Re S. & N. (Nominees) Pty. Ltd. (in liq.).

Judges:
Kelly J

Court:
Supreme Court of the Australian Capital Territory

Judgment date: Judgment handed down 10 April 1984.

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Kelly J.

An order for the winding up of S. & N. (Nominees) Pty. Limited (Nominees) was made on 13 May 1983. Mr. Robert Yeomans, an official liquidator, was appointed its liquidator. The Deputy Commissioner of Taxation for the Australian Capital Territory (the applicant) lodged a proof of debt for $46,178.09 and of that amount claimed preference for $44,853.49. By notice dated 27 July 1983 the liquidator admitted the applicant's claim as to the sum of $11,447.93 but disallowed the balance, $34,730.16, on the ground that it represented outstanding group tax and late payment penalties owing by associated companies namely, Manco Pty. Limited, Marell Pty. Limited and Marelman Pty. Limited (the associated companies).

By application dated 5 October 1972 S. & M. Engineering Pty. Ltd. of 27-29 Collie Street, Fyshwick sought registration as a group employer under the Income Tax Assessment Act 1936 (the Act). The photocopy of the application admitted in evidence shows that a group registration number, 87826, was allotted. On 7 July 1976 a letter in the following terms was written to the Deputy Commissioner of Taxation, Sydney:

``Dear Sir,

Reference: REGISTERED GROUP

EMPLOYER

GROUP No. 87826

We wish to advise that the above mentioned Group Employer ceased operations as S. & M. Engineering Pty. Ltd. on the 30th June, 1976 and became known as S. and N. Nominees as from the 1st July 1976. The company will continue trading as S. and N. Nominees.

Yours faithfully,

S. and N. NOMINEES

[Sgd]

(Jozsef Szell)''

A letter of 19 July 1979 written to the applicant was as follows:

``Dear Sir,

S. & M. Engineering Pty. Limited.

Group Tax Registration No.: 154836-98

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We wish to advise that S. & M. Engineering Pty. Limited sold its business undertaking on 30th September, 1977 to S. & N. Nominees Pty. Limited.

S. & M. Engineering Pty. Limited subsequently changed its name to Marell Engineering Pty. Limited and S. & N. Nominees Pty. Limited registered under its name the business name of S. & M. Engineering.

As from 1st September, 1978 Marell Engineering Pty. Limited and Manco Pty. Limited, being two employers associated with S. & N. Nominees Pty. Limited conjoined with that latter company in remittances to your office of the tax instalment deductions from all employees in the group; and Group Certificates have been issued for the year ended 30th June, 1979 to employees in the group, showing the name of the employer as S. & M. Engineering under Group No.: 154836-98.

We overlooked notifying you of these changes at the time they occured. However, we would now like you to make record of the fact that the companies conjoined under this group registration are:

• S. & N. Nominees Pty. Limited trading as S. & M. Engineering.
• Marell Engineering Pty. Limited.
• Manco Pty. Limited.

We wish to formally effect multiple group tax registration for the above three employers under the name of S. & M. Engineering. If special forms of application or other documentation are required to be completed we would be grateful if you would forward these to us.

The Public Officer for each company for the purposes of group tax registration is Malcolm Angelo Negri whose address for service of notices is 62 Townsville Street, Fyshwick.

Yours faithfully,

[Sgd]

M.A. Negri.

Public Officer.''

Photocopies of a number of documents described as ``Taxation Office copy remittance by Group Employer'' (advices) were also tendered. They related to the months of July, September, October and November 1982 and January 1983. Two were lodged in respect of the month of September 1982, the second for a small amount. The group number shown on each advice was 154 836 98. Grant Kingsley Van Every, a chief recovery officer in the office of the applicant, explained that when a new computer system was introduced into that office to monitor group registrations, the number formerly allotted to S. & M. Engineering Pty. Limited was converted to a new number, 154 836 98, compatible with the computer system.

All but one of the advices, that for the small amount to which I have referred, bore a certificate which referred to

``... the undermentioned Group Employer: -

S. & N. Nominees Pty. Ltd. & Assocs companies.''

The exception included in a space provided for the correction of names and addresses the following:

``S. & N. Nominees P/L 62 Townsville Street, Fyshwick.''

S. & M. Engineering Pty. Limited was incorporated on 8 September 1972. On 18 April 1978 it changed its name to Marell Engineering Pty. Limited. A return dated 31 October 1980 showed its directors as Jozsef Szell and Margaret Szell. Manco Pty. Limited was incorporated on 2 May 1974. A return dated 31 October 1980 showed its directors as Malcolm Negri and Judith Negri. It was not until 19 July 1976 that S. & N. (Nominees) Pty. Limited was incorporated. The letter of 7 July 1976 quoted above therefore gave a misleading impression. A return dated 30 June 1980 showed its directors as Jozsef Szell and Malcolm Angelo Negri. The fourth company, Marelman Pty. Limited, was incorporated on 5 June 1980. A return dated 12 June 1980 showed its directors as Malcolm Angelo Negri and Jozsef Szell.

Nominees paid the wages for all the employees of all four companies each week. Until the end of November 1982 and for the month of January 1983 it also made deductions on account of income tax from the wages of all employees it paid and forwarded them to the applicant. No deductions on account of the months of December 1982 and February, March, April and May 1983 were forwarded although net wages were paid as though deductions had been made. Nominees debited the loan account of each of the associated

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companies with the amount of wages paid. The liquidator in evidence described the process as follows:

``[Nominees] made the actual wage payments and then on a monthly basis made a charge back to each of their three associated companies for the wages paid by [Nominees] on behalf of those three companies and then on an annual basis raised an entry being the charge for management fee.''

The management fee was said to be 15 per cent of the amounts provided for the associated companies by Nominees. I do not regard as sufficiently proved at this stage the statement that an annual charge of 15 per cent was made. During the course of the hearing I was referred to a journal entry, part of Exhibit ``RJY 9'', identified as Folio J40. A section of the entries in that folio, all which related to June 1982, was as follows:

      ``Dr Management Fee -             Marell       172     57,727.63
                                       Manco       172     15,227.68
          Sub Contract:               Marell       161     25,851.26
                                       Manco       162     72,644.38
                                    Marelman       163    112,456.22
      Cr Loan A/c                     Marell       102     83,578.89
                                       Manco       103     87,872.06
                                    Marelman       104    112,456.22
      Being management fees &       Sub Contract costs charged
      for year''
        

It seems clear that each of the entries just quoted is for an annual entry, in this case for the year ended 30 June 1982.

One of the supporting folios, 102, was headed ``Loan A/c: Marell Engineering P/L''. It shows first a credit balance as at 1 July 1981 of $2,391. It shows then a debit of $69,123.61 for the year on account of payroll distribution and debits for accountancy of $300, for a lodgment fee of $50, for ``Insurance WC'' (which I take to be workmen's compensation insurance) of $405.08 and a sum for superannuation of $13,670. Folio J40 describes the sum of $13,670 as a debit against Marell Engineering Pty. Limited loan account credited to the superannuation account and said to be superannuation paid by Nominees on behalf of Manco Pty. Limited. Leaving aside the initial credit the sum of the debits is $30.20 less than the amount of $83,578.89 credited as offsetting the debits and described as ``Management SubCT'' which I take to mean ``Management Subcontract''. There is no indication in folios J40 or 102 of a service charge of 15 per cent for the year.

Another supporting folio, 103, was headed ``Loan A/c Manco Pty. Ltd.''. It also shows first a credit balance as at 1 July 1981 of $2,391. It shows a debit of $86,703.01 for the year on account of payroll distribution and debits for accountancy of $275, for a lodgment fee of $50, for ``Accrual Payroll Tax'' of $302.17 and for ``Insurance WC'' of $511.68. Again leaving aside the initial credit the sum of the debits is $30.20 less than the amount of $87,872.06 credited as offsetting the debits and described as ``Re Management & Sub Cont''. Again there is no indication in folios J40 or 103 of a service charge of 15 per cent for the year.

A third supporting folio, 104, was headed ``Loan A/c - Marelman Pty. Ltd.''. It shows first a debit balance as at 1 July 1981 of $219.25. It then shows a debit of $110,051.58 for the year on account of payroll distribution and debits for accountancy of $125, for ``Accrual - Payroll Tax'' of a net $1,370.79 which takes into account an adjustment, for ``Insurance WC'' of $639.60 and for lodgment fees of $50. Taking into account the initial debit of $219.25 the sum of the debits balances the amount of $112,456.22 credited as offsetting the debits and described as ``Management and Sub Cont''.

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The position becomes no clearer when one turns to the folios supporting the remaining entries in the section of folio J40 extracted above. I do not think it necessary to analyse the entries shown on those folios in detail. When those relating to the individual companies are taken and, if necessary, added together, their totals show an almost exact correspondence with total of debits set out in folios 102, 103 and 104. In my view, they give no support for the statement that a service charge of 15 per cent was actually made.

All of this raises some doubt as to the accuracy of the information given the liquidator by the directors of the several companies. It may be that there was truly no contract of employment between any of the associated companies and the employees whom Nominees paid each week. I am not, however, on the material before me prepared to find that the arrangement that there should be four separate employers, each with its own set of employees, was a sham. The books as kept and the other material placed before me indicate a long standing arrangement in that regard.

In his affidavit the liquidator said that his examination indicated that the associated companies charged Nominees for the labour services they provided, the charges being offset against the respective loan accounts of the companies at the end of the financial year or whenever accounts were drawn up. Assuming that to be so Nominees in the end bore the cost of employment of all those it paid.

There was evidence which was not objected to concerning the declaration forms which employees normally fill out each year in respect of income tax. The liquidator first noted that each year every employee is required to fill out a declaration form as to employment, address, taxation file number and number of dependants for deduction purposes. Then he said, ``Now these forms were quite religiously filled out by the employees in respect of each of the four companies within the group''. That evidence supports an assumption that each of the four had its own group of employees within the one factory complex, that each had different functions but contributed to the group activities and the overall results and within the group was, in accordance with the arrangement with Nominees, liable, although not ultimately, for the wages paid to its own employees. I do not think it necessary to make definitive findings on these matters. The assumption is enough for my present purposes.

Nominees was the only company of the four which sent out invoices, whether in its own name or in the business name ``S. & M. Engineering'' which it had registered on 21 April 1978 does not sufficiently appear. It was suggested in evidence that Nominees was the only company of the four which had a bank account but I am not satisfied on the evidence tendered that this was necessarily so although I do not doubt the possibility.

The relevant statutory provisions are all to be found in Div. 2 of Pt. VI of the Act.

By sec. 221A an employee is defined as ``a person who receives, or is entitled to receive, salary or wages'', an employer means ``a person who pays or is liable to pay any salary or wages'' and a group employer means ``a person who is registered as a group employer under section 221F''.

Section 221C(1A) provides that where an employer pays an employee salary or wages he shall, at the time of the payment, make a deduction from them at the rate prescribed.

Part of sec. 221F is as follows:

``(1) An employer who, during a period of 12 months ending on 31 May in any year, has ordinarily had in his employment 10 or more employees from whose salary or wages he has been required to make deductions shall, unless he is already registered as a group employer, apply to the Commissioner, not later than 14 June in that year, in a form authorized by the Commissioner, for registration as a group employer.

...

(3) The Commissioner may register as a group employer any employer, or any person acting on behalf of 2 or more employers, whether or not he is required by this section to apply for registration as a group employer, and may at any time cancel the registration of a group employer, and shall notify the group employer in writing that he has been so registered, or that his registration has been cancelled, as the case may be.

(4) An employer registered as a group employer shall, notwithstanding any change in the number of his employees, remain registered as a group employer until notified

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by the Commissioner that his registration has been cancelled.

(5) A group employer shall -

• (a) not later than the seventh day of the month next succeeding a month in which he has made deductions... pay to the Commissioner the amount of the deductions... so made;.''

Section 221G requires an employer, other than a group employer, who pays to an employee salary or wages from which he is required to make a deduction, to purchase tax stamps of a face value equal to the amount of the deduction made from the salary or wages paid that employee.

Section 221P provides that where an employer makes a deduction for the purposes of the Division or purporting to be for those purposes from the salary or wages paid to an employee and fails to deal with the amount so deducted in the manner required by the Division or to affix tax stamps of a face value equal to the amount of the deduction as required by the Division, as the case may be, he shall be liable, and where his property has become vested in, or where the control of his property has passed to, a trustee, the trustee shall be liable to pay that amount to the Commissioner.

The letter of 7 July 1976 quoted above did not have the effect of cancelling the registration of S. & M. Engineering Pty. Limited as a group employer. The letter of 19 July 1979 did not cause any change in the status of S. & M. Engineering Pty. Limited (Marell Engineering Pty. Limited) as a registered group employer since on the evidence no cancellation of the registration was made. Nor is there any evidence that the three companies referred to in the letter of 19 July 1979 as ``conjoined under this group registration'', namely, Nominees, Marell Engineering Pty. Limited and Manco Pty. Limited, were ever registered as a group employer as they might have been under sec. 221F.

No advice seems to have been furnished the applicant concerning the incorporation of Marelman Pty. Limited. Although deductions were undoubtedly made on account of wages paid to its employees by Nominees, these deductions when forwarded to the applicant were never identified as paid by or on behalf of Marelman Pty. Limited. In the absence of evidence that the four companies were registered as a group employer and because of the subsisting registration of Marell Engineering Pty. Limited under the only two registration numbers used there can be no finding that Nominees was registered as a group employer. It follows that it has no liability as a group employer under sec. 221F of the Act.

The question for decision is whether Nominees was relevantly an employer in respect of all the employees whose wages it paid whether on its own behalf or on behalf of the associated companies.

Nominees was not a group employer. Let it be assumed, however, that it was an employer as defined by sec. 221A(1) and paid salary or wages to its employees so defined. It would have been required by sec. 221C(1A) to make prescribed deductions and by sec. 221G to purchase tax stamps equal in value to those deductions. It made no deductions for the period after November 1982 except for January 1983 nor is there any suggestion that it purchased and affixed in the manner prescribed tax stamps of the appropriate value. It would therefore be liable to the Commissioner under sec. 221P for the amount of the deductions which it should have made.

Nominees acted as though it were a group employer. Having regard to the lack of specific response from the applicant's office and the continuing use of the allotted registration numbers, that is not to be wondered at. That lack effectively prevents any suggestion that, except, it may be, in respect of Marelman Pty. Limited, the responsible officers of the companies acted in a manner contrary to the spirit of the Act in respect of registration. But the policy of the Act seems plain. Either as group employers under sec. 221F or as employers under sec. 221G all employers are required to make deductions as prescribed and are liable to account appropriately for those deductions to the Commissioner.

On behalf of the liquidator it was submitted that:

• (a) at the end of each employment period (and each employee was paid weekly) each of the four companies was liable to pay the wages owing to its employees either in accordance with the award or under its own contract of employment with each employee;
• (b) each of the associated companies discharged that liability by having Nominees

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  pay its employees' wages on its behalf in accordance with the arrangement which each had with Nominees;
• (c) although its liability to each employee, that is to each person entitled to receive wages from it, was discharged when that employee received his wages, it followed, because of the provisions of sec. 221C(1A) of the Act, that at the end of each pay period and during each month each of the associated companies was under an obligation to make the deduction from the salary or wages of each of its employees at the prescribed rate;
• (d) the relevant part of the definition of ``salary or wages'' in sec. 221A(1) of the Act, namely, ``salary, wages, commission, bonuses or allowances paid... to an employee as such'' was to be read as though the words ``as such'' defined the character of the person to whom the salary or wages were paid so that the definition should be understood as meaning in a correctly expanded form ``salary, etc., paid to an employee as being the employee of the particular paying employer'';
• (e) if Nominees failed in its contractual obligation to any of the associated companies to pay wages as agreed that company might sue Nominees for breach of contract but the applicant could not;
• (f) as it happened Nominees did fail to make deductions on account of income tax even though it paid the net wages of the employees concerned, and failed to forward to the applicant the amount payable in fact in respect of the deductions which should have been made by someone;
• (g) Nominees' liability to make deductions and pay them to the Commissioner was in respect only of its own employees and in effect it acted only as an agent without incurring liability under Div. 2 of Pt. VI of the Act for the relationship between it and the persons whom it paid on behalf of the associated companies could not be that of employer and employee as those words are defined in sec. 221A(1). There was a continuing liability in each of the associated companies to make and forward the prescribed deductions in respect of income tax from its employees' wages. That continuing liability served to exhaust the applicability of the definition of ``employer'' and ``employee'' in sec. 221A(1) and left no room for the operation of the remainder of the section.

In my opinion, the submission proceeds on too narrow a basis. I can see no reason why under the legislation two distinct persons, the one who actually pays wages and the one who as employer under the contract of employment is liable to pay those wages to the person receiving them should not each be liable, but not cumulatively, to make the appropriate deductions and to forward them to the Commissioner of Taxation. Nominees undertook the burden of paying the wages, undertook the administration necessary in connection with their payment, actually paid the wages to each employee of the four companies and seems ultimately to have borne their cost. In those circumstances it seems to me that the ordinary meaning of the language used in the definitions of ``employer'' and ``employee'' ought to be given its full force and effect. Each person receiving wages from Nominees, whether employed by Nominees or by one of the associated companies, was literally ``a person who receive[d] salary or wages'' and Nominees was a person who literally ``pa[id] the salary or wages of each such employee''. To attribute that payment to some notional payment by each of the associated companies because at its request Nominees had assumed the burden of actually paying the wages and to say, therefore, that the payment was that of the appropriate associated company would, I think, be to take an unreal view of the situation which actually existed. Accepting that there was each month a breakup of the amount of wages paid so that the indebtedness of the associated companies was shown individually in Nominees' books, the fact is that never at any stage did any of the associated companies pay its employees. Each made arrangements that Nominees should pay its employees although each may have continued liable to ensure that under the several contracts of employment those employees continued to be paid.

Accordingly, I think that the liquidator's rejection of the formal proof of debt lodged by the applicant as to the sum of $34,730.16 should be set aside and that in lieu thereof the liquidator should be ordered to allow that proof of debt in the full sum claimed, namely, $46,178.09.

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THE COURT ORDERS THAT:

1. The summons herein dated 24 August 1983 as amended by order of this Court dated 15 December 1983 be further amended by the deletion therefrom of the first order sought and the substitution therefor of the following:

• That the rejection dated 27 July 1983 by the liquidator of S. & N. (Nominees) Pty. Limited of the formal proof of debt lodged by the Deputy Commissioner of Taxation for the Australian Capital Territory as to the sum of $34,730.16 be hereby set aside on the following ground:
  • That the liquidator misdirected himself by not finding that the company was liable to the Commissioner of Taxation in respect of deductions made or which should have been made by it in the sum of $34,730.16 from the wages and salaries of employees of certain associated companies, namely, Manco Pty. Limited, Marell Pty. Limited and Marelman Pty. Limited.

2. The liquidator's rejection of the said formal proof of debt insofar as it concerned the said sum of $34,730.16 be set aside.

3. In lieu thereof that the liquidator allow the said formal proof of debt in the full amount claimed, namely, the sum of $46,178.09.

4. The liquidator pay the applicant's costs of and incident to the said summons.