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Commissioner of State Revenue v Telgrove Pty Ltd[2021] QCATA 67

Commissioner of State Revenue v Telgrove Pty Ltd[2021] QCATA 67

QUEENSLAND CIVIL AND ADMINISTRATIVE TRIBUNAL

CITATION:

Commissioner of State Revenue v Telgrove Pty Ltd [2021] QCATA 67

PARTIES:

COMMISSIONER OF STATE REVENUE

(applicant)

v

TELGROVE PTY LTD

(respondent)

APPLICATION NO/S:

APL218-19

ORIGINATING

APPLICATION NO/S:

GAR219-18

MATTER TYPE:

Appeals

DELIVERED ON:

28 May 2021

HEARING DATE:

22 July 2020

HEARD AT:

Brisbane

DECISION OF:

Senior Member Aughterson

Member Lumb

ORDERS:

  1. Leave to appeal in respect of Ground 3 is refused.
  2. Leave to appeal in respect of Ground 4 is granted and the appeal on that ground is allowed in part.
  3. The appeal is otherwise dismissed.
  4. The Tribunal’s decision dated 15 July 2019 is set aside.
  5. The matter is returned to the Tribunal for reconsideration, but limited to the issue of whether or not the Tribunal is satisfied that s 74(2) of the Payroll Tax Act 1971 (Qld) is engaged having regard to the circumstances concerning the unpaid dividends (a subject of ground 4 of the appeal) and, if so satisfied, whether or not an exclusion order under s 74(1) of that Act should be made.
  6. The parties shall file (and serve on the other party), within 14 days of the date of delivery of these orders, any written submissions in respect of the question of costs of the application for leave to appeal or appeal.

CATCHWORDS:

TAXES AND DUTIES – PAYROLL TAX – LIABILITY TO TAXATION – GROUPING OF EMPLOYERS – Where Commissioner refused application to exclude various members of group under s 74 of the Payroll Tax Act 1971 (Qld) – Where respondent sought review of Commissioner’s decision to disallow objection against assessment – Where Tribunal set aside the decision refusing to make an exclusion order and also set aside the payroll tax assessments against respondent – Whether Tribunal erred in being satisfied that the business carried on by respondent was carried on independently of, was not connected with the carrying on of, the businesses carried on by any other members of the group – qualification of s 74(2) of the Act of ‘substantial’ or ‘material’ – unpaid dividends between group members – whether financial inter-dependency – operation of s 254T and s 254V(2) of the Corporations Act 2001 (Cth)

Companies Act 1961 (NSW), s 376

Corporations Amendment (Corporate Reporting Reform) Act 2010 (Cth)

Corporations Act 2001 (Cth), s 9, s 66, s 254T, s 254V, s 588G, s 1311

Payroll Tax Act 1971 (Qld), ss 68-73, s 74

Queensland Civil and Administrative Tribunal Act 2009 (Qld), s 146, s 147

Taxation Administration Act 2001 (Qld), s 73

B & L Linings Pty Ltd & Anor v Chief Commissioner of State Revenue [2008] NSWCA 187

Beaumont Constructions Pty Ltd & Ors v Commissioner of State Revenue [2020] QCAT 52

BHP Billiton Finance Ltd v Federal Commissioner of Taxation (2009) 72 ATR 746

Cessnock Tyres Pty Ltd v Chief Commissioner of State Revenue [2018] NSWCATAP 147

Commissioner of Pay-roll Tax (Qld) v John French Pty Ltd [1983] 1 Qd R 125

Commissioner of Taxation v Noza Holdings Pty Ltd (2012) 201 FCR 445

Confidential and Commissioner of Taxation [2013] AATA 112

Craig v South Australia (1995) 184 CLR163

Cridland v Federal Commissioner of Taxation (1977) 140 CLR 330

Crusher Holdings Pty Ltd v Commissioner of Taxes (NT) (1994) 29 ATR 156

Denham Constructions Pty Ltd & Ors v Chief Commissioner of State Revenue (1998) 40 ATR 416

Edgely Pty Ltd v Chief Commissioner of State Revenue [2015] NSWCATAD 16

Ericson v Queensland Building Services Authority [2013] QCA 391

Federal Coke Company Pty Ltd v Federal Commissioner of Taxation (1977) 7 ATR 519

Federal Commissioner of Taxation v Citylink Melbourne Ltd (2006) 228 CLR 1

Grant-Taylor v Babcock & Brown Ltd (in liq) [2015] FCA 149

HJA Holdings Pty Ltd & Ors v Commissioner for ACT Revenue [2014] ACAT 24

Industrial Equity Ltd v Blackburn (1977) 137 CLR 567

Kelk v Australian Postal Corporation [2014] FCA 147

Lombard Farms Pty Ltd v Chief Commissioner of State Revenue [2013] NSWADTAP 42

Marra Developments Ltd v BW Rofe Pty Ltd [1977] 2 NSWLR 616

Mead Packaging (Aust) Pty Ltd v Commissioner of Payroll Tax (NSW) (1988) 8 ATR 477

Minister for Immigration and Multicultural Affairs v Yusuf (2001) 206 CLR 323

Penev v County Court of Victoria [2013] VSC 143

Phian Pty Ltd v Commissioner of State Revenue [2016] QCAT 191

Plummers Border Valley Orchards and Commissioner of Taxes [2002] NTSC 33

Port Augusta Medical Centre Pty Ltd v Commissioner of State Taxation [2011] SASC 31

R v Kavanagh [1998] 4 VR 581

Re Associated Electronics Services Pty Ltd (In Voluntary Liquidation) [1965] Qd R 36 at 41

Regis Mutual Management Pty Ltd v Chief Commissioner of State Revenue [2015] NSWCATAD 213

Saville v Health Care Complaints Commission & Anor [2006] NSWCA 298

Scott and Bird & Ors v Commissioner of State Revenue [2016] QSC 132

Seovic Engineering Pty Ltd v Chief Commissioner of State revenue [2015] NSWCA 242

Tampalini v Robinson [2005] WASC 182

Tasty Chicks Pty Ltd & Ors v State Commissioner of State Revenue NSW (2011) 245 CLR 446

Telgrove Pty Ltd t/as P & E Francis Plant Hire v Commissioner of State Revenue [2019] QCAT 199

Wambo Coal Pty Ltd v Sumiseki Materials Co Ltd (2014) 88 NSWLR 689

APPEARANCES &

REPRESENTATION:

Applicant:

G Hartridge, of Counsel, instructed by Clayton Utz

Respondent:

H Lakis, of Counsel, instructed by PPM Tax & Legal

REASONS FOR DECISION

Introduction

  1. [1]
    The respondent to the appeal (‘Telgrove’) has been grouped with several other entities under Part 4 of the Payroll Tax Act 1971 (Qld) (‘the Act’).[1] Grouping can give rise to a payroll tax liability that might not otherwise arise. That is because payroll tax is not payable if the total wages of a business fall below a given threshold, whereas, in relation to groups, the total combined wages of all members of a group are taken into account for the purposes of establishing tax liability.[2] Hence, avoidance of tax by splitting payroll over several related entities is prevented by the Act.[3]
  1. [2]
    On the other hand, by allowing the Commissioner to exclude a business from a group, the Act enables the Commissioner to relieve against the unreasonable operation of the grouping provisions.[4]
  2. [3]
    The issue in the present case is whether Telgrove should be excluded from its grouping with several other entities, pursuant to s 74 of the Act. By s 74(1) of the Act, the Commissioner has a discretion to exclude a person from a group, but only if first satisfied as to the matters in s 74(2),[5] which provides:

The Commissioner may make an exclusion order only if the commissioner is satisfied 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 another member of the group.

  1. [4]
    In Mead Packaging (Aust) Pty Ltd v Commissioner of Payroll Tax (NSW),[6] Rath J, in relation to the equivalent NSW legislation, stated:

Section 16H(1) requires two findings to be made, namely (1) that a business carried on by the plaintiff (as a member of a group) is carried on substantially independently of a business carried on by any other member of that group; and (2) that the business is not substantially connected with the carrying on of the business carried on by the other members of the group. The first limb appears to relate to the independence of the business, and requires an examination of the connection between the business activities. The second limb appears to relate to connection in management. At all events the composite expression used in the sub-section requires a consideration of the businesses and their control, and a finding of substantial independence and substantial absence of connection.

In Commissioner of Pay-roll Tax (Qld) v John French Pty Ltd,[7] McPherson J, with whom Campbell CJ agreed, stated:

I am not altogether convinced that the distinction suggested by His Honour between the first and second limbs of s 16H(1) is readily apparent, but an examination of both business activities and management is clearly justified as part of the inquiry directed by the section.

  1. [5]
    Also, s 74(2) is framed in terms of the business being ‘carried on’ independently and not being connected ‘with the carrying on’ of a business by any other member of the group. As stated by the Appeal Panel in Lombard Farms Pty Ltd v Chief Commissioner of State Revenue in relation to equivalent NSW provisions:[8]

The focus, in s 79(2) of the Act, is on the connection between the carrying on of the business and not merely the connection between the different entities …

It is not any connection that will disentitle the Appellant from being de-grouped. It must be a connection in relation to the carrying on of the business.

Background facts

  1. [6]
    The background facts are not in dispute. On 24 February 2016, Telgrove, Postville, CFS Hire and CF Sales applied for exclusion orders to exclude them from being grouped with the other Group Members.
  2. [7]
    On 5 July 2017, the Commissioner advised Telgrove that its exclusion application had been refused (‘the exclusion decision’). By the exclusion decision, the Commissioner rejected the exclusion applications made by each of the Group Members from each other and revoked a previous de-grouping decision between Telgrove and Postville.
  3. [8]
    On 18 August 2017 and 21 August 2017, the Commissioner issued default assessment and reassessment notices, assessing Telgrove and other Group Members for payroll tax, penalty tax and unpaid tax interest for each of the financial years of 2011/2012 to 2016/2017 and a periodic assessment for the month of July 2017. The total assessment for Telgrove for the period 1 July 2011 to 31 July 2017 was $313,131.03.
  4. [9]
    In October and November 2017, each Group Member lodged objections with the Commissioner, objecting against its assessments.
  5. [10]
    On 2 May 2018, the Commissioner made a decision to disallow each of the Group Members’ objections.
  6. [11]
    On 29 June 2018, Telgrove applied to the Tribunal for a review of the decision of the Commissioner to disallow its (Telgrove’s) objection against the assessments and reassessments.
  7. [12]
    The Tribunal at first instance set aside the decision of the Commissioner refusing Telgrove’s application for exclusion and made an exclusion order pursuant to s 74(1) of the Act.[9] The tax assessments made in relation to Telgrove were also set aside. It follows that the Tribunal at first instance held that the business carried on by Telgrove was carried on independently of and was not connected with the carrying on of a business by another member of the group. The Commissioner now appeals that decision.

Grounds of appeal

  1. [13]
    The Commissioner relies on five grounds of appeal (as amended without opposition at the commencement of the hearing),[10] as follows:
  1. Whether the Tribunal erred in not construing s 74(2) of the Act as requiring the Tribunal to be first satisfied that the businesses of the entities were substantially independent and not substantially connected before the discretion to exclude was enlivened under s 74(1) of the Act (‘Ground 1’).
  2. Whether the Tribunal erred in construing s 74 of the Act as involving the weighing up of factors for and against grouping and exclusion (‘Ground 2’).
  3. Whether the Tribunal erred in not finding that the involvement of Mr Boyce Nahrung (‘Mr Nahrung’) in the businesses of and the transactions between the businesses of Telgrove, Postville and the Trustee of the NFT (‘Trustee’) satisfied the Tribunal that the businesses of those entities were not substantially independent and were substantially connected with each other (‘Ground 3’).
  4. Whether the Tribunal erred in not finding that the existence of dividends created financial inter-dependencies between Telgrove and ‘members of the group’, especially in circumstances where there was no evidence as to when the payment of the dividends was to occur (‘Ground 4’).
  5. Whether the Tribunal, upon concluding at [81] and [84] of its decision that there were ‘frequent and material purchases of parts by Telgrove from Postville’, erred in failing to go on to consider whether the discretion under s 74(1) of the Act was enlivened in the manner described in Scott and Bird & Ors v Commissioner of State Revenue (‘Scott’)[11] (‘Ground 5’).
  1. [14]
    The Commissioner seeks the following orders:
  1. That the appeal and any leave required be allowed.
  2. That the Decision be set aside.
  3. That the application for review dated 29 June 2018 be dismissed.
  1. [15]
    By the Appeal application, the Commissioner sought leave to appeal in respect of Ground 4 only, and by her written submissions contended that the other four grounds raised questions of law only.[12] At the hearing, the Commissioner maintained that contention but formally sought leave to amend the Application to also seek leave to appeal in relation to Grounds 3 and 5 in the event that the Appeal Tribunal found that either of those grounds raised a question of fact only or a mixed question of law and fact. Telgrove opposed such leave being given.
  2. [16]
    It is evident that grounds 1, 2 and 5 raise questions of law. It is an error of law to misconstrue a statutory provision or to draw a conclusion as to whether the facts as found come within a statutory provision.[13] In Kelk v Australian Postal Corporation,[14] Greenwood J, with reference to errors of law, stated:

The nature of that error, and the consequential question of law, is understood in terms of the orthodoxy of Craig v South Australia (1995) 184 CLR 163 at 179, per the Court, and Minister for Immigration and Multicultural Affairs v Yusuf (2001) 206 CLR 323 at 351 at [82] per McHugh, Gummow and HayneJJ, in these terms (Craig at p179 and approved in Yusuf at [82] and subsequent authorities):

If [an administrative tribunal such as the Administrative Appeals Tribunal] falls into an error of law which causes it to identify a wrong issue, to ask itself a wrong question, to ignore relevant material, to rely on irrelevant material or, at least in some circumstances, to make an erroneous finding or to reach a mistaken conclusion, and the tribunal’s exercise or purported exercise of power [and discharge of the review function] is thereby affected, it exceeds its authority or powers. Such an error of law is jurisdictional error which will invalidate any order or decision of the tribunal which reflects it.

  1. [17]
    On the other hand, for the reasons given below, in the course of discussion in relation to those grounds, we are of the view that grounds 3 and 4 involve either questions of fact or mixed law and fact. The question of leave to appeal is also discussed under those headings.
  2. [18]
    By s 73 of the Taxation Administration Act 2001 (Qld), Telgrove has the onus of proving its case. We proceed on the assumption that proof is on the balance of probabilities.[15]

Grounds 1, 2 and 5

  1. [19]
    In relation to grounds 1 and 5, the Commissioner submits that though the Tribunal correctly recognised that s 74(2) of the Act is a precondition to the exercise of the discretion to exclude under s 74(1), and correctly identified the relevant law, there was error in its application. It was submitted that having found that there were ‘significant and material’ and ‘frequent’ purchases of parts and equipment by Telgrove from Postville, demonstrating ‘an active and significant relationship’ between them, the Tribunal ought to have found that it was not satisfied that Telgrove’s business was substantially independent of and not substantially connected to Postville’s business and therefore the discretion to exclude Telgrove did not arise.[16]
  2. [20]
    In relation to ground 2, it is submitted that the Tribunal erred in construing s 74(2) of the Act as involving the weighing up of factors for and against grouping and exclusion’.[17] In the decision at first instance, the Tribunal referred to certain factors as ‘a matter of weight to apply to the overall balancing exercise’,[18] to ‘matters favouring grouping’ and ‘matters favouring exclusion’,[19] before stating: ‘After weighing up these issues, on balance, we are satisfied that the business of Telgrove was carried on independently of, and not connected with the carrying on of the business’ of another entity in the group, such that they should not be grouped together.[20]
  3. [21]
    There is an overlap between these submissions. In essence, in grounds 1 and 5, it is submitted that the ‘significant’, ‘material’ and ‘frequent’ purchases between Telgrove and another member of the group, in itself, was sufficient to demonstrate a relevant connection and lack of independence, while, in ground 2, it is submitted that it is not a question of weighing up or balancing all factors that might, one way or the other, indicate independence or connection for the purpose of making a determination under s 74(2) of the Act.
  4. [22]
    The parties accepted that there was some qualification to the terms ‘independently’ and ‘not connected’; that is, satisfaction of the subsection does not require a conclusion of complete independence or an absence of any connection. The Commissioner submitted that any connection that is ‘material’ would exclude satisfaction of the preconditions under section 74(2).[21] Telgrove submitted that the terms should be read as incorporating the qualifier ‘substantial’.[22]
  5. [23]
    At first instance, the Tribunal did not appear to draw any distinction between the respective terms ‘material’ and ‘substantial’. The Tribunal said:

[19]Application of the s 74 test is a question of fact and degree. Courts and Tribunals have consistently distinguished between dependencies and connections that are material or substantial on the one hand, or are insignificant and inconsequential, on the other hand.

[20]The NSW Civil and Administrative Tribunal, in considering the NSW version of the Act (which is similar to the current Queensland provision) stated:

It requires the trier of fact to determine whether, having regard to the nature of the connections between group businesses, it can nevertheless be said that the businesses are independent and not connected. Ultimately, this will be a question of judgement based on facts objectively determined. It is not the case that any connection between businesses will disentitle an Applicant from degrouping. The connection must be material and not insignificant or inconsequential. This is the approach that was adopted in the Victorian authorities … we agree with this approach because it directs the focus to “carrying on” of the business: to be relevant the connection must affect the business in some real or practical sense. To say that there can be absolutely no connection between businesses sets the bar too high. The question is of fact and degree. To disentitle an Applicant to de-grouping, the connection must be meaningful in a commercial sense and not immaterial or inconsequential to the carrying on of the businesses. Adopting the words of GT Pagone, Presiding Member (as his Honour then was) in Trilene at [25] there must be a finding of substantial absence of connection and substantial independence between the businesses, to warrant the exercise of the discretion.

(footnotes omitted, emphasis added)

  1. [24]
    The extract at Reasons [20] is from Lombard Farms Pty Ltd v Chief Commissioner of State Revenue.[23]
  2. [25]
    In Scott,[24] Bond J did not directly address this issue but it is plain from the authorities cited by his Honour at paragraph [58] of his reasons that he accepted that the respective concepts were qualified by the words ‘substantial’ or ‘substantially’. In Plummers Border Valley Orchards and Commissioner of Taxes[25] it was said by Riley J:[26]

The word ‘substantially’ does not have a fixed meaning. What is required to demonstrate that a business is ‘not substantially connected’ with another business is a matter of fact and degree to be considered in all of the circumstances. It calls for the exercise of judgment. The connection must be actual and of substance. It must not be minimal yet need not be total.

  1. [26]
    In the context of s 74(2) of the Act, which does not expressly incorporate the word ‘substantial’ or the word ‘material’, we do not consider that there is any practical distinction between those two terms. For example, one of the meanings of ‘material’ as defined in the Macquarie Dictionary is ‘of substantial import or much consequence’ (emphasis added). Neither party proffered any factual example where, say, a connection may be considered ‘material’ but not ‘substantial’.
  2. [27]
    Further, we cannot discern any inconsistency between the statements contained in the passage cited by the Tribunal at Reasons [20] (where, as noted above, those terms appear to be used interchangeably) and the observations made by Bond J in Scott.[27] In our view, these respective observations provide the necessary guidance in the application of s 74(2) of the Act, and there is no justification for seeking to attribute some precise meaning or content to, or for distinguishing between, the qualifying words ‘substantial’ and ‘material’.
  3. [28]
    In relation to grounds 1 and 5, the Commissioner submits:[28]

[26] The Tribunal found that the purchases between Telgrove and Postville were significant and material and that the transactions were more than casual, irregular or occasional [Emphasis added]:

  1. (a)
    At [81] the quantum of equipment and parts purchased from Postville as a percentage of total equipment and parts by Telgrove the resulting percentage is considered significant and material;
  1. (b)
    At [81] the high frequency of the parts transactions supports the view that these transactions are more than casual, irregular or occasional. It demonstrates an active and significant relationship between Telgrove and Postville; and
  1. (c)
    At [84] there were frequent and material purchases of parts by Telgrove from Postville.

[27]However, the Tribunal then directed itself to the wrong consideration, as, taking into account that Postville had an exclusive rights (sic) in Queensland to sell Kubota equipment and parts, the Tribunal then concluded ‘we find that Postville’s holding of exclusive rights is a matter of weight to apply to the overall balancing exercise’.

[28]The Commissioner submits that the Tribunal having identified that there were transactions that were more than casual, irregular or occasional and that it demonstrated an active and significant relationship between Telgrove and Postville that the Tribunal ought to have found it was not satisfied that Telgrove’s business was independent and not substantially connected to the Postville’s business and therefore the discretion to exclude Telgrove did not arise.

  1. [29]
    The difficulty with the approach advocated by the Commissioner in relation to grounds 1 and 5 is that businesses would be ‘connected’ and not ‘independent’ for the purposes of s 74(2) of the Act, simply because of the extent of their commercial dealings with each other, which, in itself, is unrelated to the rationale and criteria for the grouping of entities in the first place. In the Explanatory Notes to the Pay-Roll Tax (Harmonisation) Amendment Bill 2008 (Qld), the following observation is made:[29]

Businesses are only grouped under the Payroll Tax Act 1971 (Qld) where they are carried on by related corporations[30] or otherwise closely controlled by common entities or persons all connected through the use of common employees.

  1. [30]
    If ‘significant and material’ purchases were, without more, sufficient to establish a relevant connection or lack of independence, it would mean that even where there are compelling commercial reasons for the purchases or sales and where the dealings are at arms-length, the preconditions of s 74(2) of the Act could not be established. That would remain the case even where there was no viable commercial alternative.
  2. [31]
    In relation to ground 2, it is well established that an assessment made under s 74(2) of the Act involves an evaluative judgment. As stated in Scott:[31]

… the discretion to make an exclusion order is that which is conferred by s 74(1) and that discretion is only enlivened if the Commissioner is satisfied of the matters referred to in s 74(2), namely 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 the group.” The formation of that state of satisfaction does not involve an exercise of a discretion, rather it requires the formation of an evaluative judgment. The formation of the specified evaluative judgment is a pre-condition to the existence of power to exercise the discretion.

It is only if the decision maker forms the evaluative judgment referred to in s 74(2), that the discretion referred to in s 74(1) is enlivened.

  1. [32]
    In her submissions, the Commissioner acknowledged that s 74(2) of the Act, involves the formation of an evaluative judgment, including by reference to the above extract from Scott.[32] In forming that judgment, diverse factors might be considered, including the matters listed in s 74(3) of the Act. In Scott it was stated:[33]

If the discretion (under s 74(1)) is enlivened, the decision maker will be obliged to take into account the matters referred to in s 74(3), although there will be some necessary crossover between at least some of the first two considerations there referred to and the considerations that were relevant to the formation of the evaluative judgment referred to in s 74(2).

  1. [33]
    In Saville v Health Care Complaints Commission & Anor, Basten JA, with whom Handley and Tobias JA agreed, stated:[34]

It has been said on more than one occasions, and in more than one context, that matters of evaluation and judgment are not readily explained in rational terms. Various imprecise and amorphous, but relevant, considerations may need to be weighed in the balance in determining where, across a range of possibilities, the appropriate result should be found.

  1. [34]
    Also, as stated in Scott,[35] it is ‘wrong to approach either question by regarding … as necessarily irrelevant one part of the picture of how the applicant carries on the business’. Further, in Denham Constructions Pty Ltd & Ors v Chief Commissioner of State Revenue,[36] Studdert J referred to the elements relevant to the Commissioner’s opinion and noted that it was also proper to consider information supplied by the plaintiffs in order to reach a decision as to whether the plaintiffs should be excluded from the group, before concluding that the Commissioner had not misdirected himself as to the proper considerations ‘to be weighed’ for the purposes of the equivalent NSW provision.
  2. [35]
    In the present case, one part of the picture, referred to in the Commissioner’s submissions noted above, is that there were frequent and material purchases of parts by Telgrove from Postville, while another part of the picture is that Postville had exclusive rights in Queensland to sell Kubota equipment and parts (at market rates). Those factors, along with other factors, were weighed by the Tribunal at first instance in determining that the business of Telgrove was ‘carried on’ independently and was not connected with ‘the carrying on’ of a business of another member of the group.
  3. [36]
    That approach is consistent with the approach taken in other cases, where there are not infrequent references to ‘weighing’ various factors, or the ‘weight’ to be given to particular factors, and to the conduct of a ‘balancing’ exercise.[37]
  4. [37]
    Indeed, in the present case, in the making of the exclusion and objection decisions and at the hearing at first instance, the Commissioner took the view that a weighing up of factors was required.[38] In relation to the exclusion decision of 5 July 2017, the Senior Investigations Officer, having stated that she was not satisfied in terms of s 74 of the Act, that the business was carried on independently of and not connected with the business carried on by other members of the group, and having noted that it is incumbent on the Commissioner to consider all relevant matters, added that ‘it is a matter for the Commissioner to decide what weight is attached to the factors considered’.[39] In relation to the objection decision of 2 May 2018, the same approach is taken.[40] After referring to the factors to be considered in determining whether the Commissioner is satisfied in accordance with s 74(2) of the Act, it is noted that there was a ‘weighing up’ of the factors discussed.[41] There are then listed the ‘main factors in favour of exclusion’ and the ‘main factors against exclusion.[42] It is then stated: ‘On balance, I conclude Postville should not be excluded from the group’, on the basis of not being satisfied that there was not a relevant connection.[43]
  5. [38]
    Also, in the Commissioner’s submissions at the hearing at first instance, it is evident that the Commissioner adopted the approach taken in the objection decision, including the reference to factors in favour of and against exclusion and the balancing exercise.[44] Also, in drawing conclusions on Telgrove’s exclusion application, the Commissioner lists all factors taken into account, including those that favoured a finding of independence and lack of connection.[45] Further, Queensland Treasury Public Ruling PTA031.2 ‘Commissioner’s discretion to exclude from a group’, notes the matters that the Commissioner must have regard to in making an assessment under s 74(2) of the Act and, in that regard, lists some of the factors that should be considered. It is then stated:

None of the matters listed above are determinative in isolation from the other matters listed, nor are they an exhaustive list of the relevant issues. Each case will be considered on the basis of all of the relevant facts and circumstances.

  1. [39]
    In a given case, a judgment or opinion may be formed that, having regard to all relevant factors, one factor alone establishes (or two or more factors establish) that there is the requisite absence of (substantial) independence or presence of (substantial) connection for the purpose of s 74(2) of the Act, regardless of the number or weight of separate factors consistent with independence or an absence of connection. However, that is not the case here.
  2. [40]
    For the reasons outlined above, Grounds 1, 2 and 5 should be dismissed.

Ground 3

  1. [41]
    The Commissioner’s case is that the Tribunal erred in failing to find that due to the involvement of Mr Nahrung in the businesses of, and the transactions between, Telgrove, Postville and the Trustee for NFT respectively, that the respective businesses were not independent and were substantially connected with each other.
  2. [42]
    When regard is had to the position as stated by the Commissioner, we accept Telgrove’s submission that Ground 3 involves either a question of fact or a mixed question of law and fact.
  3. [43]
    In relation to the position as between Telgrove and Postville, the Commissioner submits that the finding that Mr Nahrung did not exercise management and control of the business of Postville in a material significant way was ‘inconsistent with the evidence’ as identified in paragraph 50 of the Commissioner’s primary submissions. The Commissioner points to three matters:
    1. (a)
      Mr Nahrung selected and developed the offices of Postville;
    2. (b)
      there was ‘a significant and frequent number of purchases from Telgrove’ which Mr Nahrung was involved in the management of;
    3. (c)
      Mr Nahring was involved in the Cairns office of Postville due to the Cairns manager not getting on well with the other directors of Postville.
  4. [44]
    With respect to the first matter, this was an isolated activity and, of itself, did not, in our view, preclude satisfaction of s 74(2) of the Act.
  5. [45]
    With respect to the second matter,[46] we have addressed this matter above. As noted, we consider that the Tribunal was entitled to take those matters into account. Consequently, we do not accept that the purchase transactions, of themselves, demonstrated that the Tribunal ought to have found that Mr Nahrung exercised management control of the business of Postville in a material or significant way.
  6. [46]
    With respect to the third matter, the Tribunal’s finding was as follows:[47]

The evidence establishes that Mr B Nahrung had property interests in Cairns and would regularly visit that city during the relevant period. During those visits, he would visit the Cairns manager of Postville to ensure that all was going well (there was mention of the Cairns manager not getting on with other Postville directors). Otherwise, the evidence shows that Mr B Nahrung played no significant role in the management of this business. (emphasis added)

  1. [47]
    In our view, this finding does not support a contention that Mr Nahrung was ‘involved in the Cairns office’ (in a management sense) much less that he exercised management and control of the business of Postville in a material or significant way.
  2. [48]
    In our view, the Commissioner has not demonstrated any reasonably arguable case of error in the Decision insofar as this aspect of Ground 3 is concerned. In any event, we would not have been minded to grant leave to appeal given that the Commissioner has not established that a substantial injustice would be suffered if leave were not granted and no important point of principle arises in relation to Ground 3.
  3. [49]
    In relation to the position as between Telgrove and the Trustee of the NFT, the matters relied upon by the Commissioner are integrally connected with the matters raised in relation to Ground 4 (the loan/unpaid dividends issue).[48] We consider that, absent establishing the matters that are the subject of Ground 4, the Commissioner cannot sustain its contentions as to the issue of management control (in Ground 3), in relation to the position as between Telgrove and the Trustee of the NFT. In any event, considering Ground 3 in isolation, we do not consider leave to appeal to be warranted.

Ground 4

  1. [50]
    Ground 4 challenges the Tribunal’s finding that the existence of unpaid dividends declared by Telgrove did not create financial interdependencies between Telgrove and the other Group Members (or at least between Telgrove and the Trustee of the NFT).[49] We will focus on the position as between Telgrove and the Trustee of the NFT, because we are of the view that success on this ground depends upon the position as between those two entities.
  2. [51]
    As we apprehend the Commissioner’s submissions, two essential points are raised, first, that the Tribunal erred in finding that the outstanding unpaid dividends were not loans;[50] and, second, even if not characterised as loans, the Tribunal erred in finding that the shareholder (the Trustee of the NFT) had no power to enforce payment of the unpaid dividends, and that the failure by the Trustee to demand or sue for payment of the unpaid dividends was a significant indicator that there was a lack of independence between Telgrove and the Trustee of the NFT, and that the unpaid dividends created a financial dependency between those two entities.[51]

The loan issue

  1. [52]
    The Tribunal said at Reasons [103] to [106]:

[103]A great deal of the hearing was spent on the relevance and characterisation of the unpaid dividends from Telgrove to the Trustee of the NFT. The Commissioner submitted that the unpaid dividends comprised undocumented loans; that they were significant in comparison to either total assets or current assets nett of current liabilities; and that they would have been unable to be repaid in full during the relevant period if the Trustee for NFT had demanded immediate payment.

[104]Telgrove submitted that the unpaid dividends should not be a material financial connection to deny exclusion on the basis that:

  1. (1)
    they are not a loan and,
  1. (2)
    if called upon, the payment of the unpaid dividends would not have placed Telgrove into financial difficulty.

[105]A loan is broadly defined as ‘something lent, especially a sum of money to be returned normally with interest.’ In the case of dividends there is no act of lending on behalf of the shareholder.

[106]Section 254V(2) of the Corporations Act 2001 (Cth) states that ‘if the company has a constitution and it provides for the declaration of dividends, the company incurs a debt when the dividend is declared.’ In the case of Telgrove, its constitution provides for the declaration of dividends. The unpaid dividends are therefore not a loan, but are a debt or a liability created at the time of declaration.

(footnotes omitted)

  1. [53]
    The Tribunal’s findings are consistent with the conclusion that the genesis of that liability was the declaration of a dividend or dividends by Telgrove. The necessary corollary of this conclusion is that the Commissioner’s case was that the nature of that liability changed from one of an unpaid dividend to an unpaid loan. The Commissioner relied on the fact that the unpaid amounts were recognised as loans in the financial statements of Telgrove and the Trustee of the NFT. While the Commissioner contended that the financial statements constituted ‘contemporaneous evidence’ that the unpaid dividends were loans, the Commissioner did not point to any other evidence showing that the unpaid dividends were treated as loans nor any underlying agreement by which the loans were to be so treated.
  2. [54]
    We accept Telgrove’s submission that the recording of an unpaid dividend as a ‘loan’ is not conclusive of its true legal character.[52] In light of the above, it is evident that the Commissioner’s challenge raises a question of fact only. In circumstances where we have found that the Commissioner would not suffer substantial injustice if leave to appeal were not granted (and there is no question of law involved, let alone one that is of public importance), we refuse leave to appeal this aspect of Ground 4.

The unpaid dividends issue

  1. [55]
    The Tribunal concluded, at Reasons [118], that the unpaid dividends simply reflected an ownership connection between Telgrove and its shareholders and did not constitute a financial dependency in the terms expressed in ‘Crusher Holdings.[53] This conclusion was based on the findings, also at Reasons [118], that the unpaid dividends were not loans; that they were material in amount but that the shareholders had no power to enforce their payment; and provisions of the Corporations Act 2001 (Cth) (‘Corporations Act’) ensured that there would be no danger of Telgrove facing financial difficulties ‘from this source’.
  2. [56]
    While we accept Telgrove’s submission that the declaration of a dividend is an ‘integer of ownership’,[54] that does not, of itself, provide an answer to the question of whether or not the failure of the Trustee of the NFT to press for and recover payment of the (significant) outstanding amounts meant that the preconditions under s 74(2) of the Act could be satisfied.
  3. [57]
    Reasons [107] to [117] set out the matters underlying the findings at Reasons [118]. Reasons [111] to [117] are of most relevance and state:

[111] The Constitution of Telgrove provides as to dividends that:

86(1) The company in general meeting may declare a dividend if, and only if the directors have recommended a dividend.

86(2) A dividend shall not exceed the amount recommended by the directors.

87 The directors may authorize the payment by the company to the members of such interim dividends as appear to the directors to be justified by the profits of the company.

[112] The effect of these provisions for Telgrove is that:

  1. (1)
    it is the sole director who makes a recommendation to declare a dividend,
  1. (2)
    it is shareholders with voting rights in the general meeting who have the power to declare a dividend, provided that it does not exceed the quantum recommended by the sole director, and
  1. (3)
    it is the sole director who is to determine when and how the dividend is to be paid and no interest is payable on unpaid dividends.

[113] All of these actions are to take place within the constraint that the quantum of dividends paid cannot exceed certain criteria designed to ensure that the company may be able to continue to trade and pay its creditors. These actions are also subject to the more general obligations of a director to ensure that all actions taken by the director result in the company remaining solvent (being able to pay all of its debts as they fall due) with heavy penalties in force.

[114] The oral evidence of Mr B Nahrung, as sole director of Telgrove, to the effect that dividends were only declared and paid on the advice of his external accountant, is consistent with observance of these provisions.

[115] We therefore reject the Commissioner’s submission that the unpaid dividend is a loan and the shareholders have the power to demand its immediate payment, potentially threatening financial difficulties for Telgrove.

[116] The proper characterisation of the unpaid dividends in this matter is that they are material in amount during the relevant period (for three of the years exceeding total assets less total liabilities [total equity] and at other times representing between 20% and 90% of total assets less total liabilities [total equity]), but that their payment solely rests with the sole director of Telgrove, who is under an obligation to only pay these dividends in a manner that is consistent with Telgrove being able to continue to pay its creditors.

[117] The evidence is that the unpaid dividends were progressively paid in the period July 2010 to May 2018 and fully paid in May 2018. There is no evidence that this has resulted in Telgrove falling into financial difficulties as described in Crusher Holdings, where a debt, if called in would put the company into financial difficulty such that the company was dependent upon the continuing goodwill of the creditor. (footnotes omitted)

  1. [58]
    In her appeal submissions, the crux of the Commissioner’s case was that the Tribunal erred in finding that once the dividend had been declared, the shareholders (and, we would add, in particular, the Trustee of the NFT) did not have power to demand or enforce the immediate payment of the unpaid dividends.[55] In the Commissioner’s outline for hearing, it was further submitted that the Tribunal’s consideration of whether, relevantly, the Trustee had a right to demand or enforce the debt was ‘taking the Tribunal down a road of hypotheticals’ and that such an ‘uncommercial arrangement’ can only exist where there is control or cooperation being exercised across the two businesses, which in itself is evidence of a lack of independence or evidence of connection in the manner in which the businesses are carried on.[56]
  2. [59]
    The essence of the Commissioner’s case is that the Tribunal ought to have found a substantial connection between, and/or an absence of substantial independence from, the businesses of Telgrove and the Trustee of the NFT because the unpaid dividends comprised a debt due and payable to the Trustee; that the Trustee was able to demand payment; and given the period over which the amounts were owing and the size of the amounts owing, the Tribunal ought to have found that s 74(2) of the Act was not satisfied.[57]
  3. [60]
    Telgrove relied upon what it contended was the Tribunal’s finding that by operation of s 254T of the Corporations Act,[58] Telgrove was not required to make payment of the debt constituted by the unpaid dividends (and the Trust was not able to call for payment) until it could do so without financial difficulty,[59] and Telgrove addressed the cases relied upon by the Commissioner in this context.[60]
  4. [61]
    The parties’ contentions involve, in a material part, the relationship between s 254V(2) of the Corporations Act[61] (relied upon by the Commissioner) and s 254T of the Corporations Act[62] (relied upon by Telgrove). In our view, the issues of whether s 254T is relevant at all and how that section intersects with s 254V(2) raise questions of principle, which have some importance beyond the confines of the present case and justify the grant of leave to appeal.
  5. [62]
    Before addressing these provisions and the authorities relied upon by the Commissioner, it is necessary to identify the dividends which were declared.

Declaration of dividends

  1. [63]
    The Reasons do not identify the specific amounts of the unpaid dividends, although the Tribunal does describe them as ‘material in amount’.[63] There appears to be no dispute that the unpaid dividends were as follows:[64]
    1. (a)
      In 2011, $2,351,691;
    2. (b)
      In 2012, $2,186,691;
    3. (c)
      In 2013, $1,856,691;
    4. (d)
      In 2014, $1,564,191;
    5. (e)
      In 2015, $1,399,191;
    6. (f)
      In 2016, $1,219,191;
    7. (g)
      In 2017, $469,191; and
    8. (h)
      In 2018, as at 9 May 2018 the balance had been paid.
  2. [64]
    The Tribunal found that the dividends were declared pursuant to rule 86(1) of the Constitution of Telgrove and, further, that the dividends created a debt or liability at the time of declaration (consistently with s 254V(2) of the Corporations Act).[65]
  3. [65]
    In our view, on the proper construction of the rules of the Constitution set out at Reasons [111], sub-rules 86(1) and (2) are concerned with the declaration of a final dividend (which is declared by the company in general meeting only if recommended by the directors and in an amount not exceeding the amount recommended by the directors), while rule 87 is concerned with authorisation by the directors of the payment of interim dividends (which appear to be justified by the profits of the company).

The relevant statutory provisions

  1. [66]
    Section s 254V of the Corporations Act[66] provides:
  1. (1)
    A company does not incur a debt merely by fixing the amount or time for payment of a dividend. The debt arises only when the time fixed for payment arrives and the decision to pay the dividend may be revoked at any time before then.
  1. (2)
    However, if the company has a constitution and it provides for the declaration of dividends, the company incurs a debt when the dividend is declared.

(emphasis added)

  1. [67]
    Section s 254T of the Corporations Act[67] provides:
  1. (1)
    A company must not pay a dividend unless:
  1. (a)
    the company’s assets exceed its liabilities immediately before the dividend is declared and the excess is sufficient for the payment of the dividend; and
  1. (b)
    the payment of the dividend is fair and reasonable to the company’s shareholders as a whole; and
  1. (c)
    the payment of the dividend does not materially prejudice the company’s ability to pay its creditors.

Note 1:As an example, the payment of a dividend would materially prejudice the company’s ability to pay its creditors if the company would become insolvent as a result of the payment.

Note 2:For a director’s duty to prevent insolvent trading on payment of dividends, see section 588G.

  1. (2)
    Assets and liabilities are to be calculated for the purposes of this section in accordance with accounting standards in force at the relevant time (even if the standard does not otherwise apply to the financial year of some or all of the companies concerned).
  1. [68]
    Section 254T, prior to its amendment in 2010,[68] provided:[69]

A dividend may only be paid out of profits of the company.

Note:For a director’s duty to prevent insolvent trading on payment of dividends, see section 588G.

  1. [69]
    Section 588G of the Corporations Act[70] provides, relevantly:
  1. (1)
    This section applies if:
  1. (a)
    a person is a director of a company at the time when the company incurs a debt; and
  1. (b)
    the company is insolvent at that time, or becomes insolvent by incurring that debt, or by incurring at that time debts including that debt; and
  1. (c)
    at that time, there are reasonable grounds for suspecting that the company is insolvent, or would so become insolvent, as the case may be; and
  1. (d)
    that time is at or after the commencement of this Act.

(1A)For the purposes of this section, if a company takes action set out in column 2 of the following table, it incurs a debt at the time set out in column 3.

When debts are incurred

[operative table]

Action of company

When debt is incurred

1

paying a dividend

when the dividend is paid or, if the company has a constitution that provides for the declaration of dividends, when the dividend is declared

2

making a reduction of share capital to which Division1 of Part 2J.1 applies (other than a reduction that consists only of the cancellation of a share or shares for no consideration)

when the reduction takes effect

3

buying back shares (even if the consideration is not a sum certain in money)

when the buyback agreement is entered into

4

redeeming redeemable preference shares that are redeemable at its option

when the company exercises the option

5

issuing redeemable preference shares that are redeemable otherwise than at its option

when the shares are issued

6

financially assisting a person to acquire shares (or units of shares) in itself or a holding company

when the agreement to provide the assistance is entered into or, if there is no agreement, when the assistance is provided

7

entering into an uncommercial transaction (within the meaning of section 588FB) other than one that a court orders, or a prescribed agency directs, the company to enter into

when the transaction is entered into

  1. (2)
    By failing to prevent the company from incurring the debt, the person contravenes this section if:
  1. (a)
    the person is aware at that time that there are such grounds for so suspecting; or
  1. (b)
    a reasonable person in a like position in a company in the company’s circumstances would be so aware.

Note:This subsection is a civil penalty provision (see subsection 1317E(1)).

  1. (3)
    A person commits an offence if:
  1. (a)
    a company incurs a debt at a particular time; and

(aa)at that time, a person is a director of the company; and

  1. (b)
    the company is insolvent at that time, or becomes insolvent by incurring that debt, or by incurring at that time debts including that debt; and
  1. (c)
    the person suspected at the time when the company incurred the debt that the company was insolvent or would become insolvent as a result of incurring that debt or other debts (as in paragraph (1)(b)); and
  1. (d)
    the person’s failure to prevent the company incurring the debt was dishonest.

(underlining added)

The authorities relied upon by the Commissioner

  1. [70]
    The Commissioner relies on paragraphs 67 to 69 of the judgment of the Full Federal Court in Commissioner of Taxation v Noza Holdings Pty Ltd (‘Noza’).[71] We consider that paragraphs 64 and 66 are also material. All of those paragraphs are as follows:
  1. Second, the debt created by the declaration, even if invalidly created, was, at best, only voidable: it was not void ab initio. The consequences for the payment of such a dividend are affected by s 256D of the Corporations Act. As the Explanatory Memorandum to the Company Law Review Bill 1997 (Cth) (which introduced s 254V) states:

11.47 If dividends are paid otherwise than out of profits, the directors may be liable for a reduction of capital in contravention of the capital reduction provisions (Bill s 256F(3), Schedule 5 Item 13 s 256D(3)). However, the Bill will validate a dividend that is not paid out of profits (Bill s 256F(2)(a), Schedule 5 Item 18 s 256D(2)(a).

11.48 In the case of a public company every share will have the same rights in relation to dividends, unless the company’s constitution provides otherwise, or different dividend rights are provided for by special resolution (Bill s 254W(l)). For proprietary companies, the Bill will insert a replaceable rule authorising the directors to pay dividends as they see fit, subject to the terms on which the shares are on issue (Bill s 254W(2)).

  1. Here, as the primary judge found at Reasons [184]-[185], no proceedings were instituted in 2003 by CSA, or a shareholder or a creditor of CSA, to have the dividend declared void or to enjoin CSA from making payment of the dividend, and the dividend was in fact paid.
  1. It follows:
  1. (1)
    That by reason of the making of the declaration by CSA a liability came into existence, and thereafter CSA was “definitively committed and completely subjected” to paying the dividend, for the purposes of s 25-90 of the 1997 Act: Federal Commissioner of Taxation v Citylink Melbourne Ltd (2006) 228 CLR 1 at [137]. See also Industrial Equity Ltd v Blackburn (1977) 137 CLR 567 at 578;
  1. (2)
    even if, as contended by the Commissioner, CSA had no profit from which it could pay a dividend, once declared, CSA was obliged to pay the dividend until and unless a Court declared the dividend void: Marra Developments Ltd v BW Rofe Pty Ltd [1977] 2 NSWLR 616, per Hutley JA at 623; and,
  1. (3)
    in the absence of such a declaration, the only sanctions arising from a payment of a dividend in breach of s 254T are potential offences under s 254T or s 1311 of the Corporations Act: see Tampalini v Robinson [2005] WASC 182 at [37]; see also R v Kavanagh [1998] 4 VR 581 in which the option for declaratory relief of the kind referred to in Marra Developments was endorsed.
  1. But the Commissioner cannot rely on the existence of a hypothetical action not taken by any interested party to displace the taxable facts upon which the assessment must proceed: Federal Coke Company Pty Ltd v Federal Commissioner of Taxation (1977) 7 ATR 519 at 527-528; 15 ALR 449 at 458-459; Cridland v Federal Commissioner of Taxation (1977) 140 CLR 330 at 341 and BHP Billiton Finance Ltd v Federal Commissioner of Taxation (2009) 72 ATR 746 at [124], [126] and [129].
  1. For the foregoing reasons, we are of the view that upon declaration of the dividend by CSA in favour of CSF, CSA incurred a debt by virtue of the operation of s 254V(2) of the Corporations Act and that was so whether or not CSA had sufficient profits out of which to pay the dividend; on such declaration, CSA incurred an outgoing for the purposes of s 25-90 of the 1997 Act.

(emphasis added)

  1. [71]
    The Commissioner also relies upon the cases of Marra Developments Ltd v BW Rofe Pty Ltd (‘Marra’)[72] referred to in Noza[73] and in Industrial Equity Limited v Blackburn (‘IEL’).[74] In IEL[75] it was said by Mason J (as he then was) that the declaration of a final dividend gives rise to a debt payable by the company to the shareholder immediately.

The interrelationship between s 254V(2) and s 254T of the Corporations Act

  1. [72]
    Before the amendment of s 254T in 2010, the interrelationship between s 254V(2) and s 254T raised a number of questions.[76]
  2. [73]
    We consider that a question of law raised by the parties’ appeal submissions is what, if any, impact the introduction of s 254T of the Corporations Act (as amended in 2010) has on the principle expressed in Marra[77] and Noza[78] that ‘once declared, [the company is] obliged to pay the dividend until and unless a Court declared the dividend void’.
  3. [74]
    In our view, the answer is found in the obiter dicta observations of the New South Wales Court of Appeal in Wambo Coal Pty Ltd v Sumiseki Materials Co Ltd:[79]

… s 254T precludes the payment of a dividend unless there is an excess of assets over liabilities sufficient for the payment of the dividend, the dividend is fair and reasonable to shareholders as a whole and the dividend payment does not materially prejudice the company’s ability to pay its creditors. If all those conditions are not satisfied and the legal prohibition on the payment of any dividend operates, the situation is one in which no profits are available for dividend purposes; and that situation will continue unless and until the legal prohibition is no longer operative.

  1. [75]
    We note the Court’s description of the provision as imposing a ‘legal prohibition’ on the ‘payment’ of a dividend for so long as all conditions of s 254T of the Corporations Act[80] are not satisfied.
  2. [76]
    In our view, s 254V and s 254T can both be given effect even if they do not sit entirely harmoniously together.
  3. [77]
    By virtue of s 254V(2), if a company has a constitution that provides for the declaration of dividends, the company incurs a debt when the dividend is declared. This provision aligns with s 588G(1A) of the Corporations Act.[81] Upon the declaration of the dividend, a debt immediately arises in favour of the shareholder and a liability arises on the books of the company. That liability remains, unless and until a Court order is made declaring the declaration to be invalid.
  4. [78]
    However, s 254T imposes a statutory prohibition on the payment of the dividend if one (or more) of the conditions in that provision is (are) not satisfied. That provision does not affect the existence of the liability; we consider that the provision effectively suspends the obligation to pay, until such time as the conditions in s 254T are satisfied. This situation should only arise where the declared dividend is to be paid at a later date. In our view, a dividend payable immediately should not be declared if all of the conditions in s 254T are not satisfied. Viewed as summarised above, we consider that the principle in Marra[82] and Noza[83] is to be read as subject to the operation of s 254T (as amended) in this way.
  5. [79]
    We will also consider, briefly, the timing of the application of the three elements of s 254T(1).
  6. [80]
    Unlike s 254T(1)(a), s 254T(1)(c) makes no reference to the declaration of the dividend but imposes a condition that ‘the payment’ of the dividend ‘does not’ materially prejudice the company’s ability to pay its creditors. In our view, the plain intent is that the issue of material prejudice of the company’s ability to pay creditors arises at the time of the proposed payment. Similarly, the focus of s 254T(1)(b) is also on the time of payment at which time the company must make that assessment.
  7. [81]
    The condition in s 254T(1)(a) requires that the company’s assets must exceed its liabilities ‘immediately before the dividend is declared’ and ‘the excess’ (we interpolate, of assets over liabilities) must be sufficient for payment of the dividend. In our view, on the proper construction of the subsection, the phrase ‘the excess’ is to be adjudged immediately before declaration of dividend. The prescribed assessment is governed by subsection 254T(2), which adopts the applicable ‘accounting standards’.[84]
  8. [82]
    Given that ‘the excess’ must be determined at the time expressly identified in the subsection, the question arises as to whether that assessment must, on the proper construction of the subsection, also be made immediately prior to payment of dividend.
  9. [83]
    Note 2 to s 254T refers to s 588G of the Corporations Act in the context of a director’s duty to prevent insolvent trading on payment of dividends. Pursuant to s 588G(1A), when paying a dividend, a company incurs a debt when the dividend is paid or, if the company has a constitution that provides for the declaration of dividends, when the dividend is declared. Given the language of s 254T(1)(a), which ties the question of the sufficiency of the excess to the time immediately before the dividend is declared, we consider that, at least in cases where (as here) a company has a constitution that provides for the declaration of dividends, it is at least arguable that s 254T(1)(a) need only be satisfied as at the time specified in that subsection and satisfaction of the provision does not also arise at any subsequent time of payment. We consider it unnecessary to decide this question.
  10. [84]
    Accepting that s 254T imposes a prohibition on the payment of a dividend for so long as all conditions of s 254T are not satisfied, the next issue is whether, regardless, the Tribunal erred in reaching the conclusion at Reasons [118].

Analysis

  1. [85]
    As we read Reasons [118], the Tribunal’s conclusion that the unpaid dividends reflected an ownership connection between Telgrove and its shareholders and did not constitute a financial dependency was, having regard to the word ‘accordingly’ in the last sentence, based on the preceding findings that the shareholders had no ‘power’ to enforce payment of the unpaid dividends and that ‘the provisions’ of the Corporations Act ensured that there would be no danger of Telgrove facing financial difficulties. The provisions referred to appear to be those noted at Reasons [108] (which refers to s 254T), [109], [110] and [113]. Having regard to Reasons [108] to [118], we consider that the Tribunal’s conclusion at Reasons [118] necessarily included the (material) finding that Telgrove had no obligation to pay the unpaid dividends by virtue of s 254T (and s 588G) of the Corporations Act,[85] with the corollary that ‘the shareholders’ (relevantly for present purposes, the Trustee) had no ‘power’ to demand or enforce payment of the unpaid amounts.
  2. [86]
    For the reasons addressed below, we consider that whether or not Telgrove was entitled to withhold payment of the unpaid dividends, did not dictate the answer as to whether any financial dependency (or interdependency) existed between the businesses of Telgrove and the Trustee. However, even if this were not correct, we consider that the findings made did not support a conclusion that Telgrove was entitled to withhold payment of the unpaid dividends by virtue of s 254T. As we have found, Telgrove had an ongoing liability to pay the full amount of the unpaid dividend (or dividends) to the Trustee, subject to the prohibition on payment imposed by s 254T. The requirements of s 254T include the requirement that the payment of the dividend does not ‘materially prejudice’ the company’s ability to pay its creditors.[86] The Tribunal made no such finding. The Tribunal did find, at Reasons [114], that the evidence of Mr Nahrung (as sole director of Telgrove) was to the effect that dividends were only declared and paid on the advice of his external accountant (which was said to be ‘consistent with’ the observance of the Corporations Act provisions referred to at Reasons [113]).[87] However, in our view, such a finding plainly falls short of establishing that the condition in s 254T(1)(c) was not met from time to time during the period that the outstanding amounts of the dividends remained unpaid. We consider that the Tribunal erred in finding that ‘the shareholders had no power to enforce’ the payment of the unpaid dividends. In our view, this finding was material to the conclusion reached at Reasons [118].
  3. [87]
    In any event, we accept the Commissioner’s contention that it is not for the Tribunal standing in the shoes of the Commissioner to determine, in the context of a payroll tax matter, whether or not the ultimate cause of action for recovery of the debt (comprising the unpaid dividends) would be successful.[88] For example, in our view it would not assist a taxpayer to demonstrate, post hoc, that s 254T of the Corporations Act[89] was not satisfied during the relevant period if one or more the requirements of that provision were not satisfied, if the operation of s 254T (or the principles underlying it) had no part to play in a decision not to enforce payment of unpaid dividends. In our view, the issue of the payment of the unpaid dividends not being pursued raised the question of whether the Tribunal could be satisfied as to the preconditions in s 74(2), having regard to factors such as, the nature and degree of ownership and control of the respective businesses of Telgrove and the Trustee of the NFT and the extent to which the unpaid dividends amounted to financial interdependencies.[90] In our view, the Tribunal erred in approaching the question as the Members did.
  4. [88]
    However, it does not follow from the above matters that the Tribunal should otherwise necessarily have concluded that s 74(2) of the Act was not satisfied because of the matters relied upon by the Commissioner in this context. For example, we consider that the advice received by Mr Nahrung, as sole director of Telgrove, from his external accountant may be relevant to a consideration of s 74(2). Nevertheless, although not reflected in the Reasons, any decision by the Trustee not to pursue the unpaid dividends was a matter for Mr Nahrung as the governing mind of the Trustee company, being the sole director and shareholder and having total management and day-to-day control of the business of that entity.[91] The position from the viewpoint of Telgrove was only one side of the equation. Further, the question of the extent, if any, to which Telgrove had the capacity to pay some or all of the outstanding amounts of the unpaid dividends (without in fact materially prejudicing Telgrove’s ability to pay its creditors) may also be relevant.[92]
  5. [89]
    For the above reasons, the appeal should be allowed and the Decision set aside pursuant to s 147(3)(c) of the Queensland Civil and Administrative Tribunal Act 2009 (Qld). We propose to return the matter to the Tribunal for reconsideration, but limited to the issue of whether or not the Tribunal is satisfied that s 74(2) of the Act is engaged, having regard to the circumstances concerning the unpaid dividends (a subject of ground 4 of the appeal) and, if so satisfied, whether or not an exclusion order under s 74(1) of the Act should be made.

The exercise of discretion

  1. [90]
    The focus of the appeal was on the proper construction of s 74(2) of the Act, so that if, as the Commissioner submitted, the preconditions in s 74(2) of the Act could not be satisfied then no question of the exercise of the s 74(1) discretion arises.[93] On the other hand, the Commissioner accepted that should there be need for a redetermination in relation to the matters raised in ground 4, an appropriate course would be to remit the matter to the Tribunal at first instance for reconsideration of those matters and for the exercise of the s 74(1) discretion should the Tribunal be satisfied as to the preconditions in s 74(2) of the Act.[94]

Orders

  1. [91]
    For the above reasons, we make the following orders:
  1. Leave to appeal in respect of Ground 3 is refused.
  2. Leave to appeal in respect of Ground 4 is granted and the appeal on that ground is allowed in part.
  3. The appeal is otherwise dismissed.
  4. The Tribunal’s decision dated 15 July 2019 is set aside.
  5. The matter is returned to the Tribunal for reconsideration, but limited to the issue of whether or not the Tribunal is satisfied that s 74(2) of the Payroll Tax Act 1971 (Qld) is engaged having regard to the circumstances concerning the unpaid dividends (a subject of ground 4 of the appeal) and, if so satisfied, whether or not an exclusion order under s 74(1) of that Act should be made.
  6. The parties shall file (and serve on the other party), within 14 days of the date of delivery of these orders, any written submissions in respect of the question of costs of the application for leave to appeal or appeal.

Footnotes

[1]As to the circumstances in which grouping arises, see ss 68 to 73 of the Act.

[2]See Scott and Bird & Ors v Commissioner of State Revenue [2016] QSC 132, [13]-[15] (‘Scott’).

[3]Ibid, [24]. See also Tasty Chicks Pty Ltd & Ors v State Commissioner of State Revenue NSW (2011) 245 CLR 446, 451.

[4]See Seovic Engineering Pty Ltd v Chief Commissioner of State revenue [2015] NSWCA 242, [22]; Scott (n 2) 132 [19]-[25]. In the Explanatory Notes to the Pay-Roll Tax (Harmonisation) Amendment Bill 2008 (Qld), p 11. It is stated: ‘Because the provisions are drafted broadly, the Commissioner of State Revenue has a discretion to exclude members from a group where satisfied as to certain matters.’

[5] Scott (n 2) 132 [19].

[6](1988) 8 ATR 477, 486. See also Denham Constructions Pty Ltd & Ors v Chief Commissioner of State Revenue (1998) 40 ATR 416 (Supreme Court of NSW), 423-424; Port Augusta Medical Centre Pty Ltd v Commissioner of State Taxation [2011] SASC 31, [31]-[32]. It has been accepted that the businesses must be carried on ‘substantially’ independently and be not ‘substantially’ connected; the ‘connection must be material and not insignificant or inconsequential’: see Scott, [58]; Lombard Farms Pty Ltd v Chief Commissioner of State Revenue [2013] NSWADTAP 42, [50].

[7][1983] 1 Qd R 125, 141.

[8][2013] NSWADTAP 42, [44]-[45], per RL Seiden, Deputy President, J Block, Judicial Member, C Bennett, Non Judicial Member.

[9]Telgrove Pty Ltd t/as P & E Francis Plant Hire v Commissioner of State Revenue [2019] QCAT 199, [145].

[10] Transcript T1-6 line 36 – T1-7 line 12.

[11] [2016] QSC 132 at [19] and [39] to [41].

[12]An appeal on a question of law only is governed by s 146 of the Queensland Civil and Administrative Tribunal Act 2009 (Qld), while an appeal on a question of fact or mixed law and fact is governed by s 147 and is decided by way of rehearing. In relation to an appeal under s 146, it is only if the determination of the question of law is capable of resolving the matter as a whole in the appellant’s favour that the Appeal Tribunal will be in a position to substitute its own decision: Ericson v Queensland building Services Authority [2013] QCA 391, [25].

[13]See, for example, Penev v County Court of Victoria [2013] VSC 143, [68].

[14][2014] FCA 147, [172].

[15]In that regard, see B & L Linings Pty Ltd & Anor v Chief Commissioner of State Revenue [2008] NSWCA 187, [104].

[16]Appellant’s outline of written submissions, [18]-[24]; Appellant’s outline of written submissions in reply, [16]-[19]. It was submitted that a similar error was made in relation to Telgrove and Gnurhan B Pty Ltd as trustee for the Nahrung Family Trust: Appellant’s outline of written submissions in reply, [18].

[17]Appellant’s outline of written submissions, [32]; Appellant’s outline of written submissions in reply, [20].

[18][2019] QCAT 199, [82].

[19]Ibid, [84]-[85].

[20]Ibid, [86].

[21] Transcript 10 May 2019, 1-13, lines 1-22.

[22] Respondent’s appeal submissions, [4.10].

[23] [2013] NSWADTAP 42 at [50] and [51].

[24] Scott (n 2) 132 [58].

[25] [2002] NTSC 33.

[26] At [18], in relation to the Pay-roll Tax Act (NT).

[27] Scott (n 2) 132 [58]-[59] (Bond J).

[28]Appellant’s outline of written submissions, [26]-[28]. See also Applicant’s Outline for Hearing, [32]-[33]. In the alternative, the Commissioner submits that even if the exclusive rights were relevant, the Tribunal should also have had regard ‘to the evidence of the history of the establishment of Postville by Mr Nahrung, and the inference that could reasonably be drawn that the decision of Postville to secure the licence to sell the Kubota parts in Queensland (a decision in which Mr Nahrung was actively involved), assisted both businesses’: Applicant’s Outline for Hearing, [34]. If anything, this submission properly belongs under ground 3 of the appeal. It seems that this point was not taken at the hearing at first instance: see Respondent’s (the Commissioner) Final submissions, 15 February 2019, Hearing Book, 1160. In any event it is not clear that the suggested inference is open from the affidavit relied upon by the Commissioner: see Hearing Book 685-686, 1395.

[29]Explanatory Notes, Pay-Roll Tax (Harmonisation) Amendment Bill 2008 (Qld) 11, 16. See also Scott (n 2) 132 at [23]. For a summary of the circumstances giving rise to a grouping, see Queensland Treasury Public Ruling PTA031.2 ‘Commissioner’s discretion to exclude from a group’, at point 3.

[30]That is, a related body corporate under the Corporations Act 2001 (Cth): see s 66 of the Act.

[31]Scott (n 2) 132 [40]-[41].

[32]Appellant’s outline of written submissions, [33]-[34].

[33]Scott (n 2) 132 [41].

[34][2006] NSWCA 298, [52]. See also Confidential and Commissioner of Taxation [2013] AATA 112, [186]-[187], where it was said that an example of an evaluative judgment in the administrative context is ‘a discretionary decision requiring the weighing of factors and combination of factors’.

[35] Scott (n 2) 132 [45].

[36](1998) 40 ATR 416 (Supreme Court of NSW), 416, 424.

[37]See Phian Pty Ltd v Commissioner of State Revenue [2016] QCAT 191, [107]; Beaumont Constructions Pty Ltd & Ors v Commissioner of State Revenue [2020] QCAT 52, [275], [302]; Denham Constructions Pty Ltd & Ors v Chief Commissioner of State Revenue (1998) 40 ATR 416 (Supreme Court of NSW), 424; Port Augusta Medical Centre Pty Ltd v Commissioner of State Taxation [2012] SASCFC 7, [68]; Plummers Border Valley Orchards v Commissioner of Taxes [2002] NTSC 33, [33]-[36]; Lombard Farms Pty Ltd v Commissioner of State Revenue [2013] NSWADTAP 42, [73]; Edgely Pty Ltd v Chief Commissioner of State Revenue [2015] NSWCATAD 16, [98]; Regis Mutual Management Pty Ltd v Chief Commissioner of State Revenue [2015] NSWCATAD 213, [63], [85]; Cessnock Tyres Pty Ltd v Chief Commissioner of State Revenue [2018] NSWCATAP 147, [44]; HJA Holdings Pty Ltd & Ors v Commissioner for ACT Revenue [2014] ACAT 24, [101], [103].

[38]In relation to the exclusion decision, the Senior Investigations Officer having stated that she was not satisfied in terms of s 74 of the Act that the business was carried on independently of and not connected with the business carried on by other members of the group, and having noted that it is incumbent on the Commissioner to consider all relevant matters, added that ‘it is a matter for the Commissioner to decide what weight to the factors considered’: Appeal Book, volume 2, pp 431, 442. In relation to the objection decision, the same approach is taken: Appeal Book Volume 1, p48ff.

[39]Appeal Book, volume 2, pp 431, 442.

[40]Appeal Book, volume 1, pp 38ff.

[41]Ibid, [68]

[42]Ibid, [69]-[70].

[43]Ibid, [71] ff.

[44]Hearing Book, volume 3, Tab 26, [58]-[61].

[45]Ibid, [152]-[153]. Reliance was also placed on the objection decision: see Respondents Final Submission, 10 May 2019, Appeal Book, Tab 19, [1]

[46] We assume the reference to the purchases of parts ‘from’ Telgrove should have read ‘by’ Telgrove.

[47] Reasons [60].

[48] Commissioner's primary submissions, paragraphs 51 to 53.

[49] Commissioner's primary submissions 55, 80; Commissioner's reply submissions 37.

[50] See, in particular, Commissioner's written submissions, paragraphs 56, 58 and 62.

[51] See, in particular, Commissioner's written submissions, paragraphs 64, 72, 73 and 77.

[52] Telgrove’s appeal submissions, paragraph 7.14, citing Re Associated Electronics Services Pty Ltd (In Voluntary Liquidation) [1965] Qd R 36 at 41.

[53] Crusher Holdings Pty Ltd v Commissioner of Taxes (NT) [1994] 29 ATR 156.

[54] See e.g. T 1-58 lines 8-12; Telgrove’s appeal submissions, paragraphs 7.6 to 7.11.

[55] See, in particular, Commissioner's written submissions, paragraphs 64 and 67.

[56] Paragraph 66.

[57] Commissioner's primary submissions, paragraphs 29, 68, 70, 72, 74 and 77.

[58] Corporations Act (n 31).

[59]Telgrove’s written submissions, paragraphs 7.28 and 7.31; see also paragraphs 7.20, 7.32 and 7.38.

[60] Telgrove’s written submissions, paragraphs 7.21 to 7.33.

[61] Corporations Act (n 31).

[62] Ibid s 254T.

[63] Reasons [116] and [118].

[64] HB pp 691-695.

[65] Reasons [106].

[66] Corporations Act (n 31).

[67] Ibid.

[68] Pursuant to the Corporations Amendment (Corporate Reporting Reform) Act 2010 (Cth).

[69] This provision is in similar terms to the provision referred to in Industrial Equity Ltd v Blackburn (1977) 137 CLR 567: see paragraph 71, below (s 376(1) of the Companies Act 1961 (NSW)), which provided that no dividend shall be payable to the shareholders of any company except out of profits.

[70] Corporations Act (n 31).

[71] (2012) 201 FCR 445 (‘Noza’).

[72] [1977] 2 NSWLR 616 (‘Marra’).

[73] Noza (n 71).

[74] (1977) 137 CLR 567 (‘IEL’).

[75] Ibid 572.

[76] Grant-Taylor v Babcock & Brown Ltd (in liq) (2015) 322 ALR 723 [2015] FCA 149 at [47](v) per Perram J.

[77] Marra (n 72).

[78] Noza (n 71).

[79] (2014) 88 NSWLR 689 at [126] per Barrett JA with whom Bathurst CJ and Beazley P agreed; see also [57].

[80]Corporations Act (n 31).

[81] Ibid.

[82] Marra (n 72).

[83]Noza (n 71).

[84]As defined in s 9 of the Corporations Act, picking up s 334 of that Act.

[85] See also Reasons [116].

[86] Subsection 254T(1)(c).

[87] We note the evidence of Mr Nahrung at T1-59 line 22 – T1-61 line 29; T1-85 line 13 – T1-87 line 10.

[88] Commissioner’s Outline for Hearing, paragraph 70.

[89] Corporations Act (n 31).

[90] See, eg, Scott (n 2) at [60(a)] and [60(c)].

[91] Reasons [70] and [71].

[92] We note Mr Nahrung’s evidence at HB 1297 (line 37) – 1298 (line 17) and 1322 (line 4) – 1324 (line 14); the matters raised in paragraphs 7.44 to 7.46 of Telgrove’s written submissions; and also the matters raised in paragraph 76 of the Commissioner's appeal submissions.

[93]Transcript 1-13, line 28.

[94] Ibid, 1-13, 28-41.

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Editorial Notes

  • Published Case Name:

    Commissioner of State Revenue v Telgrove Pty Ltd

  • Shortened Case Name:

    Commissioner of State Revenue v Telgrove Pty Ltd

  • MNC:

    [2021] QCATA 67

  • Court:

    QCATA

  • Judge(s):

    Senior Member Aughterson, Member Lumb

  • Date:

    28 May 2021

Appeal Status

Please note, appeal data is presently unavailable for this judgment. This judgment may have been the subject of an appeal.
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