The Supreme Court of NSW held that the taxpayer was not liable to payroll tax on the amounts it paid, to third party suppliers of persons, under the ’employment agency contract provisions in s37 of the NSW Payroll Tax Act 2007. The taxpayer provided security style services to its clients. The key was that the security guards, the taxpayer sent to its clients were not integrated into a client’s business (or added in effect to its workforce). The conclusion, however, was not a ‘slam dunk’ as can be seen by the assessment of the multiple factors, set out in para 328 of the judgment (set out below).

The facts were these.

  • The taxpayer was the main operating company in a group of companies involved in the security industry across Australia. It was also the parent company.
  • The group provided traditional security services (eg patrolling buildings, maintaining static security posts and crowd control) as well as other services that might not necessarily require any form of security licence (eg concierge, loading dock control and weighbridge services).

The taxpayer was assessed to payroll tax in respect of the wages of security guards whose services had been sub-contracted from third parties. The principal issue in dispute was whether the arrangements between the taxpayer and its clients were “employment agency contracts”, as defined in s37 of the Payroll Tax Act 2007 (NSW), which provided as follows.

1. For the purposes of this Act, an employment agency contract is a contract, whether formal or informal and whether express or implied, under which a person (an employment agent) procures the services of another person (a service provider) for a client of the employment agent.

The taxpayer relied on a previous decision of the Supreme Court of NSW: UNSW Global [2016] NSWSC 1852, which put a contextual gloss on the meaning of the word ‘for’ so that it only operated for the supply of persons who were integrated into that client’s business or effectively added to its workforce (which, after all, is what a person would generally understand an ’employment agency’ would do. Justice Ward explained this in paras [29] and [30]:

29.    Relevantly, in UNSW Global at [62], White J, as his Honour then was, construed the word “for” in s 37(1) such that a contract is only an employment agency contract if the asserted employment agent procures the services of another person “in and for the conduct of the business of” the asserted employment agent’s client. His Honour considered that this construction gave effect to the intended scope of the employment agency contract provisions, which (at [63]-[64]) his Honour said:

63. …were intended to apply to cases where the employment agent provided individuals who would comprise, or who would be added to, the workforce of the client for the conduct of the client’s business …

64. One of the hallmarks of an independent contractor is that he or she carries on his or her own business. But sometimes that is done, or is said to be done, by the individual, in substance, working for the client in the same way as would an employee of the client. Where the services of the individual are provided through the intermediary, that is, the employment agent, to help the client conduct its business in the same way, or much the same way, as it would do through an employee, then the arrangement is within the intended scope of the section.

30.    That construction has been adopted in numerous subsequent decisions (see, for example, those cited below). It is accepted by both parties in the present case that the test as to whether the services of a service provider are procured “for” the client is whether the service provider is sufficiently integrated into the client’s business to be seen as an addition to the client’s workforce and works in much the same way as the client’s employees (see Southern Cross Group Services [2019] NSWSC 666 at [60] [see also related TT article]; HRC Hotel Services Pty Ltd v Chief Commissioner of State Revenue (2018) 108 ATR 84; [2018] NSWSC 820 (HRC Hotel Services) at [153]; Bayton Cleaning Company Pty Ltd v Chief Commissioner of State Revenue (NSW) (2019) 109 ATR 879; [2019] NSWSC 657 (Bayton Cleaning) at [94]-[96]).

The Court found that the security guard services, the taxpayer provided to its clients, did not make the security guards individuals who ‘comprise, or who would be added to, the workforce of the client‘ within the meaning Justice White’s formulation of the meaning of these provisions, in the UNSW Global case. In this case, Justice Ward’s reasons were as follows.

[328]    By way of summary, and speaking at a general level, of the factors identified as relevant in considering whether the workers are provided “in and for” the client’s business, in the present case the evidence establishes the following. The location at which the services are provided by the workers is generally that of the client’s premises (although, as with Baiada, the location is physically separate from the client’s main business operations; and with the Department of Education holiday school patrols the location might be described as a roving location that necessarily extends beyond the boundary of the schools themselves). There is a regularity with which the workers provide the services to the clients in the Commercial sector but a more ad hoc provision of services in, say, the health sectors or Event sector and certainly for one-off or short-term clients. The level of interaction as between the workers and the client’s customers or contractors varies but there is generally at least some interaction between them (except in the Department of Education holiday patrols and the HammondCare out-of-hours vehicle patrols). There is some level of direction or instruction reserved to the client under the contractual documentation that was in evidence though, as noted above, I do not accept that it would extend to the control over or giving of binding instructions as to security decisions of a kind required under the legislation to be made by the security licence holder. I see as significant the distinction drawn by various of the witnesses between security issues and non-security issues. The workers’ access to and use of client staff facilities is limited or non-existent in most cases (and I do not regard access to the JOCC at the Australian Turf Club on race days relevant in this regard, since I consider that a necessary incident of control over the security aspects of the work performed by E Group Security personnel – and, equally, others have access thereto, such as the police officers, who on no view would be regarded as integrated into the Club’s own workforce). Last, I accept that there is an obvious significance (or necessity) to the clients of the security services provided by E Group Security’s workers; and the clients may or may not be in a position to obtain or hold licences which would permit the clients themselves to perform those services.

[329]     Balancing all of those factors, I have concluded that the arrangements by which E Group Security provided security guard services to the clients in the present case do not constitute employment agency contracts and do not give rise to payroll tax liability.

There were numerous subsidiary and related issues, which this summary does not focus on.

E Group Security Pty Ltd v Chief Commissioner of State Revenue [2021] NSWSC 1190, NSW Supreme Court, Ward CJ in Eq, 22 September 2021.

[Wolter Klewer’s summary; LTN 219, 12.11.21]

[Tax Month – November 2021Previous 2021] 13.11.21

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