TASTY CHICKS PTY LTD & ORS v CHIEF COMMISSIONER OF STATE REVENUE (NSW)

Members:
Gzell J

Tribunal:
New South Wales Supreme Court

MEDIA NEUTRAL CITATION: [2009] NSWSC 1007

Decision date: 25 September 2009

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Gzell J

1. Minas Souris, the fourth plaintiff, and his wife, Jenny Souris, the fifth plaintiff, conducted a business called M & J Chickens in partnership. The partnership of M&J Souris processed and supplied chicken meat products to wholesale customers such as restaurants and takeaway shops as well as to large customers such as Qantas.

2. The defendant, the Chief Commissioner of State Revenue, grouped M&J Souris with Tasty Chicks Pty Limited, the first plaintiff, Angelo Transport Pty Limited, the second plaintiff and Souris Holdings Pty Limited, the third plaintiff, for the purposes of the now repealed Pay-roll Tax Act 1971 and for the purposes of the Taxation Administration Act 1996.

3. Tasty Chicks provides secretarial, accounting, sales, marketing and clerical services. Victoria Phylactou and her husband Soterakis Phylactou, known as Sam, are its sole directors and shareholders. Its major client is M&J Souris.

4. Michael Souris, the son of Minas and Jenny Souris, owns and operates Angelo Transport. It has a fleet of temperature-controlled vehicles for transporting chicken or meat. Its major customer is also M&J Souris.

5. Minas and Jenny Souris are the sole directors and shareholders of Souris Holdings. It owned premises at Marrickville, portions of which were separately let to M&J Souris, Tasty Chicks and Angelo Transport.

6. Tasty Chicks grew out of Victoria Phylactou's relationship with Minas and Jenny Souris. In the early 1980s she worked in their delicatessen at Wiley Park after school and at weekends.

7. After she left school, Victoria Phylactou worked elsewhere for a year or so and then returned to work for Minas and Jenny Souris at Marrickville, by which stage their business consisted of the processing and wholesale supply of chicken meat. Victoria Phylactou took over the administration and paper work to which Jenny Souris attended as well as visiting customers and doing deliveries.

8. The operations expanded and Victoria Phylactou required assistance. In 1991 she established Tasty Chicks of which she and a friend, Harry Halioris, were the only shareholders and directors. Thereafter Tasty Chicks provided secretarial and administrative services to M&J Souris.

9. Minas Souris and Chris Phylactou, Sam Phylactou's brother, had started a business of selling chicken meat at the Flemington markets on a Friday. The business was called Market Chicks. Tasty Chicks undertook the administrative work for that business. It was ultimately taken over by Chris Phylactou and subsequently sold.

10. Stacey Tripolitsiotis replaced Harry Halioris as the other shareholder and director of Tasty Chicks. She introduced a customer, Delta Refrigeration Services, for which Tasty Chicks provided administrative services until Stacey Tripolitsiotis left Tasty Chicks.

11.

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Stacey Tripolitsiotis was replaced by Steve Diacopoulos as the other director and shareholder of Tasty Chicks. When he resigned, Victoria Phylactou was for some time the only shareholder and director.

12. Sam Phylactou had left Barclays Bank and joined Tasty Chicks as an employee. He later became its co-director and shareholder.

13. Victoria and Sam Phylactou and Chris Phylactou and his wife, Athanasia, went into business to set up a stall at Flemington Markets on a Saturday called Saturday Chicks. Tasty Chicks did the administrative work for that business. It was also subsequently sold.

14. Tasty Chicks provided administrative services to Cavos Products, another customer independent of Souris interests, for about ten years. Work for that company is now done on a sporadic and an on-call basis.

15. Tasty Chicks has also provided initial assistance at no charge to a business called Exotic Cuisines owned by Chris and Athanasia Phylactou, assisting them in setting up accounting and payroll systems, obtaining necessary licences and attending to GST registration.

16. Tasty Chicks also provided administrative services to D & H Levonis before the business closed in 2008. The services were the same as those provided by Tasty Chicks to Pelagia Investments Pty Ltd, a company in which Souris interests held 51%, the remaining 49% interests being held by Mr and Mrs Levonis. It trades under the management of Mr and Mrs Levonis as M&J Chickens Queensland. It has offices in Brisbane and Townsville.

17. Townsville staff send information to the Brisbane staff who send information to Tasty Chicks in Sydney. Tasty Chicks provides Pelagia Investments with payroll services, paying invoices from suppliers and contacting debtors. Product orders are taken in Queensland by Pelagia Investments staff. The information is fed into a computer system accessible by Tasty Chicks' staff in Sydney. On a needs basis Sam Phylactou visits Queensland to sort out problems.

18. Minas and Jenny Souris operate a business in Victoria under the name M & J Chickens - Victoria. It is treated separately from M & J Chickens. The administrative services performed by Tasty Chicks for Pelagia Investments are performed also with respect to the M & J Chickens - Victoria business.

19. Tasty Chicks also provides administrative services to Angelo Transport. This involves wages administration; superannuation administration; taxation payments for the company and its employees; end of financial year paper work; workers compensation paper work; registration of vehicles; insurance of business; mechanical repairs of vehicles; chasing drivers to get traffic or parking fines sent to the correct licensee; organising training for drivers; organising uniforms for drivers; quality assurance training; preparing letters of employment and checking the currency of licences.

20. Driver training is necessary because of the need for temperature control of chicken meat stored prior to transport and during transport. Uniforms for drivers do not bear any logo but caps branded with the logo of the business for whom the transport is undertaken are worn by the drivers.

21. The business of Tasty Chicks is controlled by Victoria and Sam Phylactou. No one else is involved in the management of the business.

22. Minas Souris has occasionally lent funds to Tasty Chicks. They are repaid as soon as possible from Tasty Chicks' cash flow and rarely remain outstanding for more than 12 months. Minas and Jenny Souris provided a guarantee when Tasty Chicks obtained an overdraft when Victoria and Sam Phylactou's house burnt down.

23. The office of Tasty Chicks is on the first floor of the Marrickville premises. A ground floor entrance to the stairs to the office is separate from the entrance to the ground floor office of M&J Souris. The office of Tasty Chicks is exclusively in its possession. The premises are leased from Souris Holdings at $575 per week subject to an annual increase of 5% and market rent reviews every five years.

24. Tasty Chicks attends to orders for chicken products of M & J Chickens. Tasty Chicks' staff take telephone calls and respond to facsimiles and emails. They prepare a packing slip for each order that is sent to the

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processing plant of M&J Souris directly below by a basket and string. When orders are made up by M&J Souris staff, the packing slips are returned to the Tasty Chicks office. Sometimes they are changed because the precise quantity of chicken meat has not been processed. Tasty Chicks' staff create new packing slips for those that have been altered and raise invoices from the packing slips. They also produce labels for boxes. Tasty Chicks' staff then enter the invoices in the debtors ledger maintained for M & J Chickens.

25. Payment for M & J Chickens' products was received in cash, by electronic funds transfer, or by cheque. Cash and cheques are regularly collected by the drivers transporting the product. They deliver the cheques or cash to Tasty Chicks' office. Tasty Chicks' employees check a receipt against the invoice and make an entry in the debtors ledger to reflect payment. The moneys are then banked.

26. M & J Chickens' staff send invoices from creditors to Tasty Chicks' office for processing. Prices are checked against delivery dockets and supplier invoices and a list of creditors is prepared which forms part of the daily report by Sam Phylactou to Minas Souris. Once approval has been received from Mr Souris, cheques are prepared for his signature. Sam Phylactou has authority to write cheques for Pelagia Investments subject to the instructions of Mr and Mrs Levonis.

27. So far as Angelo Transport is concerned, Michael Souris and Victoria Phylactou have authority to write cheques and to arrange for electronic funds transfers upon approval by Michael Souris.

28. Tasty Chicks' staff keep debtors and creditors ledgers for each customer from which are generated reports of debtors, creditors and the cash position.

29. Tasty Chicks arranges for payment of the monthly or weekly payroll of employee wages for all its customers. The payroll is prepared from time sheets and other electronic monitoring in each location, which are forwarded to Tasty Chicks.

30. Shortly after Sam Phylactou left Barclays Bank and joined Tasty Chicks, Minas Souris approached him and Victoria Phylactou asking for marketing assistance. He said M & J Chickens was doing business with Qantas and he did not know anything about the way big companies did business. He said M&J Souris had been asked to tender for the supply of product to Qantas, Spotless and the State Government in relation to its contract with prisons and hospitals. He had been given enormous documentation and did not have a hope of working through it. Victoria and Sam Phylactou agreed to prepare the paper work for M&J Souris on the normal cost plus margin basis.

31. Tasty Chicks had its own equipment in its office. M&J Souris had computer equipment in its processing plant. Tasty Chicks has recently spent approximately $250,000 on new computer equipment and software licences to make its operation more efficient. Finance was obtained from St George Bank Limited under commercial hire purchase or leasing agreements.

32. On a daily basis, Sam Phylactou provided Minas Souris with financial reports including cash flows and lists of payments due to be made by M&J Souris. Minas Souris made the decision as to the order in which payments were to be made. Victoria and Sam Phylactou had the authority to sign cheques on behalf of M&J Souris but only when Minas Souris was not available. Electronic funds transfers could be made by Victoria and Sam Phylactou and two other members of Tasty Chicks staff upon authorisation from Mr Souris.

33. Occasionally Minas Souris made interstate trips to meet with employees of M&J Chickens - Victoria and Pelagia Investments. When he did, Sam Phylactou usually accompanied him because of Minas Souris's lack of fluency in the English language and his need for financial assistance.

34. Tasty Chicks charges its customers on a cost plus margin basis. Sam Phylactou estimated that 45% of Tasty Chicks' costs were for work for M & J Chickens in New South Wales; 20% were for M & J Chickens - Victoria; 30% were for Pelagia Investments; 4% were for Angelo Transport and 1% were for 10 independent customers.

35. Victoria Phylactou was given a precedent deed of agreement by a non-lawyer. She did not discuss it with a lawyer. Each year

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the precedent was used to create a deed of agreement with Tasty Chicks' customers for the forthcoming year. The deeds of agreement provided that Tasty Chicks would be paid, weekly in arrears, a management fee negotiated from time to time but in the absence of specific agreement, a sum equal to the total expenditure incurred by Tasty Chicks in providing the services to its customer plus a margin of 6%. Each year Tasty Chicks negotiated the level of cost that it would charge. In the case of M & J Chickens, this negotiation was with Minas Souris.

36. The first time Victoria Phylactou took legal advice with respect to the deeds of agreement was in preparation for these proceedings. Since that advice, the precedent deed of agreement has not been used by Tasty Chicks.

37. The deeds of agreement between Tasty Chicks and M & J Chickens provided that Tasty Chicks and its employees should faithfully and to the best of their skill and ability conduct and manage M & J Chickens' business as Tasty Chicks should direct and they should use their best endeavours to promote and improve the same. Tasty Chicks covenanted that it and its employees would not during the period of Tasty Chicks' employment engage in or be interested in, financially or otherwise, any business of a similar nature to that carried out by M & J Chickens. Tasty Chicks was subject to such orders and directions as might be given to it by M & J Chickens from time to time all of which orders and directions Tasty Chicks should promptly and faithfully obey, observe and comply with.

38. The deeds of agreement provided that Tasty Chicks should have authority to draw against a bank account of M & J Chickens for petty cash and wages in respect of staff as well as its own remuneration. Tasty Chicks had, subject to the directions of M & J Chickens, the general management of all persons employed in or about the business of M & J Chickens provided that it could not dismiss without cause or increase wages without the consent of M & J Chickens except in accordance with award increases.

39. Those provisions in the deed of agreement were honoured in the breach rather than the observance. M&J Souris paid an amount each month into Tasty Chicks bank account to cover the monthly amount of the management fee. Tasty Chicks and its employees did not manage the business of M&J Souris. The latter had its own employees managed by Minas and Jenny Souris. Tasty Chicks provided administrative services to M&J Souris. M&J Souris did not exercise any restraint of trade against Tasty Chicks and its employees. Victoria and Sam Phylactou commenced the Saturday Chicks business without seeking any approval from M&J Souris. Victoria and Sam Phylactou conducted the business of Tasty Chicks in providing services to M&J Souris without orders or directions from M&J Souris as to the manner in which those services would be provided. Tasty Chicks did not draw against a M & J Chickens bank account for petty cash, wages and its remuneration. Victoria and Sam Phylactou had authority to sign cheques and to make electronic funds transfers only when Minas Souris was not available. Tasty Chicks did not exercise general management over the employees of M&J Souris.

40. Deeds of agreement in similar terms were executed between Tasty Chicks and Angelo Transport. The annual negotiation as to costs was carried out on behalf of Angelo Transport by Panos Phillis, the external accountant for Tasty Chicks, M&J Souris and Angelo Transport.

41. When Michael Souris left school he worked for a brief time in the business of M & J Chickens. He was not interested in that business. He was interested in the transport industry.

42. Angelo Transport was then owned by Angelo Hlentzos and it provided transport services for M & J Chickens. Michael Souris thought the business was not operating to its full potential. It had about eight vehicles at the time. Michael Souris acquired the business by taking over its liabilities. The company now has a fleet of refrigerated trucks and transports product to Canberra, Newcastle, Port Macquarie, New South Wales Central Coast, Coffs Harbour, Tamworth, Armidale, Hunter Valley, Dubbo and Parkes. Its vehicles are all under lease finance and turned over at regular

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intervals. There are no personal guarantees or security given to the leasing companies.

43. Drivers are trained on aspects of refrigeration, how to run the truck and how to monitor the temperature. Angelo Transport now has 20 vehicles ranging in size from two to nine tonnes. As the business of M & J Chickens grew and required more transport, Michael Souris was able to increase the size of his business.

44. Neither Minas nor Jenny Souris put any money into Angelo Transport. When asked whether he discussed Angelo Transport with Michael, Minas Souris said "we live in the same house". He said they discussed several issues but did not discuss the finances of Angelo Transport.

45. M & J Chickens was the major customer of Angelo Transport. It does service a few independent meat-processing companies like Blackforest Small Goods, Mastercut Gourmet Meats and Andrew's Meats. It was put to Michael Souris that they accounted for less than 1% of Angelo Transport's business. He said he was not sure of the exact percentage but it was small value. A comparison between the fees paid by M & J Chicken to Angelo Transport and its total transport fee receipts establishes this proposition.

46. Angelo Transport employed 14 drivers engaged principally in loading and unloading goods into vans and trucks, maintaining the vehicles and ensuring the requisite standards of hygiene and food safety. Apart from entering the cool room to pick up the boxes of products to be carried, employees of Angelo Transport do not enter the processing plant.

47. Angelo Transport leases portion of the premises at Marrickville for parking vehicles. He uses part of the downstairs office of M & J Chickens connected to the loading dock. The current rental paid to Souris Holdings by Angelo Transport is $10,510 per month.

48. Michael Souris is the sole director and shareholder of Angelo Transport.

49. For M & J Chickens, delivery instructions are picked up at 4.30 am. They consist of a list of customers, their addresses, the stock to be delivered and the invoices. Michael Souris then organises loads into various trucks to maximise the efficiency of runs. Stock is loaded onto steel trolleys left in the cool room. When the driver comes to pick up the stock, invoices are ticked one by one and the stock is loaded into the truck. Drivers have a log to fill out and they need to return crates to M & J Chickens at the end of the run.

50. It is important that drivers record temperatures at the point of delivery and keep data on a form to make sure the temperature is correct all day. Angelo Transport does 300 to 400 deliveries per day.

51. Angelo Transport has a St George Bank overdraft of $100,000 guaranteed by Minas and Jenny Souris and secured over their house.

52. Angelo Transport vehicles carry advertising of M & J Chickens on the side of the trucks. If carrying for another customer, Michael Souris is happy to include its advertising as well.

53. Angelo Transport did not advertise and had no telephone number listed in the yellow pages or the white pages. Michael Souris gives his mobile number to people for whom he provides transport services. He lives with his parents and conducts most of his business from home.

54. Gerard Weedmore, a senior compliance officer in the Office of State Revenue, in company with another officer, conducted an interview of Mr Phillis in the Tasty Chicks' office. As a result, Mr Weedmore came to a number of conclusions.

55. He said there was one payroll system for the group of M&J Souris, Souris Holdings, Tasty Chicks and Angelo Transport and that Victoria Phylactou was the only person who used the software.

56. Victoria Phylactou refuted this conclusion and I accept her evidence. She said a number of Tasty Chicks staff were trained to use the payroll administration software. At no time had she sole control of it, as she did not work fulltime it would seriously hamper the efficiency of the services provided by Tasty Chicks if she was the only person who had access to the software.

57. Mr Weedmore concluded that Victoria Phylactou had been given authorisation to process payments on each of the bank accounts of the group to enable weekly pays.

58.

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The limited authority to make such payments given to Victoria Phylactou for this purpose has been described above.

59. Mr Weedmore concluded that loans existed between each of the businesses in the group.

60. The balance sheet for M & J Chickens included as current assets or current liabilities loan accounts for Souris Holdings, Angelo Transport and Tasty Chicks. Loan accounts for other members of the group appeared in the balance sheets of each member of the group. None of the witnesses cross-examined with respect to these accounts could explain them.

61. The balances of the loan accounts were in relatively small amounts in comparison with the turnover of the members of the group. If the accounts were drawn on an accruals basis and income and expenses were adjusted to include items earned or incurred but not paid by the end of the accounting period, the asset or liability resulting from such an adjustment could be reflected in current assets and current liabilities as debtors and creditors or in loan accounts if the debtors or creditors were recurrent. That may be the explanation for the loan accounts in this case.

62. Mr Weedmore concluded that the cost of the new computer system of Tasty Chicks was to be spread across the group over five years.

63. Victoria Phylactou said that to the extent that this statement implied that the customers of Tasty Chicks would contribute directly to the cost of the computer system used in the business, it was incorrect.

64. Mr Weedmore concluded that the activities of Tasty Chicks included debt recovery for other group members and maintenance of ISO standards and Halal accreditation.

65. Tasty Chicks' debt collection activity has been described above. With regard to ISO standards and Halal accreditation, Victoria Phylactou said that Tasty Chicks' role was confined to providing advice with regard to these matters. Tasty Chicks did not assume any responsibility and did not play any part in how the advice or recommendations were implemented by M&J Souris or any similar company. I accept that evidence.

66. Mr Weedmore concluded that Tasty Chicks organised recruitment for the group with the final approval needed by Minas Souris.

67. Victoria Phylactou said that Tasty Chicks very rarely was involved in recruitment for M & J Chickens, Angelo Transport or any other customer. She said that on a couple of occasions she had been asked to place an advertisement in newspapers for M & J Chickens advertising for staff. I accept that evidence.

68. Mr Weedmore concluded that Angelo Transport had only one major customer being M & J Chickens. The financial statements showed that over 99% of its income was derived from M & J Chickens.

69. This was so. Michael Souris said he had been developing business with other companies independent of M & J Chickens and it was his intention to develop his business. He had looked at transporting for Redlea Chickens to Queensland but he needed 10 pallets a day business to cover the costs of the driver, fuel and van costs. He said at this stage it was not economically viable for Angelo Transport to do this but he is working on developing the business down the track.

70. Michael Souris said he had also given consideration to taking over the transportation for M & J Chickens Queensland. He said M&J Souris used JAT Transport to send goods to Queensland. The arrangement had limitations because M & J Chickens needed to organise its schedules to fit with JAT Transport and that could sometimes be inflexible. On the other hand, Angelo Transport could be far more flexible and that should benefit M & J Chickens as well as giving Angelo Transport the opportunity to expand its business.

71. If Angelo Transport carried M & J Chicken products to Queensland, the trucks could bring products from Queensland manufacturers such as Pelagia Investments back to New South Wales. Michael Souris said he had had a number of initial discussions with contacts in Queensland and with his parents. He said he had also asked Mr Phillis to look in detail into the financial feasibility of the proposal. I accept that evidence.

72. Mr Weedmore concluded that M & J Chickens was researching a new line of stock

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that involved preparing chickens using marinades etc. If this range proved successful in the market, the concept would be shared with other chicken wholesalers in the group.

73. There are no other chicken wholesalers in the group.

74. In a State tax audit report it was said that calculations of the management fees paid to Tasty Chicks were based on the expense budget of it and M & J Chickens plus a certain percentage on the total expense budget for the financial year. It stated that the budget preparations were done by Tasty Chicks with the help of Mr Phillis and with Minas Souris's approval.

75. Victoria Phylactou said that Mr Souris did not approve the budgets for Tasty Chicks or have any input into what the various line items were. She said that she and Sam Phylactou prepared the budgets for expenses and income for their business on an annual basis with the help of Mr Phillis.

76. Victoria Phylactou said that while it was true that those budgets formed the basis for annual negotiation, once the management fee was agreed for the following year, there was no variation to it. She and Sam Phylactou were responsible to ensure that their expenses were covered by the management fees negotiated. I accept that evidence.

77. The report said that on Tasty Chicks' voicemail, when one was put on hold, an advertisement or promotion of various products of M & J Chickens was heard.

78. Victoria Phylactou said the telephone number to which reference was made in the report was that of M & J Chickens. The Telstra online white pages confirm that to be so.

79. In a recommendation that Tasty Chicks not be excluded from the group, it was stated that while there did not seem to be any sharing of customers between Tasty Chicks and M & J Chickens, M & J Chickens distributed products on behalf of Tasty Chicks.

80. Victoria Phylactou disputed this statement. She said M & J Chickens did not distribute any products on behalf of Tasty Chicks. I accept that evidence.

81. It was also stated in the recommendation that M & J Chickens pays a management fee to Tasty Chicks but Angelo Transport does not.

82. Michael Souris denied this statement. Angelo Transport did pay a management fee to Tasty Chicks. I accept that evidence.

83. In a letter discussing findings for the rejection of the exclusion request by Tasty Chicks it was stated that the group had common banking facilities as demonstrated by the fact that Victoria Phylactou and Tasty Chicks did the group's payroll and she was a signatory to the bank accounts of all group members.

84. Victoria Phylactou said that the group did not have common banking facilities. Tasty Chicks maintained its own bank account and had its own financing arrangements with St George Bank. Michael Souris said the same thing. Angelo Transport did not have common banking facilities with any other company or business.

85. While Victoria Phylactou and one or two of her staff had authority to access the bank account of Angelo Transport, it was for the limited purpose of making payments of the payroll of Angelo Transport and otherwise as specifically authorised by him. I accept that evidence.

86. The Chief Commissioner issued assessments for the payroll tax years ended 30 June 2003 to 30 June 2007. He made determinations that M&J Souris, Tasty Chicks, Angelo Transport and Souris Holdings comprised a group. He made determinations refusing to exclude Angelo Transport and Tasty Chicks from the group.

87. Objection was raised to these assessments and determinations. The objection was rejected. Application was made to this Court for a review of the objection decision. It was in the following terms:

"Having regard to all of the information available and the connections that exist between the businesses, it is considered that the business carried on by Tasty Chicks Pty Limited, M & J Souris Partnership and Angelo Transport Pty Limited are not carried on substantially independently of one another, and are substantially connected with each other.

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The different group members compliment each other's businesses. When viewed as a whole it becomes apparent that the business activities are structured in such a way that each business performs an integral role in the whole process ie the procurement, processing, sale and transportation of chicken meat products to customers including the management of this whole process.

Whilst the chicken meat products are procured, owned and processed by the M & J Souris Partnership, employees of Tasty Chicks Pty Limited are performing much of the administration, taking orders, invoicing and managing customer accounts throughout the whole process.

With respect to Angelo Transport Pty Limited, its income is derived exclusively from the arrangement between itself and the M & J Souris Partnership. The company owns the transport vehicles and employs the drivers. However these drivers are also performing much of the maintenance work for the chicken meat products owned and sold by the M & J Souris Partnership. Clearly, the drivers are required to ensure the chicken meat products are adequately maintained in the cool rooms prior to transportation as well as when the boxes are packed and placed on the delivery vehicles and during transportation.

In view of the above we are unable to issue exclusion orders to exclude Tasty Chicks Pty Limited and Angelo Transport Pty Limited from group membership."

88. The assessments and determinations were made in three periods to which differing legislative provisions applied. In the first period from 1 July 2001 to 30 June 2003 the relevant grouping provision was s 16C of the Pay-roll Tax Act which was in the following terms:

"For the purposes of this Act, where:

• (a) an employee of an employer, or two or more employees of an employer, performs or perform duties solely or mainly for or in connection with a business carried on by that employer and another person or other persons or by another person or other persons, or
• (b) an employer has, in respect of the employment of, or the performance of duties by, one or more of his or her employees, an agreement, arrangement or undertaking (whether formal or informal, whether expressed or implied and whether or not the agreement, arrangement or undertaking includes provisions in respect of the supply of goods or services or goods and services) with another person or other persons relating to a business carried on by that other person or those other persons, whether alone or together with another person or other persons,

that employer and:

• (c) each such other person, or
• (d) both or all of those other persons,

constitute a group."

89. The Victorian equivalent of s 16C(a) of the Pay-roll Tax Act was considered in
Commissioner of State Revenue (Vic) v Muir Electrical Co Pty Ltd & Ors 2003 ATC 4858; [2003] VSCA 112; (2003) 8 VR 200. The taxpayers conducted discount electrical stores under a common trading name in addition to their individual trading names. The respondent operated two stores and provided administrative and accounting services to the other taxpayers.

90. The provision under consideration was s 9A(1A)(c) of the Pay-roll Tax Act 1971 (Vic). It was in the following terms:

• "(1A) For the purposes of this Act, if -
  • …
  • (c) an employee of an employer is, or two or more employees of an employer are, employed solely or mainly to perform duties for or in connection with a business carried on by another person or other persons (which other person is, or other persons are, in this section, called an 'associate'), or
  • …

  the employer and all persons who are related persons or associates in relation to that employer together constitute a group and each is a member of that group."

91. The question before the Court of Appeal was whether the word "business" included the plural. It was held that it did not. There were

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two indications to the contrary of the legislative presumption that the singular includes the plural. Parliamentary counsel did not rely on s 37(c) of the Interpretation of Legislation Act 1984 (Vic) in drafting the relevant provisions of s 9A of the Pay-roll Tax Act (Vic). It was replete with expressions in the singular and in the plural. As Callaway JA, with whom the other members of the Court agreed, said at 207 [14]:

"The apparently careful choice between the use of both the singular and the plural for some expressions and the use of the singular only for other expressions suggests a contrary intention of the kind referred to in s 37(c). There is more than the mere fact that the reading of words suggests an emphasis on singularity as opposed to plurality."

92. In providing services to the business of M & J Chickens, employees of Tasty Chicks performed duties not only in connection with a business carried on by M&J Souris, but also in connection with the business carried on by Tasty Chicks.

93. Likewise, the employees of Angelo Transport performed duties in connection with a business carried on by M&J Souris and they performed duties in connection with the business carried on by Angelo Transport.

94. The interpretation placed upon the Victoria legislation in Muir, which I accept applies equally to the New South Wales legislation, denies the Chief Commissioner the entitlement to group Tasty Chicks and Angelo Transport with M&J Souris unless the three entities carried on the same business. It was conceded on behalf of the Chief Commissioner that he must fail in grouping the three entities if Tasty Chicks, Angelo Transport and M & J Chickens were different businesses.

95. It was argued on the Chief Commissioner's behalf that the essential elements of the business of M & J Chicken was to buy chicken, to process it, to sell chicken products, to distribute those products to customers and to carry out administrative tasks.

96. Minas Souris had said that transportation and administration were outsourced. But it was submitted that establishing separate corporate entities did not change the nature of the original business and it included transportation and administration.

97. Administrative functions for M & J Chickens were initially carried out by M&J Souris. But the evidence did not establish that M&J Souris ever conducted their own transportation. Minas Souris said he could not remember. It was many years ago. He did not think so. The evidence was that Angelo Transport, then owned by Mr Hlentzos, provided transport services for M & J Chickens.

98. The original nature of a business does not determine its nature for all time. Businesses develop and as they do their nature may change. In this case M & J Chickens ceased to carry out administration activities when Tasty Chicks was established and it provided those services. And the services provided to M & J Chickens by Angelo Transport became larger and more sophisticated. The elements of the M & J Chickens business remained the buying of chickens, the processing of chickens and the selling of chicken products. Transport and administration services were provided to it by third parties. There is no suggestion that Minas and Jenny Souris had any ownership interest in Tasty Chicks or Angelo Transport. Nor did they exercise control over the way in which Victoria and Sam Phylactou ran the Tasty Chicks business or Michael Souris ran the Angelo Transport business.

99. The purpose of grouping provisions is to eliminate the practice of splitting business activities among separate employers to take advantage of the general exemption from tax. It does not extend to grouping independent service providers with their customers. An employer who receives services from an independent third party was not in a position to split its activities to establish the third party. Independent control denies splitting. Splitting requires, ultimately, common ownership or control of the service provider and its customer. That is not the situation in this case.

100. It follows that M&J Souris, Tasty Chicks and Angelo Transport did not conduct a single business and the Chief Commissioner was not entitled to group them under s 16C(a) of the Pay-roll Tax Act.

101. The Chief Commissioner also relied upon the deeds of agreement as enabling him to

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group the three entities under s 16C(b) of the Pay-roll Tax Act.

102. The Victorian equivalent of that provision had been considered in an earlier decision of the Victorian Court of Appeal in
The Muir Electrical Co Pty Ltd & Ors v Commissioner of State Revenue (Vic) [2001] VSCA 86; (2001) 4 VR 70. The administrative services provided by the appellant to the other taxpayers was governed by a supplemental deed under which it provided a banking facility, it paid for stock purchases, salaries and wages and any accounts authorised by an individual taxpayer. It also provided that half of the board of directors of each other taxpayer would be representatives of the appellant.

103. The relevant provision was s 9A(1A)(d) of the Pay-roll Tax Act (Vic). It was in the following terms:

• "(1A) For the purposes of this Act, if -
  • …
  • (d) an employer has, in respect of the employment of, or the performance of duties by, one or more employees, an agreement, arrangement or undertaking, whether formal or informal and whether expressed or implied, with another person or other persons (which other person is, or other persons are, in this section, called an 'associate') relating to a business carried on by the associate or by the associate and another person or persons -

  the employer and all persons who are related persons or associates in relation to that employer together constitute a group and each is a member of that group."

104. It was held at 75-76 [10-11] that, for the paragraph to apply, the agreement relating to the other person's business must also be an agreement in respect of the performance of duties by one or more of the employer's employees. That conclusion applies equally to s 16C(b) of the Pay-roll Tax Act.

105. Even if the deeds of agreement are taken at face value, ignoring variations of them established by the conduct of parties, they are not agreements in respect of performance of duties by the employees of Tasty Chicks on the one hand and by the employees of Angelo Transport on the other.

106. By its deeds of agreement, Tasty Chicks was appointed by M&J Souris to provide managerial services for M & J Chickens. It was agreed that in providing such services Tasty Chicks would, in the absence of agreement to the contrary, employ the greater part of its staff in its leased premises at Marrickville. It covenanted that it and its employees would not disclose trade secrets, or dealings with customers. It covenanted that it would not solicit any customers or business associates, or engage in, or be interested in, financially or otherwise, any business of a similar nature to that carried on by M&J Souris. It covenanted that it would not, directly or indirectly, hold or deal in any shares of any other company carrying on a similar business to M & J Chickens.

107. The agreement provided that, subject to such orders and directions as might be given to it by M&J Souris, Tasty Chicks should at all times have control of the business of M & J Chickens and should carry on that business in strict conformity with the law. The provisions of the agreement with respect to banking and cheques have been noted as has the provision giving Tasty Chicks general management of all persons employed in the M & J Chickens business.

108. The statute requires an agreement with another person relating to that person's business to be an agreement with respect to the employer's employment of its employees.

109. Apart from the requirement that Tasty Chicks employ its staff in its leased premises at Marrickville, the agreement does not deal with Tasty Chicks' employment of its employees. It deals with the provision of services by Tasty Chicks to the partnership and the sort of constraints and protection of its confidential information and restraint of trade that one would expect.

110. The provisions with respect to control of employees of M&J Souris falls outside the statutory requirement which is with respect to the employment of the employer's employees and not the employment of the other person's employees. What brings an agreement within the statutory provision is an agreement by the

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other person with respect to the employer's employment of its employees.

111. I do not regard the singular requirement that Tasty Chicks employ its employees at Marrickville, when no other controls of the way in which its employees are to work in Tasty Chicks' provision of services to the M & J Chickens' business, as sufficient to enable the Commissioner to group Tasty Chicks and Angelo Transport with M&J Souris.

112. A fortiori if the agreement is construed in light of the variations to it constituted by the parties' conduct.

113. Similar considerations apply to Angelo Transport's agreement with M&J Souris.

114. It was submitted that the earlier Muir case was distinguishable because the agreement was multilateral whereas the agreements for the provision of services by Tasty Chicks and Angelo Transport are bilateral. In my view that is a distinction without a difference. The question is whether, with respect to the employment of its employees, a service provider has an agreement with another person or persons relating to the business carried on by them. A service agreement that leaves it to the service provider as to how its employees will perform duties in relation to its customer's business would not, normally, answer the statutory description.

115. The Chief Commissioner was not entitled to group Tasty Chicks and Angelo Transport with M&J Souris under s 16C(b) of the Pay-roll Tax Act.

116. It follows that there is no need for me to consider the degrouping provision in s 16H of the Pay-roll Tax Act which applied during this first period and since its terms are different from those of the degrouping provisions that applied in the second and third periods, it is preferable that s 16H not be addressed by way of obiter dictum.

117. In the second period from 1 July 2003 to 30 June 2005, s 16C of the Pay-roll Tax Act was repealed and replaced by s 106H(1) of the Taxation Administration Act by the Pay-roll Tax Legislation Amendment (Avoidance) Act 2002. It was in the following terms:

"If 2 persons have an agreement under which an employee of 1 of them works solely or mainly in connection with a business carried on by:

• (a) the other, or
• (b) both of them,

then the 2 persons constitute a primary group."

118. Because of the singularity of business required by the former s 16C(a) of the Pay-roll Tax Act was removed, no complaint is made of the Chief Commissioner's grouping of Tasty Chicks and Angelo Transport with M&J Souris during the second period.

119. Nor is any compliant made of the Chief Commissioner's grouping of the three entities in the third period from 1 July 2005. Section 106H of the Taxation Administration Act remained the same during the third period. The legislative change in that period was of the degrouping provision.

120. In the second period s 16B(1) of the Pay-roll Tax Act was in the following terms:

"The Chief Commissioner may, by order in writing, determine that the person who would, but for the determination, be a member of a group is not a member of the group."

121. Relevantly, s 16C of the Pay-roll Tax Act was in the following terms:

• "…
• (3) The Chief Commissioner must not make a determination under section 16B unless satisfied that the person who is the subject of the determination has continuously carried on the business concerned, and will continue to carry on that business, 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."

122. In the first period from 1 July 2001 to 30 June 2003, section 16H(1) of the Pay-roll Tax Act contained an additional requirement

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that the business was not substantially connected with the carrying on of the business or businesses of another member of the group.

123. With effect with from 1 July 2005, s 16C(3) of the Pay-roll Tax Act was amended to address the question of independence with respect to the business rather than with respect to the person carrying on that business. It was in the following terms:

"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."

124. I do not regard this change as requiring a different analysis of substantial independence.

125. The features upon which the Chief Commissioner relied in his objection decision have been addressed.

126. The independence of the person or the business conducted by the person required by the statute is to be judged in terms of ownership, control and nature of the businesses.

127. The nature and degree of ownership of Tasty Chicks is confined to the shareholding of Victoria and Sam Phylactou. The nature and degree of ownership of Angelo Transport is confined to the single shareholding of Michael Souris. There are no other ownership interests.

128. As already mentioned, control of the Tasty Chicks business is confined to Victoria and Sam Phylactou and the control of the business of Angelo Transport is confined to Michael Souris.

129. The nature of the businesses are separate and distinct. M & J Chickens processes chicken meats. Tasty Chicks provides administrative services. Angelo Transport provides the services of a fleet of refrigerated vehicles and drivers.

130. Those matters to be taken into account suggest that the businesses are carried on substantially independently of each other and there is no suggestion other than that they will continue to be so.

131. The shift in focus from the person carrying on business to the business carried on by that person does not alter the conclusion to be drawn from the facts.

132. The Chief Commissioner points to the use of the same premises. That is, no doubt, a matter of convenience. Leases are held of the areas in question at commercial rates.

133. Secondly, the Chief Commissioner relies on the inter entity loans. Accrual accounting may explain the existence of the loan accounts. The evidence revealed that M&J Souris made loans to, or guaranteed financial facilities of, Tasty Chicks and Angelo Transport if Minas Souris considered it to be beneficial to the business of M&J Souris. The loans were made occasionally in comparatively small amounts and usually repaid within a year.

134. Thirdly, the Chief Commissioner placed reliance upon the use of the same computer system. The evidence was to the contrary. M&J Souris had computer equipment in the boning room. Tasty Chicks purchased new computer equipment for its office.

135. The Chief Commissioner, fourthly, referred to advertising of M & J Chickens on Angelo Transport trucks. It is not uncommon for transport vehicles to bear the logos of customers. That is an additional service. It does not suggest a lack independence.

136. Fifthly, the Chief Commissioner submitted that there was a financial connection between the entities. The evidence was, however, that financial aspects were not discussed with the owners or managers of other businesses except in the case of the daily provision by Sam Phylactou of financial information to Minas Souris. That was financial information with resepct to M & J Chickens and not with respect to Tasty Chicks. Each of the entities has its own banking facilities. The fact that they all bank at St George Bank is not indicative of a lack of independence. The secured guarantee of the Tasty Chicks facility was a unique occasion following the burning down of the house of Victoria and Sam Phylactou. St George Bank did not demand and did not receive cross-collateral security between the group entities.

137. Sixthly, the Chief Commissioner pointed to the retainer of the same external accountant in Mr Phillis. Again, that is a matter

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of administrative convenience not demonstrating a lack of independence.

138. Seventhly, the Chief Commissioner submitted that the cost plus a margin service fee gives rise to no entrepreneurial risk. But costs are negotiated and unless Tasty Chicks and Angelo Transport ensure that all their budgeted costs are covered they run the risk of loss.

139. Eighthly, The Chief Commissioner suggested that each of the entities was part of an east coast M & J Chickens' operation managed and under the ultimate control of M&J Souris. But, as has already been pointed out, Tasty Chicks and Angelo Transport are separately owned and managed. M & J Chickens - Victoria is managed by an employee and M & J Chickens Queensland is operated by Pelagia Investments under the direction of Mr and Mrs Levonis.

140. Ninthly, the Chief Commissioner relied upon the deeds of agreement. That matter has been addressed. In particular, the deeds of agreement give Tasty Chicks on the one hand, and Angelo Transport on the other, control over the business of M & J Chickens. For the one east coast business submission to succeed, M & J Chickens would need to control the businesses of Tasty Chicks and Angelo Transport.

141. Tenthly, the Chief Commissioner relies on the proportion of business derived by Tasty Chicks and Angelo Transport from M & J Chickens. There is no doubt that Tasty Chicks earns little from independent third parties. But small though that percentage may be, it still involves some 10 customers. 99% of Angelo Transport's income comes from M & J Chickens. But Michael Souris is building up the business and has plans to expand the number his customers.

142. In my view, the evidence establishes a substantial independence of Tasty Chicks and Angelo Transport or the businesses they conduct from the business of M & J Chickens. The Chief Commissioner was not prevented by s 16C(3) of the Pay-roll Tax Act from making a determination under s 16B(1).

143. But s 16B(1) of the Pay-roll Tax Act is permissive: the Chief Commissioner "may" make a determination. The final question is whether this Court may interfere with the Chief Commissioner's exercise of that discretion in this case.

144. In
Avon Downs Pty Ltd v Federal Commissioner of Taxation (1949) 78 CLR 353 at 360, Dixon J analysed the circumstances in which a Court could review a decision of the Commissioner of Taxation. His Honour said that it was for the Commissioner and not for him to be satisfied of the state of the voting power of a company at the end of a year of income. The Commissioner's decision was reviewable only if his conclusion was affected by some mistake of law, if he took some extraneous reason into consideration, or he excluded from consideration some factor that should affect his determination.

145. The Income Tax Assessment Act 1936 (Cth) then drew a distinction between the power of a Board of Review and the power of a Court to review a decision of the Commissioner of Taxation. A dissatisfied taxpayer had a choice between a Board of Review and a Court. Under s 193(1), a Board of Review, subject to exceptions, had all the powers and functions of the Commissioner of Taxation in making assessments, determinations and decisions under the Act and its decisions upon review were deemed to be the assessments, determinations or decisions of the Commissioner of Taxation.

146. By contrast, s 200(1) of the Income Tax Assessment Act provided that the Court hearing an appeal might make such orders as it thought fit and might by such order confirm, reduce, increase or vary the assessment.

147. It was in this context that Dixon J made his observations. Those observations were endorsed with respect to the same context in
Federal Commissioner of Taxation v Brian Hatch Timber Co (Sales) Pty Ltd 72 ATC 4001; (1971-1972) 128 CLR 28 at 52, 57 and in
Kolotex Hosiery (Australia) Pty Ltd v Federal Commissioner of Taxation 75 ATC 4028; (1974-1975) 132 CLR 535 at 567, 576.

148. In
Affinity Health Ltd v Chief Commissioner of State Revenue (NSW) [2005] NSWSC 663; 2005 ATC 4637, I pointed to the abrogation of a distinction in the powers of the Administrative Decisions Tribunal on the one hand and the Supreme Court of New South Wales on the other in s 101(1) of the Taxation

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Administration Act. I concluded at [57]-[58] that the Court was empowered to exercise the Chief Commissioner's discretion if it disagreed with it:

"But against those considerations, is the clear language of the Taxation Administration Act 1996, s 101(1). It provides that the Court or the Tribunal may do any one or more of the specified actions. And that clear language is not to be cut down, in my view, by any of the considerations of the functions and purpose of the Tribunal.

In my view, the Court is empowered by the Taxation Administration Act 1996, s 101(1) to take any of the specified actions stated therein and is not limited to a review of the Chief Commissioner's exercise of discretion in terms of the principles stated by Dixon J in Avon Downs or the principles in
House v R (1936) 55 CLR 499 at 504-505. I propose to consider afresh the exercise of discretion under the Duties Act 1997, s 119(2)."

149. Reference was made to
The Ballarat Brewing Co Ltd v Commissioner of Pay-roll Tax (Vic) 79 ATC 4452 at 4460 where Gray J adopted the approach of Dixon J in Avon Downs to the exercise of discretion of the Victorian Commissioner of Pay-roll Tax with respect to the grouping of the taxpayer with another company.

150. It was appropriate for his Honour to do so. The legislation with which he was concerned adopted the same dichotomy between the powers of the Court and the powers of a Tribunal that were in the provisions of the Income Tax Assessment Act with which Dixon J was concerned.

151. The Pay-roll Tax Act (Vic), s 33(1) gave an employer the choice of referring an adverse decision to the Victorian Taxation Board of Review or to treat the objection as an appeal to the Supreme Court.

152. Section 33B(1) of the Pay-roll Tax Act (Vic) provided that the Board should review the decision and might confirm, reduce, increase, or vary the decision, assessment or determination. Section 33B(3) was in the following terms:

"For the purpose of reviewing the decision assessment or determination, the Board shall have all the powers and functions of the Commissioner in making decisions assessments and determinations under this Act and such decisions assessments and determinations of the Board and its decisions upon review shall for all purposes (except for the purpose of objections thereto and review thereof and appeals therefrom) be deemed to be decisions assessments and determinations of the Commissioner."

153. By contrast, the Pay-roll Tax Act (Vic), s 33C(1) adopted the wording of s 200(1) of the Income Tax Assessment Act (Cth). It was in the following terms:

"On the hearing of an appeal by the Court, the Court may make such order as it thinks fit and may by such order confirm reduce increase or vary the assessment."

154. Reference was made to
Scotford Cameron & Middleton Pty Ltd v Commissioner of State Taxation (WA) 81 ATC 4144 at 4146. While Brian Hatch is mentioned, no discussion of the nature of the appeal to the Court occurred.

155. On appeal,
Commissioner of State Taxation (WA) v Scotford Cameron & Middleton Pty Ltd 81 ATC 4576 at 4578 the Court remarked that the appeal had been argued upon the basis that, should it appear upon the material before the Commissioner that he fell into error in considering the degrouping provision, then his decision could be examined by the Court. Reference was made to what Dixon J had said in Avon Downs. The Court adopted that approach without considering its merits.

156. In any event the legislation under which the appeal was determined was quite different from the legislation with which I am concerned.

157. The Pay-roll Tax Assessment Act 1971 (WA), s 33(1) provided that an employer dissatisfied with the decision of the Commissioner on an objection might request the Commissioner to treat the objection as an appeal and forward it to the Supreme Court. Section 33(2)(b) provided that for the purposes of such an appeal, rules of court might be made for regulating the procedure and practice to be followed on the appeal. No rules of court had been promulgated when the appeal was lodged.

158.

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Finally, reference was made to
Denham Constructions Pty Ltd v Chief Commissioner of State Revenue 99 ATC 4139 at 4144 where Studdert J, following what Dixon J had said in Avon Downs, said it was not for the Supreme Court to decide whether, had it stood in the Chief Commissioner's shoes, it would have exercised the discretion conferred by s 16H of the Pay-roll Tax Act in the plaintiff's favour.

159. At the time relevant to the decision in Denham the Taxation Administration Act, s 96(1) provided that a taxpayer might appeal to the Supreme Court if dissatisfied with the Chief Commissioner's determination of an objection. Section 102 was in the same terms as the current s 101(1) save that it referred to the powers as those of the Supreme Court on appeal whereas s 101(1) refers to the powers of the Supreme Court or the Administrative Decisions Tribunal on review.

160. While provision for the establishment of the Administrative Decisions Tribunal had been enacted in the Administrative Decisions Tribunal Act 1997, s 11, that section did not commence until 6 October 1998. The alternative to an appeal to the Supreme Court by way of review by the Tribunal, which now exists, was not then available.

161. Nevertheless, the Taxation Administration Act, s 102 as at the relevant date in Denham adopted language quite different from that applicable to the dichotomy between Board of Review and Supreme Court powers on appeal under the Income Tax Assessment Act with respect to which Dixon J made his observation in Avon Downs.

162. With respect, I do not agree with Studdert J's adoption of the Dixon J approach. His Honour did not have regard to the language used in s 102 of the Taxation Administration Act and the effect that language had on the dichotomy drawn between the powers of a Court and a Board of Review under the Income Tax Assessment Act, which was the context in which Dixon J made his observation.

163. It was submitted that the discretion considered in Affinity was different from that to be considered in this case. It was submitted that what was required in this case was the Commissioner's satisfaction as to a very narrow factual basis.

164. I reject that distinction. In Affinity I stated a general proposition relating to the power of the Court with respect to any exercise of discretion by the Chief Commissioner whether it be on narrow or broad grounds.

165. The powers in the Taxation Administration Act, s 101 are quite different from the powers of a Court on appeal under the Income Tax Assessment Act. They are specific and include the power to make an assessment or other decision in place of the assessment or decision the subject of the review. And any dichotomy between the powers of the Supreme Court and the powers of the Administrative Decisions Tribunal has been abrogated. The powers on review are the same for Court and Tribunal.

166. I propose to make a decision in place of that made by the Chief Commissioner not to exclude Tasty Chicks and Angelo Transport from the group. In my view, on the facts as set out above the Chief Commissioner ought to have exercised his discretion under s 16B(1) of the Pay-roll Tax Act to exclude them from the group.

167. In terms of s 101(1)(b) of the Taxation Administration Act I will replace the Chief Commissioner's decision not to make an order in writing under s 16B(1) of the Pay-roll Tax Act that on and after 1 July 2003 Tasty Chicks and Angelo Transport were not members of a group with M&J Souris.

168. I have already said that the Chief Commissioner had no power to group Tasty Chicks and Angelo Transport with M&J Souris in the period from 1 July 2001 to 30 June 2003. I will replace his decision to do so with a decision that they not be grouped.

169. In terms of s 101(1)(a) of the Taxation Administration Act I will revoke the assessments of the Chief Commissioner that depended on one or other or both of those decisions.

170. The Chief Commissioner must pay the costs.

171.

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I will hear the parties on the appropriate terms of orders. I direct the parties to bring in short minutes of order reflecting these reasons.