CITATION: eJobs Recruitment Specialists Pty Ltd v Chief Commissioner of State Revenue [2007] NSWADT 36 DIVISION: Revenue Division APPLICANT PARTIES: eJobs Recruitment Specialist Pty Ltd RESPONDENT Chief Commissioner of State Revenue FILE NUMBER: 066068 HEARING DATES: 15/12/2006 SUBMISSIONS CLOSED: 15 December 2006 DATE OF DECISION: 13 February 2007 BEFORE: Verick A - Judicial Member CATCHWORDS: Pay-roll tax - contractors MATTER FOR DECISION: Principal matter Pay-roll Tax Act 1971 LEGISLATION CITED : State Revenue Legislation (Miscellaneous Amendments) Act 1998 State Revenue Legislation Further Amendment Act 1999 CASES CITED: Aquila Executive Search Pty Ltd v Chief Commissioner of State Revenue [2004] NSWADT 24 Moore Park Gardens Management Pty Ltd v Chief Commissioner of State Revenue [2006] NSWCA 115 APPLICANT B Andrew, agent REPRESENTATION: RESPONDENT I Latham, barrister ORDERS: The objection decision under review is affirmed REASONS FOR DECISION Factual Background 1 The applicant seeks a review of the decision made by the respondent to disallow objections to pay-roll tax assessments for years ended 30 June 2001 and 30 June 2002 made under the Pay-roll Tax Act 1971 ("the Act"). 2 The applicant commenced business in 1999 and operates as a recruitment agency specialising in the IT and financial planning sectors. The applicant has a small number of permanent staff that is responsible for recruiting suitably qualified people for permanent placement with the end user clients. Persons recruited in this manner become employees of the end user client and any resultant payroll tax obligations are the responsibility of the end user. 3 However, the applicant also operates as an employment agency whereby it places contractors with an end user client on temporary assignments. These contractors use incorporated entities to enter into written contracts with the applicant, in circumstances where the incorporated entity becomes the contract worker and the person who actually provides services to the end client is described in these contracts as a "consultant". 4 The respondent selected the applicant for an audit in its project to detect, in particular, cases where amounts paid to contractors were not included in the total wages subject to pay-roll tax under the Act. 5 In this matter, the respondent concluded his audit by issuing an amended assessment for the year ended 30 June 2001 by including amounts paid to two contractors and for the year ended 30 June 2002, an amended assessment, by including amounts paid to three contractors. There were other minor adjustments, which are not disputed by the applicant. 6 The applicant has explained "the process in finding and assigning contractors to end clients", the arrangements that were involved in respect of the contractors included in the two assessments, as follows: "a. eJobs receives a requirement from a Client for a Contractor b. eJobs will search eJobs internal database and advertise for the requirement c. eJobs sources persons and receives applications for the job d. eJobs then selects 1-3 potential candidates and sends their details to the Client e. The Client chooses one or asks us to look again. If we look again we go back to step b. f. If the chosen candidate is a PAYG person eJobs signs them up for tax and payment and adds them to the salary list for eJobs for which we pay payroll tax. g. If the chosen person has come from a company we seek to write a Contract with the Company and also require proof of the Companies registration and you will see several ASIC certificate copies in the following and our previous submissions. h. We execute the Contract with the Company and also execute a Contract with the Client. i. We do not determine the payment to the Contractor by the Company we contract with and all our dealings are at arms length with the Company providing the Consultant, having checked out the validity of the Company and executed Contracts for the work." 7 With the exception of one contractor, all other contractors and consultants the subject of the assessments entered into a standard agreement with the applicant. The relationship between the parties is set out in Clause 6 of the standard contract as follows: "6.1. The Contractor is an independent Contractor and nothing in this Agreement shall be construed so as to create an employment or partnership relationship between EJOBS and the Contractor or EJOBS and the Consultant. Neither the Consultant nor the Contractor has any authority to bind EJOBS or incur obligations on behalf of EJOBS in Contract or otherwise. 6.2. The Contractor acknowledges that it is solely responsible for the payment of all applicable taxes, superannuation, medical premiums, unemployment insurance, holiday pay, insurance premiums and workers compensation in respect of itself and the Consultant and agrees to indemnify EJOBS against all liability arising out of same. 6.3. The Contractor shall indemnify and keep indemnified EJOBS in respect of all liabilities and costs (including EJOBS legal costs on a solicitor and own client basis) arising out of any claim, demand or action brought against EJOBS in connection with the provision of services by the Contractor or the Consultant under this agreement." 8 In relation to the contractor included in the assessment for the year ended 30 June 2002 who did not enter into the standard agreement, the agreement entered into merely had details of the consultant, client, contract period and contract rate. The services of this contractor/consultant were to be performed with the Attorney General's Department in Canberra. 9 The applicants objected to the amended assessments which were disallowed by the respondent on the following grounds: "The reasons for the determination are that the wages paid to the contractors in dispute have been correctly included in your assessable wages, for the years in question, under section 3C of the Pay-roll Tax Act 1971. It has been established that eJobs has entered into employment agency contracts with the said contractors. This had the effect of making the employment agency the employer and the contract worker the employee. None of the exceptions to section 3C apply in this case as the end user is not an exempt body or under the threshold and the contract workers have not paid the tax." 10 The applicant seeks a review of the objection decision made by the respondent. Relevant Legislative Provisions 11 Under s 8 of the Act pay-roll tax is charged on all "taxable wages" paid or payable by an employer. Section 3(1) of the Act defines "taxable wages" as "wages that, under section 6, are liable to pay-roll tax". Section 6 sets out the "wages" that are liable to pay-roll tax. It relevantly provides: "(1) The wages liable to pay-roll tax under this Act are wages that are paid or payable by an employer for services performed or rendered during a month or part of a month …" 12 Subsection 3AA(1) defines wages as "any wages, salary, commission, bonuses or allowances paid or payable (whether at piece work rates or otherwise and whether paid or payable in cash or in kind) to an employee as such". Subsection 3AA(2) further expands the definition of "wages" to include various other amounts, which might not ordinarily be regarded as wages. In relation to this application, s 3AA(2)(e) in the extended definition includes "any amount deemed by or under a provision of this Act to be wages". 13 Section 7 is the charging provision, which imposes pay-roll tax depending on the relevant threshold for payment of tax. For the period from 1 July 2001, the threshold was fixed at $600,000. An employer, after 1 July 2001, only became liable to pay-roll tax if "the total taxable wages and interstate wages paid or payable" during the relevant financial year exceeded $600,000. 14 Generally speaking, pay-roll tax under the Act is a tax on "wages" paid or payable to an employee by an employer. Most such employer and employee relationships are readily identifiable, in particular, the common law employer and employee relationships. The Act, in addition, contains several provisions that deem a person to be an employer for purposes of the Act and the person becomes liable to pay-roll tax. For purposes of this application the relevant deeming provision that is in issue is section 3C, which provides: "3C Employment agents (1) For the purposes of this Act, an employment agency contract is a contract under which a person (in this section referred to as an employment agent) by arrangement procures the services of another (in this section referred to as a contract worker) for a client of the employment agent (by a means other than a contract of employment between the contract worker and the client) and as a result receives directly or indirectly payment in respect of the services provided by the contract worker to the client, whether by way of a lump sum or ongoing fee, during or in respect of the period when the services are provided. (2) For the purposes of this Act: (a) the employment agent under an employment agency contract is taken to be an employer, and (b) the contract worker under an employment agency contract is taken to be an employee of the employment agent, and (c) an amount, the value of a benefit or a payment, being: (i) any amount paid or payable to the contract worker in respect of the provision of services in connection with an employment agency contract, and (ii) the value of any benefit provided for or in relation to the provision of services in connection with an employment agency contract that would be a fringe benefit if provided to a person in the capacity of an employee, and (iii) any payment made in relation to the contract worker that would be a superannuation benefit if made in relation to a person in the capacity of an employee, is taken to be wages paid or payable by the employment agent. (3) If it is not reasonably practicable to determine the extent to which an amount, benefit or payment constitutes wages under subsection (2) (c), the Chief Commissioner may accept a return, or make an assessment, in which the amount on which pay-roll tax is levied is determined on the basis of estimates. (4) An employment agent is not liable to pay-roll tax under this Act in relation to an employment agency contract: (a) if the contract worker is liable to pay pay-roll tax (as the employer of the person who actually provides the services to the client of the employment agent under the contract) in respect of wages paid for those services and a declaration to that effect has been given by the contract worker to the employment agent, or (b) if the wages that the amount, value of the benefit or payment under subsection (2) (c) is taken to be would have been exempt from pay-roll tax under section 10 had the contract worker been paid those wages by the client of the employment agent and a declaration to that effect has been given by the client to the employment agent, or (c) if the client of the employment agent: (i) is not registered or required to be registered as an employer under this Act, and (ii) would not be required to be registered as an employer under this Act if the client were the employer in respect of the wages paid or payable under all the employment agency contracts to which the client is a party, and a declaration to that effect has been given by the client to the employment agent. (5) If a contract worker gives a declaration to an employment agent under subsection (4) (a), and that paragraph does not apply or at any time ceases to apply to the contract worker, the employment agent is liable to pay pay-roll tax in respect of the wages paid or payable under the employment agency contract during any period in which the paragraph does not apply. (6) If a client of an employment agent gives a declaration to the employment agent under subsection (4) (b), and that paragraph does not apply or at any time ceases to apply in respect of the wages paid or payable under the employment agency contract, the client, and not the employment agent, is liable to pay pay-roll tax in respect of the wages paid or payable under the employment agency contract during any period in which the paragraph does not apply. (7) If a client of an employment agent gives a declaration to the employment agent under subsection (4) (c), and that paragraph does not apply or at any time ceases to apply to the client, the client, and not the employment agent, is liable to pay pay-roll tax in respect of the wages paid or payable under the employment agency contract at any time during the financial year in which the paragraph does not apply. (8) A declaration under subsection (4) is to be in a form approved by the Chief Commissioner." 15 Under section 3C an employment agent is liable for pay-roll tax on wages paid under an employment agency contract. The employment agent is taken to be the employer, but the employment agent is not liable to pay-roll tax in circumstances set out in subsection (4). Submissions 16 Broadly, the applicant submitted as follows: "At all times eJobs has been the innocent party in this matter as it contracted at arms-length with other organizations to supply labour under an arrangement where the other party had a contractual obligation to pay 'all applicable taxes'. Under this contract the third party companies had the obligation to pay any payroll tax, which arose from the relationship between the parties. The contractual arrangement was one where the third party companies were sub-contractors in the supply of labour to a range of employers and eJobs was never the employer of the person ultimately supplying the labour." 17 In particular, the applicant relied on s 3C(4)(a) of the Act and claimed that clause 6.2 of the contract between the applicant and the contractor with the consultant constituted the necessary "declaration" required by the provision. In the case in which no contract was entered into, the applicant claimed that, as the contractor and consultant would have been liable to pay-roll tax in the Australian Capital Territory, it was not liable to pay-roll tax in relation to that case in New South Wales under s 3C. 18 In addition, the applicant submitted that the decision of this Tribunal in Aquila Executive Search Pty Ltd v Chief Commissioner of State Revenue (2004) NSWADT 24 can be "distinguished from the situation in eJobs" on a number grounds. 19 There was a suggestion by the respondent that the applicant was a common law employer in relation to the contractors, but the issue was not argued fully nor was there any evidence before the Tribunal to suggest that the applicant was a common employer. It is, therefore, not necessary for the Tribunal to consider that submission. 20 The relevant assessments were made by the respondent under s 3C of the Act to treat the applicant as an employer in respect of the contractors included in relevant assessments. 21 The respondent submitted that the applicant was a deemed employer under the provisions of s 3C and that Clause 6.2 of the standard contract did not constitute the necessary declaration for purposes s 3C(4)(c). The respondent relied on the decision of the New South Wales Court of Appeal in Moore Park Gardens Management Pty Ltd v Chief Commissioner of State Revenue [2006] NSWCA 115 and of the Tribunal in Aquila Executive Search Pty Ltd v Chief Commissioner of State Revenue. Findings and Decision 22 Essentially, the only issue that needs to be considered in this matter is whether the applicant is not liable to pay-roll tax in relation to the contractors because the contractors and consultants have given to the applicant the necessary declaration required by s 3C(4)(a). The applicant accepted that it was an employment agency, which was liable to pay-roll tax under s 3C but had argued that it was not liable under s 3C(4)(a). 23 Section 3C was originally introduced to the Act in 1998 by the State Revenue Legislation (Miscellaneous Amendments) Act 1998, which commenced to operate on 1 January 1999. The section was amended in 1999 by the State Revenue Legislation Further Amendment Act 1999, which resulted in the section reading in its present form, and commenced to operate on 1 January 2000. In particular, the amendments in 1999 resulted in the introduction of the declaration procedure for exemption. 24 In Moore Park Gardens Management Pty Ltd v Chief Commissioner of State Revenue, the New South Wales Court of Appeal considered the question when the declaration for purposes of the exemption under s 3C is to be given. In the principal judgment, his Honour Justice Santow, examined in some detail the history of s 3C and provided the following useful historical background to the introduction of the original s 3C and the reasons for subsequent amendments to the section which is the current s 3C: "69 When the section was first introduced in 1998, the relevant Minister stated in the Second Reading speech: The Pay-roll Tax Act currently provides that wages paid to temporary staff provided through employment agents are taxable in the hands of the end user of the labour services. An administrative arrangement allowed the agent to take responsibility for the tax but only if the end user agrees. Traditionally, the majority of temporary staff had been accepted as common law employees of the end user. Some are deemed to be employees under the relevant contract provisions. The relevant contract provisions are anti-avoidance provisions designed to bring to tax wages paid to persons who are, for all intent and purposes, performing duties similar to those of employees. Recent judicial pronouncements in other jurisdictions have confused the issue of liability to the point that employers and employment agents are unsure of their obligations. The uncertainty has promoted refund claims by employment agents which are likely to reach some $200,000,000.00 in New South Wales alone. Those claims represent windfall gains for employment agents as the pay-roll tax would already have been passed on to the clients. To secure the traditional tax base and make taxpayers obligations and point of liability absolutely clear, the Bill introduces specific provisions relating to payments to workers engaged through employment agents. The agent will now be liable to pay-roll tax, bringing New South Wales into line with Victoria, Western Australia, South Australia and Queensland. The other jurisdictions do not have specific agency provisions. Concessions have been provided where the end user of the services is exempt, such as a public hospital or a charity and where the end user is under the pay-roll threshold. The provisions have been developed in collaboration with major agency associations and have the support of small business and the accounting profession. 70 The Explanatory Memorandum circulated at the time stated as follows: Employment Agents The Pay-roll Tax Act 1971 is amended by Schedule 6[2] and [3] to make employment agents, instead of the end user, liable to pay-roll tax in respect of employment agency contracts, not being contracts of employment. An employment agent is not liable to pay-roll tax if: - The contract worker is liable for pay-roll tax in respect of the wages paid for provision of the services, or - The wages paid to the contract worker will be exempt from tax if they had been paid to the contract worker by the end user of the services, or - The end user of the services is not liable to pay-roll tax. 71 When the provision was amended in 1999 the relevant Minister stated in his Second Reading speech: The second new provision closes a potential loophole in the pay-roll tax exemptions for employment agents. Employment agents are liable for pay-roll tax on wages paid to contract workers who are provided to a client under an employment agency contract. An exemption applies if the client is not liable for pay-roll tax because total wages do not exceed the registration threshold. This exemption was introduced following submissions from small business. There is evidence to show, however, that employers and agents are abusing the threshold exemption by entering into arrangements whereby the employer's total wages are maintained below the registration threshold, and additional workers are provided under one or more agency contracts. The amendments in the Bill will ensure that the exemption only applies when a written Declaration has been provided by the client to the agent stating that the client is not registered, is not required to be registered or would not be required to be registered if all agency contract wages were considered in determining the threshold exemption. If a false Declaration is provided, or if circumstances change at any time after a declaration is provided, the client, not the agent, will have responsibility for pay-roll tax. These amendments provide greater certainty for employment agents and ensure that employers do not abuse the exemptions provided to agents. 72 The Explanatory Memorandum circulated at the time of the 1999 amendments stated as follows: Employment Agents Section 3C of the Pay-roll Tax Act 1971 provides for the application of the Act to employment agency contracts. An employment agent is a person who procures the services of another person (a contract worker) for a client and receives remuneration from the client for the services provided by the contract worker to the client. An employment agent is deemed to be an employer under the Act. The Act provides that an employment agent is not liable to pay-roll tax in relation to an employment agency contract if: (a) the contract worker is liable to pay-roll tax in respect of the wages paid for those services, or (b) the wages paid or payable under the contract would have been exempt from pay-roll tax had the contract worker been paid those wages by the client instead of the employment agent, or (c) the client is not registered or required to be registered as an employer under the Act." 25 Under the relevant arrangements in this matter, the applicant entered into a contract with a company (described as the "Contractor") as the employer of the contract worker (described as "Consultant") to provide the services of the consultant to the applicant's end client. Under these contracts, the end client was excluded. The applicant had an independent arrangement with the end client. The applicant claims that, under these contracts, the contractor and not the consultant is the "contract worker" for purposes of s 3C(4)(a). The applicant further claims that clause 6.1 is the declaration required by s 3C(4)(a). 26 In the present matter the provisions of s 3C(4)(b) and (c) are not in issue. 27 The critical question for purposes of the application of s 3C(4)(a) in this matter is whether Clause 6.2 of the contract satisfies the requirements set out in s 3C(4)(a). Under Clause 6.2 the contractor acknowledged that it was solely responsible for payment of all applicable taxes in respect of itself and the consultant. The respondent conceded at the hearing that the words "applicable taxes" could be construed to include pay-roll tax. The Tribunal agrees with that construction but is of the opinion that Clause 6.2 does not satisfy the requirements set out in s 3C(4)(a). 28 It is not sufficient to satisfy the requirements of s 3C(4)(a) by merely setting up a company as the employer of the actual contract worker to provide the necessary declaration. This is sometimes done for income tax purposes to split personal services income and obtain deductions for business expenses. It is also done sometimes to avoid the pay-roll tax threshold. There was no suggestion in this matter that any of the corporate contractors were set up for any such purposes. 29 The provisions of s 3C(4)(a) only apply if the contract worker is actually liable to pay-roll tax (as the employer of the person who actually provides the services to the client of the employment agent under the contract) in respect of wages paid for those services and a declaration to that effect has been given by the contract worker to the employment agent. Only a contract worker registered for pay-roll tax and with a liability for pay-roll tax would qualify to rely on these provisions. 30 In addition, it is important to note that the declaration required by s 3C(4) "is to be in a form approved by the Chief Commissioner" (s 3C(8)). The respondent has published a form of a declaration that is acceptable to him in cases where the employer of the contract worker is the employer in terms of s 3C(4)(a) of the Act. This form was published in September 2003 by the respondent to assist taxpayers seeking exemption under s 3C(4)(a). Prior to the publication of this form, the respondent relied on the form produced in each individual case by the taxpayer. The form suggested by the respondent requires an employer of a contract worker to declare that the "employer of the contract worker is liable for pay-roll tax in its own right, and that pay-roll tax will be paid by this business in respect of wages paid to the persons engaged under this employment agency contract". 31 An employment agency seeking to rely on s 3C(4)(a) was, prior to September 2003, required to have the declaration in a form approved by the respondent. 32 In Moore Park Gardens Management Pty Ltd v Chief Commissioner of State Revenue all members of the Court of Appeal agreed that it was not possible for the client of an employment agency to provide a s 3C(4)(c) declaration on a retrospective basis. Santow JA (both Handley JA and Bryson JA agreeing with Santow JA) gave the following explanation for this view: "77 I agree with the submission of the respondent that it is not possible for the client of an employment agency to provide a s 3C(4)(c) declaration on a retrospective basis. There is no express provision as to when the declaration must be given. Properly construed, I consider that the declaration under either version of the section must be given at or before the time that the client's liability to pay-roll tax arises." 33 Although the Court of Appeal was considering the exemption under s 3C(4)(c), the views expressed would equally apply to a declaration under s 3C(4)(a). In the present matter, the applicant relied on Clause 6.2, of the contract that was entered into to give effect to the arrangement to employ the contract worker. In that sense Clause 6.2 would have been given at or before the time that the employment agency's liability to pay-roll tax arose under s 3C and thus no question of retrospectivity arises in this matter. The issue in this matter is essentially whether Clause 6.2 in the standard contract was acceptable as a declaration for purposes of s 3C(4)(a). 34 A contract worker can only give a declaration if the contract worker is liable to pay pay-roll tax in respect of the wages paid for the services carried out under the employment agency contract. Under Clause 6.2 the contractor merely acknowledged that it was "responsible" for payment of all applicable taxes. What was required was a declaration clearly declaring that the contractor was liable for the payment of the pay-roll tax in respect of the relevant wages and that the contractor would pay the pay-roll tax. Clause 6.2 did not declare that the contractor was liable for pay-roll tax in respect of the relevant wages and would pay the pay-roll tax in respect of the wages. 35 Section 3C is essentially an anti-avoidance provision and recognises that the structure that it has to deal with is a means other than a contract of employment between the contract worker and the end client. Section 3C allows the respondent to look at the real substance of the relevant arrangement rather than the mere form used. The provisions of s 3C(4)(a) are designed to apply in circumstances where there is no loss of revenue and to avoid double taxation of the relevant wages. It is not designed to exclude "wages" that fall within s 3C by a mere statement by a contract worker that the contract worker will be "solely responsible for the payment of all applicable taxes". To qualify for the exclusion from the application of s 3C the contract worker must be clearly liable for pay-roll tax in respect of the relevant wages and the contract worker must also agree to pay the pay-roll tax. 36 The additional problem for the applicant in the instant circumstances is that there was no evidence that the relevant contractors were liable to pay-roll tax and that they had paid the pay-roll tax in respect of the wages included in the assessments. 37 Clause 6.2 was merely a form of an indemnity given to the employment agency by the contractor and the consultant. It was also not in a form that was approved by the respondent as required by s 3C(8). In these circumstances, the respondent was entitled, pursuant to the provisions of s 3C, to include the wages paid under the contracts as the provisions of s 3C(4)(a) did not apply in respect of those contracts. 38 Some reliance was placed by the respondent on the decision of this Tribunal in Aquila. I agree with the applicant that the decision in Aquila can be distinguished from the facts in this matter. In that case, there was evidence that the relevant executives were in fact common law employees and also no question of the application of s 3C(4)(a) arose as the applicant in that case had conceded that no declarations had in fact been given. It was a decision on its own facts and has little relevance to the current matter. 39 In the case of the contract worker that did not enter into the standard contract and was included in the assessment for the year ended 30 June 2002, the applicant has failed to establish that it was not liable under s 3C to pay-roll tax on the wages received by the contract worker. The applicant's argument was the relevant contract was made in Victoria under Victorian contract law and the work was carried out in Canberra under ACT tax requirements. No evidence was produced to establish this assertion nor was any particular provision of the Act cited to support this argument. As the wages were paid by the applicant to the contractor under an employment agency arrangement, the wages had to be included to calculate the applicant's liability under s 3C in the absence of any of the exemptions applying to the contract worker. 40 The respondent's objection decision is accordingly affirmed. 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.