment scheme. ^[1] Pay-Roll Tax Act 1941 (Cth). In 1971 the Commonwealth agreed to relinquish the tax to the States because it appeared to be the only " growth tax " available to them. ^[2] Queensland Treasury Paper – Sam Reinhardt, Lee Steele, “ A brief history of Australia ‘ s tax system ” (Paper presented at 22 ^nd APEC Finance Ministers ’ Technical Working Group Meeting, Khanh Hoa, Vietnam, 15 June 2006 http://www.treasury.gov.au.

77. Payroll tax was first introduced in South Australia by the Act in 1971. South Australia ' s largely agricultural economy had, in the previous two decades, been supplemented by substantial industrial production. Large factories employing many workers in the manufacture of motor vehicles and white goods had been established. However, business and corporate structures were still relatively simple. Professions and skilled trades were, by and large, conducted by natural persons, alone or in partnership. All of the workers engaged in a productive enterprise were generally engaged by a single entity which undertook the business. Modern organisational innovations like outsourcing parts of a manufacturing process, and engaging workers through labour hire firms, were in their infancy.

78. A tax free threshold was enacted from the commencement of the Act. ^[3] Pay-Roll Tax Act 1975 (No. 52 of 1975) (SA) s 11(3). A general avoidance provision was also enacted, ^[4] Pay-Roll Tax Act 1975 (No 52 of 1975) (SA) s 41. but initially there was no grouping scheme such as that which is in issue on this appeal. Within just four years, the Act was amended to address business structures which threatened to stunt the " growth tax. " The predecessors of the grouping provisions and s 18I of the Act were first enacted in 1975. ^[5] Pay-Roll Tax Amendment Act 1975 (SA) s 12. The 1975 amendments reflected the realisation that economic and industrial activity had quickly become more complicated than the paradigm contemplated by the Act. The grouping provisions, in effect, created fictional aggregated employers in accordance with the old paradigm. The independent business test was enacted because it was recognised that the net cast by the grouping provisions might enmesh employers which, historically, would have been taxed separately. ^[6] Commissioner of Payroll Tax (NSW) v R G Elsegood & Co Pty Ltd 83 ATC 4150 ; (1983) 1 NSWLR 223 at 229 – 230; Artistic Pty Ltd v Commissioner of State Revenue [ 2000 ] WASAT 39 at [ 98 ] – [ 99 ] . The concepts of connection and independence in s 18I of the Act evoke the business model, on which the Act was premised in which dependent or substantially connected businesses were undertaken by a single entity which engaged all of the workers employed in those businesses.

79. I turn now to a closer consideration of the provisions of the Act.

80. Section 8 of the Act renders all wages liable to payroll tax. Wages are widely defined to include any form of remuneration paid or payable to a person in relation to his or her capacity as an employee. ^[7] Pay-Roll Tax Act 1971 (SA), s 3. Section 10 of the Act imposes the tax on employers. Section 15 of the Act imposes a duty on employers to lodge monthly returns specifying the wages paid in that month. Section 11A of the Act provides for the deduction of a prescribed amount from the wages paid for the purposes of assessing the liability of payroll tax.

81. Section 18A of the Act defines business to include a trade or profession, any activity carried on for reward, and the activity of employing persons to perform work in connection with another business.

82. Section 18B of the Act groups corporations which are, by reason of s 50 of the Corporations Act 2001 (Cth) ( Corporations Act ) to be taken to be related. Holding companies and subsidiaries are related corporations for the purposes of the Corporations Act . A corporation is a subsidiary of another if it controls the composition of the Board, or is in a position to control more than one half of the available votes at a general meeting, or more than one half of the issued share capital. ^[8] Section 47 of the Corporations Act provides that a body corporate is controlled by another if the other corporation can appoint or remove all, or the majority, of the Directors of that body. For the purposes of determining whether a body corporate is a subsidiary, any shares held, or powers exercisable, by the other body in a fiduciary capacity are treated as not held or exercisable by it. ^[9] Corporations Act 2001 (Cth), s 48(2).

83. Because s 18I(2) of the Act expressly precludes the exclusion of a corporation which is a related corporation, it follows that related corporations may be grouped for the purposes of payroll tax assessment even if their businesses are substantially independent of, and not substantially connected with, each other.

84. Section 18C of the Act groups employers who engage the same employees in their respective businesses. Such a group might of course, comprise more than two employers. Even though the employment of common employees suggests a degree of connection and interdependence, the group so formed might nonetheless be disaggregated by s 18I of the Act, if the degree of connection or interdependence is not substantial.

85. Section 18D of the Act forms groups of just two businesses owned by entities which are " controlled " by the same person or persons. Section 18D(1) of the Act expressly excludes from the operation of s 18D, any two businesses which are owned, legally and beneficially, by the same person or persons, or which are held by a trustee or trustees on the same trust. It is readily apparent that in such cases, the employees engaged for the purposes of those businesses are employed by the same employer. There is therefore no reason to group them. However, it is not obvious to me that a grouping of the businesses would have caused any mischief necessitating the enactment of s 18D(1) of the Act. Perhaps it was feared that, but for the enactment of s 18D(1) a single employer with diverse businesses might be cleaved into two separate employers by s 18I of the Act.

86. Section 18D(2) of the Act groups together any two businesses over which the same person or persons have a controlling interest, as defined in s 18D(3). Section 18D(3) of the Act, in its subparagraphs (a) through to (e), specifies five circumstances which are sufficient to establish a controlling interest. In explaining the defining criteria of s 18D(3) of the Act, I will use the singular to refer to both those cases where a single person exercises the specified form of control or a plurality of persons does so. My references to a corporation are to those which carry on a business.

87. Subparagraph (a), provides that a person has a controlling interest in a business if the directors, or some of the directors holding a majority of the voting power, in the corporation are " accustomed or under an obligation, whether a formal or informal to act in accordance with " that person ' s directions.

88. Subparagraph (b) provides that a person has a controlling interest in a business if he or she, directly or indirectly, may control, or substantially influence, the exercise of 50 per cent or more of the voting power of the corporation ' s shares.

89. Subparagraph (c) deals with controlling interests in partnerships and need not be further considered here.

90. Subparagraph (d) provides that a person who is a beneficiary in respect of 50 per cent or more of the value of the interests in a trust, has a controlling interest in any business carried on by that trust.

91. Subparagraph (e) provides that a person has a controlling interest in a business if that person is the sole owner of the business, whether or not as a trustee of a trust.

92. Several of the forms of control specified in s 18D(3) of the Act are further extended by other subsections of s 18D. Section 18D(4) of the Act provides that a corporation which has a controlling interest in a business, also has a controlling interest in a business in which a related corporation has a controlling interest.

93. Section 18D(5) of the Act provides that any person who holds 50 per cent or more of the value of the interest of a trust, also controls any business controlled by the trustee ' s of that trust by reason of s 18D(3) of the Act.

94. Section 18D(5) of the Act appears to multiply the affect of s 18D(3)(d). The joint operation of those two provisions can perhaps be best explained by example. If C Pty Ltd holds 50 per cent of the shares in A Pty Ltd and 50 per cent of the units in a trust of which B Pty Ltd is the trustee, s 18D(3)(b) and (d) of the Act operate to constitute businesses " A " and " B " as a group. If C Pty Ltd is the trustee of unit trust " C " , but does not conduct a business, then " A " and " B " are the only members of the group. However, if D Pty Ltd, as trustee of the " D " unit trust, holds 50 per cent of the units in trust C, then D Pty Ltd, pursuant to s 18D(5) of the Act, will be taken to have a controlling interest in businesses " A " and " B " . If C, in fact, also operates a business, then D Pty Ltd will control the following groups: A and B, A and C and B and C. The groups might then also be aggregated in to a single group pursuant to s 18F of the Act.

95. Section 18D(6) of the Act allows for businesses linked by a chain of controlling interests to be grouped. That subsection provides that where a person has a controlling interest, pursuant to s 18D(3) of the Act, in a business and the entity carrying on that business has itself a controlling interest in another business, then the first mentioned person also has a controlling interest in that other business.

96. Section 18F of the Act allows for the amalgamation of otherwise discreet groups. It provides that where a person is a member of two or more groups, all of the members of those groups constitute, for the purposes of the Act, one group. Section 18F of the Act is necessary to avoid the multiple imposition of payroll tax with respect to a single employee because the business in which he or she is employed is a member of more than one group. However, it is a necessary consequence of its operation, that groups constituted by s 18F of the Act may include businesses which are substantially independent of, and not connected to at least some of the other members of the group. Moreover, that business will not be removed from the group, pursuant to s 18I of the Act, unless it is not relevantly related to " any other member of the group. "

97. Section 18H of the Act places a beneficiary of a discretionary trust, in the same position as a beneficiary entitled to 50 per cent or more of the value of the interests in a trust.

The groupings in this case

98. The trial Judge identified the corporate members of the group constituted in this case and summarised their relationship in those paragraphs reproduced in paragraph [ 14 ] of the judgment of Anderson J.

99. The constitution of the corporations as one group has not been challenged. It is not clear from the material before this Court how the Commissioner constituted the group. However, applying the provisions of s 18D of the Act, it can be seen that Dr Bhola controlled PAMC and Bhola Pty Ltd (Bhola), pursuant to s 18B(3)(b), by reason of his 50 per cent shareholding in those two corporations. They therefore constituted a group. Dr Bhola, by reason of his 50 per cent shareholding, also controlled PAMC and Guyram Pty Ltd (Guyram). They therefore also constituted a group. Those two groups, each comprising one business, PAMC, in common, are amalgamated pursuant to s 18F of the Act (the Bhola group).

100. The 50 per cent unit holding of Guyram in the PAMC unit trust also gives Guyram a controlling interest in the business of PAMC. The relevant group which is thereby constituted is one comprising the business of PAMC and the investment business of Guyram, pursuant to subparagraphs (d) and (e) s 18D(3) of the Act. Guyram does not have a controlling interest in any other business. The 50 per cent unit holding of Guyram in the PAMC unit trust is therefore an additional reason to group PAMC and Guyram, which are then in turn grouped, pursuant to s 18F of the Act, with Bhola and PAMC by reason of the common membership of PAMC. Dr Bhola ' s directorship of the three corporations in the Bhola group is not sufficient to group any two of them because there is no evidence that the other directors of those corporations were obliged, or accustomed, to act in accordance with Dr Bhola ' s instructions as required by s 18D(3)(a).

101. By analogous reasoning the businesses of Yeung Pty Ltd, PAMC, and Vay Pty Ltd (Vay) formed another group (the Yeung Group).

102. PAMC ' s membership of both the Bhola and Yeung groups enlivened the operation of s 18F(1) of the Act merging them into a single group comprised of all of the members of the two smaller groups (the PAMC group).

103. Section 18I of the Act clearly contemplates that businesses grouped pursuant to the grouping provisions might, in fact, operate independently of, and without any substantial connection, to other businesses in the group. It does not follow however that a grouping criterion, will never, of itself be sufficient to show a substantial interdependence or connection between the businesses.

104. The appellants submitted that the fact that Guyram and Vay each held a 50 per cent interest in the PAMC unit trust, could not be relied on to show a dependence or connection between their respective businesses and the business of PAMC. That may be accepted as a submission in a case where the group is constituted by s 18D(3)(d) of the Act, because a trust entitlement to a distribution, in itself, does not prove any connection between the underlying businesses. But it does not follow that, other grouping criteria, such as, for example, exercising influence over the voting decisions of directors, can not also establish a substantial connection and dependence between the grouped businesses. Be that as it may, the actual distribution of income in accordance with the trust entitlement transcends the mere holding of an interest, which is the criterion for the grouping, and can properly be considered in the application of s 18I of the Act. Even more importantly, the way in which the money so distributed is used may be a strong indicator of interdependence and is a different consideration from the bare entitlement to receive it. It is one thing for a beneficiary to merely receive a distribution as an accretion to its assets, or for further distribution, and quite another to make use of that distribution in its business. If the distribution is used in the business of the beneficiary, the importance of the distribution to the successful operation of the beneficiary ' s business, and the particular way in which it is used, may show a substantial connection between the businesses.

105. With these considerations in mind, I proceed to apply s 18I of the Act to the circumstances of the single group constituted pursuant to s 18F of the Act in this case.

106. I turn first to the relationship between PAMC and the Bhola and Yeung incorporated medical practices. In my view, the critical question is not the extent to which Dr Bhola and Dr Yeung controlled the business of PAMC, but the extent to which PAMC ' s business was carried on in a way which was dependent on, and connected to, the businesses of their incorporated medical practices. True it is that an investigation of the extent of the control exercised by Dr Bhola and Dr Yeung over PAMC will inform the question of the degree of connection and dependence. However, it is the latter, and not the former, which is the statutory test.

107. Counsel for PAMC emphasised before the trial judge, and on appeal, the extent to which all of the medical practitioners in the medical centre actively participated in the process of making decisions affecting the operation of the medical centre. It is to be remembered however that the business of PAMC is the provision of support services to the medical practitioners who conducted their own businesses within the premises leased and maintained by PAMC. The agendas and minutes of the regular meetings held between PAMC and the doctors were received into evidence. The minutes and agendas are entitled " Practice Meetings " . These were not meetings of the shareholders, directors or managers of PAMC alone. They were joint meetings between PAMC and its clients, medical practitioners who were the owners and operators of their own individual medical practices. They were meetings which were conducted in the context of the professional relationships between the medical practitioners, including Dr Yeung and Dr Bhola, and the contractual matrix of the service agreement which bound PAMC and all of the medical practitioners. The way in which decisions were made in those meetings shows the co-operative way in which PAMC and the doctors combined to provide medical services from the centre, but it says very little about the management of the business of PAMC. There is no evidence that the medical practitioners played an active part, for example, in the engagement or dismissal of PAMC ' s employees, or their performance management. Nor is there any evidence that the medical practitioners were actively engaged in the choice of premises from which the practice would operate, the terms on which the premises would be leased or acquired, or the choice of support systems used by PAMC.

108. On the other hand, the evidence did establish that Dr Bhola and Dr Yeung had a strong preference to provide medical services from a medical centre serviced by PAMC. Dr Bhola and Dr Yeung, for that very reason, established a practice in Adelaide with PAMC as the service provider when they moved their family residences from Port Augusta to Adelaide. Their preference for that form of practice is no doubt in part attributable to the collaborative and cooperative environment of the Port Augusta clinic. That environment was established through the medium of PAMC, and by its managers whom were personally selected by Dr Bhola and Dr Yeung. Their preference is very probably also attributable to the profitability of the practice model provided by PAMC. Very importantly, when Dr Bhola and Dr Yeung decided to move their families and to practice in Adelaide, PAMC followed them. PAMC established and operated an Adelaide medical centre from which the incorporated medical practices of Dr Bhola and Dr Yeung, together with other doctors, provided medical services.

109. Moreover, even though it suited their family and personal interests to reside in Adelaide, Dr Bhola and Dr Yeung continued to visit Port Augusta and provide services from the centre operated by PAMC. I infer that they did so because they were anxious to ensure that the Port Augusta clinic continued to operate smoothly, and that PAMC continued to operate profitably.

110. In my view, substantially for the reasons given by Anderson J in [ 25 ] the clause " is carried on substantially independently of, and is not substantially connected with " should be applied as a compound expression describing the nature of the business relationship between the entities. Insofar as the two limbs of the clause focus on different aspects of the relationship between the entities, in my view, the former focuses on control of the management of the businesses and the latter on the relationship between the business activities themselves. ^[10] The converse has been suggested in Crusher Holdings Pty Ltd v Commissioner of Taxes (NT) 94 ATC 4646 ; (1994) 117 FLR 485 at 494; Mead Packaging (Aust) Pty Ltd v Commissioner of Pay-Roll Tax (NSW) 78 ATC 4164 , 4172. Cf John French Pty Ltd v Commissioner of Pay-Roll Tax [ 1984 ] 1 Qd R 125 at 141. The circumstances mentioned in the proceeding two paragraphs in my view establish a substantial connection and interdependence between the incorporated medical practices, Bhola and Yeung, and PAMC. The substantial managerial interdependence of the businesses is demonstrated by the way in which PAMC expanded its business to support their medical practices in Adelaide and by the way in which Dr Bhola and Dr Yeung managed their medical practices so as to support the continuing profitability of PAMC ' s operation in Port Augusta. The business of PAMC is also substantially connected to the business of the incorporated medical practices because PAMC has little capacity to attract clients and business outside of the medical centres in which Dr Bhola and Dr Yeung practice. ^[11] Cf Commissioner of Stamps v Garret F Hunter Pty Ltd 97 ATC 4787 ; (1997) 69 SASC 275 at [ 567].

111. The finding of a substantial connection and dependence between PAMC and the incorporated medical practices is sufficient to deny the application of s 18I of the Act because it means that PAMC cannot show that it is not relevantly related to " any other member " of the group. Nonetheless in order to determine all of the issues raised on this appeal I turn next to the connections between PAMC on the one hand and Vay and Guyram on the other.

112. The evidence is that a substantial proportion of the income of the trust companies was received from PAMC. That fact, in itself, to my mind is not decisive. If the money distributed by PAMC to Vay and Guyram was simply further distributed by those entities as trustees to family members, then there would be little connection, if any, between the investment businesses conducted by Vay and Guyram and the funds distributed to them by PAMC. On the other hand, if the investment activities and business conducted by Vay and Guyram in the relevant period were, substantially, the investment of distributions made from PAMC in the relevant period, then there would, in my view, be a substantial connection.

113. However, the evidence does not allow for an assessment of the strength of that connection. There is no clear evidence of how the distributions were in fact deployed. The financial records of Vay and Guyram were not put into evidence. In my view the fact that PAMC was managed so as to maximise its profitability does not carry much weight in establishing the required proximity between it and Vay and Guyram. All private business proprietors strive to maximise profit so that their owners, shareholders or beneficiaries will benefit. On the other hand, there is some significance in the ownership of the medical practice premises in Port Augusta by Vay and Guyram. Vay and Guyram have, by so investing their funds, supported the business of PAMC by ensuring that it has a sympathetic landlord. That investment indicates some connection between the businesses, and some managerial dependence, but I acknowledge that the degree of connection and dependence, may not, necessarily, be substantial. However, the appellant carries the onus of showing that the businesses were carried on substantially independently of, and were not substantially connected to, each other. Given my conclusion in [ 112 ] above, it is strictly not necessary to decide whether the appellant made out a case for exclusion based on the relationship between PAMC and the family trusts, but I record that I am not persuaded that the trial Judge erred in finding that the appellant failed to discharge its onus.