In a lengthy decision, the NSW Supreme Court has allowed a taxpayer’s appeal and revoked payroll tax assessments concerning out of hours cleaning services provided to supermarkets and other businesses.
The taxpayer (JP) provided contract cleaning and property maintenance services to commercial and industrial clients, including supermarkets operated by Franklins Pty Ltd. To provide those services, the taxpayer used ‘subcontractors’.
The Chief Commissioner audited JP and assessed it to about $340,000, in payroll tax, on the basis that Subcontractor Contracts were ’employment agency contracts’, under s37 of the NSW Payroll Tax Act 2007 (Tax Act), and the amounts it paid to the Subcontractors were deemed to be wages under s40 of that Act (which are all part of Div 8 of Part 3 of the Tax Act, relating to ’employment agency contracts’). JP had quite a number of clients but much of the attention was focussed on the supermarket operator: Franklins.
The case hinged around whether the circumstances resulted in JP’s contracts with its subcontractors being ’employment agency contracts’ (EAG’s) within the meaning of s37 (as already stated). The definition of EAG gives little to go on and is in the following terms.
37 Definitions
(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.
Despite the apparent breath of this definition, JP argued its Subcontractor Contracts did not, relevantly, come within this definition. The submissions and reasons revolved around things like, whether Franklins provided cleaning services (which plainly they didn’t) and whether the cleaning services were provided ‘out of hours’ (about which there was doubt, as it was after Franklins was open to the public but during the time it did hire packers and loading dock personnel).
One might have expected to find statutory provisions making these sorts of factors determinative, but there are none. Rather these factors came out of the case law: two in particular: Freelance Global Ltd v Chief Commissioner of State Revenue [2014] NSWSC 127 (Freelance Global) and UNSW Global Pty Ltd v Chief Commissioner of State Revenue [2016] NSWSC 1852; (2016) 104 ATR 577 (“UNSW Global”), both decided by White J. Central to the reasoning was that these provisions were ‘anti-avoidance’ in nature and not intended to catch every contractor payment. But his honour said the provisions were not limited to ’employment agency’ arrangements as generally understood (e.g. nursing agencies that supplied nurses to hospitals or secretarial workers to clients with offices). This can be seen from para [151] of the reasons in Freelance Global.
151 If s 3C (or s 37) were intended to apply only to the activities of the employment agents, as that expression is said to be commonly understood, subs (1) would not have defined an “employment agent” for the purposes of the Act by reference merely to any person who by arrangement procured the services of another for a client of the employment agent etcetera. The section could simply have provided that an employment agency contract was one under which an employment agent procured the services of another for a client of the employment agent etcetera.
However, his Honour did not, in that case, have to decide the limits of the EAG provisions. Indeed, para [157] records a number of difficult scenarios as follows:
157. Other hypothetical examples of the possible reach of s 3C and s 37 were raised during the course of oral submissions. They included the case of a building contractor who arranges the services of subcontractors and receives payment from the principal which includes payment in respect of the services provided by the subcontractors. Would a contractor be required to include in its taxable wages the amounts paid by the contractor to the subcontractors? Would a solicitor who retains counsel for the solicitor’s client, and as a result receives from the client payment of counsel’s fees which are then paid to counsel, be obliged to include the amount of counsel’s fees in the solicitor’s taxable wages? Would a supplier of brochures who engaged a printer to print the brochures and was reimbursed for the expense by its customer be obliged to include the payment made to the printer in its taxable wages?
His Honour got his opportunity to better define the limits of the EAG definition in the UNSW Global case, which involved payments, by solicitors, to the expert witnesses they retained, for clients, in the course of the litigation they ran for them (a situation close to solicitors retaining counsel, mentioned as one of the hypothetical scenarios referred to above in the earlier Freelance Global case)_.
His Honour accepted that the literal words of the EAG provisions went far beyond the mischief which they were intended to address. In para 41 he put it this way.
41 I accept the plaintiff’s submission that the mischief against which the employment agency contract provisions was directed was the avoidance of payroll tax through the interposition of an agent to give the appearance of a contractor relationship where one did not exist in substance. The mischief to which the provisions were directed was not where the service provider was a genuine independent contractor whose services were provided to a client through an intermediary. Although the legislation did not use the language of the Pay-roll Tax (Amendment) Act 1985 which defined an employment agent as one who procured the services of a person for another under an arrangement where the worker, although not becoming an employee of either the agent or the client, carried out duties of a similar nature to those of an employee, that was the very mischief to which the 1998 provisions were directed, namely to address the consequences of the first instance decision in Drake Personnel. That this was the mischief sought to be remedied is apparent from the events that led to the amendments and the Second Reading speeches.
So His Honour set out his understanding of the proper scope of the EAG provisions as follows in paras 62 -65 (emphasis in italics provided in the JP judgement and emphasis by underlining has been added by me).
“62 That is not to say that the scope of the employment agency contract provisions should not be confined by a purposive construction if the text of the provisions so permits. The argument advanced by UNSW Global was not advanced in Freelance nor CXC Consulting. Applying a purposive construction, as mandated by s 33 of the Interpretation Act, I think that the definition of an employment agency contract as being a contract under which a person (the employment agent) “… procures the services of another … for a client of the employment agent” can be read as meaning a contract under which a person procures the services of another person in and for the conduct of the business of the employment agent’s client. That was the intended scope of the provisions. It does not do too much violence to the text (Taylor v The Owners — Strata Plan 11564 at [40]) to confine the operation of the phrase “for a client” in that way, rather than as meaning for the client’s benefit.
63 Whether the worker is to be characterised as an employee or a contractor, the employment agency contract provisions 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. The mischief apprehended by the legislature following the first instance decision in Drake Personnel was that the supply of temporary personnel by a labour hire company resulted in the avoidance of payroll tax because it muddied the waters as to whether the individuals concerned might be classified as independent contractors, although they would be serving the same function for the client as its employees.
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.
65 But where the services, although provided for the client’s benefit, are not provided by the service provider working in the client’s business, the arrangement does not fall within the intended scope of the provision. In substance, when the Chief Commissioner’s oral submissions are read with his contentions referred to at [26] above, this was conceded by the Chief Commissioner.”
On the basis of this reasoning, White J came to the common sense conclusion that solicitors did NOT have to pay payroll tax on payments to the ‘expert witnesses’ they retained to fight their client’s cases.
And, once one understands the limits to the EAG provisions, applied by way of the ‘purposive construction’ in the cases, then the basis of the reasoning, in the JP case, makes more sense.
In this case, JP did not have to pay payroll tax on the payments it made to its subcontractors as they were not common law employees and its contracts with those subcontractors were not within the ‘purposive’ definition, of EAG, because the cleaners were not part of of the services Franklins (for instance) used ‘in and for the conduct of the business of [Franklins]’. In short, the cleaners were not working ‘in’ Franklin’s business.
The result was that the Court ordered that the Assessments be revoked (including the penalty tax levied).
(JP Property Services Pty Limited v Chief Comr of State Revenue [2017] NSWSC 1391, NSW Supreme Court, Kunc J, 12 October 2017.)
[FJM; LTN 196, 13/10/17; TM Oct 2017]