The NSW Civil and Administrative Tribunal has confirmed payroll tax assessments issued under the employment agency provisions of the Payroll Tax Act 2007 (NSW).

The taxpayer operated a security services business, part of which involved the provision of security guards to clients. The taxpayer employed its own security staff and also engaged sub-contractors to obtain further security personnel. For example, pursuant to a contract with Coles Myer Limited (CML), the taxpayer supplied both employee and sub-contracted security guards to CML’s “Brands” (being related corporations such as Kmart, Target, Officeworks and Liquorland).

The taxpayer did not pay the sub-contracted security guards (‘service providers’) – they were paid by the sub-contractor closest to the employee/service provider.

The Chief Commissioner determined that the taxpayer was liable to pay payroll tax with respect to the sub-contracted security guards. Payroll tax assessments were issued for the 2011 to 2015 financial years and a 25% penalty was imposed. This was under Part 3, Division 8 of the Payroll Tax Act 2007 (relating to ‘Employment Agents’).

The taxpayer applied to the Tribunal seeking a review of the assessments.

The Tribunal found in favour of the Chief Commissioner, holding that the taxpayer failed to satisfy the onus of proving that the payroll tax assessments were incorrect. However, the Tribunal agreed to reduce the 25% penalty by 5% due to the taxpayer’s co-operation during the audit.

(Knight Watch Security Services Pty Ltd v Chief Comr of State Revenue [2017] NSWCATAD 223 (NSW Civil and Administrative Tribunal, Isenberg SM, 13 July 2017.)

FJM Note: Both parties conceded that the relevant ‘Employment Agents’ provisions enabled the Commissioner to assess any paying party in a ‘chain of on-hire’ to Payroll Tax and s41 of the Division 8 also precluded double payroll tax by relieving other links from that liability, once one other person has paid payroll tax.

All parties conceded that the Commissioner had issued a ruling saying that he would generally assess the person closes to the ‘ultimate client’. Both parties conceded that this was only administrative and couldn’t bind the Commissioner as to the party he should assess.

Notwithstanding this, the taxpayer, here, submitted that the Commissioner ought (contrary to his ruling) assess the payer of the employee/service provider (that is the bottom of the chain, not the top).

The taxpayer’s submission did not succeed – not to invalidate the assessments.

[Austlii report: [2017] NSWCATAD 223; FJM; TT Month; LTN 148, 7/8/17]

Extract from the Austlii report

Knight Watch’s business activities

  1. In the Objection Knight Watch said that the Chief Commissioner had incorrectly determined that it was liable for payroll tax under the employment agency provisions of the Act.
  2. Knight Watch described its relevant business activities in AS at [10] to [12]:

10 Knight Watch operates a security services business. As part of its business, Knight Watch contracts with clients to provide them (or their related entities) with security guards.
11 Knight Watch contracts with various sub-contractors to fulfil its contracts with its clients. These sub-contractors sometimes enter into further contracts with sub-sub-contractors to fulfil its (sic) contracts with Knight Watch. …. Knight Watch does not make any direct payment (in the form of wages or otherwise) to the employees or contractors of its sub-contractors.
12 …. the entity with which Knight Watch contracts, the entity which pays Knight Watch for its services, and the entity to whom Knight Watch actually provides the security services are not necessarily the same. The contracting entity may act as an intermediary for other entities who are the ultimate “end users” of the security services. By way of example, under a contract entered into between Knight Watch and Coles Myer Limited (“CML“) in September 2006 (“CML Contract“), CML contracted with Knight Watch to provide security services, but the services were provided to CML’s related corporations such as Kmart, Liquorland, Officeworks and Target. ….

  1. Knight Watch relied on HD-1, HD-2 and a contract at Tab A in Exhibit HD (the CML Contract), to support the above submissions.
  2. The Chief Commissioner described Knight Watch’s business activities and the dispute as follows:

11. Knight Watch operates a security services business. It supplies its clients with security guards who are stationed at its clients’ premises. Knight Watch has entered into a contract with [CML] for the provision of security guards. Knight Watch supplies the security guards from two sources. Knight Watch employs its own security staff and pays payroll tax on those wages. Knight Watch also contracts with various other third parties to obtain security personnel.
12. It is that second category of security guards which is the subject of these proceedings. The Chief Commissioner has assessed that Knight Watch is liable to pay payroll tax with respect to those security guards. Knight Watch disputes this.

  1. There is no material dispute as to the factual background of the matter as set out above by each party other than that the Chief Commissioner submitted that CML and its related corporations were clients of Knight Watch and that Knight Watch procured services for CML and the related corporations.
  2. The dispute relates to the interpretation of certain provisions of Division 8 and the interpretation and relevance of the Chief Commissioner’s Revenue Ruling No. PTA 027 (the Ruling) in relation to the application of the Act to the facts in evidence.

Analysis

Liability for payroll tax under Division 8

  1. Knight Watch relied heavily, both in the Objection and before the Tribunal, on submissions that the Chief Commissioner’s interpretation of Division 8 in the Ruling was fundamentally incorrect.
  2. The Ruling outlines an administrative procedure used by the Chief Commissioner to determine the payroll tax implications of an employment agency arrangement which involves multiple employment agents. The Chief Commissioner describes this as a “chain of on-hire”.
  3. The Ruling notes that a strict application of the employment agency provisions means that multiple employment agents are liable for payroll tax on essentially the same employment agency arrangement and the Chief Commissioner may choose to impose payroll tax liability on any of those employment agents.
  4. As an administrative measure, the Ruling provides that the Chief Commissioner will hold “the employment agent closest to the ultimate client” liable for relevant payroll tax.
  5. In these proceedings, there is no dispute that Knight Watch was engaged by CML to provide the services of security guards. There is no dispute that wages paid to security guards employed directly by Knight Watch are subject to payroll tax. However, Knight Watch also engaged subcontractors to obtain the services of security guards. The security guards were not paid by Knight Watch and were not directly employed by Knight Watch.
  6. CML’s related corporations were described as “Brands” in clause 1.1 of the CML Contract. The Contract provided that CML engaged Knight Watch to provide security guards to each “Brand” at specified sites occupied or utilised by the Brand.
  7. The Chief Commissioner submitted that CML was the ultimate client, and that payments by Knight Watch to subcontractors, for the purpose of directly or indirectly engaging security guards to provide security at specified sites were taxable wages for the purpose of Division 8.
  8. Knight Watch submitted that the ultimate clients were the Brands, Knight Watch’s subcontractors were the employment agents closest to the Brands, and, in accordance with the Ruling, the subcontractors were the employment agents liable for payroll tax.
  9. Knight Watch submitted that having regard to its interpretation of the Ruling, including its determination as to which employment agent was closest to the “ultimate client” it was clear that Knight Watch was not liable for payroll tax.
  10. Notwithstanding Knight Watch’s focus on, and numerous submissions concerning, its interpretation of the Ruling, Knight Watch also conceded that the Ruling did not have the force of law.
  11. Further, Knight Watch conceded that Division 8 provides that payroll tax liability is imposed on each employment agent in a chain of multiple employment agents.
  12. I observe that s 41 is designed to avoid double taxation by providing that if one employment agent has paid payroll tax in respect of the provision of services in connection with an employment agency contract then no other person, “including any other person engaged to procure the services of the service provider for the employment agents client as part of the arrangement” is liable to pay payroll tax in respect of relevant wages.
  13. Notwithstanding the wording of the Ruling, the legislation does not distinguish between the payroll tax liability of an employment agent who is “closest” to an ultimate client and the liability of any other employment agent involved in the Chief Commissioner’s “chain of on-hire”. That distinction is merely part of an administrative procedure adopted by the Chief Commissioner for the purpose of the Ruling, which the Chief Commissioner has acknowledged, does not have the force of law.
  14. Notwithstanding the acknowledgement by both parties that the Ruling is not the law, Knight Watch submitted at [21]:

…. It is the employment agent with the closest and most direct relationship with the ultimate service provider, and not the “employment agent closest to the client”, who is liable to pay payroll tax. Put simply, it is the entity that actually pays the service provider who is liable to pay payroll tax on the wages paid to the service provider. If there is a sub-contractor, then it is the sub-contractor who procures. If there is a sub-sub-contractor, then it is that sub-sub-contractor who is liable.

  1. Knight Watch submitted that there were three reasons for this submission.
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