A hit on the Chief Commissioner’s grouping powers

Does a disclaimer signed by a beneficiary of a trust mean that the grouping provisions of the Taxation Administration Act 1996 and the Payroll Tax Act 2007 have no application for the tax years in question?

In answering that question affirmatively, his Honour White J’s decision in Smeaton Grange Holdings Pty Ltd v Chief Commissioner of State Revenue [2016] NSWSC 1594 is a significant blow to the Chief Commissioner’s extended recovery artillery.

The Chief Commissioner assessed a company now in liquidation as being liable for payroll tax, interest and penalties. The Chief Commissioner then issued assessments to two other companies on the basis that they were members of a group of companies that included the company in liquidation, by operation of section 72(1), (2)(g) and (6) of the Payroll Tax Act 2007. Parenthetically, and as his Honour noted, section 106I(6) of the Taxation Administration Act as in force during the 2005 to 2007 financial years was to the same effect as section 79(6) of the Payroll Tax Act 2007.

The facts which led to the basis of the Chief Commissioner’s determination to group the three companies was generally accepted however somewhat complex; the grouping involved a series of relationships between a particular director, his family members, two discretionary trusts, the insolvent company, and the solvent companies each a trustee of one of the two discretionary trusts.

Relevantly though, and after the period of assessment, the director executed various deeds poll in which he disclaimed any interest he might have had under the two discretionary trusts. The Chief Commissioner accepted that the only basis upon which he relies for grouping the two solvent plaintiff companies with the two discretionary trusts was if the director fell within section 106I(6) of the Taxation Administration Act as in force prior to 1 July 2007, and section 72(6) of the Payroll Tax Act 2007 from 1 July 2007, as a discretionary object of those trusts.

The plaintiffs contended that the disclaimers were effective and operated retrospectively so that the director was taken never to have been a discretionary object of either trust. This require the Court to answer four questions, namely whether:

  1. it is possible for the director to have disclaimed his right as a discretionary object;
  2. disclaimer of the director’s rights as a discretionary object can be effected by a deed poll, without consideration being provided to him for the surrender of those rights;
  3. the director tacitly accepted his position as a discretionary object of either trust so that it was too late for him to disclaim; and
  4. the disclaimers could operate retrospectively so as to defeat the operation of the statute, notwithstanding that a liability for payroll tax was imposed on the insolvent employer in each month in the tax years in question and was imposed on every member of a group of which the insolvent company was a member when it failed to pay the tax for which it was liable.

Answering each of the questions in favour of the plaintiffs, his Honour’s rational in respect of the last question on retrospective disclaimer was of great importance to grouping liability. At [107] – [108] his Honour said:

As a matter of general law, it was open to [the director] to disclaim the right whereby he could so benefit from the discretionary trusts and such a disclaimer would operate retrospectively. I see no reason that the general law principle as to the retrospective effect of a disclaimer cannot apply. That would be consistent with authority.

Moreover, persons may be discretionary objects of discretionary trusts without their knowledge. There may be many discretionary trust deeds under which the whole world other than specifically excluded individuals are potential discretionary objects … The grouping provisions could operate oppressively if the general law principles in relation to disclaimer did not have their full operation.”

The result: the Chief Commissioner is to revoke the notices of assessment addressed to the solvent plaintiffs.

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