CITATION: Nikaed Pty Ltd v Chief Commissioner of State Revenue [2004] NSWADT 121 DIVISION: Revenue Division APPLICANT PARTIES: Nikaed Pty Ltd RESPONDENT Chief Commissioner of State Revenue FILE NUMBER: 036001 HEARING DATES: 26/09/2003, 04/02/2004 SUBMISSIONS CLOSED: 02/04/2004 DATE OF DECISION: 06/18/2004 BEFORE: Hole M - Judicial Member APPLICATION: Pay-roll tax - common law employment relationship MATTER FOR DECISION: Principal Pay-roll Tax (Amendment) Act 1985 LEGISLATION CITED : Pay-roll Tax Act 1971 Taxation Administration Act 1996 Behmer & Wright Pty Ltd v Commissioner of State Revenue (Vic) 94 ATC 2067 CASES CITED: MLC Limited & Anor v DFC of T 2002 ATC 5105 North Ryde RSL Community Club Ltd v FC of T 2002 ATC 4293 APPLICANT REPRESENTATION: S Peters, agent RESPONDENT R Hamilton, barrister ORDERS: The Chief Commissioner of State Revenue's assessment of Payroll Tax issued to the applicant on 9 November 2001 in respect of the remaining 41 contracts is confirmed; The interest on the assessment of the 11 contracts reassessed during the period 26 September 2003 and 15 December 2003 is remitted for that period REASONS FOR DECISION Introduction 1 The applicant corporation has applied to have the pay roll tax assessments by the Chief Commissioner of State Revenue issued on 9 November 2001 reviewed. 2 The applicant entered into various arrangements with individuals and corporations, during the period 1997 to 2001, for the supply of services to itself and to its clients. There were various arrangements in place between the applicant and employees/contractors. 3 The Chief Commissioner of State Revenue audited the applicant in respect of its pay-roll tax obligations, commencing that audit in 2001 for the tax years 1998, 1999, 2000 and 2001. As a result of the audit the Commissioner came to the opinion that the arrangements between the applicant and contractors being companies or trusts constituted "relevant contracts" as defined in section 3A Payroll Tax Act 1971 (the Act). As a result of this opinion the assessments dated 9 November 2001 were issued. 4 The applicant objected to the assessments and some of the objections were partially allowed. This application is in respect of the residue matters, being some 43 relationships. 5 The applicant and the Commissioner co-operated in a convoluted program of attempting to re-construct the past arrangements (which were subject of the audit). The program included the following steps:- • Preparation of a contractor schedule disclosing the consulting organisation, relevant State, fees, duration of contract, objections and comments. A further table was attached disclosing codified description of "evidence". • The applicant attempted to find, in its records, the probable contract arrangement document. • The applicant surveyed the named contractors as to their arrangements with the applicant. This was not particularly ellucifying as the named contractors often could not be contacted or, if contacted, were reluctant to become involved. It was suggested that there were several reasons for this including that the period to be covered went back 6 years in some cases and the contractors were concerned at supplying material for use in a "tax" matter. This process included:- • The formulation of a questionnaire; this was with the involvement of both the applicant and the Commissioner. The Commissioner made suggestions to the applicant and, as a result, the information persuaded the Commissioner to allow a large number of objections. • The forwarding of the questionnaire and obtaining information from those questioned and providing whatever evidence available in the applicant's records. • Consideration of the resulting information by the Commissioner. • Allowance/disallowance of an objection. • The applicant supplied comments in respect of each and every consulting organisation. 6 The matter came before the Tribunal on 26 September 2003 and was adjourned to 4 February 2004. Evidence was given by the parties which disclosed that the process prior to 26 September 2003 had not permitted the parties to narrow the objections. The hearing was adjourned to allow a process to occur whereby the respondent could specifically consider each contract and related objections. The extent of the evidence which may be considered by the respondent, as persuasive towards allowing an objection was not clearly established, prior to the hearing. There was no formal information available. The auditors were not required to go beyond the questionnaire even though, particularly in this instance, the Commissioner had taken a hand in framing the questionnaire. The following directions were made on 26 September 2003: "The Applicant and Respondent confer and the Applicant supply information to the Respondent to allow the Respondent to reconsider that information as in relation to objections to the assessment, the information to be supplied to the Respondent on or before 27 October 2003. The Respondent to consider the information and advise the Applicant as to any further specific information required to consider the objections to the assessment on or before 17 November 2003, the Applicant to respond to the request for further specific information on or before 1 December 2003. The Respondent to advise the Applicant as to the Chief Commissioner's decision in respect of the objections to the assessment by 15 December 2003. I direct that interest accruing on the existing assessment is not to accrue for the period between today and the date to be fixed to continue this hearing provided that the Applicant complies with the timetable. I give leave to the Applicant to amend the application at any time up to 14 days prior to the date to be fixed to continue this hearing. I direct that a further date be set to continue this hearing as soon as possible after 15 December 2003 but not before 26 January 2004." 7 After further material was supplied by the applicant to the respondent, by 15 December 2003, the respondent reviewed the subject contracts. Following review of the matters by the respondent, the available material in respect of 13 contracts was accepted as sufficient to make a decision as to whether section 3A(1)(e)(v) applied. As a result the respondent applied this exemption to 2 of those 13. The remaining 30 fell into a category where the respondent did not consider that there was sufficient evidence to make a decision. 8 The parties have submitted substantial evidence to the Tribunal and have asked that a decision be made as to the remaining 41 Contractors. This would require a consideration as to each of the 41 to determine the following questions: 1. Are the parties to the contract entering into a genuine "service" contract? 2. Does the Contractor offer services to the public; and if so: does the Contractor earn more than it's/his/her annual income from the Company; or is the timeframe that the Contractor engaged longer than a particular period as e.g. 12 months; or is the Contractor engaged on several back-to-back contracts. 3. Is the contract within exemptions set out in section 3A? Legislation 9 The applicable legislation is section 3A of the Pay-roll Tax Act 1971 Application of this Act to certain contracts Section 3A Application of this Act to certain contracts (1) A reference in this section to a relevant contract in relation to a financial year is a reference to a contract under which a person (in this subsection referred to as the "designated person"), during that financial year, in the course of a business carried on by the person: (a) supplies to another person services for or in relation to the performance of work, (b) is supplied with the services of persons for or in relation to the performance of work, or (c) gives out goods to natural persons for work to be performed by those persons in respect of those goods and for re-supply of those goods to a designate person or, where the designated person is a member of a group, to another member of that group, but does not include a reference to a contract of service or a contract under which the designated person, during a financial year, in the course of a business carried on by the designated person: (d) is supplied with services for or in relation to the performance of work that are ancillary to the supply of goods under the contract by the person by whom the services are supplied or to the use of goods which are the property of that person, (e) is supplied with services for or in relation to the performance of work where: (i) those services are of a kind not ordinarily required by the designated person and are rendered by a person who ordinarily renders services of that kind to the public generally, (ii) those services are of a kind ordinarily required by the designated person for less than 180 days in that financial year, (iii) those services are provided for a period that does not exceed 90 days or for periods that, in the aggregate, do not exceed 90 days in that financial year and are not services: (A) provided by a person by whom similar services are provided to the designated person, or (B) for or in relation to the performance of work where any of the persons who perform the work also perform similar work for the designated person, for periods that, in the aggregate, exceed 90 days in that financial year, (iv) the payment of the consideration under the contract is made at a rate that is not less than $800,000 per annum, or (v) those services are supplied under a contract to which subparagraphs (i)–(iv) do not apply and the Chief Commissioner is satisfied that those services are rendered by a person who ordinarily renders services of that kind to the public generally, or (f) is supplied by a person (in this paragraph referred to as "the contractor") with services for or in relation to the performance of work under a contract to which paragraphs (d) and (e) do not apply, where the work to which the services relate is performed: (i) by 2 or more persons employed by, or who provide services for, the contractor in the course of a business carried on by the contractor, (ii) where the contractor is a partnership of 2 or more natural persons, by 1 or more of the members of the partnership and 1 or more persons employed by, or who provide services for, the contractor in the course of a business carried on by the contractor, or (iii) where the contractor is a natural person, by the contractor and 1 or more persons employed by, or who provide services for, the contractor in the course of a business carried on by the contractor, unless the Chief Commissioner determines that the contract under which the services are so supplied was entered into with an intention either directly or indirectly of avoiding or evading the payment of tax by any person. (1A) For the purposes of this section, a contract under which: (a) a person is supplied with services ancillary to the conveyance of goods by means of a vehicle provided by the person conveying them, (b) a person is supplied with services for or in relation to the procurement of persons desiring to be insured by the person, or (c) a person is supplied with services for or in relation to the door-to-door sale of goods to consumers on the person's behalf, is not a relevant contract, unless the Chief Commissioner determines that the contract was entered into with an intention either directly or indirectly of avoiding or evading the payment of tax by any person. (1B) For the purposes of this section, a contract under which services are supplied by an employment agent, or a contract worker is procured by an employment agent, under an employment agency contract within the meaning of section 3C is not a relevant contract. (2) For the purposes of this Act: (a) a person: (i) …. (ii) to whom during a financial year, under a relevant contract, the services of persons are supplied for or in relation to the performance of work, or (iii) who during a financial year, under a relevant contract, gives out goods to other persons, shall be deemed to be an employer in respect of that financial year, (b) a person who during a financial year: (i) performs work for or in relation to which services are supplied to another person under a relevant contract, or (ii) being a natural person, under a relevant contract, re-supplies goods to an employer, shall be deemed to be an employee in respect of that financial year, (c) amounts paid or payable by an employer, and benefits paid or payable by an employer and received by a person that would be fringe benefits if they were paid or payable to the person in the capacity of an employee of the employer, during a financial year for or in relation to the performance of work relating to a relevant contract or the re-supply of goods by an employee under a relevant contract shall be deemed to be wages paid or payable during that financial year, and (d) where an amount referred to in paragraph (c) is included in a larger amount paid or payable by an employer under a relevant contract during a financial year, that part of the larger amount which is not attributable to the performance of work relating to the relevant contract or the re-supply of goods by an employee under the relevant contract may be prescribed by the regulations, and (e) an amount paid or payable for or in relation to the performance of work under a relevant contract is taken to include any payment made by a person who is taken to be an employer under a relevant contract in relation to a person who is taken to be an employee under the relevant contract that would be a superannuation benefit if made in relation to a person in the capacity of an employee, and (f) an amount paid or payable for or in relation to the performance of work under a relevant contract is taken to include the value of any contribution to a share scheme (not otherwise included as wages under this Act) provided or liable to be provided by the employer that is taken to constitute wages under section 3AD. (4) Where: (a) a contract under which a person (in this subsection referred to as the "designated person") in the course of a business carried on by the person supplies to another person services for or in relation to the performance of work would, but for subsection (1) (e) (iv), be a relevant contract, and (b) contracts under which the designated person in the course of the same business is supplied with the services of persons for or in relation to the performance of work would, but for subsection (1) (e) (ii) or (iii), be relevant contracts, the Chief Commissioner may, unless the designated person satisfies the Chief Commissioner that the business is carried on independently of, and is not connected with, the carrying on of a business carried on by another person or other persons and that the business is not carried on with an intention either directly or indirectly of avoiding or evading the payment of tax whether by the designated person or another person, by notice in writing given to the designated person determine that the contracts referred to in paragraph (b) are relevant contracts notwithstanding subsection (1) (e) (ii) and (iii). (5) Where, in respect of a payment for or in relation to the performance of work that is deemed to be wages under this section, pay roll tax is paid by a person deemed under this section to be an employer: (a) no other person shall be liable to pay roll tax in respect of that payment, and (b) where another person is liable to make a payment for or in relation to that work, that person shall not be liable to pay roll tax in respect of that payment unless it or the payment by the person so deemed to be an employer is made with an intention either directly or indirectly of avoiding or evading the payment of tax whether by that deemed employer or another person. (6) In this section: (a) a reference to a contract includes a reference to an agreement, arrangement or undertaking, whether formal or informal and whether express or implied, (b) a reference to supply includes a reference to supply by way of sale, exchange, lease, hire or hire-purchase and, in relation to services, includes a reference to the providing, granting or conferring of services, (c) a reference (however expressed) to the re-supply of goods acquired from a person includes a reference to: (i) a supply to the person of goods in an altered form or condition, (ii) a supply to the person of goods in which the first mentioned goods have been incorporated, and (iii) a supply to the person of an article manufactured or produced from any such goods, (d) a reference to services includes a reference to results (whether goods or services) of work performed, and (e) a reference to a financial year shall be deemed to include a reference to the period from the commencement of this section to 30 June 1986. 10 The Explanatory Note to the Pay-roll Tax (Amendment) Bill 1985, which introduced section 3A to the Act, contains the following comments: "The Bill proposes several amendments to the Pay-roll Tax Act 1971, the main purposes of which are – (a) to combat certain avoidance practices in relation to pay-roll tax; and …" "Schedule 1(2) inserts a new sections 3A and 3B into the principal Act to provide for the taxation of payments to contractors under certain contractual arrangements. The arrangements within the scope of section 3A are set out in the definition of "relevant contract" in subsection 1. The terms of this definition are directed to capture several means of disguising the employer-employee relationship by contractual arrangements, which have been increasingly resorted to in recent years by persons seeking to defeat the objects of the Principal Act. The definitions contains appropriate exclusions, so that the parties to genuine service contracts will not be prejudiced." Part 4 confirms the intention of the legislators and states: "These measures were aimed at schemes designed to avoid liability for pay-roll tax by severing the employer-employee relationship." "It should be said, at this point, that the legislative changes relating to contractors were designed to make liable only those payments to persons who are, essentially, employees. It was not intended to tax payments made to independent contractors or subcontractors who genuinely offer their services to the public at large." 11 The liability to pay pay-roll tax is on the employer and the burden of proof to allow an exemption to apply rests with that employer. The Company Structure 12 The applicant company is a provider of project management and strategic consulting services, covering areas including:- • systems and technology integration; • information management planning; • business process improvement; • business planning and implementation; • data management; • records and document management. 13 The company enters into contracts with its clients to produce specific results (deliverable). The example given to the Tribunal is that the company may be engaged (e.g.) by a client where the deliverable was to develop an on-line services plan and implement the same. Each contract requires different specialist skills and the company engages specialist contractors to perform particular parts of the contract work. 14 The applicant developed a standard sub-contractor agreement. Part of that agreement states:- "It is a fundamental term of this Agreement that the Contractor shall perform the Works/Services as an independent contractor of the Company, and not as an employee or servant of the Company. More particularly, the Company shall not have direct control over the manner in which the Contractor performs the Works/Services. The Contractor shall be responsible in respect of itself, its employees and sub-contractors for making all deductions and performing all acts necessary under applicable income tax legislation, superannuation legislation, payroll tax legislation, GST legislation, or other legislation which provides for long service leave or annual holidays to be paid and the Contractor agrees to pay and be solely responsible for all entitlements, whether relating to sick leave or pay in respect of sickness, long service leave, annual holiday or award entitlements of its employees or sub-contractors. The Contractor shall not have any claim against the Company in respect of any damage or injury suffered by the Contractor or any of its employees of sub-contractors in performing the Works/Services or giving effect to this Agreement, and shall itself insure against all claims and liabilities arising as a result of any accident or injury to any of the Contractor's employees and shall take out adequate Workers' Compensation Insurance and shall ensure that all of its sub-contractors are similarly insured." 15 There are other clauses in the contract which are directed to various matters including:- • the ability of the company to delegate contractual tasks (including security check provisions) • provision of equipment by the company • contract amount • GST • confidentiality • intellectual property rights • ethical behaviour • conflict of interest • termination (including right of company to do so if sub-contractor becomes bankrupt or is liquidated) • conditional arrangement – subject to company being awarded the work/services by a client 16 The applicant submitted that its operation in the above manner is driven by the commercial nature of the work it undertakes. The projects do not require a consistency of skills, timing or remuneration. There may be some sub-contractors whose skills are applicable to back to back contracts with different clients, there may be others that are only required for one specific contract or who are not sub-contracted after one contract. 17 There is no security of engagement beyond a specified sub-contracted task. Case Law (Precedent) 18 Both the applicant and the respondent referred extensively to the Victorian AAT case of Behmer & Wright Pty Ltd v Commissioner of State Revenue (Vic) (94 ATC 2067) (Behmer & Wright). This case considered the equivalent statutory provision in the Victorian pay-roll legislation. 19 Behmer & Wright considered payments to contractors under relevant contracts. The contractor did not advertise but was invited to tender. The majority of the contractor's income was derived from services to the company. Whether the contractor ordinarily rendered services to the public generally. 30 Contracts – Insufficient evidence to exempt 20 There are 30 Contracts subject of this application where the respondent has not been able to decide that they are entitled to the exemption. The respondent's representative submitted that in these contracts it would be necessary to draw large inferences to enable the exemption to be available. Further that the respondent recognised that the applicant suffered from the difficulty in obtaining information from five to six years prior to the assessment. This recognition was tempered with regret, whilst noting that the applicant needed to be aware of the risks in not obtaining and retaining all of the evidence that may be required at a substantially later date. 21 The applicant had been subject of an assessment complicated by operating in more than one State, in this case Western Australia and New South Wales. Initially the respondent applied a reduced threshold because the view was that certain contractor payments in Western Australia were taxable in Western Australia. This was clarified and ground 12 of the original objection to assessment was allowed. 22 Section 3A is clear enough to take a view that if a person (or company) is served and work is performed by a different person (or company), or supplied with the services of a different person (or company) in relation to the performance of work, or gave out goods to a different person (or company) to be worked on and resupplied to the person (company or member of a group) then payroll tax is payable unless an exemption is available. 23 The exemptions as quoted above, from the Act, provide a clear direction that every available piece of information regarding the operation of a business such as the applicant relating to contracts, must be obtained, maintained and be available for a long period of time regardless of the cost, and, in a large number of situations, limited usefulness. The use of this voluminous records maintenance would certainly need to be balanced against the risks and profit of conducting a business within the complex and confusing legislation as at 2004. 24 The applicant submitted that the 30 contracts, where there was insufficient material, should be treated as being within a "class" of exempt contracts. The class being the total of the approximately 100 contracts examined by the respondent where about 60% had been found to be exempt. 25 Both the applicant and respondent referred to Behmer & Wright. This case considered the equivalent Victorian provision to Section 3A. The issues were similar to this matter except that the relevant material enabling the Commissioner of State Revenue (Victoria) to make a decision was available. 26 The facts supplied in respect of the contractors in this case cannot be considered to be ones within a "class" of contractors. There was no evidence supplied that each of the 30 contractors had common characteristics to enable them to be considered as within a recognised class. 11 Contracts – Sufficient material – not exempted 27 There remained 11 contracts after a determination following the supply of additional information after 26 September 2003. These remaining contracts were the subject of further information being supplied to the respondent and then found to be not exempt. The system which evolved between the applicant and the respondent to elucidate the information to allow the respondent to make a decision was fundamentally flawed. The questionnaire and drawing the material together in hindsight was in itself unsatisfactory. The process of supplying information and then further requisitioning did not provide an air of confidence that either the applicant knew what it was doing (albeit having professional advice) or that the respondent knew what it needed to obtain and hence the request for guidance from the Tribunal referred to below. 28 There is sufficient information for the respondent to make a decision on these 11 contracts and it has done so. The applicant submitted that one example was sufficient to indicate that these decisions were incorrect. 29 The Act is directed to ensure that payroll tax is paid where the person supplying the services is essentially an employee and not someone who genuinely offers their services to the public at large. 30 Once again the onus is on the taxpayer to establish that an exemption is available and this has not been established by the material supplied. Tribunal view 31 The respondent has requested that the Tribunal state its view regarding the approach to be taken when considering the possibility of exempting a contract from the requirement for the payment of payroll tax. The Tribunal's view is that the Act provides a complicated framework for the decision to be made as to availability of an exemption if:- • there is sufficient evidence that each contractor considered individually (unless a member of a recognised class), ordinarily did or did not render services to the public within a time to be determined. The time should relate to that as described in Section 3A(1)(e)(ii) and/or (iii) and should not be arbitrarily set at a time for remuneration under the contract as this would interfere with trade and commerce to a constricting extent. • the information regarding a contractor includes sufficient to disclose that the contractor is offering services generally to the public at large. This information must be sufficiently detailed and could include: • the proportion of the contractor's income for the financial year derived from the work undertaken for the principal under review; • the number of principals to whom the contractor provided services in the financial year; • the work history of the contractor; • the length of commitment to the principal under the particular contract; • actions of the contractor indicating ordinary rendering of services to the public generally (e.g. advertising). Penalties and interest 32 The respondent has submitted that the respondent sought information by letter dated 3 July 2001 directed to the applicant and that the provisions in Section 28 enabling reduction of any penalty was subjected to the applicant applying sufficient information to enable determination of any liability. The respondent also drew attention to MLC Limited & Anor v DFC of T 2002 ATC 5105 and North Ryde RSL Community Club Ltd v FC of T 2002 ATC 4293. 33 As previously noted the applicant and respondent engaged in a sequence of events to enable the respondent to have sufficient information available to come to a decision. This delay has caused considerable difficulties and once the process had been embarked upon it needed to be brought to resolution. On 26 September 2003 it was clear that the process had not been completed. Any penalty payable, and interest, during the period from 26 September 2003 to 15 December 2003 should be remitted as the respondent had not had the opportunity to receive further material, this should only be in respect of the 13 contracts where further information was provided to the respondent. Subsequently the respondent did receive further material and reassessed 13 of the matters (2 in favour of the applicant). Decision 34 The Chief Commissioner of State Revenue's assessment of Payroll Tax issued to the applicant on 9 November 2001 in respect of the remaining 41 contracts is confirmed. 35 The interest on the assessment of the 11 contracts reassessed during the period 26 September 2003 and 15 December 2003 is remitted for that period. DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.