• The impact of this case on ATO policy is discussed in Decision Impact Statement: Water West Pty Ltd and Commissioner of Taxation (2021-4194).

Water West Pty Ltd v FC of T

Members:
BJ McCabe DP

Tribunal:
Administrative Appeals Tribunal, Sydney

MEDIA NEUTRAL CITATION: [2022] AATA 427

Decision date: 8 March 2022

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BJ McCabe (Deputy President)

1. The Commonwealth provided a range of supports to businesses that were struggling in the face of the recent Coronavirus pandemic. The measures - including the Jobkeeper payment and the cashflow boost - were

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introduced quickly to deliver assistance when it was required. Given that time was of the essence, the administration of the various measures was entrusted to the Commissioner of Taxation who was able to bring the resources of the Australian Taxation Office to bear. The legislation also used legal concepts already contained in taxation legislation instead of legislating from scratch.

2. The applicant in these proceedings says it is entitled to receive cashflow boost payments in the months of March, April, May and June 2020. The Commissioner concluded (at first instance, and on objection) that the applicant did not satisfy the rules which govern eligibility for the payments. The rules in relation to the first round of cashflow boosts - the payments in question in this case - are found in s 5 of the Boosting Cash Flow for Employers (Coronavirus Economic Response Package) Act 2020 (Cth) (the BCF Act). (The rules governing eligibility for the second round of cashflow boost payments are found in s 6 of the BCF Act.)

3. Section 5(1) includes a series of requirements that must be satisfied. The only requirement which is in issue for present purposes is that set out in s 5(1)(d)(ii). The sub-section requires that:

… the commissioner is satisfied on a reasonable basis that the entity is a small business entity or a medium business entity for the income year in which the period starts;…

4. The question of what constitutes a small business entity or medium business entity is determined with reference to the aggregate turnover of that entity and related entities at a point in time. The applicant in this case was formerly part of a much larger group of companies with a high aggregate turnover. The applicant could not satisfy the requirement in s 5(1)(d)(ii) if its entitlement to cashflow boost was assessed at a point in time when it was part of the larger group. But the applicant's share ownership changed in December 2019, and it changed again in March 2020. The applicant was no longer part of the larger group after the change in ownership at the end of December 2019. After that date, it was part of a different group (actually, two different groups - one post December 2019 and another post March 2020) that had much lower aggregate turnover. The applicant says it clearly qualified as a small business entity following the change in shareholdings which cut its links with the larger group in December 2019. The Commissioner disagrees. He says the relationship with the larger group was still relevant during the income year in which the relevant period starts. In those circumstances, I was told, the applicant's aggregate turnover includes the turnover of the large multinational group - which means the applicant was not a small or medium business at the time when eligibility must be assessed. The Commissioner explains that outcome is a consequence of the way the legislation requires that one define the relevant income year.

5. The Commissioner has the better of the legal argument. It follows the reviewable objection decision must be affirmed. I explain my reasons below.

6. The parties provided submissions and other materials, and the matter was heard on the papers pursuant to s 34J of the Administrative Appeals Tribunal Act 1975 (Cth) (the AAT Act).

THE FACTS

7. The underlying facts are largely uncontroversial. The applicant was incorporated on 24 October 2013. It was a subsidiary of BPIH Pty Limited, which traded as Brookfield Infrastructure Group. Companies in the BPIH group managed large infrastructure assets. BPIH is a significant global entity, or SGE.

8. At the outset, the applicant and its parent had different accounting periods. The applicant's accounting period began on 1 July and concluded on 30 June in the following year. That is the default position for Australian companies: s 4-10 of the Income Tax Assessment Act 1997 (ITAA97) requires that income tax be paid by Australian companies in respect of a financial year that ends on 30 June. But the parent company was headquartered in Canada. The accounting period for Canadian companies usually ends on 31 December. That creates difficulties for corporate groups that need to prepare consolidated accounts. It is usually desirable for all companies in a group to have the same accounting period. That is why

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the Commissioner has a discretionary power to change the accounting period where appropriate. The power is found in s 18 of the Income Tax Assessment Act 1936 (ITAA36).

9. In September 2014, the applicant applied to the Commissioner for permission under s 18 of ITAA36 to change its accounting period to a 'substituted accounting period', or SAP, to achieve synchronisation with its parent. I note the request form confirmed the combined entities had total business income exceeding $250 million in a normal 12-month period: document ST23 at 126. The Commissioner agreed to the SAP: see document T3 at 17. The substitution was effected by creating a transitional accounting period in the 2015 year of income that was underway at the time of the approval. The transitional period for the 2015 year of income was taken to commence on 1 July 2014 and end on 31 December 2014. The new accounting period for the 2016 year of income was taken to commence on 1 January 2015 and end on 31 December 2015. Thereafter, the applicant would account at the end of the calendar year like the other companies in its group. The letter of approval from the Commissioner dated 22 September 2014 included the following observation:

Your new accounting period remains in place unless we give approval for you to use another period. You should keep this letter as a record of this change.

10. Copies of BPIH's consolidated group company tax returns for the years ended 31 December 2018 and 31 December 2019 are included in the supplementary T documents (ST26 and ST27). The group reported total gross income of $1,598,686,340 in the 2018 year of income and total gross income of $2,292,788,921 in the 2019 year of income. Its GST inclusive sales in the first six months of the 2020 calendar year ranged from $73.4 million in one month to $80.4 million in another, for a total of $457,784, 413 during the period. The BPIH group was, on any analysis, a big business - and the applicant was part of it. BPIH held 73% of the shares in the applicant.

11. The applicant said that changed on 10 December 2019. On that date, BPIH transferred all its shares in the applicant to three other entities: Azure Capital Investments Pty Ltd, Azure Capital Securities Pty Ltd and Mr Jeffrey Strahan as trustee for the Strahan Family Trust. In written submissions, the applicant pointed out those three entities had an aggregated turnover at all relevant times of less than $10 million.

12. The applicant pointed out in written submissions there was a further change of ownership on 3 March 2020. On that date, the Azure entities sold all their shares in the applicant to a company the applicant identified as Local Utility Pty Ltd. Mr Strahan, who had come to own 23% of the shares in the applicant, also sold most of his shareholding to Local Utility. Local Utility was a member of the Dahl group of companies. The applicant says it thereafter had an aggregated turnover (ie a turnover that included that of its parent) at all material times of less than $10 million.

13. While the dates of the share transactions are not in doubt, they are not the only dates that are relevant to the outcome of these proceedings.

14. On 20 March 2020, following the most recent change in ownership, the applicant applied to change its substituted accounting period. It asked to revert to a balance date of 30 June to synchronise with the accounting period of its (new) parent.

15. The form recording the application for change (document T5) says the new parent of the applicant was a company called Thixotropic Holdings Pty Ltd. That document did not mention Local Utility. Thixotropic was said to own 95% of the shares in the applicant. The apparent discrepancy is resolved when one has regard to the other T documents, which include a letter from the applicant's tax agent to the Commissioner dated 11 December 2020 setting out its argument in favour of eligibility. The letter explained both Local Utility and Thixotropic were part of the Dahl group of companies. I infer Local Utility was either controlled by Thixotropic, or Local Utility was the new name of Thixotropic. That anomaly might have been conveniently resolved at a hearing but the precise details of the ownership structure of the group probably does not make any difference to the outcome of the proceedings. It is the aggregated turnover of the related companies that is relevant.

16.

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In any event, the applicant said in the request dated 20 March 2020 that the change in reporting date became necessary on 3 March 2020. That was the date of the most recent change in ownership. The Commissioner agreed to the request. In a letter dated 8 April 2020 (document T6), the Commissioner confirmed the transitional accounting period to achieve the change would see the 2020 income year commence on 1 January 2019 and end on 30 June 2020.

17. On 19 March 2021, the applicant applied for a new SAP with an early balance date of 31 December 2019. In its form requesting the change (document T15), the applicant did not indicate it wanted the change in order to synchronise the balance date with other companies in its group. Its stated reason for seeking the change was:

A PREVIOUS SAP APPLICATION FORM WAS SUBMITTED AND ACCEPTED TO CHANGE THE BALANCE DATE FROM 31 DECEMBER (EARLY) TO 30 JUNE. HOWEVER, THIS WAS DONE IN ERROR AND WE ARE REQUESTING TO CHANGE THE BALANCE BACK TO 31 DECEMBER (EARLY).

18. The Commissioner declined to exercise the discretion to allow an SAP in response to the March 2021 application. The reasons for decision were included in a letter dated 21 April 2021: document T16. The Commissioner concluded the applicant had not provided sufficient reasons to justify a SAP when it was understood its Australian parent had an accounting period ending on 30 June. In those circumstances, the Commissioner explained in the correspondence, the earlier decision to revert to an accounting period concluding on 30 June remained in effect.

19. I note the applicant lodged activity statements declaring PAYG holding amounts for the months ending 31 March, 30 April, 31 May and 30 June 2020.

20. Consistent with the Commissioner's decision of 8 April 2020, the applicant lodged its tax return for the year 1 January 2019 to 30 June 2020 on 28 May 2021. The Commissioner pointed out in written submissions that the return did not identify an immediate or ultimate holding company. The return also did not say the applicant was part of a SGE which would be required to provide additional documentation. The applicant points out in written submissions that it had advised the Commissioner in correspondence dated 8 April 2020 that it was no longer part of an SGE.

21. In the meantime, the pandemic had taken hold. The Commonwealth responded with its relief including the cashflow boost payments under the BCF Act. Those measures were announced in a press release dated 12 March 2020 which outlined the eligibility requirements. The press release also explained the measures were specifically designed to "keep Australians in jobs and help[…] small and medium sized businesses to stay in business".

22. The applicant applied for cashflow boost payments for the period in question. The Commissioner said the applicant was ineligible, a position that was confirmed on objection. Which brings us to the law that governs the outcome in the present proceedings.

THE LAW

23. There does not appear to be any dispute that the decisions as to eligibility for the cashflow boost in the periods March, April, May and June 2020 are discrete and severable. Section 5(1)(d)(ii) requires me to identify in each case "the income year in which the period starts". Section 4(1) of the BCF Act directs one to the definition of 'income year' in the ITAA97. The provisions of the ITAA97 assume the income year is the financial year unless an exception applies - including where the Commissioner has allowed a SAP pursuant to s 18 ITAA97. In this case, the relevant income year in which all of the periods start is 1 January 2019 through 30 June 2020: see the Commissioner's letter dated 8 April 2020. The assessment as to whether the applicant was a small business entity or a medium business entity must be completed having regard to that period.

24. Which brings me to the question: what is a small business entity? The definition section of the BCF Act once again refers to the definition in the ITAA97 - specifically, s 328-110(1), which provides:

• 1) You are a small business entity for an income year (the current year) if:

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    (a) You carry on a *business in the current year; and
  • (b) One or both of the following applies:
    • (i) You carried on a business in the income year (the previous year) before the current year and your * aggregated turnover for the previous year was less than $10 million;
    • (ii) Your aggregated turnover for the current year is likely to be less than $10 million.

25. There is no doubt the applicant was carrying on a business at all material times. The question is whether it can satisfy either of the limbs in s 328-110(1)(b).

26. The first limb focuses on the previous income year. As I have already explained, the previous income year to the one in question concluded on 31 December 2018. That is a problem for the applicant because it was a member of the BPIH group of companies throughout that entire year. Section 328-115 says the applicant's aggregated turnover during that income year includes the annual turnover (defined in accordance with s 328-120) of connected or affiliated companies. It follows the applicant's aggregate turnover for that previous income year far exceeded $10 million. (I would reach the same conclusion even if the Commissioner had not agreed to the change of income year on 8 April 2020. If that decision had not been made, the income year would have been 1 January 2019 through 31 December 2019 as a consequence of the Commissioner's decision in late 2014 to accept a SAP. The applicant remained a part of the BPIH group throughout most of the 2019 calendar year, so the turnover of the group companies was relevant.)

27. The second limb focuses on the current income year (ie, the income year at the time the applicant applied for the cashflow boost payments). As a consequence of the Commissioner's decision dated 8 April 2020, the current income year for present purposes commenced on 1 January 2019 and concluded on 30 June 2020. At first glance, that suggests the turnover of the BPIH group remains relevant since the applicant was part of the BPIH group for almost two thirds of that year - and s 328-110(2) says you work out your aggregated income for the current year as at the first day of that year.^[1] Where the entity commences business during the year, the assessment is made as at the date the business commenced: s 328-110(2)(b). Section 328-110(3) also says an entity cannot be a small business entity in the current year if it had an aggregated turnover exceeding $10 million in the two previous years. That exclusion appears to apply here.

28. The applicant points out s 5(1)(d)(ii) refers to the Commissioner being satisfied on a reasonable basis that the applicant was a small business entity in the relevant year of income. The applicant says the Commissioner (and the Tribunal, on review) should take account of the change in the applicant's ownership that occurred when it exited the BPIH group in late 2019, and the further change in ownership that occurred in March 2020. The applicant points out the Commissioner was aware of the change in ownership by at least 4 March 2020 when the applicant (unsuccessfully) applied to change the substituted accounting period under s 18 ITAA97. There is no doubt the applicant and its related and affiliated companies did not have an aggregated turnover of greater than $10 million following the change in ownership. When one has regard to the ownership changes in light of the beneficial intent behind the BCF Act, I was told, it was obvious the Commissioner had a reasonable basis for concluding the applicant was a small business entity in the relevant year of income.

29. In written submissions, the applicant questioned whether the Commissioner was correct in claiming that the income year in question was the 18-month transitional period provided for in the letter dated 8 April 2020. The applicant referred to correspondence and policy statements that it said were inconsistent with that position. The written submissions appear to argue the Commissioner's position with respect to the year of income was reasonable.

30. Section 5(1)(d)(ii) does not authorise the Commissioner to determine whether a particular year of income is reasonable. The power to change the default income year is found in s 18 ITAA97, and that power was last exercised on 8 April 2020. (The Commissioner declined to exercise the power again in 2021 when asked to do so, so the decision of April 2020 stands.) To the extent the applicant is

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asking me to make different findings about the year of income to those I have already made, that is impossible.

31. That said, it remains necessary to consider whether the Commissioner has a reasonable basis for concluding the applicant was a small business entity (or a medium business entity if its aggregate income was less than $50 million) in the relevant year of income. The Commissioner says that question cannot be asked in a vacuum: one must have regard to the definition of small business entity in s 328-110 of ITAA97. For reasons I have explained, the applicant cannot satisfy s 328-110(1)(a) or either limb of s 328-110(1)(b) because the timing of the income year meant the turnover of the BPIH group companies had to be taken into account. It is not open to the Commissioner to identify other reasons that might justify a departure from that outcome which is mandated by the operation of the statute. The power to make a determination on a 'reasonable basis' is only available where the Commissioner does not have access to all of the information he would ordinarily consider when making an assessment of likely turnover. As the explanatory memorandum makes clear, the urgency of the situation confronted by the BCF Act might justify the Commissioner taking a more flexible approach towards the information he required when making assessments of likely turnover in connection with an application for a cashflow boost payment: explanatory memorandum at [3.23]-[3.26]. But that is not the challenge here. There is no doubt about the applicant's aggregated turnover in the relevant income year. Section 5(1)(d)(ii) of the BCF Act does not permit the Commissioner to ignore the operation of s 328-110 ITAA97 to achieve an outcome that is reasonable having regard to the laudable objectives of the BCF Act.

CONCLUSION

32. The applicant relied heavily on the widely discussed policy arguments which motivated the introduction of the legislation. When one has regard to those arguments, it is easy to see why the applicant thinks it should have access to the scheme.

33. While the law in this case conferred some limited procedural discretion on the Commissioner in his administration of the programs, the rules mostly dictated outcomes in individual cases. The applicant in this case points to statements of policy and other materials that raised expectations about the purpose of the scheme comprised in the law. While well-intentioned, those statements do not govern the outcome. The Commissioner (and the Tribunal when it stands in the Commissioner's shoes on review) must give effect to the legislation. While that can occasionally lead to disappointed expectations, it cannot be any other way in a society governed by the rule of law. The executive must give effect to the law parliament has actually written. The Commissioner and the Tribunal cannot rewrite the law to meet a laudable policy objective.

34. The objection decision must be affirmed.