Civil and Administrative Tribunal New South Wales Medium Neutral Citation: Qualweld Australia Pty Ltd v Chief Commissioner of State Revenue [2014] NSWCATAD 227 Hearing dates: 30 September and 1 October 2014 Decision date: 22 December 2014 Jurisdiction: Administrative and Equal Opportunity Division Before: R Deutsch, Senior Member Decision: The decision under review is affirmed Catchwords: Employment agency contracts, payroll tax, procure, wages, penalties, reasonable care Legislation Cited: Payroll Tax Act 2007 Taxation Administration Act 1996 Cases Cited: CXC Consulting Pty Ltd v Commissioner of State Revenue (2013) VSC 492 Freelance Global Ltd v Chief Commissioner of State Revenue (2014) NSWSC 127 On Call Interpreters & Translators Agency Pty Ltd v Commissioner of Taxation (No 3) (2011) FCA 366 RVO Enterprises Pty Ltd ATF the R M O'Mara Family Trust v Chief Commissioner of State Revenue (2004) NSW ADT 64 Taneja v Commissioner of Taxation (2009) AATA 87 Value Engineering (Australasia) Pty Ltd v Commissioner of State Taxation (WA) (1985) Category: Principal judgment Parties: Qualweld Australia Pty Ltd (Applicant) Chief Commissioner of State Revenue (Respondent) Representation: Qualweld Australia Pty Ltd (Applicant in person) File Number(s): 1410067 reasons for decision INTRODUCTION - WHAT THIS CASE IS ALL ABOUT! 1This case concerns an application by the Applicant under s 96 of the Taxation Administration Act 1996 (NSW) (the TA Act) for a review of an assessment for payroll tax for the years ended 30 June 2009 to 30 June 2012 (the relevant period). 2The Applicant is involved in the welding industry. In this case, the issue that arises is whether amounts paid to welders who the Applicant uses on certain projects count as wages or salary paid to employees for the purposes of the Payroll Tax Act 2007 (the Payroll Tax Act). 3The welders are not employees of the Applicant at general law and therefore the amounts paid to them are not ordinarily wages or salary. However, the welders may nonetheless be treated as employees and the amounts paid to them as wages or salary under certain extended concepts covered by the Payroll Tax Act. There are two such possibilities - Division 8 and Division 7 of that Act 4The primary issue (the Employment Agency Issue) concerns the application of Division 8 of the Payroll Tax Act 2007 ( the Payroll Tax Act) and specifically whether payments made by the Applicant to its contractors during the relevant period were paid pursuant to "employment agency contracts " as defined in s 37 of the Act. The Applicant asserts that the payments were not so paid; the Respondent asserts they were. 5If the primary issue is resolved in favour of the Applicant, there remains a further issue (the Relevant Contracts Issue) as to whether Division 7 of the Payroll Tax Act and specifically whether payments made by the Applicant to its contractors during the relevant period were paid pursuant to "relevant contracts" as defined in s 32 of the Act. Again the Applicant asserts that they were not so paid, largely because the exceptions to the definition of relevant contracts in s 32(2) applies; the Respondent asserts that they were so paid largely because the exceptions to the definition of relevant contracts do not apply. Again, it is worth stressing that this issue becomes relevant only if the Applicant is successful in respect of the Employment Agency Issue. 6If either of these Divisions is held to apply, there is a further issue (the Penalty Issue) as to whether the Applicant failed to take reasonable care in determining its payroll tax obligations. The Applicant contends there was no failure to take reasonable care; the Respondent asserts there was. THE RELEVANT FACTS Introduction 7The Applicant is a company incorporated in Australia with its registered office and main place of business in Strathfield, NSW. Its sole director and shareholder is Mr Yong Kil Kwon (Mr Kwon). 8The Applicant has no direct employees of its own other than Mr Kwon and his wife. 9The Applicant was established in 2007 by Mr Kwon and it seems it was established for the purpose of enabling the Applicant to be involved in larger projects. 10Mr Kwon was born in Korea where he trained as a specialist welder in 1977. In 1987 Mr Kwon migrated to Australia. Both before and after migrating, he worked on large scale welding projects in Asia and in the Middle East and he has over the years developed a reputation for his specialist welding capabilities in a number of industrial and infrastructure projects. 11The Applicant entered into a number of contracts with its clients in respect of particular projects. 12It seems that while there were many projects involved, the contract described below is reasonably representative. Contract with Power Project International Pty Limited (PPI) 13On 11 July 2007 a director of PPI, Mr Kee Joo Kim requested the Applicant to quote for the provision of specialist welding services and in response the Applicant quoted for the provision of welders and boilermakers at specified hourly rates. 14In February and August 2010, the Applicant provided a further quote to PPI for the supply of welders in which hourly rates were quoted for pressure welders and boilermakers both on day shifts and night shifts. 15It appears to be the case that there was no written contract between PPI and the Applicant. However, there does not appear to be any dispute between PPI and the Applicant that there was an agreement between the parties that the Applicant would provide the requested services based on the quoted hourly rates. 16While there were no written contracts, it appears that there were purchase orders and that the purchase order dated 10 August 2010 confirms that the Applicant is to make a " supply of pressure welders and other required staff as per PPI's supervisor or site managers request: Witness Statement of Mr Kee Joo Kim. 17As the Applicant does not directly employ any welders of its own, it entered into agreements with welding contractors and boilermakers. These agreements were actually made with corporations and in each case the corporation employed the relevant welder or boilermaker. 18Each of the welders or boilermakers involved were engaged directly by the Applicant to work on the Eraring Power Station project. Under the terms of the "Service Agreement" between the Applicant and the relevant interposed entity, the following was specified: "This Agreement between the parties is for providing services as nominated for the tradesmen as agreed. The term if (sic) this agreement will be for the term of the project or until advice is given by the Principal Contractor (Qualweld) detailed below, that the tradesmen is no longer required, has breached Occupational Health and Safety (OH&S) issues or other associated employment conditions as stipulated by the employer". (See Attachments to the Witness Statements of Jai Sung Lee and Yong Chul Ko) 19A welder and a boiler-maker respectively, namely Mr Lee and Mr Ko provided witness statements in which they indicated that their respective interposed entities entered into agreements with the Applicant under which the project on which they would personally work as a welder or boilermaker respectively was the Eraring Power Station project. In each case the relevant remuneration was calculated on an agreed hourly basis. 20It is clear from all the circumstances that neither Mr Lee nor Mr Ko ever became employees of either the Applicant or PPI. Description of the Business carried on by the Applicant 21A key fact in dispute between the parties is the description of the exact nature of the business carried on by the Applicant. 22The Applicant contends that the business it carries on is a complex one in which it undertakes significant projects involving the up-grading of infrastructure facilities such as power stations and oil and gas refineries for third party clients. 23The Respondent contends that the business the Applicant carries on is far simpler than that described by the Applicant and involves no more than providing to its third party clients, the services of Workers who the Applicant sources. WHO'S WHO? 24Before going any further in considering the critical issues in this case, some clarity is needed around the terminology used to describe the four key players involved in the factual matrix presented in this case and in similar cases to which reference will be made. The four key players are essentially: * the taxpayer who is responsible for the payment of the pay-roll tax if the employment agency contract or relevant contract provisions apply. In this case that is the Applicant and I will consistently refer to that party as the Applicant. In some other cases, I will describe this party as the taxpayer. For the sake of clarity I also note that this party has often been referred to as the Consultant and at times it goes by the loaded term "the employment agent". That loaded term should be avoided as using such a descriptor suggests that a decision has already been reached on the very issue the Tribunal is called upon to decide. * the person who actually does the physical work is sometimes referred to as the contractor but I will use the term "the Worker" or "the Workers" ; * the person who receives the service is sometimes called the end-user or the client. I will use the term "the Client" or "the Clients"; and * the company that enters into the contract with the Applicant and which actually employs the worker. I will refer to this entity as "the Interposed Entity". THE LEGISLATIVE FRAMEWORK 25The Payroll Tax Act: * imposes payroll tax on "all taxable wages" (section 6); and * creates a liability on an employer by whom taxable wages are paid or payable to pay payroll tax on the wages (section 7). Section 10(1) states that "For the purposes of this Act, taxable wages are wages that are taxable in this jurisdiction." Section 11(1) so far as it is relevant states that "For the purposes of this Act, wages are taxable in this jurisdiction if: (a)the wages are paid or payable by an employer for or in relation to services performed by an employee wholly in this jurisdiction........................." Section 13 defines "wages" as follows: (i) For the purposes of this Act, wages means any wages , remuneration , salary , commission, bonuses or allowances paid or payable to an employee, including: ......................... (e) an amount taken to be wages under another provision of this Act.' 26Thus, in order for Payroll Tax to apply to a particular payment, the payment in question must be payment that is: * Paid or payable by an employer; * Made in relation to services performed by an employee; and * Wages etc or an amount taken to be wages under another provision of this Act. 27Division 8 of the Payroll Tax Act seeks to fulfil these 3 requirements in certain circumstances by providing that where there is an employment agency contract: * The employment agent is taken to be an employer (section 38); * The person who performs the work for or in relation to which services are supplied (the service provider) to a third party (the client) under the contract is taken to be an employee of the employment agent (section 39); and Any amount paid or payable to or in relation to the service provider in respect of the provision of services in connection with the employment agency contract is taken to be wages paid or payable by the employment agent (section 40). 28Thus, whether there is an employment agency contract or not is critical since if there is amounts paid to the service provider will be taken to be wages paid or payable by the employment agent. 29This inevitably leads one to the critical question namely "what is an employment agency contract". 30This term is defined in section 37 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. (a) However, a contract is not an employment agency contract for the purposes of this Act if it is, or results in the creation of, a contract of employment between the service provider and the client. (1) In this section: Contract includes agreement, arrangement and undertaking." 31In a similar vein under Division 7, section 33, 34 and 35 achieve the same outcome where there is a relevant contract as sections 38, 39 and 40 achieved where there is an employment agency contract. 32The issue is similar but instead of asking is there an employment agency contract, we now need to consider and resolve whether there is a relevant contract. 33The definition of relevant contract in s 32 is lengthy and complex. In view of the conclusions reached by the Tribunal on the Employment Agency Issue, it is not necessary to set out that section here. 34The Penalty Issue arises from the application of the Taxation Administration Act 1996 (NSW) in particular sections 26 and 27 Section 26(1) provides that "If a tax default occurs, the taxpayer is liable to pay penalty tax in addition to the amount of tax unpaid. ' 39 Relevantly, sub-sections 27 (1) and (3) provide that "(1)The amount of penalty tax payable in respect of a tax default is 25% of the amount of tax unpaid, subject to this Division." (3)The Chief Commissioner may determine that no penalty tax is payable in respect of a tax default if the Chief Commissioner is satisfied that: (a)the taxpayer(or the person acting on behalf of the taxpayer) took reasonable care to comply with the taxation law; or............................................" THE EMPLOYMENT AGENCY ISSUE The Critical Elements and the Relevant Case Law 35Before the employment agency provisions can apply, the following elements must be satisfied: * there must be a contract; under that contract, the services of the Worker must be procured by the Applicant; the procurement of those services by the Applicant must be "for a client of" the Applicant; the contract must not be a contract of employment between the worker and the client. the contract must not result in the creation of a contract of employment between the welder/worker and the client 36The first, fourth and fifth of these elements are clearly satisfied. There is a contract in existence between the Applicant and the Interposed Entity but that contract is neither a contract of employment between the Worker and the Client nor could it result in the creation of such a contract. 37The two issues that lie at the heart of this case are the second and third elements, which together call for conclusions to be reached as to whether the Applicant has procured the services of the Worker for the Client by entering into the contract with the Interposed Entity. 38All this puts considerable emphasis on the word "procure" as the interpretation of the meaning of that word and its application to the facts at hand will, to a large degree, determine the outcome of this case. 39The meaning of the word 'procure" has been considered in a number of pay-roll tax cases, most particularly in :- * Value Engineering (Australasia) Pty Ltd v Commissioner of State Taxation (WA) (1985) 16 ATR 296 (Value Engineering); * CXC Consulting Pty Ltd v Commissioner of State Revenue 2013 VSC 492 (CXC); * Freelance Global Ltd v Chief Commissioner of State Revenue 2013 NSWSC 127 (Freelance). 40In Value Engineering, the Western Australian Court of Appeal considered a case in which the taxpayer entered into a series of contracts with its clients to supply the services of engineers, draftsmen and similar personnel. In doing so, Value Engine contracted with various entities which employed the engineers, draftsmen and similar personnel in question. The work was carried out physically by the personnel who generally speaking were employees of the interposed subcontractors but at no time were they employees of either Value Engineering or its clients. 41The principal business activity conducted by Value Engineering in that case was agreed to be to provide engineering and related services to other businesses. 42The legislation which was the subject of the dispute in the case was the West Australian Payroll Tax Act and, in particular, the relevant definition of an 'employment agent' for the purposes of that Act. 43That definition provided that 'employment agent' means a person(in this definition referred to as the agent) who buy an arrangement procures the services of a person (in this definition referred to as the worker) for another person (in this definition referred to as the client) under which arrangement - (a) the worker does not become the employee of either the agent or the client but carries out duties of a similar nature to those of an employee; and (b) remuneration is paid directly or indirectly by the agent to the worker or to some other person in respect of the services provided by the worker." 44The Court of Appeal held that Value Engineering did procure the services provided to its clients and was therefore an employment agent. Kennedy J at 308 concluded that: "In my opinion, the contracts tendered by consent constituted arrangements whereby the appellant procured the services of workers for the client. Under those contracts, as already indicated, the subcontractor undertook, for the present purposes, to supply the professional services of another person or persons for the client and, in my opinion, the appellant relevantly procured those services which were eventually rendered. The use of the term 'procure' does not, in my view, require there to be a direct contractual relationship between the appellant and the person providing the services." 45In CXC, CXC conducted a business in the information technology (IT) industry and part of that business involved the taxpayer administering remuneration and other matters for IT workers and their interposed entities who provided services to clients. 46In reaching the conclusion that the employment agency contract provisions applied, Ginnane J at 94 concluded that "The existence of the written contracts supports the conclusion that CXC Consulting brought about or obtained and, applying the dictionary definitions, procured the provision of the contractor's services to its clients on terms contained in the written contracts. It entered into contracts with the contractors and the end -users which obligated the contractors to provide specified services to end-users for an agreed rate of payment. It therefore by its own actions in arranging for the entry into the written contracts, brought about, obtained and procured the provision of services by contractors for its clients." 47Finally, in Freelance, Freelance was described essentially as "a specialist facilitator of legal structures, remuneration models and administration services to contractors.' 48Typically, it would enter into contracts with clients under which it undertook to provide the required services as an independent contractor but with the understanding that it would be utilising a third party being an interposed entity to perform the work as it's delegate. The contract would further acknowledge that Freelance might delegate the performance of the services to suitably qualified persons selected by Freelance provided that the client is first consulted. 49In his decision, White J noted a number of other decisions which have sought to interpret the word 'procure' or related terms such as 'procures' or 'procured' in contexts other than payroll tax. It does not seem to me that these cases, being in materially other contexts (including for example criminal law) shed much light on the issue and assist one way or another. Even though he included these cases in his decision, it does not seem to me that White J in Freelance was relying to any significant degree on the interpretation of the meaning of the word 'procure' in any of those decisions. 50Of more significance in Freelance and in this case would seem to be the dictionary definitions of the word "procure". The most directly relevant appears to be the Macquarie Dictionary definition of procure as ' to obtain or get by care, effort or the use of special means' and the Oxford English Dictionary definition of procure as "bring about, especially by care or with effort; cause to be done". 51In Freelance, White J was called upon again to consider the meaning of the word "procure" in the relevant statutory context and in doing so concluded at 115 as follows: "I think the better view is that "procure" when used in s3C and 37 means more than facilitate or enable and requires that the employment agent cause the services of a contract worker (or service provider) to be provided to the employment agent's clients, with the expenditure of care and effort by the employment agent. I do not accept that this can only be done if the employment agent recruits the contract worker or service provider for the client." 52Thus, in Freelance, White J concluded that Freelance had discharged its commitment to undertake and complete the assignment with its clients by providing the services of the contractor and consequently, Freelance was an "employment agent" within the meaning of that term in section 37 of the relevant legislation. Key Features in this Case of Relevance to the Employment Agency Issue 53The three cases considered above all demonstrate that the application of the employment agency contract provisions require a careful analysis of the precise facts involved to see whether there are factors which operate such as to give rise to a conclusion that there was a procurement of services for the client. 54To use the words of the Oxford English Dictionary as identified by White J in Freelance, did the Applicant "obtain or get by care, effort or the use of special means" the services of the Workers for the Client. 55Both parties raised some specific aspects of the nature of the arrangements that applied generally in this case and although not put in these precise terms it seems to me that the key factors raised are: (1)The fact that there was no prior relationship between the Worker and the Client; (2)The fact that the Client paid an hourly rate for the services provided; (3)The fact that the Applicant has no employees of its own other than Mr Kwon and his wife; (4)The appropriate way in which to describe the business conducted by the Applicant (5)The way in which the work to be done by the Applicant is described in the critical documents; (6)The extent to which revenue from the provision of welding services makes up the total revenue derived by the Applicant. 56These matters will now be considered sequentially. Prior relationship 57The Applicant suggests that the facts are factually different primarily because both CXC and Freelance involved independent contractors who had prior agreements with clients to provide certain services and who subsequently engaged CXC/Freelance to enter into binding contracts with those clients for the provision of the services. 58While that may be true, it does not seem that that was the central issue in those cases. Certainly the existence of a prior relationship between the independent contractors (ie the Interposed Entity) and the head company (the Client) may make it easier in some senses to prove that there has been a procuring of services. However it does not follow that the absence of such a prior relationship would rule out the procuring of those services for the Clients in this case. Hourly rates 59The Respondent pointed to the fact that the contract sum paid by the client is usually determined on an hourly basis and that that fact tends to lead one to the conclusion that the arrangement is essentially only one that suggests the delivery of a service and nothing more. 60This matter has been canvassed in a number of decisions albeit in different statutory contexts to that which is being considered here. Thus, in Taneja v Commissioner of Taxation (2009) AATA 87 the Administrative Appeals Tribunal considered the significance of the payment by way of an hourly rate in determining the application of section 87 - 18(3) of the Income Tax Assessment Act 1997. Similarly in On Call Interpreters and Translators Agency Pty Ltd v Commissioner of Taxation (No. 3) (2011) FCA 366 the Court was asked to consider the importance of hourly charge out rates. 61In both cases the decision makers emphasise that what is important is what you are paid for and not the manner in which your fee is calculated. 62Clearly having regard to these cases and the general proposition that what matters here is the work that is being done and not the manner by which it is being remunerated, I discount the relevance of the fact that the payment was often made on an hourly charge out basis. Very Few Employees 63The Respondent emphasised both at hearing and in written submissions that the Applicant had but 2 employees namely Mr Kwon and his wife. 64It is clear that Mrs Kwon's involvement in the Applicant's activities was limited to assisting with the administration of the Applicant's business. She had a Bachelor Degree in Religion from Hope College in Korea and had completed a short course in management in Australia at the Macquarie Business Training Centre. She clearly had little or no experience in welding or the industries connected with it. 65In contrast Mr Kwon's experience in welding and industries associated with it, was and is substantial. He had a background in the welding industry having had over 30 years experience in projects in Asia, the Middle East and Australia. 66The fact is however that he was the only employee of the Applicant with any real connection to the welding industry and there is no evidence to suggest that others were involved in the project on behalf of the Applicant. 67It becomes more difficult to accept the assertion that the Applicant carried on a business of delivering complex welding project work which involved consideration of complex logistical issues for its Clients in circumstances where it had at its disposal the services of just on one individual, albeit a very knowledgeable and relevant employee . 68This is not to suggest that the Applicant could not carry on a business of the kind it contends for with only one actively involved employee. It is however another factor which assists the argument contended for by the Respondent. The nature of the underlying business 69There was a clear difference of opinion between the Applicant and the Respondent as to the appropriate way in which to describe the nature of the business being undertaken by the Applicant in this case. 70The Applicant in the document labelled "Applicant's Supplementary Submissions" suggested that the following critical factors should be noted: "Qualweld is engaged by its clients to achieve a result in the form of the completion of a specified welding, pipefitting and/or boilermaking project; That result can only be achieved by the engagement of expert contractors to perform the work under the contract; Before engaging its resources, Qualweld's director - Mr Kwon - provides expert services to the client to determine the nature of the technical task and to resolve any technical difficulties; The task is not as simple as construction of a building on a vacant block of land. Rather, the delivery of the contracted services requires consideration of complex logistical issues affecting the project (shut-down periods; work being undertaken by other tradesmen; unforeseen difficulties in carrying out the specific welding tasks); Given the nature of the task, the client generally imposes strict time, quality and service delivery standards. Productivity is determined by the number of weld butts completed per day; Qualweld generally assumes a commercial risk in relation to each of those requirements; Qualweld identifies the resources required to achieve the result, bearing in mind time, quality and service delivery standards; Qualweld through the expertise of its director Mr Kwon is engaged in, and supervises, the delivery of services to achieve the contract result." 71On that basis, the Applicant asserts that it is engaged in a business of delivering significant welding projects for its clients. It is not engaged simply in a business of providing or otherwise procuring work for welders, albeit that the provision of such work may be incidental to the Applicant's business activities. The Welders or their Interposed Entities provide services to the Applicant rather than to the Client, in order to enable the Applicant to fulfil its contractual obligations to the Client. 72By contrast, the Respondent takes a much narrower view of the nature of the business carried on by the Applicant and asserts that the Applicant carries on a business of providing welding services on large-scale industrial projects, such as power stations and oil and gas refineries in New South Wales and Queensland. The Applicant does not in the Respondent's view conduct a broader business of the kind suggested by the Applicant. 73There is no doubt that this case is more difficult to determine than some of the earlier decisions considered above. It is suggested, and to some extent it must be accepted that, based solely on what the Applicant has described as its business: * The arrangement has some results based elements; * The Applicant supervises the welders and meets with the Clients to discuss the services to be performed; * The re-doing of any defective work is generally organised by the Applicant at its own expense; * The Applicant reviews the specifications for the work. 74None of this however comes through in the quotes or the invoices (see below). Those documents almost universally refer to and are limited to price quoting and invoicing in respect of the supply of welders and nothing else. They make no reference to, for example, supervision work or reviewing work of the kind referred to in the previous paragraph. 75Thus, in objectively assessing the nature of the business, even though there are elements which went beyond the provision of the welders for the Clients, the central and predominant aspect of the Applicant's business was precisely that. Anything beyond the provision of such welders for the Clients was largely incidental to that core business The description of the work to be done by the Applicant 76There also appears to have been a clear difference of opinion between the Applicant and the Respondent as to the exact nature of the work which was being done by the Applicant. 77In this regard there are a number of important source documents which need to be considered in more detail. Quotation - Applicant to the Client 78The Tribunal was provided with a number of "Quotations for Supply of Welders" addressed to PPI and presented on the Applicant's letterhead. These quotes, provided by the Applicant to the Client, indicate how much would be charged for providing welders for the particular project and these reflected hourly rates often based on whether the welding work was to be done as part of the day shift or nightshift. These invoices also included references to boilermaker services although the title to each quotation generally referred only to the supply of welders. Service Agreement - Contract: the Applicant and the Interposed Entity 79The Tribunal was provided with copies of service agreements which appear to be contracts entered into by the Applicant with the Interposed Entity acting for particular welders. These service agreements are to the effect that the Interposed Entity will provide the services of the nominated welder and in consideration of so providing the services of the nominated welder, a service fee will be calculated and paid to the Interposed Entity. The fee will be based on the hours paid by the Applicant multiplied by the agreed rate ($70 per hour in one case) less any deposited funds to the account of the tradesmen. 80This suggests that the amount paid by the Applicant to the Interposed Entity will be calculated at the agreed rate (eg $70 in this case) times the number of hours for which the Applicant charged the Client. This would, when viewed in the context of all the other available material, seem to have the broad effect of giving the Applicant a fee for procuring the services of the Worker for the Client. Purchase Orders - The Client to the Applicant 81The Tribunal was provided with a copy of a Purchase Order dated 10 August 2010 which is directed to the Applicant and which appears to have been issued by the Client, PPI ordering "the supply of pressure welders and other required staff as per PPI's supervisor or site manager's request."(Witness Statement dated 29 April 2014 of Kee Joo Kim, Managing Director, PPI). 82This document also makes reference to the way in which the fee to be paid will be calculated and also refers to the fact that "PPI will pay extra money if Qualweld has achieved better than standard works by calculation of actual gains and divide between PPI and Qualweld by mutual agreement." 83This has the flavour of an order for the supply of welders rather than an order for welding services as part of a broader business. Although expressed in a somewhat tortured manner, the idea seems to be that PPI's supervisor or site manager will assess the need for welders and will then inform the Applicant of the number needed 84The reference to the "extra money" would appear to be based on an extra financial return to the Applicant for a positive result but this seems to be of less significance than the fundamental requirement which is to provide welders as needed. Invoice - The Applicant to the Client 85The invoices presented for work done by the Applicant refers specifically to "the Supply of Welders" and at times "the Supply of Welders and Pipefitters." No mention is made of any broader activity. The invoices invariably relate to the supply of welders without any further embellishment. Again this is suggestive of the procurement of services for the Client by the Applicant. (See, for example, Invoice No 002243-52 dated 31 July 2012) Email from the Client to the Applicant 86An email written in Korean but translated into English was provided to the Tribunal and marked as Exhibit R2. This email was from Mr Justin J Ryu, Assistant Manager at PPI and addressed to Mr Kwon. The full content of the email is as follows " How are you Mr Youngkil Kwon? I am going to express our company's view before we process the final invoice. Before we began the construction of the current boiler, Austpower and PPI signed the NDT works agreement with the condition of approximately 2-3%failure . No extra cost was incurred by the three phases of construction of No. 1 2 and 3 because their failure rate was not too far off the agreed failure rate. However, concerning the construction of the No. 4 unit, Austpower charged PPI an extra labour cost of $27,654, citing the failure rate of 5% which was higher than the agreed figure. In response to this, our company has not only paid for the hours billed by Qualweld during the construction of No. 4 but also for the extra hours claimed for the faulty welding work. Although these costs resulted from the faulty welding work, our company has paid for all the hours each worker claimed. Therefore, we are confident that the extra cost incurred by the faulty welding work must be exclusively borne by Qualweld. However, considering all the hard work and effort you Mr Kwon has put in so far, our company has decided to pay 50% as a good-will gesture whilst asking your company to pay the other 50%, or $13,827(ex-GST). We will pay the invoice less the aforementioned amount." 87The significance of this email is that it provides a clear indication in the context of a dispute between the parties that the client (in this case PPI) expected to pay for each welder who it was agreed would work on the job. They were not paying anything further for amounts that related to an unacceptable failure rate in relation to the work carried out. This would seem to suggest that the Client was paying for the supply of welders that were secured to it by the Applicant and for nothing else. In this case it paid an additional amount but only as a goodwill gesture and not because it was obligated to do so. Again, this suggests a procurement of services by the Applicant for the Client in the very sense referred to in the Payroll Tax Act. How significant is the revenue from providing the welding supplies to the Applicant as a percentage of the overall revenue derived by the Applicant in conducting its business? 88The accounts as prepared for the Applicant in the relevant years of income are summarised in the Table below and what is significant to note is that the line item described as " Contr, s/contr and commisn" (which would seem to be the full payments made to Interposed Entities etc) " reveals an amount for the 2011 year of $ 5,745,741. This is a significant amount particularly when measured against the total revenue of the Applicant which reveals for that year, an amount of $ 6,493,851. In other words payments to Interposed Entities represent 88.48% of the total revenue generated by the Applicant from all its activities. For the 2010 year the figure was 86.66% and for the 2009 year 87.5%. 89These numbers would suggest that the Applicant's assertion that the provision of the services of tradespeople (especially welders) is merely incidental to its broader business activities, is a difficult argument to sustain. The reality based on these numbers is that the provision of the services of welders is a fundamental and critical aspect of the business carried on by the Applicant. 90In conclusion on this issue, having regard, in particular, to * the documents referred to above most of which are consistent with the view that essentially what was delivered here by the Applicant was the services of particular tradespeople for the Client; * the fact that the Applicant had no employees other than Mr and Mrs Kwon; and * the fact that the vast majority of the Applicant's revenue was generated from the provision of welders to the Client the preferable view is that the Applicant procured the services of the welders for the Clients and accordingly in each relevant case there is an employment agency contract. 91There are some aspects of the documents that confusingly point the other way, but looking at the totality of the evidence presented, it seems to the Tribunal that fundamentally what the Applicant was doing was procuring the services of the tradespeople for the projects being undertaken by the Clients and the Applicant had a responsibility which carried with it certain financial implications to ensure that these tradespeople would be qualified to carry out that work to the standards required. THE RELEVANT CONTRACTS ISSUE 92As I have found in favour of the Respondent in respect of the Employment Agency Issue it is not necessary and I do not propose to consider the Relevant Contracts Issue. THE PENALTY ISSUE 93The Penalty Issue raises one particularly important question and that is whether the Chief Commissioner should have been satisfied that the taxpayer (or the person acting on behalf of the taxpayer) took reasonable care to comply with the taxation law. 94Reasonable care is the care that a reasonable person in the circumstances of the taxpayer would be likely to have exercised to fulfil the taxpayer's obligations. 95In RVO Enterprises Pty Ltd ATF the R M O'Mara Family Trust v Chief Commissioner of State Revenue 2004 NSWADT 64 the Tribunal view was expressed as follows: "In each case, it is essentially a question of fact whether the taxpayer has taken reasonable care in attending to its tax obligations. Factors that would indicate that a taxpayer took reasonable care include reasonable attempts to comply with the tax law, reasonable professional and other enquiries to ensure compliance, reliance on professional advice or on official published views of the tax law. Factors which indicate that a taxpayer failed to take reasonable care include oversight or forgetfulness to meet with obligations, failure to maintain adequate records and procedures to prevent errors from occurring, not seeking professional advice and errors in complying with the law." 96The law in this area is complex and difficult to apply with confidence, resting largely as it does on the interpretation of the rather vague word "procure." 97Nonetheless, the test is not one of evaluating the difficulty of the law and its application although that may be a relevant factor. 98The point here is that the taxpayer has provided precious little in the way of hard evidence to demonstrate that it took the sort of steps one would expect a reasonable person to take in such circumstances. The application of the employment agency provisions do not appear to have been considered by the Applicant in any detail until it became apparent that there were concerns raised by the Respondent. Certainly no evidence was provided that legal advice had been sought or obtained at any relevant time. 99The Applicant did retain the services of Andrew Nam Accounting Services Pty Ltd for the purpose of having that firm prepare its quarterly Business Activity Statements, its annual tax returns and to advise generally on compliance issues. The Applicant provided the adviser with bank statements and an excel spreadsheet summarising the business expenses. At no time while these arrangements were on foot was any issue raised with either Mr or Mrs Kwon as to the pay-roll tax liability of the Applicant and certainly no discussion was ever initiated by the advisors as to whether payments made to the Interposed Entities should be part of the calculation in determining pay-roll tax liability having regard, in particular, to the employment agency provisions. 100Unfortunately, such an oversight provides no basis for the Chief Commissioner to relieve the Applicant in respect of the 25% penalty otherwise imposed. 101Some relief based on voluntary disclosure has been provided by the Respondent in the form of a reduction in the penalty from 25% to 20%. 102In the circumstances, the imposition of the penalty must stand as the Chief Commissioner could not be satisfied based on the evidence presented that the taxpayer took reasonable care. ********** I hereby certify that this is a true and accurate record of the reasons for decision of the Civil and Administrative Tribunal of New South Wales. Registrar 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. Decision last updated: 22 December 2014