The Federal Court has dismissed the taxpayers' appeals against an Administrative Appeals Tribunal (AAT) decision. The AAT had ruled against one of the taxpayers (a company as trustee of a trust) concerning an alleged sham arrangement, input tax credits denied, GST shortfall penalties, a penalty for not withholding and remitting pay as you go (PAYG) tax amounts, and certain income tax deductions. Two additional taxpayers (a couple) were also unsuccessful before the AAT in a consequential matter – amended assessments had increasing their taxable incomes due to an increase in trust income and shortfall penalties.
Mr E operated a business providing casual labour for orchardists and vignerons through a company (Alper Harvesting Contractors Pty Ltd) which had engaged employees and accounted for PAYG deductions and payroll tax. In June 2011, the operation changed: Sunraysia Harvesting Contractors Pty Ltd was incorporated. It acted as trustee of a discretionary trust – Sunraysia Harvesting Contractors Trust – for which Mr and Mrs E were the beneficiaries. It was argued that Sunraysia no longer engaged employees, but instead subcontracted three companies (Danood, Jameron and Kigra) that engaged the employees, and those companies (not Sunraysia) were required to account for PAYG deductions and payroll tax, if necessary.
After a tax audit, the Commissioner concluded that the arrangements between Sunraysia and Danood, Jameron and Kigra were "a sham". The Commissioner disallowed input tax credits Sunraysia had claimed on supplies it said those companies had made to it between 1 July 2011 and 31 December 2013. The Commissioner also imposed GST shortfall penalties.
The taxpayers appealed to the AAT, which said the circumstances pointed to the conclusion that the three companies concerned "were part of a façade created by [a third party] to permit Sunraysia to avoid remitting PAYG deductions". It said the arrangements between Sunraysia and the three companies "were never intended to create any legally enforceable obligation". The taxpayers then appealed to the Federal Court.
The Federal Court said that, "[i]n design, the structure … looks to be but a crude, interposed company of no worth, run by a straw man (a feature reminiscent of the 'bottom of the harbour' behaviours of a generation ago) with 'phoenix' successors. Whatever fiscal efficacy that had depended on [Mr E adopting it]. As it happened, he failed to show that he ever intended the key legal elements of the structure to take effect … The appeal must be dismissed, with costs." (Sunraysia Harvesting Contractors Pty Ltd (Trustee) v FCT  FCA 694, Federal Court.)