Civil and Administrative Tribunal New South Wales Medium Neutral Citation: Knight Watch Security Services Pty Ltd v Chief Commissioner of State Revenue [2017] NSWCATAD 223 Hearing dates: 04 May 2017 Date of orders: 13 July 2017 Decision date: 13 July 2017 Jurisdiction: Administrative and Equal Opportunity Division Before: N S Isenberg, Senior Member Decision: (1) The decision of the Chief Commissioner, as to the amounts of tax payable, interest assessed and penalty tax contained in the Assessments, is confirmed. Catchwords: REVENUE LAW – payroll tax – employment agent - penalty tax – Division 8 of Part 3 of the Payroll Tax Act 2007 Legislation Cited: Administrative Decisions Review Act 1997 Pay-roll Tax Act 1971 Payroll Tax Act 2007 Taxation Administration Act 1996 Cases Cited: B & L Linings Pty Ltd v Chief Commissioner of State Revenue [2008] NSWCA 187, (2008) 74 NSWLR 481 Chan & Naylor Australia v Chief Commissioner of State Revenue [2016] NSWCATAD 4 Cornish Investments Pty Limited v Chief Commissioner of State Revenue (RD) [2013] NSWADTAP 25 FEDERAL COMMISSIONER OF TAXATION v. WADE [1951] HCA 66; (1951) 84 CLR 105 Freelance Global Limited v Chief Commissioner of State Revenue [2014] NSWSC 127 Happy Days Property Pty Ltd v Chief Commissioner of State Revenue [2016] NSWCATAD 289 Qualweld Australia Pty Ltd v Chief Commissioner of State Revenue [2014] NSWCATAD 227 Stature Pty Ltd -v- Chief Commissioner of State Revenue [2002] NSWADT 271 UNSW Global Pty Ltd v Chief Commissioner of State Revenue [2016] NSWSC 1852 Value Engineering (Australasia) Pty Ltd v Commissioner of State Taxation (WA) (1985) 16 ATR 296 Texts Cited: Nil Category: Principal judgment Parties: Knight Watch Security Services Pty Ltd (Applicant) Chief Commissioner of State Revenue (Respondent) Representation: Counsel: K Morgan and D Wong (Applicant) S Balafoutis and A Spies (Respondent) Solicitors: Clamenz Lawyers (Applicant) NSW Crown Solicitor's Office (Respondent) File Number(s): 2016/00378337 Publication restriction: Nil REASONS FOR DECISION Introduction 1. On 30 September 2015, the Respondent (the Chief Commissioner) issued Payroll Tax Assessment Notices to the Applicant (Knight Watch) in respect of the 2011 to 2014 financial years and on 27 January 2016 a further Payroll Tax Assessment Notice was issued in respect of the 2015 financial year. 2. Knight Watch objected to all of the assessments for the financial years 2011 to 2015 inclusive (the Assessments) (the Objection). The Chief Commissioner disallowed the Objection (the Disallowance Decision) and on 16 September 2016 Knight Watch applied to the Tribunal to review the Disallowance Decision. 3. On 24 April 2017 Knight Watch filed an amended application with the Tribunal (the Application) seeking a review of the Assessments (instead of the Disallowance Decision). 4. This matter has been conducted, without objection by the Chief Commissioner, on the basis that the Tribunal is reviewing the Assessments, rather than the Disallowance Decision. 5. For the reasons set out below, the Tribunal's decision is that the amounts of tax payable, interest and penalty tax in the Assessments are confirmed. Powers of Tribunal on review 1. Section 96 of the Taxation Administration Act 1996 (TA Act) provides that under certain circumstances a taxpayer may apply to the Tribunal for an administrative review under the Administrative Decisions Review Act 1997 (ADR Act) of a decision (including an assessment) that has been the subject of an objection. The circumstances include dissatisfied by the taxpayer with the Chief Commissioner's determination of the objection. 2. The Tribunal may confirm or revoke the assessment or other decision to which an application relates, or make a decision in place of the reviewable decision and make orders as to costs or otherwise as it thinks fit, s 101(1) of the TA Act. 3. In determining an application, the Tribunal is to decide what the correct and preferable decision is having regard to the material then before it, including any relevant factual material and any applicable written or unwritten law, s 63 of the ADR Act. Material before the Tribunal 1. The Respondent relied on: 1. two bundles of documents created pursuant to s 58 of the ADR Act respectively filed on 21 October 2016 (s 58 Vol 1) and 12 December 2016 (s 58 Vol 2); 2. affidavit of Patricia Box sworn 7 April 2017 filed 10 April 2017; 3. written submissions dated and filed 10 April 2017 (RS); 4. written supplementary submissions dated and filed 23 June 2017 (RSS) and 5. oral submissions made during the proceedings by Mr Balafoutis. 1. Knight Watch relied on: 1. a witness statement of Harry Davernaris made 7 February 2017 filed 8 February 2017 (HD-1) together with a tabbed but unpaginated bundle of documents exhibited to HD-1 (Exhibit HD); 2. a second witness statement of Mr Davernaris made 10 March 2017 filed 28 March 2017 (HD-2); 3. a Summary Table of assessments, interest and penalty, including handwritten changes (the Summary Table); 4. amended written submissions made 10 March 2017 filed 28 March 2017 (AS); 5. some of the documents contained in s 58 Vol 1 and s 58 Vol 2; and 6. oral submissions made during the proceedings by Ms Morgan. 1. Unless stated to the contrary, references in these reasons: 1. to paragraphs of written submissions by the Chief Commissioner are to paragraphs of RS; 2. to paragraphs of written submissions by Knight Watch are to paragraphs of AS; and 3. to legislative provisions are to provisions of the Payroll Tax Act 2007 (the Act). 1. The parties agreed that the figures set out in the Summary Table, including manuscript amendments, were correct as at the date the Assessments were issued. 2. Extracts reproduced in these reasons do not include references to footnotes. Issues 1. The general issue for the Tribunal is whether the Assessments are correct. 2. Specific issues raised by Knight Watch are: 1. at [10.4] in the Objection, that Knight Watch is not liable for payroll tax on payments made to its sub-contractors "pursuant to the Commissioner's application of Division 8 of the Act"; and 2. at [42] in AS, in the alternative, no penalty tax should be payable. Onus of proof 1. The Applicant has the onus of proving its case in a review by the Tribunal, s 100(3) of the TA Act. The requisite standard of proof in such a review is the "balance of probabilities" Cornish Investments Pty Limited v Chief Commissioner of State Revenue (RD) [2013] NSWADTAP 25 at [31] and B & L Linings Pty Ltd v Chief Commissioner of State Revenue [2008] NSWCA 187, (2008) 74 NSWLR 481 at [104]. 2. Ms Morgan conceded that in these proceedings, the onus lay on Knight Watch. Consideration The legislative scheme 1. Payroll tax is a tax on employers in respect of taxable wages paid during each financial year. If total wages paid by an employer during a financial year are below the statutory payroll tax threshold for that year, then no payroll tax is payable by that employer. 2. The imposition of payroll tax, liability to pay and the amount payable are dealt with at ss 6 to 8 of the Act 6 Imposition of payroll tax Payroll tax is imposed on all taxable wages. 7 Who is liable for payroll tax The employer by whom taxable wages are paid or payable is liable to pay payroll tax on the wages. 8 Amount of payroll tax The amount of payroll tax payable by an employer is to be ascertained in accordance with Schedules 1 and 2. 1. The words "employer" and "wages" are relevantly defined in ss 3 and 13 as follows: 3 Definitions (1) In this Act: employer means a person who pays or is liable to pay wages and includes: …. (b) a person taken to be an employer by or under this Act, and …. 13 What are wages? (1) For the purposes of this Act, wages mean wages, remuneration, salary, commission, bonuses or allowances paid or payable to an employee, including: (e) an amount that is included as or taken to be wages by any other provision of this Act 1. Specific legislative provisions in respect of the liability of employment agents for payroll tax are found in Division 8 of Part 3 of the Act (Division 8) which is extracted below: Division 8 Employment agents 37 Definitions (1) For the purposes of this Act, an employment agency contract is a contract, whether formal or informal and whether express or implied, under which a person (an employment agent) procures the services of another person (a service provider) for a client of the employment agent. (2) 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. (3) In this section: contract includes agreement, arrangement and undertaking. 38 Persons taken to be employers For the purposes of this Act, the employment agent under an employment agency contract is taken to be an employer. 39 Persons taken to be employees For the purposes of this Act, the person who performs work for or in relation to which services are supplied to the client under an employment agency contract is taken to be an employee of the employment agent. 40 Amounts taken to be wages (1) For the purposes of this Act, the following are taken to be wages paid or payable by the employment agent under an employment agency contract: (a) 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, (b) the value of any benefit provided for or in relation to the provision of services in connection with the employment agency contract that would be a fringe benefit if provided to a person in the capacity of an employee, (c) any payment made in relation to the service provider that would be a superannuation contribution if made in relation to a person in the capacity of an employee. (2) Subsection (1) does not apply to an employment agency contract to the extent that an amount, benefit or payment referred to in that subsection would be exempt from payroll tax under Part 4 (other than under Division 4 or 5 of that Part, section 50 or clause 5 of Schedule 2) had the service provider been paid by the client as an employee, if the client has given a declaration to that effect, in the form approved by the Chief Commissioner, to the employment agent. 41 Liability provisions Subject to section 42, if an employment agent under an employment agency contract: (a) by arrangement procures the services of a service provider for a client of the employment agent, and (b) pays payroll tax in respect of an amount, benefit or payment that is, under section 40, taken to be wages paid or payable by the employment agent in respect of the provision of those services in connection with that contract, no other person (including any other person engaged to procure the services of the service provider for the employment agent's client as part of the arrangement) is liable to pay payroll tax in respect of wages paid or payable for the procurement or performance of those services by the service provider for the client. 42 Agreement to reduce or avoid liability to payroll tax (1) If the effect of an employment agency contract is to reduce or avoid the liability of any party to the contract to the assessment, imposition or payment of payroll tax, the Chief Commissioner may: (a) disregard the contract, and (b) determine that any party to the contract is taken to be an employer for the purposes of this Act, and (c) determine that any payment made in respect of the contract is taken to be wages for the purposes of this Act. (2) If the Chief Commissioner makes a determination under subsection (1), the Chief Commissioner must serve a notice of the determination on the person taken to be an employer for the purposes of this Act. (3) The notice must set out the facts on which the Chief Commissioner relies and the reasons for the determination. (4) This section has effect in relation to agreements, transactions and arrangements made before, on or after the commencement of this section. Knight Watch's business activities 1. In the Objection Knight Watch said that the Chief Commissioner had incorrectly determined that it was liable for payroll tax under the employment agency provisions of the Act. 2. Knight Watch described its relevant business activities in AS at [10] to [12]: 10 Knight Watch operates a security services business. As part of its business, Knight Watch contracts with clients to provide them (or their related entities) with security guards. 11 Knight Watch contracts with various sub-contractors to fulfil its contracts with its clients. These sub-contractors sometimes enter into further contracts with sub-sub-contractors to fulfil its (sic) contracts with Knight Watch. …. Knight Watch does not make any direct payment (in the form of wages or otherwise) to the employees or contractors of its sub-contractors. 12 …. the entity with which Knight Watch contracts, the entity which pays Knight Watch for its services, and the entity to whom Knight Watch actually provides the security services are not necessarily the same. The contracting entity may act as an intermediary for other entities who are the ultimate "end users" of the security services. By way of example, under a contract entered into between Knight Watch and Coles Myer Limited ("CML") in September 2006 ("CML Contract"), CML contracted with Knight Watch to provide security services, but the services were provided to CML's related corporations such as Kmart, Liquorland, Officeworks and Target. …. 1. Knight Watch relied on HD-1, HD-2 and a contract at Tab A in Exhibit HD (the CML Contract), to support the above submissions. 2. The Chief Commissioner described Knight Watch's business activities and the dispute as follows: 11. Knight Watch operates a security services business. It supplies its clients with security guards who are stationed at its clients' premises. Knight Watch has entered into a contract with [CML] for the provision of security guards. Knight Watch supplies the security guards from two sources. Knight Watch employs its own security staff and pays payroll tax on those wages. Knight Watch also contracts with various other third parties to obtain security personnel. 12. It is that second category of security guards which is the subject of these proceedings. The Chief Commissioner has assessed that Knight Watch is liable to pay payroll tax with respect to those security guards. Knight Watch disputes this. 1. There is no material dispute as to the factual background of the matter as set out above by each party other than that the Chief Commissioner submitted that CML and its related corporations were clients of Knight Watch and that Knight Watch procured services for CML and the related corporations. 2. The dispute relates to the interpretation of certain provisions of Division 8 and the interpretation and relevance of the Chief Commissioner's Revenue Ruling No. PTA 027 (the Ruling) in relation to the application of the Act to the facts in evidence. Analysis Liability for payroll tax under Division 8 1. Knight Watch relied heavily, both in the Objection and before the Tribunal, on submissions that the Chief Commissioner's interpretation of Division 8 in the Ruling was fundamentally incorrect. 2. The Ruling outlines an administrative procedure used by the Chief Commissioner to determine the payroll tax implications of an employment agency arrangement which involves multiple employment agents. The Chief Commissioner describes this as a "chain of on-hire". 3. The Ruling notes that a strict application of the employment agency provisions means that multiple employment agents are liable for payroll tax on essentially the same employment agency arrangement and the Chief Commissioner may choose to impose payroll tax liability on any of those employment agents. 4. As an administrative measure, the Ruling provides that the Chief Commissioner will hold "the employment agent closest to the ultimate client" liable for relevant payroll tax. 5. In these proceedings, there is no dispute that Knight Watch was engaged by CML to provide the services of security guards. There is no dispute that wages paid to security guards employed directly by Knight Watch are subject to payroll tax. However, Knight Watch also engaged subcontractors to obtain the services of security guards. The security guards were not paid by Knight Watch and were not directly employed by Knight Watch. 6. CML's related corporations were described as "Brands" in clause 1.1 of the CML Contract. The Contract provided that CML engaged Knight Watch to provide security guards to each "Brand" at specified sites occupied or utilised by the Brand. 7. The Chief Commissioner submitted that CML was the ultimate client, and that payments by Knight Watch to subcontractors, for the purpose of directly or indirectly engaging security guards to provide security at specified sites were taxable wages for the purpose of Division 8. 8. Knight Watch submitted that the ultimate clients were the Brands, Knight Watch's subcontractors were the employment agents closest to the Brands, and, in accordance with the Ruling, the subcontractors were the employment agents liable for payroll tax. 9. Knight Watch submitted that having regard to its interpretation of the Ruling, including its determination as to which employment agent was closest to the "ultimate client" it was clear that Knight Watch was not liable for payroll tax. 10. Notwithstanding Knight Watch's focus on, and numerous submissions concerning, its interpretation of the Ruling, Knight Watch also conceded that the Ruling did not have the force of law. 11. Further, Knight Watch conceded that Division 8 provides that payroll tax liability is imposed on each employment agent in a chain of multiple employment agents. 12. I observe that s 41 is designed to avoid double taxation by providing that if one employment agent has paid payroll tax in respect of the provision of services in connection with an employment agency contract then no other person, "including any other person engaged to procure the services of the service provider for the employment agents client as part of the arrangement" is liable to pay payroll tax in respect of relevant wages. 13. Notwithstanding the wording of the Ruling, the legislation does not distinguish between the payroll tax liability of an employment agent who is "closest" to an ultimate client and the liability of any other employment agent involved in the Chief Commissioner's "chain of on-hire". That distinction is merely part of an administrative procedure adopted by the Chief Commissioner for the purpose of the Ruling, which the Chief Commissioner has acknowledged, does not have the force of law. 14. Notwithstanding the acknowledgement by both parties that the Ruling is not the law, Knight Watch submitted at [21]: …. It is the employment agent with the closest and most direct relationship with the ultimate service provider, and not the "employment agent closest to the client", who is liable to pay payroll tax. Put simply, it is the entity that actually pays the service provider who is liable to pay payroll tax on the wages paid to the service provider. If there is a sub-contractor, then it is the sub-contractor who procures. If there is a sub-sub-contractor, then it is that sub-sub-contractor who is liable. 1. Knight Watch submitted that there were three reasons for this submission. Knight Watch's first reason 1. At [24] Knight Watch submitted that its construction of the Ruling at [21] is consistent with relevant legislative framework, and the meaning of the legislative provisions must be determined by reference to the language of the instrument viewed as a whole. 2. Knight Watch also submitted that statutory deeming provisions in the Act do not change the conceptual basis for payroll tax which is a tax on employee's wages paid by the person paying that employee's wages, and all wages paid to the security guards were paid by the subcontractors. 3. The Chief Commissioner submitted at [35] that Knight Watch's submission is based "on the mistaken assumption that only one employment agent may be liable under the Act". 4. I prefer the Chief Commissioner's submission because Knight Watch's construction would disregard the extended definition of 'wages' in s 13(e), provide no work for the deeming provisions in the Act, and, as Knight Watch has conceded, Division 8 provides that each employment agent in the chain is liable for payroll tax. 5. Accordingly, I reject Knight Watch's first reason for its submission. Knight Watch's second reason 1. Knight Watch submitted that its construction avoids an impractical operation of the Act and is "fairer and more convenient". The Applicant also submitted that in the context of complex contractual arrangements, the end user may not be the same entity that enters into the contractual relationship with the putative employment agent, accordingly the putative employment agent may not be liable for payroll tax because it is not "closest" to the client/end user, [26] and [27]. 2. These submissions disregard: 1. the wording of the Act, which imposes payroll tax on every employment agent in a chain; and 2. Knight Watch's express concession that the Ruling, on which Knight Watch relies, does not have the force of law. 1. I also observe that Knight Watch provided no authority for its submission in respect of the need for the "closest" employment agent to be liable for payroll tax. 2. I reject Knight Watch's second reason for its submission. Knight Watch's third reason 1. At [30] Knight Watch submitted that its "construction is consistent with the previous iteration of the legislative framework". Knight Watch then provided the following excerpt from s 3C(4) of the Pay-roll Tax Act 1971 (the 1971 Act). "(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". 1. Ms Morgan conceded that Knight Watch did not extract the whole of s 3C(4)(a) which is: (4) An employment agent is not liable to pay-roll tax under this Act in relation to an employment agency contract: 1. 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 (emphasis added). 1. Instead, Knight Watch submitted at [31] and [32] that s 3C(4) focused on an actual employer of the service provider, thus disregarding the deemed employer-employee relationship created by statute. 2. Knight Watch conceded that s 3C(4) was not reproduced in the Act and that in Freelance Global Limited v Chief Commissioner of State Revenue [2014] NSWSC 127, White J said at [14] that although ss 37 - 40 were modelled on s 3C of the 1971 Act, there was a "material difference in relation to "subs 3C (4) of the 1971 Act and the provisions of the [Act]". 3. Notwithstanding the clear finding by White J extracted in the previous paragraph, Knight Watch then submitted "the correct interpretation of section 37 is the position as expressly drafted in section 3C of [the 1971 Act]". 4. Knight Watch has discounted both the legislative wording and the finding by White J and provided no authority for its reasoning. I reject the reasoning. 5. In its submissions at [34] and following, and in oral submissions by Ms Morgan, Knight Watch claimed that it was not liable for the relevant payroll tax because it was not the employment agent that was "closest to the ultimate client". 6. This argument relies on express wording from the Ruling. In so doing, Knight Watch, which conceded that the Ruling was not binding and asserted that part of the Ruling wrongly interpreted the Act, seeks to both approbate and reprobate the effect of the Ruling. 7. I repeat that the Ruling represents no more than an administrative procedure adopted by the Chief Commissioner. I prefer to rely on the clear wording of the legislation and reject the argument that only the employment agent who is "closest to the ultimate client" is liable for payroll tax under Division 8. 8. Having rejected the express reasoning for Knight Watch's submission that "it is the employment agent with the closest and most direct relationship with the ultimate service provider …. who is liable to pay payroll tax", I reject the submission. Reliance on Qualweld 1. In oral submissions Ms Morgan sought to rely on its interpretation of a finding by Professor Deutsch SM at [35] in Qualweld Australia Pty Ltd v Chief Commissioner of State Revenue [2014] NSWCATAD 227 that before the employment agency provisions can apply, elements which must be satisfied include that the procurement of relevant services by an applicant must be "for a client of" the applicant. 2. Knight Watch' submissions were to the effect that that CML had entered into a contract with Knight Watch and that relevant security services were provided to corporations related to CML, not to CML. Accordingly, as Knight Watch had not entered into agreements with the related corporations which had received the services, those corporations were not clients of Knight Watch and Knight Watch was not liable for Division 8 payroll tax. 3. The submissions do not have regard to the following terms of the CML Contract: 1. clause 1.1 defines "CML" to mean not only CML but also "its related corporations", that is the "Brands"; 2. at clause 3.2 Knight Watch "acknowledges and agrees that CML enters into this Agreement on its own behalf and as agent for the Brands, which may which may use and require the Services under the terms of this Agreement from time to time"; 3. at clause 3.5(b) Knight Watch must perform the Services in accordance with the reasonable directions of CML; 4. clause 1.1 states that "the services to be provided by [Knight Watch] for CML [are] described in the Specifications; and 5. the specifications, which are stated to be applicable to all guard services provided by Knight Watch, require the guards attending each site to be fully inducted by store personnel, to be subject to the direction of representatives of the Brands, to provide reports to store/site management immediately after any incidents have occurred; to wear uniforms agreed by CML, to be appropriately licensed to comply with any occupational health and safety requirements and security guidelines required by CML; and to act at all times in the best interest of CML. 1. Ms Morgan submitted that (notwithstanding the clear wording of the above clauses) the related corporations were not parties to the Contract for the purpose of Division 8. She provided no authority for her submission and, having regard to the wording of the Contract and the relevant context, I reject the submission. 2. I am not satisfied that the words "for a client of" in s 37 and at [35] in Qualweld do not, in the context of the CML Contract, reasonably mean "on behalf of" or "in respect of the business interests of" the Brands as clients of Knight Watch. Nor has Knight Watch satisfied me that, having regard to the relationship of CML to its related corporations, the security of the business activities of those corporations is not a normal business activity of CML in which the guards are directly engaged together with the "Coles Myer Asset Protection Department", to which reference is made in Schedule 3 of the CML Contract and with which Knight Watch is required by the Schedule to be available for contact " 24 hours every day" throughout the term of the Contract. Relevance of section 41 – Liability provisions 1. I am satisfied that a Division 8 liability for payroll tax could lie on more than one employment agent if a "chain of on-hire" situation arose as envisaged by the Ruling and as occurred on the evidence before me. Section 41 provides a mechanism to avoid double taxation in such circumstances. 2. The evidence of Patricia Box is that she is a Senior Litigation Officer with OSR and has perused the OSR records for the period 1 July 2010 to 30 June 2015. As at 7 April 2017 there is no evidence that any person other than Knight Watch has paid or will pay payroll tax in respect of service providers procured by Knight Watch in the 2011 to 2015 financial years. 3. Knight Watch did not challenge Ms Box's evidence and provided no evidence or submissions to the contrary. 4. Accordingly, I am not satisfied that there has been any payment, pursuant to which, s 41 would relieve Knight Watch from the payroll tax liability it would otherwise have, from carrying out the terms of the CML Contract. Additional authorities 1. After the hearing, both parties were asked to provide short submissions in respect of two decisions, Value Engineering (Australasia) Pty Ltd v Commissioner of State Taxation (WA) (1985) 16 ATR 296 (Value Engineering) and UNSW Global Pty Ltd v Chief Commissioner of State Revenue [2016] NSWSC 1852 (UNSW Global). Value Engineering 1. In Qualweld, Professor Deutsch placed considerable emphasis on the importance of the word "procure" in Division 8 and the necessity for a conclusion to be reached as to whether the applicant in that matter had procured the services of the relevant worker for the client by entering into a contract with a third-party, [37] and [38]. He noted that the meaning of "procure" had been considered in a number of payroll tax cases including Value Engineering. 2. Professor Deutsch said: 40 In 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. 41 The principal business activity conducted by Value Engineering in that case was agreed to be to provide engineering and related services to other businesses. 42 The 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. 43 That definition provided that 'employment agent' means a person (in this definition referred to as the agent) who buy (sic) 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." 44 The 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.": 1. The Chief Commissioner's submission in respect of Value Engineering included, at [12] and [14] in RSS: 12 In Value, the Full Court of the Supreme Court of Western Australia considered s 2(a) of the Pay-roll Tax Assessment Act 1979. That section relevantly provided that an "employment agent" means a person who by arrangement procured the services of a worker for a client. In that case the alleged employment agent contracted with its clients to provide engineers. The alleged employment agent also contracted with subcontractors who provided engineers to supply those services. There was no direct arrangement between the alleged employment agent and the individuals who performed the services. The Full Court held at 299 and 308 that the fact that the taxpayer dealt only with the subcontractors, not with the individuals who performed the services, did not mean that the taxpayer did not procure their services to be provided to their clients. 14. The Chief Commissioner referred to Value in his objection determination dated 29 July 2016. The judgment supports the Chief Commissioner's position that Knight Watch is an employment agent even if it does not have a direct relationship with the persons providing the work. 1. I observe that although Knight Watch had the opportunity to provide substantive submissions and submissions in reply to the Chief Commissioner's submissions, in respect of the decision in Value Engineering, Knight Watch made no submissions regarding the case. 2. Having regard to the decisions in Qualweld and Value Engineering I am not satisfied that, for the purpose of Division 8, the fact that Knight Watch dealt with subcontractors and not directly with individuals who performed specific guard services means that Knight Watch did not procure the services of those individuals for CML. This applies even if the Brands were not clients of Knight Watch UNSW Global 1. UNSW Global concerned the extent of the reach of the employment agency provisions of both the 1971 Act and the Act. 2. UNSW Global, through its business unit Unisearch, arranges the provision of expert opinions by consultants. The Chief Commissioner issued a payroll tax assessment notice to Global on the basis that payments made by Global to consultants were deemed to be wages under both the 1971 Act and the Act. 3. White J found at [13] that the experts retained by Unisearch were independent contractors who were not subject to control or direction by Unisearch in how they were to undertake their engagement. They were engaged to achieve a particular result. Some consultants were engaged through their private companies. They bore the risk of any substandard work. 4. At [30] His Honour accepted that: …. the mischief to which …. s 37 was directed was where a person procured the services of another to perform services in and for the purposes of its client's business where the person's status as employee or independent contractor might be unclear 1. At [31] His Honour found that a literal reading of the legislative text within Division 8 produced an "absurd and unreasonable result". He referred to his decision in Freelance where he dealt with legislative history and further considered that history, certain judicial decisions and second reading speeches in both the Victorian and New South Wales parliaments. 2. His Honour said: 41 …. the mischief against which the employment agency contract provisions was directed was the avoidance of payroll tax through the interposition of an agent to give the appearance of a contractor relationship where one did not exist in substance. The mischief to which the provisions were directed was not where the service provider was a genuine independent contractor whose services were provided to a client through an intermediary . … 43 On a literal construction of the employment agency contract provisions all of the payments to consultants engaged by UNSW Global are taken to be wages paid by it under an employment agency contract …. . In terms of s 37, in a literal sense, it is clear that UNSW Global entered into agreements and arrangements under which it (being a person) procured the services of another person (the expert consultant) for its client…. 45 In Alcan (NZ) Alumina Pty Ltd v Commissioner of Territory Revenue (2009) 239 CLR 27; [2009] HCA 41, the plurality (Hayne, Heydon, Crennan and Kiefel JJ) said (at [47]): "[47] This court has stated on many occasions that the task of statutory construction must begin with a consideration of the text itself. Historical considerations and extrinsic materials cannot be relied on to displace the clear meaning of the text. The language which has actually been employed in the text of legislation is the surest guide to legislative intention. The meaning of the text may require consideration of the context, which includes the general purpose and policy of a provision, in particular the mischief it is seeking to remedy." (Citation of authority omitted.) 46 In this case, unlike Alcan (see Alcan at [45]), giving the provisions their natural and ordinary, or literal, meaning does lead to an absurd or unreasonable result. …. 49 This is not a case in which a literal construction fails to address the mischief that Parliament was concerned to address, but rather a case in which the literal words used to address that mischief go far beyond the mischief intended to be addressed. To the extent the text of the legislation permits …. the provisions should be construed so as not to apply to all arrangements that could fall within their literal terms, but should be construed in accordance with the legislative intent as ascertained from the statutory context, including the juxtaposition of the employment agency contract provisions with the relevant contract provisions, the legislative history, and the extrinsic materials. This may mean that the legal meaning to be given to the provisions differs from their literal meaning. 50 …. the Chief Commissioner ultimately accepted that a literal interpretation would have far-reaching and unintended consequences…. …. 62 …. Applying a purposive construction, as mandated by s 33 of the Interpretation Act, I think that the definition of an employment agency contract as being a contract under which a person (the employment agent) "… procures the services of another … for a client of the employment agent" can be read as meaning a contract under which a person procures the services of another person in and for the conduct of the business of the employment agent's client. That was the intended scope of the provisions …. 63 Whether the worker is to be characterised as an employee or a contractor, the employment agency contract provisions were intended to apply to cases where the employment agent provided individuals who would comprise, or who would be added to, the workforce of the client for the conduct of the client's business ….. 64 One of the hallmarks of an independent contractor is that he or she carries on his or her own business. But sometimes that is done, or is said to be done, by the individual, in substance, working for the client in the same way as would an employee of the client. Where the services of the individual are provided through the intermediary, that is, the employment agent, to help the client conduct its business in the same way, or much the same way, as it would do through an employee, then the arrangement is within the intended scope of the section. 65 But where the services, although provided for the client's benefit, are not provided by the service provider working in the client's business, the arrangement does not fall within the intended scope of the provision. …. 1. His Honour found that the evidence was that work done by experts retained by Unisearch was "provided for the benefit of the client's business, but [was] not carried out in the client's business" and revoked the assessments issued by the Chief Commissioner. 2. In the subject matter, the Chief Commissioner submitted that Knight Watch had provided little evidence about the nature of the security guards' role in the relevant businesses, stated that the guards were stationed at the client's sites, wore uniforms supplied by the clients, and performed their duties in accordance with instructions given by the manager of the site. 3. The Chief Commissioner submitted in RSS: 9 These circumstances indicate that the security guards are working in the ordinary conduct of the clients' businesses. Accordingly, UNSW Global is consistent with a finding that Knight Watch is liable for payroll tax 10. Admittedly, the evidence on this issue is very limited and not verified by affidavit. That does not assist Knight Watch. It has the onus of proof. It has not adduced any evidence to establish it is not an employment agent in accordance with the principles in UNSW Global. 1. I refer to the Specifications contained in the CML Contract, to which reference was made at [64(e)] above. There is no material before me to the effect that relevant security guards were independent contractors in any sense, let alone the sense in which that phrase was used in UNSW Global. 2. Knight Watch provided no submissions in respect of the decision in UNSW Global and did not attempt to refute the Chief Commissioner's arguments. 3. In the circumstances, I am not satisfied that the Chief Commissioner's submissions at [9] and [10] in RSS are incorrect and I find that the decision in UNSW Global does not assist Knight Watch. Penalty Tax 1. The TA Act provides general provisions with respect to the administration and enforcement of taxation laws including the Act (Preamble and s 4 of the TA Act). Division 2 of Part 5 of the TA Act, ss 26 to 33, provides for penalty tax, in addition to interest, in respect of certain tax defaults including failures by a taxpayer to pay the whole or part of tax that the taxpayer is liable to pay, TA Act s 3. 2. Knight Watch conceded: 16 …. a failure to pay payroll tax (or the correct amount of tax) is a tax default which is subject to interest and penalty tax under the Taxation Administration Act 1996 (NSW). and submitted: 42 …. no penalty tax should be payable. The Commissioner may determine that no penalty tax is payable in respect of a tax default if it is satisfied that the taxpayer took reasonable care to comply with taxation laws. Presently, Knight Watch has cooperated during the course of the tax audit undertaken by the Commissioner. It is apparent from the above that the proper interpretation of the Act is debatable and, as such, the Commissioner should be satisfied that Knight Watch took reasonable care to comply with its obligations. 1. Ms Morgan's oral submissions included: 1. Knight Watch had complied with all its payroll tax obligations in relation to its own direct employees. Its understanding was that it had paid payroll tax for all employees. Accordingly, it had taken reasonable care to comply with its relevant obligations; 2. Knight Watch's understanding as to its Division 8 liability was based on the contents of an email chain with the OSR dated 22 September 2015 reproduced at page 308 in s 58 Vol 2; and 3. the Chief Commissioner had conceded that Knight Watch had cooperated during the payroll tax audit which led to the Assessments. 1. The Chief Commissioner's submissions in respect of penalty are at [44] to [50]. They include references to ss 26, 27 and 29 of the TA Act. The Chief Commissioner's summary submission is at [45], namely: The [TA Act] …. provides that, if a taxpayer is in default, the taxpayer is liable to pay penalty tax of 25% of the amount of tax unpaid (ss 26, 27). However, that amount may be reduced to 20% if the taxpayer cooperates with a tax audit (TAA, s 29). 1. Having regard to my above findings as to the liability for payroll tax under Division 8, it is apparent that Knight Watch had not dealt with all of its payroll tax obligations. Accordingly, a tax default has occurred and Knight Watch is liable to pay penalty tax on the amount of tax unpaid, TA Act s 26. 2. The onus lies on Knight Watch to prove its case, s 100(3) of the TA Act. Reasonable care and s 27(3) 1. Section 27(3) provides: (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 a person acting on behalf of the taxpayer) took reasonable care to comply with the taxation law, or (b) the tax default occurred solely because of circumstances beyond the taxpayer's control (or if a person acted on behalf of the taxpayer, because of circumstances beyond either the person's or the taxpayer's control) but not amounting to financial incapacity. 1. Ms Morgan conceded that there was no evidence before the Tribunal: 1. that Knight Watch had taken reasonable care prior to the audit, other than that it had complied with its obligations in respect of its own direct employees; and 2. that the tax default had occurred solely because of circumstances beyond Knight Watch's control or the control of any person acting on behalf of Knight Watch. 1. The Chief Commissioner submitted at [50]: Whether the interpretation of the Act is reasonably arguable is a question of law. Whether a taxpayer took reasonable care to comply with its obligations is a question of fact. To establish that the taxpayer took reasonable care, it must provide evidence demonstrating the steps that it has taken to comply with its taxation obligations. A submission that sought to equate the two concepts was rejected by the Tribunal in Chan & Naylor Australia v Chief Commissioner of State Revenue [2016] NSWCATAD 4, [109] - [1 12] …. 1. I find that there is no evidence before me that, prior to the Chief Commissioner informing Knight Watch that a relevant investigation was to be carried out, Knight Watch gave any consideration to its obligations under Division 8 , nor sought or obtained any advice in relation to those obligations, whether from a tax agent, a lawyer, or any other person, nor that it took any steps to comply with those obligations. 2. Knight Watch conceded that the circumstances envisioned by s 27(3)(b) did not apply. Reliance on email chain with Office of State Revenue on 22 September 2015 1. I have considered the chain of emails reproduced at page 308 and following in s 58 Vol 2. The emails from the Office of State Revenue (OSR) acknowledge assistance by Knight Watch during the course of the investigation and contain a statement that the "minimum possible penalty" has been applied in accordance with legislation. This does not mean that Knight Watch complied with its obligations prior to the commencement of the investigation nor does it mean that Knight Watch had taken reasonable care to comply with taxation law prior to the investigation. 2. Accordingly, I find that the exemption in s 27 (3) of the TA Act does not apply to Knight Watch. 3. I observe that a Senior Compliance Officer from the OSR informed Knight Watch in the email chain that it had been "incredibly cooperative", that the "minimum possible penalty" had been imposed and there was a belief at OSR that the outcome was "based on the legislation." I also observe that in the Disallowance Decision another officer of the OSR stated that the penalty tax had been reduced to 20% in accordance with s 29 of the TA Act. 4. Section 29 is dealt with below, as is s 33 of the TA Act, which was not raised by either party. To the extent that Knight Watch states it is relying on the email chain and having regard to the OSR's email statement that the minimum possible penalty had been imposed it may be appropriate at this point to mention the issue of administrative estoppel. 5. In FEDERAL COMMISSIONER OF TAXATION v. WADE [1951] HCA 66; (1951) 84 CLR 105 which dealt with the application of the Income Tax Assessment Act 1936-1947 (Cth), Kitto J said at 117 "No conduct on the part of the commissioner could operate as an estoppel against the operation of the Act." 6. Wade and other superior court decisions were cited in this Tribunal's predecessor, the Administrative Decisions Tribunal, in Stature Pty Ltd -v- Chief Commissioner of State Revenue [2002] NSWADT 271 at [11] and [12] where Verick JM said: "It is well established that the doctrine of estoppel cannot be invoked by a taxpayer so as to prevent the Commonwealth Commissioner of taxation assessing tax pursuant to the statutory duty so to do…. The accepted view is, therefore, clearly that no conduct on the part of revenue can operate as an estoppel against an obligation imposed by revenue legislation to assess for the correct amount of tax subject, of course, to any specific statutory provisions which prevent the revenue from exercising its statutory duties. 1. In Happy Days Property Pty Ltd v Chief Commissioner of State Revenue [2016] NSWCATAD 289 I said at [40]: In the state revenue context, in BBLT Pty Ltd v Chief Commissioner of the Office for State Revenue [2003] NSWSC 1003, Gzell J, when dealing with submissions by the plaintiffs that various kinds of estoppel arose against the Chief Commissioner referred to several appellate authorities, including Wade, and said at [111]: It should be noted, however, that with few exceptions the courts have concluded that estoppel does not lie against a fiscal authority on the basis that the authority cannot be prevented from carrying out the public duties cast upon it by the legislation. 1. The issue of reliance by Knight Watch on the emails was not referred to in the Objection nor in Knight Watch's written submissions. It was first raised in oral submissions in reply by Ms Morgan towards the end of the hearing. Other than referring to the emails themselves Ms Morgan brought no evidence to the Tribunal's attention to support her submission that Knight Watch relevantly relied on the emails. 2. In the circumstances, and having regard to settled law concerning estoppel not generally lying against a revenue authority I reject the submission that there was any relevant reliance by Knight Watch on the emails and that the Tribunal, in the shoes of the Chief Commissioner, should impose any penalty less than that imposed below. Section 28 1. Section 28 provides that the amount of the penalty determined under s 27 may be reduced by 80% if there is a relevant disclosure before the Chief Commissioner informs the taxpayer that there will be an investigation. 2. No evidence of any such disclosure was brought to my attention. I find that the s 28 reduction of penalty tax does not apply. Sections 27 and 29 1. Ms Morgan orally submitted that the combined effect of ss 27 and 29 of the TA Act was that the amount of penalty tax should be reduced to 5% of the amount of unpaid tax. 2. Section 27(1) imposes penalty tax in the amount of 25% of the amount of tax unpaid, subject to Division 2 of Part 5 of the TA Act. Section 27(2) of the TA Act increases the penalty in certain circumstances. I have found that the reduction in s 27(3) does not apply. 3. Section 29 (1) of the TA Act states: 29 Reduction in penalty tax for disclosure during investigation (1) The amount of penalty tax determined under section 27 is to be reduced by 20% if, after the Chief Commissioner informs the taxpayer that an investigation relating to the taxpayer is to be carried out and before it is completed, the taxpayer discloses to the Chief Commissioner, in writing, sufficient information to enable the nature and extent of the tax default to be determined. 1. The Chief Commissioner submitted at [45] and [46] that the amount of the 25% penalty tax imposed by s 27 had been reduced by 20% pursuant to s 29. 2. Ms Morgan pressed her interpretation of s 29 to the effect that it meant that the 25% s 27 penalty was reduced to a 5% penalty. Ms Morgan provided no authority to support her submission. 3. I find that a reduction of the 25% penalty to 5% would be a reduction by 80%. Section 29 clearly refers to a "reduction by 20%" of the "amount of penalty tax determined by section 27" not a reduction by 80%% of the penalty tax determined by s 27. I reject the submission. 4. However, s 29 (2) provides for circumstances where the reduction in s 27 penalty authorised by s 29(1) does not apply. Section 29(2) states: (2) This section does not apply in respect of information disclosed by a taxpayer if the taxpayer is registered under a taxation law and: (a) the tax default involved a failure to lodge a return as required under that taxation law, or (b) the tax default involved a failure to pay tax by the date required under that taxation law. 1. There is no dispute that Knight Watch is registered under a taxation law and I am not satisfied that Knight Watch paid the relevant amount of payroll tax in accordance with Division 8. Accordingly, s 29(2)(b) has effect as a tax default involving a failure to pay tax by the date required under the Act. Accordingly, the reduction in penalty authorised by s 29 (1), which had been allowed by the Chief Commissioner, cannot apply. Application of section 33 of the TA Act. 1. Section 33 of the TA Act provides a general power for the Chief Commissioner to remit penalty tax. The section states: 33 Remission of penalty tax The Chief Commissioner may, in such circumstances as the Chief Commissioner considers appropriate, remit penalty tax by any amount 1. There is no evidence before me to indicate that the Chief Commissioner considered the application of this section. 2. However, there is evidence in the form of the 22 September 2015 email chain that a Senior Compliance Officer from the Office of State Revenue informed Knight Watch that it had been "incredibly cooperative", that the "minimum possible penalty" had been imposed, and there was a belief at OSR that the outcome was "based on the legislation". 3. There is also a statement by another officer from the OSR at page 4 in the Disallowance Decision acknowledging that Knight Watch cooperated during the course of the investigation. 4. I observe that, in the email chain, the OSR informed Knight Watch of the requirement that taxation legislation be applied equally and fairly to all. 5. I have dealt above with the issue of estoppel. 6. There is no reason of which I am aware why the 25% penalty imposed by s 27 of the TA Act should not be reduced to 20% having regard to the circumstances in evidence before me including particularly helpful action by Knight Watch after the investigation commenced. This reduction will result in the remission of penalty tax pursuant to s 33 of the TA Act in the same amount as the Chief Commissioner previously determined, believing that same was authorised by TA Act s 29(1). 7. This is not the maximum remission permitted under the legislation. However, I am of the opinion that it is reasonable in the circumstances. Assessment of interest 1. The Assessments include interest assessed in respect of the 2011 to 2014 financial years as at as at 5 May 2015. The Chief Commissioner stated in the Disallowance Decision that interest had been calculated in accordance with the relevant market rate. 2. The interest figures are replicated in the Summary Table and the parties have agreed as to the accuracy of those figures. 3. To the extent that the Application seeks a review of the interest component of the amounts set out in the Assessments I observe that Knight Watch has provided no evidence of any errors and has made no relevant submissions. Having regard to the onus on Knight Watch to prove its case, I am not satisfied that there are any errors in the amounts of interest included in the Assessments. Decision 1. Having regard to the above findings on the material before me, Knight Watch has not satisfied its onus of proving on the balance of probability by admissible and probative evidence that any of the amounts in the Assessments are incorrect. Orders 1. Accordingly, the correct and preferable decision of the Tribunal is that the decision of the Chief Commissioner, as to the amounts of tax payable, interest assessed and penalty tax contained in the Assessments, is confirmed. ********** 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: 13 July 2017