Supreme Court New South Wales Medium Neutral Citation: Downer EDI Engineering Pty Ltd v Chief Commissioner of State Revenue [2019] NSWSC 743 Hearing dates: 26 February 2019 Date of orders: 21 June 2019 Decision date: 21 June 2019 Jurisdiction: Equity Before: Payne J Decision: (1) Application allowed. (2) Assessments for payroll tax issued to the plaintiff for the years ended 2010, 2011, 2012 and 2013 are revoked. (3) The defendant issue the plaintiff with a replacement Notice of Assessment for the relevant financial year in respect of each of the Notices of Assessment referred to in (2) above, as if the objection lodged by the plaintiff under s 86 of the Taxation Administration Act 1996 (NSW) had been allowed in whole. (4) The defendant pay the plaintiff's costs as agreed or assessed. Catchwords: TAXES AND DUTIES – payroll tax – liability to taxation – arrangements affecting liability to tax – objections and appeals – review of assessments pursuant to s 97(4) of the Taxation Administration Act 1996 (NSW) TAXES AND DUTIES – interpretation of s 32(2)(a) of the Payroll Tax Act 2007 (NSW) – whether subcontracts were excluded from being relevant contracts – whether supply of services by subcontractors under the subcontract was ancillary to the supply of goods – meaning of "supply" – meaning of "under the contract" – meaning of "ancillary" – whether Smith's Snackfood Company v Chief Commissioner of State Revenue [2013] NSWCA 470 is distinguishable TAXES AND DUTIES – interpretation of s 32(2)(d)(i) of the Payroll Tax Act 2007 (NSW) – whether subcontracts were excluded from being relevant contracts – whether the supply of services by subcontractors was ancillary to the conveyance of goods by means of a vehicle provided by subcontractors – meaning of "conveyance" – whether Smith's Snackfood Company v Chief Commissioner of State Revenue [2013] NSWCA 470 is distinguishable TAXES AND DUTIES – penalty tax and interest – interpretation of ss 28, 29, 33 of the Taxation Administration Act 1996 (NSW) – whether the scope of the discretion under s 33 is confined by ss 28 and 29 – whether penalty should be reduced to take into account the parties' conduct Legislation Cited: Payroll Tax Act 2007 (NSW), ss 6, 13, 31-35 Pay-roll Tax Act 1971 (NSW), s 3A Pay-roll Tax Act 1941 (Cth) Pay-Roll Tax (Amendment) Act 1986 (NSW) Pay-roll Tax (Amendment) Act 1985 (NSW) Pay-roll Tax Assessment Act 1941 (Cth) State Revenue Legislation Further Amendment Act 2014 (NSW) Taxation Administration Act 1996 (NSW), ss 25-30, 33, 86, 101 Cases Cited: Andaloro v Wyong Co-operative Dairy Society Ltd (1965) 66 SR (NSW) 466 at 479 Bennett v Cooper (1948) 76 CLR 570 at 577; [1948] HCA 29 Commissioner of Taxation v Energy Resources of Australia Ltd (1984) 54 FCR 25 Commonwealth v Sterling Nicholas Duty Free Pty Ltd (1972) 126 CLR 297; [1972] HCA 19 Federal Commissioner of Taxation v Consolidated Media Holdings (2012) 250 CLR 503; [2012] HCA 55 H R C Hotel Services Pty Ltd v Chief Commissioner of State Revenue [2018] NSWSC 820 SZTAL v Minister for Immigration and Border Protection (2017) 262 CLR 362; [2017] HCA 34 National Bus Co Pty Ltd v Federal Commissioner of Taxation (1998) 38 ATR 211 Smith's Snackfood Company Ltd v Chief Commissioner of State Revenue (NSW) [2013] NSWCA 470 Symes v Stewart (1920) 28 CLR 386; [1920] HCA 73 Tasty Chicks Pty Ltd v Chief Commissioner of State Revenue of New South Wales (2011) 245 CLR 446; [2011] HCA 41 The Smith's Snackfood Company Limited v Chief Commissioner of State Revenue (NSW) [2012] NSWSC 1116 Category: Principal judgment Parties: Downer EDI Engineering Pty Ltd (Plaintiff) Chief Commissioner of State Revenue (Defendant) Representation: Counsel: N J Young QC / C A Burnett (Plaintiff) R Seiden SC / M Sealey (Defendant) Solicitors: Ashurst (Plaintiff) Crown Solicitor's Office (Defendant) File Number(s): 2017/00301085 Publication restriction: None Judgment Judgment Evidence Relevant Facts Contractual arrangements Typical activities of subcontractors Tasks performed by subcontractors Pricing of each task Materials and labour components of each task Materials component Labour component Materials and labour components of truck roll Apportionment of amounts attributable to the performance of work and not attributable to the performance of work Submissions of the parties Downer's submissions Section 32(2)(a) "Supply" "Ancillary" Section 32(2)(d)(i) Chief Commissioner's submissions Section 32(2)(a) "Supply" "Ancillary" Section 32(2)(d)(i) Consideration – ss 32(2)(a) and 32(2)(d)(i) Legislative history of the provisions Text of the provisions Smith's Snackfood Company Determination of the relevant contract issue Section 32(2)(a) "Supply" "Under the contract" "Ancillary" Section 32(2)(d)(i) Conclusion – ss 32(2)(a) and 32(2)(d)(i) Penalty tax and interest Downer's submissions Chief Commissioner's submissions Consideration – penalty tax and interest Conclusion and orders 1. PAYNE J: Between 1 July 2009 and 30 June 2013, the plaintiff, Downer EDI Engineering Pty Ltd ("Downer") contracted with the FOXTEL partnership ("Foxtel") to perform work for Foxtel consisting of the delivery and installation of equipment for Foxtel Subscription Television at the premises of Foxtel's customers ("the Foxtel contract"). Most of the work under the contract was not performed by Downer employees but by third party contractors ("subcontractors") engaged by Downer under agreements ("subcontracts") [1] to perform work in relation to the Foxtel contract. 2. On or around 13 April 2016, the Chief Commissioner of State Revenue, the defendant, amended the Downer's payroll tax assessments for the financial years ended 30 June 2010, 2011, 2012 and 2013 in relation to the subcontracts. On 10 June 2016, Downer lodged objections to the amended assessments. On 9 August 2017, the Chief Commissioner disallowed Downer's objections. 3. It is now agreed between the parties that 57.7% of the amounts paid or payable under the subcontracts were not attributable to the performance of work and thus not subject to payroll tax. It follows that 42.3% of the amounts paid or payable under the subcontracts remain in dispute. Because of this, it is common ground that the assessments issued to Downer must be revoked in any event since the Chief Commissioner's assessments proceeded on the basis that only 25% of the relevant payments were not attributable to the performance of work. 4. The issue now in dispute is whether the subcontracts were excluded from being "relevant contracts" by ss 32(2)(a) or 32(2)(d)(i) of the Payroll Tax Act 2007 (NSW) (the Act), with the result that the payments were exempted from payroll tax. 5. The remaining questions are, if the concession in either s 32(2)(a) or 32(2)(d)(i) of the Payroll Tax Act does not apply, whether the assessments correctly reflect the percentage of penalties, and the amount of interest which should be imposed. Evidence 1. The plaintiff read affidavits by Wen-Ts'ai Lim sworn on 5 October 2017, John Ray Heydenrych sworn on 28 February 2018, Rasool Safavizad sworn on 28 February 2018 and two affidavits of Noel Gerard Redfern sworn on 28 February 2018 and 19 July 2018. 2. Mr Heydenrych was employed by Downer between March 2008 and November 2016 in various roles including state operations manager, supervisor for training and operations, field supervisor and installation technician. He was responsible for managing subcontractors that delivered and connected Foxtel equipment for Foxtel customers. His expression of opinion in paragraph 28 relating to the installation of set top boxes, that "it was a simple task", was read as a submission only. 3. Mr Safavizad was employed by Downer between October 2012 and January 2013 as a subcontractor who delivered and connected Foxtel equipment for Foxtel customers. He is now employed as the national stakeholder manager. 4. Mr Redfern was employed by Downer between 2012 and 2017 as the commercial and business performance manager for Downer's Foxtel business. He was responsible for managing the relationship between Downer and Foxtel. 5. Mr Lim of Ashurst, solicitor for the plaintiff, annexed to his affidavit copies of notices of assessments issued by the defendant to the plaintiff for the financial years ended 2010, 2011, 2012 and 2013, a notice of objection dated 10 June 2016, and a determination of the plaintiff's objection by the defendant dated 9 August 2017. 6. There was no cross-examination of these witnesses. I have summarised their evidence at [14]-[37]. 7. The plaintiff read the expert report of Mark Woodley dated 28 February 2018. The defendant read the affidavit and expert report of Needal Farhat affirmed on and dated 24 July 2018. I have summarised that expert evidence at [38]-[43]. Relevant Facts 1. In what follows I set out my principal findings of fact. Contractual arrangements 1. The work Downer was required to perform under the Foxtel contract was set out in the scopes of work in Schedule 1A in relation to cable installations. As noted at the outset, most of the work under the Foxtel contract was not performed by Downer employees but by subcontractors who entered into various subcontracts with Downer. The relevant subcontract for present purposes is the "Foxtel Cable Installation" agreement dated 30 August 2012 ("the subcontract"). 2. The subcontract comprised, relevantly, the following documents: 1. General Terms and Conditions; 2. Annexure A – Scopes of Work; 3. Annexure B – Operational Procedures; and 4. Annexure C – Subcontractor Rate Card, Codes and Pricing. 1. The General Terms and Conditions provided, relevantly, that subcontractors must: 1. perform the tasks set out in the scopes of work (see [18] below) described in Annexure A and in accordance with Annexure B, and in accordance with Orders issued by Foxtel (cl 2.1); 2. ensure that the tasks set out in the scopes of work (see [18] below) are provided (cl 2.2(a)); 1. with the degree of care, diligence, professionalism, prudence, efficiency, purposefulness and skill that would be expected from a skilled and competent person engaged in performing the tasks (cl 2.2(a)(i)); 2. in a manner that avoids the risk of damage to person or property (cl 2.2(a)(iii)); 3. in a manner that avoids hazard, danger or inconvenience to Downer, Foxtel, customers, Telstra and other third parties (cl 2.2(a)(iv)); 1. inform themselves of and put into effect all things necessary to provide the tasks in accordance with the subcontract (cl 2.2(h)); 2. only use equipment and materials approved by Downer (cl 2.2(i)); 3. ensure that any goods and materials given to them by Downer are protected from all damage, theft, loss or misappropriation. If goods and materials are damaged, stolen, lost or misappropriated, the subcontractor must pay Downer the cost of those goods and materials (cl 2.2(j)); 4. maintain good relationships and fully cooperate with Downer, Foxtel, Foxtel personnel, Telstra and Telstra personnel at all times (cl 2.2(n)); 5. provide everything necessary (labour, plant, equipment, vehicle and other things) to perform the tasks (cl 2.4); 6. be responsible for the delivery and collection to and from Downer's store or the customer's premises and all necessary loading and unloading of plant and equipment (cl 3.1(a)); 7. be responsible for the care, maintenance and repair of plant and equipment, and the replacement of plant and equipment should they be damaged or lost (cl 3.1(b)-(c)); 8. purchase a delivery vehicle for use in carrying out the tasks which is repaired promptly if damaged, properly maintained and is in a good condition, roadworthy and safe for use (cll 3.2-3.3); 9. ensure that at all times the vehicle that is being used to perform tasks is comprehensively insured (cl 9.1); 10. have at all times "Goods in Transit Insurance" to the value of $20,000 (cl 9.2); 11. purchase a computer field device to carry out the works including communication in relation to the allocation, status and recording completion of tasks (cl 3.3); 12. not carry out tasks until they have undergone induction and training by Downer (cll 5.9, 5.11); and 13. comply with Downer's policies and procedures (cl 21.1). Typical activities of subcontractors 1. I accept the following evidence which was given about the typical activities of subcontractors as sufficiently reliable to enable me to draw conclusions about the operation of the subcontract. Those typical activities were as follows: 1. On a typical work day, subcontractors were allocated two to four tickets of work for the next day which they would accept or decline on their field device. Subcontractors would then contact the Foxtel customer in respect of each ticket to confirm the appointment to attend the customer's premises and to plan the delivery route for the next day. 2. Prior to delivery, subcontractors undertook a stocktake of the materials in their vehicle. If they required additional materials, they ordered and acquired such materials at Downer's warehouse. 3. Tools and equipment were required to complete an installation, including a soft flame burner, plaster saw and cable specific tools, in addition to a vehicle. 4. Subcontractors called the Foxtel customer to notify them that they were en route. Upon arrival, subcontractors completed a "zero harm risk assessment" which involved performing an inspection of the customer's property to identify any health and safety risks, and submitted the assessment to Downer before commencing work. 5. Subcontractors asked the customer where they would like the Foxtel set top box to be located, and discussed where cables could run and access points, explained to the customer how the connection would take place, obtained the customer's approval to proceed, and unpacked all the necessary equipment, tools and materials. Some customers already had Foxtel hardware installed on their property and only required subcontractors to connect and commission a Foxtel set top box, whereas other customers would require hardware such as satellite dishes, wall mounts and cables to be fixed in place. 6. To install the set top box, subcontractors connected the box using an HFC cable which was connected to a satellite dish or to a pit outside the customer's premises. Most of the time, there was an existing conduit from the pit outside the customer's premises to the customer's premises. Sometimes, subcontractors had to extend the conduit to connect the cable to the premises; this was known as a "full installation" which was the most complex of the tasks a subcontractor was required to perform. To do this, subcontractors connected the cable through a "Madison Box" (a grey box outside the customer's premises) and installed an isolator (to stop the current running backwards into the network), then ran the cable into the premises where subcontractors would terminate it on a wall plate. If a customer wanted a wall plate installed on an internal wall, subcontractors would run the cable under the house. Subcontractors then plugged a cable from the wall plate to the set top box. 7. From 2010 or 2011, when set top boxes started to have internet connection, subcontractors connected the set top box into the customer's internet modem using a cable if the modem was close. If the modem was in a different room, subcontractors used a powerline adapter (a device which used the electrical circuit in the customer's premises as a computer network) to connect the box to the modem. 8. Subcontractors checked that the Foxtel signal was being received by the set top box, connected the box to the customer's television with an HDMI cable, turned on the box, and entered the customer's Foxtel code. The subcontractor showed the customer how to turn on the box, use the remote, select channels and pre-record programs. 9. Subcontractors then packed away their tools, collected all rubbish, asked the customer to sign for delivery, marked the job as complete on their field device, and drove to the next job. Tasks performed by subcontractors 1. The scopes of work in Annexure A to the subcontract set out 77 discrete tasks required to be performed by subcontractors. These tasks replicate the 77 discrete tasks in the scopes of work in Schedule 1A of the Foxtel contract which were required of Downer by Foxtel. The tasks were grouped by activity in the technician rate cards in Annexure C to the subcontract as follows: Activity Task Ref Truck roll Truck Roll 76 Connection Install 10mm Lead 9-11 Install 10mm Lead Underground 12-14 Install 20mm Lead 15-17 Install Aerial Lead 18-22 Install Cable 23-24 Install Foxtel Ready 26-36 Install Lateral Coil 42-44 Install Lateral Not Run 45-47 Install Lateral Pull 48-50 Install Opposite Aerial Lead 59-61 Backboned Building Deliver STU 4-6 Additional Outlets Add Viewing Screen 1 Install Multiroom 51-58 Return Path Activity Install Digipath Primary 25 Install Return Path 62-63 IP Activity Install IP Lead 37 Install IP Powerline Adapter 38 Install IP Wiring 19 39-40 Supplementary Activities Add Wallplate 2 Customised Installation 3 Install Amplifier 21 Relocate Viewing Location 67 Service Change Install iQ – Replace Standard STU 41 iQHD Upgrade 64-66 Replace Foxtel iQ with Standard STU 68 Replace iQHD with iQ 69 Replace iQHD with Standard Set Top Box 70 Upgrade Box from Service Call 77 Service Call Service Call Domestic & MDU 71 Service Call Business 72-73 Service Call Replace Amplifier 74 Disconnect Disconnection – Recover Equipment 7 Disconnection – Disconnect & Collect 8 STU Swap STU Swap Surround Sound 75 1. Most of these 77 discrete items are repetitive and describe different ways of performing the one "activity"; for example, there are 10 different types of leads of cables for "connection" and six separate types of "service change". 2. The installation tasks required by the subcontract are properly described as mechanical or menial. To the extent that it is relevant in characterising the installation tasks required to be performed under the subcontract, those tasks involved unskilled labour. Most subcontractors did not have any technical qualifications and the training provided by Downer was limited to attending a short training course conducted by Downer and obtaining mandatory occupational health and safety certifications. Obtaining the occupational health and safety certification was a short and straightforward process. 3. Subcontractors did not perform any construction work. For example, if the job required any concrete cutting, Downer would be informed and the work would be performed by a civil works team from another group. This was reflected in the scopes of works in Annexure A as referred to in the "performance of works" in cl 2 of the Foxtel contract and the subcontract. Construction work is not within the scopes of works. 4. By far the most important item in time spent by subcontractors in fulfilling their obligations under the subcontract was taken up by the collection and delivery of goods. This was, in part, encompassed by "truck roll". "Truck roll" was defined in the subcontract as the "standard callout charge for the travel time to attend a location and proxity [sic proximity]" to Downer's local base. There were three types of truck rolls: standard truck roll, island truck roll and regional truck roll. The defined task was said to be complete when the Downer "technician attends the location". 5. The components of truck roll were described as follows: "There were a number of task types concerned with "truck roll". In the industry, truck roll means the cost of providing and operating a delivery vehicle. The operations team members and I prepared estimates of truck roll depending upon whether the work concerned satellite or cable, commercial or domestic premises, and involved regional or metropolitan addresses. We divided truck roll into different tasks to account for these variable[s]. As with other tasks, the truck roll tasks comprised both a labour and materials component. To calculate the labour component, we estimated, in respect of each truck roll task, the average amount of time it would take to drive the truck to the site and multiplied the time taken by the agreed hourly rate. We calculated the material components of truck roll by estimating the costs such as: (a) fuel; (b) maintenance; (c) lease; (d) registration; (e) insurance; (f) administration; (g) parking; and (h) other expenses (such as tools, furniture, computers, iPads and printers). The allowance for the other expenses was not usually regarded in the industry as forming part of truck roll. However, it was necessary for Downer to reimburse the contractors for overheads incurred by them. Those costs were built into the truck roll tasks for the sake of convenient administration because every job involved truck roll." 1. As can be seen from this description and as will become apparent when dealing with the time taken to perform tasks required by the subcontract, truck roll encompassed a number of critical requirements of the subcontract. Pricing of each task 1. The fee Downer charged to Foxtel for each discrete task was known as the "sell price". The sell price payable by Foxtel to Downer was calculated by applying a profit margin to the cost of materials and labour agreed between Foxtel and Downer for each task. The sell price was recorded in a document known as the "sell rate card". The sell rate card set out each task, the fee charged by Downer for each task, a breakdown between the material and labour costs of each task, information as to the components of the material and labour costs, and Downer's profit margin. 2. The fee Downer paid to subcontractors for each discrete task was known as the "buy price". Once the sell price had been fixed, the buy price payable by Downer to subcontractors was calculated by adjusting the previous buy price so that the profit margin before and after the negotiation of the sell price remained the same. The buy price was recorded in a document known as the "technician rate card". The technician rate card set out the fixed buy price paid to subcontractors for each task regardless of the time taken to deliver and connect the equipment or the amount of materials required. The fact that a fixed buy price applied to all of the tasks required unto be performed under the subcontract underlines the correct characterisation of those required installation tasks as mechanical or menial. Materials and labour components of each task 1. The materials and the labour component of each task were priced to determine the cost to Downer of performing each discrete task. This involved making an estimate about the quantity of materials required to perform each task and the amount of time it would take to complete that task. Materials component 1. The estimate of the material cost of each task was based upon the actual cost of materials charged by Foxtel or purchased by Downer and on-sold at cost to subcontractors. 2. Downer supplied to subcontractors some materials, including the critical centrepiece of the installation, the Foxtel set top box, free of charge. Subcontractors were required to purchase consumables, such as cables, powerline adapters, screws and silicone sealant, from Downer or other electrical wholesale suppliers. Downer sold these materials to subcontractors at cost. 3. There were four categories of materials: 1. Foxtel consignment equipment – This comprised Foxtel set top boxes and Smartcards which were provided by Foxtel to Downer, and then by Downer to subcontractors without charge. However, if subcontractors lost a box, Downer would be liable to pay Foxtel for it and Downer in turn would charge subcontractors $500-$700 for the box. 2. Foxtel sell-through equipment – This comprised equipment and materials such as satellite dishes and assembly kits, powerline adapters and HDMI cables. Foxtel sold these items to Downer which in turn on-sold them at cost to subcontractors. 3. Foxtel free of charge equipment – This comprised various items of stationery and the Foxtel remote control unit which were supplied without charge to subcontractors. 4. Foxtel approved parts and consumables – These comprised parts which were not required to be obtained from Foxtel but had to conform to Foxtel specifications, and consumables, such as screws and silicon sealants, which subcontractors could acquire from Downer or an electrical wholesale supplier. Downer sold these materials at cost. Labour component 1. The estimate of the labour cost of each task was based upon an hourly rate which had been agreed between Downer and Foxtel ("the agreed hourly rate"). 2. Mr Heydenrych conducted a time and motion study of seven subcontractors of different levels of experience. The study recorded the time taken on each task against pre-determined work descriptions, the results of which were consistent with his own experience in the field and as a trainer and supervisor of subcontractors. The time and motion study demonstrated: 1. In relation to subcontractor Stavrianos – two jobs were completed on the relevant day. A total of 2 hours 41 minutes was spent travelling to pick up stock from the warehouse and attending the customers' premises (including idle time and travel time to home). A maximum total of 2 hours 8 minutes was spent actually performing installation tasks. As I will later explain, that estimate of time performing installation tasks is exaggerated in that those installation tasks also contained a component of "conveyance" or "supply" of the relevant goods by including, for example, the time taken to place the set top box in the place in the customer's premises agreed after discussion with the customer, as an installation task, rather as part of "conveyance" or "supply". For example, the first job in the study involved, principally, 18 minutes in mounting the dish to the roof, 18 minutes in the installation of the lead in cable, 12 minutes in location and connection of the set top box to the television, and 15 minutes in box hit/activation. A total of 25 minutes was spent on safety assessment and set up. A total of 13 minutes was spent in clean up and check of work area. A total of 21 minutes was spent in customer interaction. 2. In relation to subcontractor Luu – Three jobs were completed on the relevant day. A total of 2 hours 28 minutes was spent travelling to pick up stock from the warehouse and attending the customers' premises (including idle time and travel time to home). A maximum total of 3 hours 11 minutes was spent performing installation tasks. For example, the second job, a cable installation, involved, principally, 22 minutes in running and crimping cables correctly, and 11 minutes in location and connection of the set top box to the television. A total of 16 minutes was spent on safety assessment and set up. A total of 23 minutes was spent in clean up and check of work area. A total of 17 minutes was spent in customer interaction. 3. In relation to subcontractor Butina – Four jobs were completed on the relevant day. A total of 3 hours 47 minutes was spent travelling to pick up stock from the warehouse and attending the customers' premises (including idle time and travel time to home). A maximum total of 3 hours 33 minutes was spent performing installation tasks. For example, the second job, a satellite dish installation, involved, principally, 10 minutes in mounting the dish to the roof, 8 minutes in running and crimping cables correctly, and 2 minutes in location and connection of the set top box to the television. A total of 32 minutes was spent on safety assessment and set up. A total of 18 minutes was spent in clean up and check of work area. A total of 31 minutes was spent in customer interaction. 4. In relation to subcontractor P Nguyen – Three jobs, all cable installations, were completed on the relevant day. A total of 1 hour 37 minutes was spent travelling to pick up stock from the warehouse and attending the customers' premises (including idle time and travel time to home). A maximum total of 1 hour 27 minutes was spent performing installation tasks. For example, the first job involved, principally, 5 minutes in crimping cables correctly, 5 minutes in interconnection of equipment, 1 minute in location and connection of the set top unit to the television, and 10 minutes in box hit/activation. A total of 18 minutes was spent on safety assessment and set up. A total of 30 minutes was spent in clean up and check of work area. A total of 26 minutes was spent in customer interaction. 5. In relation to subcontractor Jammal – Two jobs, both cable installations, were completed on the relevant day. A total of 2 hours 10 minutes was spent travelling to pick up stock from the warehouse and attending the customers' premises (including idle time and travel time to home). A maximum total of 2 hours 12 minutes was spent performing installation tasks. For example, the first job involved, principally, 15 minutes in installation of the box, 40 minutes in installation of lead in the cable, 15 minutes in running the cable, and 20 minutes in box hit/activation. A total of 16 minutes was spent on safety assessment and set up. A total of 15 minutes was spent in clean up and check of work area. A total of 30 minutes was spent in customer interaction. 6. In relation to subcontractor Dousti – Four jobs, all satellite dish installations, were completed on the relevant day. A total of 3 hours was spent travelling to pick up stock from the warehouse and attending the customers' premises (including idle time and travel time to home). A maximum total of 2 hours 12 minutes was spent performing installation tasks. For example, the first job involved, principally, 30 minutes in mounting the dish to the roof, 30 minutes in installation of lead in the cable, and 3 minutes in box hit/activation. A total of 30 minutes was spent on safety assessment and set up. A total of 27 minutes was spent in clean up and check of work area. A total of 7 minutes was spent in customer interaction. 7. In relation to subcontractor T Nguyen – Two jobs, both cable installations, were completed on the relevant day. A total of 2 hours 5 minutes was spent travelling to pick up stock from the warehouse and attending the customers' premises (including idle time and travel time to home). A maximum total of 1 hour 7 minutes was spent performing installation tasks. For example, the first job involved, principally, 5 minutes in installation of lead in the cable, 10 minutes of running cable, 10 minutes in box hit/activation, and 10 minutes in new connectors and check pit. A total of 16 minutes was spent on safety assessment and set up. A total of 5 minutes was spent in clean up and check of work area. A total of 9 minutes was spent in customer interaction. 1. I accept the results of that study. Subcontractors spent a substantial part of their work time collecting and transporting the Foxtel equipment in their vehicles to the customers' premises. In most cases, subcontractors spent more time travelling in their vehicles than actually performing installation tasks, even taking into account, as I have explained, the fact that the time recorded for installation tasks also contained a component of "conveyance" or "supply" of the relevant goods by including, for example, the time taken to place the set top box in the place in the customers' premises. 2. The conclusion that subcontractors spent a substantial part of their work time collecting and transporting the Foxtel equipment is supported by the evidence of Mr Safavizad, which I accept, that "[o]n average, over half my working day was spent on the road". Materials and labour components of truck roll 1. It will be recalled that "truck roll" was defined as the "standard callout charge for the travel time to attend a location and proxity [sic]" to Downer's local base. Truck roll comprised both a materials and a labour component. To calculate the labour component, the average amount of time it would take to drive the vehicle to the site was multiplied by the agreed hourly rate. To calculate the materials component, the costs of materials were estimated. 2. The following items were charged for the time spent by a subcontractor while on the job: 1. "Travel time (mins) or travel time" – This was the sum paid for the time spent by a subcontractor driving his or her vehicle to the Foxtel customers' premises. 2. "Extra travel" – This was the sum to be paid for the time spent by a subcontractor driving his or her vehicle in regional areas. It applied only to the category of "truck roll regional". 3. "Ferry travel time" – This was charged for any time that a vehicle may need to be transported across water by ferry to jobs in regional areas. It applied only to the category of "truck roll regional". 1. The following items were charged in respect of non-labour costs incurred by a subcontractor: 1. "Fuel" – This was charged in respect of the cost of purchasing fuel for the vehicle. 2. "Lease, Registration, Insurance, Admin costs" – These were charged in respect of the costs of leasing, registering, insuring and maintaining a vehicle and for out of pocket expenses of maintaining a home office, such as furniture, computers, iPads and printers. The out of pocket expenses were usually not regarded in the industry as forming part of truck roll, however Downer reimbursed the subcontractors for overheads incurred by them since every job involved truck roll. It did not include any payment for time spent on these matters. "Vehicle Costs" and "Maintenance" were used interchangeably with "Lease, Registration, Insurance, Admin Costs". 3. "Parking" – This was charged in respect of parking fees incurred by a subcontractor when working in a city area. 4. "Ferry Costs" – This was charged in respect of the cost of a ticket to travel by car ferry. It applied only to the category of "truck roll regional". 5. "SMC Cost" – This referred to the costs of operating a service maintenance centre for which Foxtel reimbursed Downer. It was a sell-side cost only. "Other" was used interchangeably with "SMC Cost". Apportionment of amounts attributable to the performance of work and not attributable to the performance of work 1. Experts were engaged by the parties to calculate the total sum paid by Downer to subcontractors which was attributable to the performance of work and the sum which was not attributable to the performance of work. The labour component was referred to as amounts attributable to the performance of work and the materials component was referred to as amounts not attributable to the performance of work. 2. Mr Woodley, a risk analytics expert, was instructed by Downer's solicitors. Mr Woodley found that the total sum paid by Downer to subcontractors for the relevant period attributable to the performance of work was $24,782,170, and the total sum paid by Downer to subcontractors not attributable to the performance of work was $31,016,331. 3. Mr Farhat, a technology forensic investigator, was instructed by the Chief Commissioner's solicitors to evaluate the suitability and integrity of the approach employed by Mr Woodley. Mr Farhat was instructed as to the allocation of amounts comprising the components of truck roll attributable to the performance of work and not attributable to the performance of work to be used for his calculations. The "primary characterisation" characterised all component amounts of truck roll as related to the performance of work. Mr Farhat was also given a different allocation referred to as the "alternative characterisation" which characterised "Travel time (mins)", "Extra travel" and "Ferry travel time" only as attributable to the performance of work. Mr Farhat found that the average cost in relation to the performance of work was 64.10% for the primary characterisation and 42.34% for the alternative characterisation. 4. The difference in the experts' calculations can be explained by the different instructions as to the allocation of labour and non-labour components given to the experts by the parties' solicitors. 5. I do not need to determine the dispute between the methods used by the experts for the reason, noted at the outset, that the parties agreed prior to the hearing that 57.7% of the total sum paid by Downer to subcontractors for the relevant period was not attributable to the performance of work. Only 42.3% of the total sum paid by Downer to subcontractors for the relevant period was attributable to the performance of work. 6. It is, however, relevant to note that, on both parties' calculations, the total sum paid by Downer to subcontractors for the relevant period that was attributable to the performance of work included travel time. In identifying the relevant components of the subcontract that remain in dispute it is important to recall that a substantial part of the time spent by subcontractors in completing tasks under the subcontracts was spent travelling. That is, in relation to the 42.3% of the total sum paid by Downer to subcontractors for the relevant period, the time spent delivering and conveying the relevant goods was a substantial part of the total time spent by subcontractors in performing their obligations under the subcontract. Submissions of the parties 1. The parties agreed that this is the first time that a court has been asked to consider s 32(2)(a) of the Payroll Tax Act or its most closely equivalent provision under former legislation, s 3A(1)(a) of the Pay-roll Tax Act 1971 (NSW). Section 32(2)(d)(i) of the Payroll Tax Act, however, has been considered in Smith's Snackfood Company Ltd v Chief Commissioner of State Revenue (NSW) [2013] NSWCA 470. It will be necessary to refer to Smith's in detail later in these reasons. Downer's submissions 1. Downer submitted that the subcontract was a contract under which Downer, as the designated person, in the course of its business had supplied to it the services of subcontractors for or in relation to the performance of work: s 32(1)(b). Payroll tax applied unless one of the exemptions or exceptions in s 32(2) applied. Downer submitted that s 35(1) of the Payroll Tax Act was a critical provision because it says "amounts paid or payable by an employer during a financial year for or in relation to the performance of work relating to a relevant contract or the re-supply of goods by an employee under a relevant contract are taken to be wages". Downer submitted that this intersects with the broad approach to what may be wages under ss 6 and 13, but the s 35 deeming is entirely dependent on classifying the contract as a "relevant contract". 2. Downer submitted that both contracts, being the Foxtel contract and the subcontract, are clearly directed to the supply and installation of Foxtel equipment so as to provide an operational Foxtel service to the customer. Only after the equipment has been installed and demonstrated to be working does the customer accept supply by signing off on the supply. 3. Downer submitted that it is relevant that the Foxtel contract specifies certain service levels that are to be achieved in relation to the installation and supply. Broadly speaking these are quality standards. Downer submitted that its basic obligation was to ensure that the services were provided under the Foxtel contract; the definition of services in Sch 9 of the contract was very broad. Section 32(2)(a) 1. Downer submitted that substantial goods were provided or furnished and for some of them title was transferred and for some it was not. Downer submitted that there were three essential categories of tasks or functions under the subcontract: 1. ordering, collecting, storing and transporting equipment to the customer's residence or office and unloading the equipment at the premises; 2. installation services (which are essential, as with transportation, to enabling the equipment to operate and be accepted by the customer); and 3. supply of goods by delivering possession or title (in some cases) to the customer and the customer sign-off on that supply at the end of the process. 1. Downer emphasised the typical process followed by a subcontractor as being travel to the customer's premises, conduct of a risk assessment, identification of the location of installation and the installation equipment required, set up of connections to the HFC cable and/or installing a satellite service, a check that the equipment is working, demonstration to the customer, clean up, and customer sign-off on the delivery. 2. Downer submitted that for s 32(2)(a) to apply there must be supply of goods under the subcontract by the subcontractor and a supply of services to Downer by the subcontractor that is ancillary to that supply of goods. Downer submitted that the same considerations as are relevant under s 32(2)(d)(i) apply to the construction of the word "ancillary" in s 32(2)(a) of the Act. 3. Downer submitted that the essential contest between the parties is whether the reference to the supply of goods necessitates the transfer of ownership coincident with the supply. The Chief Commissioner's position is that supply does not include a mere delivery or furnishing or handing over of goods. Downer's position is that "supply of goods" is a phrase that carries its ordinary and natural meaning and it extends to the furnishing or provision of goods. 4. Downer submitted that this is not limited to a delivery that includes a transfer of ownership; a transfer of possession is sufficient. Alternatively, Downer submitted that, in any event, the subcontract involves to a substantial extent a transfer of title to goods (the sell-through equipment and the remote control unit) and that these goods are not insubstantial or non-critical. Therefore there is nonetheless a supply of goods even if the narrow interpretation of supply were to apply. 5. Downer submitted that s 32(2)(a) does not cover the same field as s 32(2)(d)(i) as most services ancillary to the supply of goods will not involve the vehicular conveyance of goods, nor will all s 32(2)(d)(i) cases be subsumed by s 32(2)(a) because, where a contract involves an essential element of conveyance, s 32(2)(d)(i) will apply and, where the supply of services is ancillary to the supply of goods, s 32(2)(a) will apply. 6. Downer submitted that, in this case, the supply of goods, the conveyance of those goods, and the installation services once those goods have been conveyed are all critical and essential to the performance of the subcontract. Downer submitted that, while in Smith's Gleeson JA concluded at [92] that "the principal matter or subject of the [relevant contract] is the conveyance of goods", the Court of Appeal did not require such a conclusion in every case as it would undermine the flexibility of the concept of "ancillary" and risk restricting its meaning to "secondary or subservient". 7. Downer further submitted that the Chief Commissioner's submissions do not adequately explain why the phrase "supply of goods" in relation to s 32(2)(a) should be narrowed to the supply of goods simultaneous with a transfer of title in the goods by the subcontractor. It was not disputed that the ordinary meaning of "supply" is to furnish or provide. Downer submitted in reply that the subcontractors clearly furnished and provided customers with the Foxtel equipment. Downer further submitted that no considerations of statutory context overwrite the ordinary meaning of "supply" in the provision. "Supply" 1. So far as the meaning of "supply" of goods was concerned, Downer submitted that it may include the mere delivery of goods by subcontractors to Foxtel's customers. The ordinary meaning of "supply" is to furnish or provide: Symes v Stewart (1920) 28 CLR 386 at 389; [1920] HCA 73; Andaloro v Wyong Co-operative Dairy Society Ltd (1965) 66 SR (NSW) 466 at 479; National Bus Co Pty Ltd v Federal Commissioner of Taxation (1998) 38 ATR 211 at 215. 2. Downer submitted that it followed that the delivery by subcontractors to customers of Foxtel equipment constituted a "supply of goods" for the purposes of s 32(2)(a). Downer pointed out that, in a different statutory context, it has been held by the High Court that a supply of goods does not require a transfer of title: Commonwealth v Sterling Nicholas Duty Free Pty Ltd (1972) 126 CLR 297; [1972] HCA 19. Downer submitted that the equipment supplied by the subcontractors was part of an operating package and thus essential in order to supply the functioning service. 3. Downer submitted that the provision is careful to speak of who is supplying the services and who is receiving the services, but any person may be the recipient of goods (in this case, the recipient of the goods is the Foxtel customer). Downer submitted that there was no reason to depart from the ordinary meaning of the phrase "supply of goods". 4. Downer submitted that there is contextual support for a wide meaning of "supply". Downer submitted that s 32(1)(c) may be relevant to inform the word "supply" since, in the circumstance of giving out goods in s 33(1)(c) the person is taken to be an employer. Downer submitted that the Payroll Tax Act clearly treats a giving out of goods for work to be done on them as a type of supply, as otherwise the word "re-supply" would not then be used. There is no context which suggests some need to narrow the ordinary meaning of the words by reading in a requirement for transfer of title. "Ancillary" 1. Downer submitted that the Court of Appeal's decision in Smith's was important as it overturned the first instance judge's characterisation of "ancillary" in s 32(2)(d)(i) as meaning "subservient". Downer submitted that, drawing from the passages of the Court of Appeal's judgment in Smith's at [95]-[97], [109], [111], three propositions became evident: 1. the meaning of "ancillary" in the context of this provision is that the services are supplemental or auxiliary or accessory but that is not a mathematical exercise; 2. it is a question of fact and degree as to whether the connection is sufficient to satisfy the word "ancillary"; and 3. "subservience" is not a characteristic of "ancillary". 1. Downer submitted that there are a range of services provided in the subcontract, all of which facilitate the supply of the equipment. Downer submitted that the relevant services, including installation, transport, loading and unloading, were all essential services that were ancillary to the supply of goods. Downer submitted that the word "subsidiary" introduces overtones of subservience, and such ranking is inappropriate as it would undermine one of the key findings of the Court of Appeal in Smith's. 2. Downer submitted that the fundamental objective of the subcontract in this case is to deliver an operating service, and to do that certain things must be brought together, namely the equipment, the installation and the demonstration. Thus there are three groups of essential tasks in a necessary relationship where the services are ancillary, in the sense of facultative, incidental and accessory, to the supply of goods 3. Downer submitted that while truck roll represents 21% of the aggregated payments to subcontractors, Downer's evidence established that more than half of the time spent by subcontractors on the job is driving. Further, the remaining 79% of the aggregated payments to subcontractors was not compensation for installation services but was, in large measure, compensation for the materials purchased, collected and conveyed by the subcontractors; it is common ground that under s 35(2), 57.7% of the payments were not attributable to the performance of work. Downer submitted that the payments attributable to installation services, as opposed to materials cost and conveyance services, were less than 42.3% of the total payments to subcontractors. Section 32(2)(d)(i) 1. Downer submitted that the elements that need to be satisfied under s 32(2)(d)(i) are: 1. a conveyance of goods, and 2. that conveyance must be by means of a vehicle provided by the person conveying them. 1. There was no dispute that those two elements were satisfied in this case. 2. Downer submitted that the only issue is whether there are services ancillary to conveyance. Downer submitted that there is evidence that the amount of time spent driving which is work-related is significant, and that this supports the significance of the conveyance element of the subcontract. 3. In relation to s 32(2)(d)(i), the conveyance of goods by means of the vehicle provided by the subcontractor included: 1. collecting the Foxtel equipment from Downer's warehouse; 2. transporting the Foxtel equipment to the customer's premises; and 3. delivering the Foxtel equipment to its final location at the customer's premises, which included: 1. placing the Foxtel box in the location indicated by the customer; 2. placing the other items of Foxtel equipment in their final location, including by laying cables and placing an isolator or satellite dish where required; and 3. handing the remote control unit and Foxtel brochures to the customer. 1. Downer submitted that the services ancillary to the conveyance were: 1. conducting a safety inspection of the customer's premises; 2. connecting the items of Foxtel equipment once they are in place, and moving and manipulating equipment other than the Foxtel equipment (such as cables, routers or connection points belonging to the customer or to Telstra); 3. cleaning up any rubbish after the installation; and 4. providing a brief demonstration of the use of the Foxtel service to the customer. 1. Downer submitted that there was no material difference between the subcontract in this case and the contract in Smith's. In both cases, the subcontractor was required to: 1. provide their own vehicle of a certain specification; 2. undertake training provided by the taxpayer in how to undertake the relevant tasks; 3. collect and transport the relevant items by way of their vehicle; 4. unload the items and manipulate them until they are placed in their final location; 5. clean the site of the installation and remove and dispose of items no longer necessary at the site; 6. check installed equipment to ensure it was working; and 7. undertake other ancillary or de minimis activities. 1. Downer submitted that it is clear from Smith's at [144] that conveyance includes the further steps to make the conveyance "complete". Downer submitted that, in the present case, conveyance includes the subcontractor collecting the Foxtel equipment from Downer's warehouse, driving it to each customer's premises, unloading it from their vehicle, unpackaging it and putting each item of Foxtel equipment in its intended location at the customer's premises. Downer further submitted that much of what the Chief Commissioner would characterise as installation is conveyance; much of the work inside a customer's premises, skilled or not, goes to completing the conveyance. 2. Downer submitted that the question was not whether the relationship between the services and the conveyance of goods by means of a vehicle is one of dominance and subservience or primary and secondary roles, as this imports a "mathematical" rigidity which would inappropriately constrain the provision (Gleeson JA in Smith's at [104]). The question is, rather, whether it can be said that one is ancillary to the other. 3. Downer submitted that there were, in addition, services ancillary to the conveyance, such as conducting the safety inspection, connecting items, demonstrating equipment, cleaning up. These were ancillary as they gave the conveyance its commercial significance and allowed the value of the conveyance to be achieved in the finalisation of the supply. 4. Downer submitted that it is a false position to look only at the amount of time charged on truck roll and come to a conclusion that only 21% of payments related to conveyance. Downer submitted that the concept of conveyance was wider, and that a mathematical approach reduced what should be a broad substantive question of whether there was a nexus that amounts to an ancillary relationship into a question of quantification. Chief Commissioner's submissions Section 32(2)(a) 1. The Chief Commissioner submitted that the structure of the Act means that one must first characterise the contract, asking whether it is a contract for the supply of goods or the conveyance of goods. Only after having characterised it as a contract of one of those kinds does one ask whether the services (in this case the installation services) are ancillary to the supply of goods or the conveyance of goods. 2. The Chief Commissioner submitted that the Court should characterise the subcontract as an installation services contract. "Supply" 1. The Chief Commissioner submitted that "supply" of goods as employed in s 32(2)(a) only extends to the supply of goods "by the person by whom the services are supplied" and does not include mere delivery or conveyance of those goods. If the words "that are ancillary to the supply of goods" were read as including "that are ancillary to the conveyance of goods" there would be no work for the conveyance exemption in s 32(2)(d)(i) to do, because that paragraph is also concerned with services "that are ancillary to the conveyance of goods". 2. The Chief Commissioner submitted that the person who is doing the supply must have some sort of title to the goods, and that this is reflected in the definition of "supply". 3. The Chief Commissioner submitted that, if "supply" comprehends a mere conveyance, there would never be a case in which you would need to engage subs (d)(i) as cases would always fall into subs (a). The word "supply" in subs (a) could be substituted with the word "conveyance". 4. The Chief Commissioner submitted that the above conclusion is only reinforced, but is not dependent upon, the Chief Commissioner's preferred construction of the word "supply"; i.e. that supply as used in s 32(2)(a) does not include a mere conveyance. The Chief Commissioner submitted that this is so because the Foxtel set top box remains owned at all times by Foxtel and it cannot be said that the services supplied by the subcontractors are ancillary to the supply of the cables and various items necessary to connect the Foxtel set top box. "Ancillary" 1. The Chief Commissioner submitted that "ancillary" is a relational term, thus one must first identify something before something can be ancillary to it. In this case, the essential character of the subcontract is the installation. The fundamental purpose of the subcontract is to deliver the Foxtel service; it is an agreement for installation. The Chief Commissioner did not contend that delivery of the equipment had nothing to do with the subcontract, but submitted that it was not its essential character. 2. The Chief Commissioner submitted that Smith's demonstrates that the Court may look at the surrounding circumstances of the contract, but the purpose of doing this was to identify the principal matter or subject of the contract. In order for the whole contract to be exempt under the Act, one must be able to say that the services other than the supply of goods under the contract are ancillary to its principal matter or subject. 3. The Chief Commissioner submitted that the relative complexity of the installation shows that installation was the essence or principal matter of the subcontract. This distinguished Smith's on the facts. 4. The Chief Commissioner submitted that the training of subcontractors in installation distinguished them from a delivery person who is merely conveying or supplying the goods. The Court would need to be satisfied that the principal matter of the subcontract was the conveyance of the goods in order to take the next step and identify whether the services are ancillary to those principal matters, and this training shows that mere conveyance was not the principal subject matter. The test, it was submitted, is one of complexity. 5. The Chief Commissioner submitted that the agreed 57% figure is a proxy for the things that subcontractors have been paid for, which would not be described as payment for his or her time, labour or expertise (i.e. sell-through equipment, insurance). 6. The Chief Commissioner submitted that the installation of the Foxtel service in the premises of the Foxtel customer was a skilled and multi-staged task, and that it cannot be said that all of the tasks involved were ancillary to driving to the customer's premises for the purposes of delivering the equipment. Likewise, if delivery or conveyance is characterised as it was by Sackville AJA in Smith's at [242] as "the process of loading, unloading, conveying and delivering goods", then it is difficult in this case to characterise complex and intricate installation techniques as being ancillary to that process. 7. The Chief Commissioner submitted that this is emphasised by the fact that only one chargeable item of the 77 items under the subcontract relates wholly to delivery, being "truck roll", and that the amount paid by Downer to subcontractors in the 2013 year relating to the cost of providing and operating a delivery vehicle (i.e. truck roll) was only 21.1% of the total amounts paid by Downer to subcontractors. 8. The Chief Commissioner submitted that the principal subject of the subcontract was the skilled installation services required to be provided by subcontractors in order that Downer might satisfy its obligations to install the Foxtel subscription television service in Foxtel's customers' premises. 9. The Chief Commissioner submitted that Downer's construction of "ancillary" means all that is required is that the services "be contractually connected with the conveyance". It was submitted that this construction would strip the word "ancillary" of any concept of relative weighting and would be inconsistent with Smith's. 10. The Chief Commissioner submitted that the subcontract can only be characterised in conjunction with the Foxtel contract, and the principal subject matter of the Foxtel contract was not the supply of goods by Downer to Foxtel's customers, nor were the installations services supplied by Downer to Foxtel ancillary to the supply of goods to Foxtel's customers. 11. The Chief Commissioner submitted that it was accepted in Smith's that a synonym for ancillary was subsidiary. The concept of ancillary is relational. It is not enough for Downer to say that the installation services are not the principal matter of the subcontract; the onus is on Downer. 12. The Chief Commissioner submitted that Smith's sets the ground rules for how one approaches the exemptions: one must identify the principal matter of the subcontract to be the supply or conveyance of goods and only then ask if the services are ancillary to that. Until the Court decides what is the principal matter of the subcontract, asking whether something is ancillary or incidental is not relevant to the way in which the statutory test is arrived at. The Chief Commissioner submitted that it is irrelevant to ask whether something is ancillary to something that is not the principal subject of the contract. Section 32(2)(d)(i) 1. The Chief Commissioner submitted that the 21% figure relating to "truck roll" is a calculation of the value of, not the time taken by, the conveyance. The Chief Commissioner did not accept that subcontractors spend more than half their time driving. Even if this were true, it was submitted that less than half of the value of the contract relates to driving. 2. The Chief Commissioner submitted that the value of conveyance is relatively small, thus the contract should not be characterised as one of conveyance. This characterisation exercise, however, is not a mathematical exercise. 3. The Chief Commissioner submitted that Smith's should be distinguished on its facts from the present case. Applying the approach to the construction of s 32(2)(d)(i) articulated by Gleeson JA results in the opposite conclusion in the present case, namely that the provision does not apply to the subcontract. 4. The Chief Commissioner submitted that, unlike the facts in Smith's where there was no supervening agreement that governed the subcontract at the head contractor level, the subcontract in this case was inextricably linked to the Foxtel contract. Further, the Chief Commissioner submitted that the only reason for the entry into the subcontract and engagement of subcontractors was to facilitate Downer fulfilling its obligations to Foxtel to install the Foxtel subscription television service in Foxtel's customers' premises. This was explicitly stated in the Recitals to the subcontract. 5. The Chief Commissioner reiterated, in aid of the proposition that conveyance is not the principal matter of the subcontract, that the total value of truck roll, which is a proxy for conveyance, is 21%. Even though subcontractors were spending large amounts of time in the car, this was not a high value component of the contract. 6. The Chief Commissioner submitted that, despite the fact that the conveyance would not be complete should the Foxtel equipment be left on the customer's doorstep, the installation services "take over" from the conveyance after subcontractors go past the front door, and this is what makes the subcontract effective. Consideration – ss 32(2)(a) and 32(2)(d)(i) 1. The High Court has repeatedly stated that the process of statutory construction begins with a consideration of the text: Federal Commissioner of Taxation v Consolidated Media Holdings (2012) 250 CLR 503; [2012] HCA 55 at [39]. This requires a consideration of the ordinary and grammatical meaning of the words of the provision by reference to all the provisions of the statute. In SZTAL v Minister for Immigration and Border Protection (2017) 262 CLR 362; [2017] HCA 34 Kiefel CJ, Nettle and Gordon JJ explained that: "[14] The starting point for the ascertainment of the meaning of a statutory provision is the text of the statute whilst, at the same time, regard is had to its context and purpose. Context should be regarded at this first stage and not at some later stage and it should be regarded in its widest sense. This is not to deny the importance of the natural and ordinary meaning of a word, namely how it is ordinarily understood in discourse, to the process of construction. Considerations of context and purpose simply recognise that, understood in its statutory, historical or other context, some other meaning of a word may be suggested, and so too, if its ordinary meaning is not consistent with the statutory purpose, that meaning must be rejected." (Footnotes omitted.) 1. In the same case, after referring to statements of high authority about the importance of context being considered in the first instance, not merely at some later stage when ambiguity might be thought to arise, Gageler J said: "[38] The constructional choice presented by a statutory text read in context is sometimes between one meaning which can be characterised as the ordinary or grammatical meaning and another meaning which cannot be so characterised. More commonly, the choice is from "a range of potential meanings, some of which may be less immediately obvious or more awkward than others, but none of which is wholly ungrammatical or unnatural", in which case the choice "turns less on linguistic fit than on evaluation of the relative coherence of the alternatives with identified statutory objects or policies" Integral to making such a choice is discernment of statutory purpose: Taylor v Owners – Strata Plan No 11564 (2014) 253 CLR 531 at 557 [66]; [2014] HCA 9." 1. The essential issue is whether the subcontracts are excluded from being relevant contracts under one or both of s 32(2)(a) and s 32(2)(d)(i) of the Payroll Tax Act. If the subcontracts are excluded from being relevant contracts, there will be no payroll tax applicable and the assessments will be set aside in whole as a result. If they are not excluded, the parties have agreed that 57.7% of the payments are not taken to be wages due to s 35(2) of the Act and thus that 57.7% would not be subject to payroll tax. Legislative history of the provisions 1. The Pay-roll Tax Act 1971 (NSW) was introduced subsequent to the repeal of the Commonwealth Payroll Tax Act which had been introduced during WWII: Pay-roll Tax Act 1941 (Cth); Pay-roll Tax Assessment Act 1941 (Cth). 2. The Pay-roll Tax (Amendment) Act 1985 (NSW) amended the Pay-roll Tax Act 1971 to provide for the taxation of payments made under certain contracts. Payroll tax was charged on all taxable wages by s 7 of the 1971 Act. Section 8 provided that the tax was to be paid by the employer, by whom the taxable wages were paid or payable. Taxable wages were defined in s 3(1) to mean wages that, under s 6, were liable to payroll tax. By s 6(1)(a) the wages that were liable to payroll tax were wages that were paid or payable by an employer for services performed or rendered during a month or part of a month and were wages that were paid or payable in New South Wales. Wages were defined in s 3(1) to have the meaning given by s 3AA. By this provision, wages were defined to mean any wages, salary, commission, bonuses or allowances paid or payable (whether at piece work rates or otherwise and whether paid or payable in cash or in kind) to an employee as such. 3. By s 3AA(2)(e), wages included any amount deemed by or under a provision of the 1971 Act to be wages. One such provision was s 3A(2)(c), which deemed amounts paid or payable by an employer for or in relation to the performance of work relating to a "relevant contract" to be wages. This provision was in similar terms to s 35(1) of the 2007 Act. 4. The contractor provisions of the 1971 Act, s 3A, were introduced by the Payroll Tax (Amendment) Act 1985 (NSW). According to the Explanatory Note to the Payroll Tax (Amendment) Bill 1985 (NSW), the terms of the definition of "relevant contract" in s 3A(1) were: "directed to capture several means of disguising the employer-employee relationship by contractual arrangements which have been increasingly resorted to in recent years by persons seeking to defeat the objects of the Principal Act. The definition contains appropriate exclusions so that the parties to genuine service contracts will not be prejudiced." 1. The Explanatory Note to the 1985 Bill further stated: "This Bill proposes several amendments to the Pay-roll Tax Act 1971, the main purposes of which are— (a) to combat certain avoidance practices in relation to pay-roll tax; and (b) to vary the range of tapered exemptions from pay-roll tax. … Schedule 1 (2) inserts new sections 3A and 3B into the Principal Act to provide for the taxation of payments to contractors under certain contractual arrangements. The arrangements within the scope of section 3A are set out in the definition of "relevant contract" in subsection (1). The terms of this definition are directed to capture several means of disguising the employer-employee relationship by contractual arrangements which have been increasingly resorted to in recent years by persons seeking to defeat the objects of the Principal Act. The definition contains appropriate exclusions, so that the parties to genuine service contracts will not be prejudiced. The effect of the new section is that the parties to these contractual arrangements will be treated as employers and employees, and money paid in accordance with these arrangements will be treated as wages, for the purposes of the Principal Act." 1. The Minster (Mr Bob Debus) said in the second reading speech: [2] "I turn now to the subject of tax avoidance. It is a most unfortunate fact that in every walk of life there is a small minority of people who, by their unscrupulous behaviour, spoil things for everyone else. Thus it is that there has been a significant increase over the years in the use of artificial schemes and contrived arrangements by taxpayers attempting to avoid their liabilities to taxation. This has occurred in the area of pay-roll tax, just as it has in other more celebrated fields such as income tax. This bill includes a number of measures which will catch schemes designed to avoid liability for pay-roll tax by severing the employer-employee relationship. Such arrangements have included the use of so-called contractors to replace wages staff. Typical of the situations that are known to exist and are the target of the legislation is the employer who, by arrangement with an employee, enters into a contract for service with the employee's family trust, partnership or company for the provision of the employee's services. The employee then performs the services for the employer but his salary is paid to the trust, partnership or company, resulting in the avoidance of pay-roll tax by the employer. Certain contracts will be exempted from liability for pay-roll tax, including contracts in excess of $500,000 where the contractor would need to hire staff and would therefore be liable for pay-roll tax. Bona fide independent contractors will not be caught by the legislation." 1. Section 3A was further amended by the Pay-Roll Tax (Amendment) Act 1986 (NSW). This is the genesis of the present exemption provisions the subject of this case. Schedule 1, s 4(1) inserted s 3A(1A) which provided the following exemptions. Section 3A(1A)(a) is presently relevant: (1) Section 3A (Application of this Act to certain contracts)— (a) Section 3A (1A)— After section 3A (1), insert: (1A) For the purposes of this section, a contract under which— (a) a person is supplied with services ancillary to the conveyance of goods by means of a vehicle provided by the person conveying them; (b) a person is supplied with services for or in relation to the procurement of persons desiring to be insured by the person; or (c) a person is supplied with services for or in relation to the door-to-door sale of goods to consumers on the person's behalf, is not a relevant contract, unless the Chief Commissioner determines that the contract was entered into with an intention either directly or indirectly of avoiding or evading the payment of tax by any person. 1. The Explanatory Note to the Pay-roll Tax (Amendment) Bill 1986 (NSW) stated: "The object of this Bill is to amend the Pay-roll Tax Act 1971— (a) with respect to the pay-roll tax payable by employment agents and other persons deemed under that Act to be employers in respect of work performed under certain contractual arrangements; and … The amendments made by Schedule 1 (1) (a) makes it clear that the section does not apply to certain contractual arrangements relating to the carriage of goods, insurance brokerage and door-to-door selling." 1. Mr Debus in the second reading speech said, relevantly: [3] "The legislation was designed to overcome certain tax-avoidance practices involving contractors and employment agents. … The legislation also imposed liability for pay-roll tax on the wage component of payments to contractors for the performance of work under what are called relevant contracts. A relevant contract is defined as one under which: a person, in the course of a business, is supplied services by another person, or a person, in the course of a business, is supplied with workers through a third party, such as a family company. … The main exemptions for arrangements that would otherwise be caught as relevant contracts are, where the supply of labour is ancillary to the supply or use of goods … Only one of these exemptions need apply to a particular contract for it to be exempt. In effect, only contracts that are similar to a normal contract of service are subject to payroll tax; that is, only if a contractor works solely or mainly for one employer for an extended period or periods does the employer become liable for payroll tax. … On 10th March, I announced that the Government had made a decision to exclude contracts involving owner-drivers, direct sellers and insurance agents from payroll tax under the relevant contracts provisions. This decision will keep the New South Wales legislation in line with almost identical legislation that has operated in Victoria since January 1984. Schedule 1 (1) of the Pay-Roll Tax (Amendment) Bill contains provisions to exempt these groups." 1. It is a matter of passing historical interest that in the second reading debate for the 1986 Bill it was asserted by Mr Bruce Baird, then the relevant opposition spokesman, that complaints by the Long Distance Road Transport Association and then prominent broadcaster Mr John Laws were the most important causes of the introduction of the exemptions for contracts that the Minister described as "involving owner-drivers" and "direct sellers" which were effected by the 1986 Bill. [4] Text of the provisions 1. The Payroll Tax Act 2007 (NSW) repealed the Pay-roll Tax Act 1971. Section 6 of the Payroll Tax Act imposes payroll tax on all taxable wages: 6 Imposition of payroll tax Payroll tax is imposed on all taxable wages. 1. Taxable wages are defined in s 10(1) as wages that are taxable in this jurisdiction. There is a wide definition of "wages" in s 13 13 What are wages? [5] (1) For the purposes of this Act, wages mean wages, remuneration, salary, commission, bonuses or allowances paid or payable to an employee, including: (a) an amount paid or payable by way of remuneration to a person holding an office under the Crown or in the service of the Crown, and (b) an amount paid or payable under any prescribed classes of contracts to the extent to which that payment is attributable to labour, and (c) an amount paid or payable by a company by way of remuneration to or in relation to a director of that company, and (d) an amount paid or payable by way of commission to an insurance or time-payment canvasser or collector, and (e) an amount that is included as or taken to be wages by any other provision of this Act. (2) For the purposes of this Act, wages, remuneration, salary, commission, bonuses or allowances are wages: (a) whether paid or payable at piece work rates or otherwise, and (b) whether paid or payable in cash or in kind. (3) This Act applies in respect of wages referred to in subsection (1) (a)–(e) that are paid or payable to or in relation to a person who is not an employee in the same way as it applies to wages paid or payable to an employee (as if a reference in this Act to an employee included a reference to any such person). 1. This concept of "wages" is picked up by ss 32, 33 and 35 of the Payroll Tax Act. Section 32 replicates the provisions from the 1971 Act for the taxation of payments made under certain contracts. [6] By s 35(1) amounts paid or payable by an employer for or in relation to the performance of work relating to a "relevant contract" were taken to be wages. The expression "relevant contract" was defined in s 32. For present purposes, the material provisions of Div 7 of the Payroll Tax Act provides: 31 Definitions In this Division: contract includes an agreement, arrangement or undertaking, whether formal or informal and whether express or implied. relevant contract has the meaning given in section 32. re-supply of goods acquired from a person includes: (a) a supply to the person of goods in an altered form or condition, and (b) a supply to the person of goods in which the first-mentioned goods have been incorporated. services includes results (whether goods or services) of work performed. supply includes supply by way of sale, exchange, lease, hire or hire-purchase, and in relation to services includes the providing, granting or conferring of services. 32 What is a relevant contract? (1) In this Division, a relevant contract in relation to a financial year is a contract under which a person (the designated person) during that financial year, in the course of a business carried on by the designated person: (a) supplies to another person services for or in relation to the performance of work, or (b) has supplied to the designated person the services of persons for or in relation to the performance of work, or (c) gives out goods to natural persons for work to be performed by those persons in respect of those goods and for re-supply of the goods to the designated person or, where the designated person is a member of a group, to another member of that group. (2) However, a relevant contract does not include a contract of service or a contract under which a person (the designated person) during a financial year in the course of a business carried on by the designated person: (a) is supplied with services for or in relation to the performance of work that are ancillary to the supply of goods under the contract by the person by whom the services are supplied or to the use of goods which are the property of that person, or (b) is supplied with services for or in relation to the performance of work where: (i) those services are of a kind not ordinarily required by the designated person and are performed by a person who ordinarily performs services of that kind to the public generally, or (ii) those services are of a kind ordinarily required by the designated person for less than 180 days in a financial year, or (iii) those services are provided for a period that does not exceed 90 days or for periods that, in the aggregate, do not exceed 90 days in that financial year and are not services: (A) provided by a person by whom similar services are provided to the designated person, or (B) for or in relation to the performance of work where any of the persons who perform the work also perform similar work for the designated person, for periods that, in the aggregate, exceed 90 days in that financial year, or (iv) those services are supplied under a contract to which subparagraphs (i)–(iii) do not apply and the Chief Commissioner is satisfied that those services are performed by a person who ordinarily performs services of that kind to the public generally in that financial year, or (c) is supplied by a person (the contractor) with services for or in relation to the performance of work under a contract to which paragraphs (a) and (b) do not apply where the work to which the services relate is performed: (i) by two or more persons employed by, or who provide services for, the contractor in the course of a business carried on by the contractor, or (ii) where the contractor is a partnership of two or more natural persons, by one or more of the members of the partnership and one or more persons employed by, or who provide services for, the contractor in the course of a business carried on by the contractor, or (iii) where the contractor is a natural person, by the contractor and one or more persons employed by, or who provide services for, the contractor in the course of a business carried on by the contractor, unless the Chief Commissioner determines that the contract or arrangement under which the services are so supplied was entered into with an intention either directly or indirectly of avoiding or evading the payment of tax by any person, or (d) is supplied with: (i) services ancillary to the conveyance of goods by means of a vehicle provided by the person conveying them, or (ii) services solely for or in relation to the procurement of persons desiring to be insured by the designated person, or (iii) services for or in relation to the door-to-door sale of goods solely for domestic purposes on behalf of the designated person, unless the Chief Commissioner determines that the contract or arrangement under which the services are so supplied was entered into with an intention either directly or indirectly of avoiding or evading the payment of tax by any person. 1. Section 33 provides: 33 Persons taken to be employers (1) For the purposes of this Act, a person: (a) who during a financial year, under a relevant contract, supplies services to another person, or (b) to whom during a financial year, under a relevant contract, the services of persons are supplied for or in relation to the performance of work, or (c) who during a financial year, under a relevant contract, gives out goods to other persons, is taken to be an employer in respect of that financial year. (2) If a contract is a relevant contract under both section 32 (1) (a) and (b): (a) the person to whom, under the contract, the services of persons are supplied for or in relation to the performance of work is taken to be an employer, and (b) despite subsection (1) (a), the person who under the contract supplies the services is taken not to be an employer. 1. Section 35(1)-(2) relevantly provides: 35 Amounts under relevant contracts taken to be wages (1) For the purposes of this Act, amounts paid or payable by an employer during a financial year for or in relation to the performance of work relating to a relevant contract or the re-supply of goods by an employee under a relevant contract are taken to be wages paid or payable during that financial year. (2) If an amount referred to in subsection (1) is included in a larger amount paid or payable by an employer under a relevant contract during a financial year, that part of the larger amount which is not attributable to the performance of work relating to the relevant contract or the re-supply of goods by an employee under the relevant contract is as determined by the Chief Commissioner. … 1. The interpretation of s 32(2)(d)(i) is governed, at least before me, by the decision of the Court of Appeal in Smith's Snackfood Company to which I will now turn. Smith's Snackfood Company 1. At first instance, in The Smith's Snackfood Company Limited v Chief Commissioner of State Revenue (NSW) [2012] NSWSC 998 at [30], Gzell J held that "ancillary" in s 32(2)(d)(i) of the Payroll Tax Act meant "subsidiary, incidental, accessory, auxiliary" and held, at [39], that the word "ancillary" carried with it connotations of subservience or subordination. 2. On appeal, Gleeson JA, with whom Beazley P agreed, held at [78] and [111] that subservience is not a characteristic of an "ancillary" matter in this statutory context. I am bound by the decision in Smith's. The reasoning of the plurality should be set out in full. Gleeson JA stated: "[78] First, as explained below under the heading "Meaning of 'ancillary'", none of the cases upon which the Commissioner relied for the meaning of the term "ancillary" are directed to a statutory provision in the same terms as s 32(2)(d) of the 2007 Act (s 3A(1A)(a) of the 1971 Act). Nor are the dictionary definitions of "ancillary", which include "subordinate or subservient", determinative. An ancillary service does not necessarily need to be a subordinate or subservient one to the conveyance of goods. [79] Secondly, the relevant question under s 32(2)(d) is not whether the services of transportation, filling and maintaining the vending machines (and the other services supplied under the GDAs) can be considered secondary or subservient to the other. The focus of the exemption is on the relevant contract. The question to be answered is whether the GDA is a contract under which Smith's is supplied with services ancillary to the conveyance of goods by means of a vehicle. The words "under which" may be taken as meaning "in accordance with", "pursuant to" or "required by" the terms of the GDA. It is the relationship between the services required to be provided to Smith's under the GDA and the conveyance of goods by means of a vehicle, which the terms of the statutory exemption are directed to, not the quite different question posed by the Chief Commissioner as to whether any of the services can be considered secondary or subservient to the other. [80] Expressed in another way, the Chief Commissioner's submissions characterising the GDA in terms of labelling the contractor as storeman, stock-taker, driver, cleaner, repairman and business scout, do not answer the question posed by the exemption. The task of statutory construction is not assisted by resorting to such labels. Those labels reflect no more than descriptions ascribed to particular services provided under the GDAs. This distracts attention from the correct question which is required to be answered in determining whether the exemption is engaged. [81] Thirdly, and related to the previous point, it is a mistake when determining whether the exemption is engaged to read a particular contractual obligation in isolation. Further, as ultimately conceded by the Chief Commissioner, de minimis activity compared to the conveyance of goods by a vehicle would not preclude the engagement of the exemption. [82] Fourthly, in undertaking what both parties agreed was an evaluative exercise in answering the question posed by the exemption, regard is to be had to the contractual arrangement under which the services are actually provided. Merely describing the GDA as a "multi-faceted arrangement" does not assist in answering the question as to whether the exemption is engaged. [83] Fifthly, the absence of the words of limitation or restriction such as "solely" or "only" qualifying the expression "services ancillary" in s 32(2)(d)(i) is significant, particularly when contrasted with the language of the exemption in subparagraph (d)(ii) which contains the qualification "solely" in relation to contracts relating to insurance agents. The absence of the requirement of exclusivity in s 32(2)(d)(i) (or s 3A(1A)(a)) means that the exemption can be engaged even where multiple services exist under a relevant contract, not all of which are ancillary to the conveyance of goods. Ultimately, this appeared to be accepted by the Chief Commissioner in oral argument: see [75] above. [84] Sixthly, contrary to the oral submissions of the Chief Commissioner, there is no basis for implying a requirement of primarily as qualifying the expression "services ancillary". This would involve a distortion of the statutory language. As the High Court has repeatedly stated, the process of statutory construction begins with a consideration of the text: Commissioner of Taxation v Consolidated Media Holdings Ltd [2012] HCA 55; 293 ALR 257 at 268 [39]. This requires a consideration of the ordinary and grammatical meaning of the words of the provision by reference to all the provisions of the statute. Context and legislative purpose are also important: Commissioner of Taxation v Unit Trend Services Pty Ltd [2013] HCA 16; 297 ALR 190 at [47] per French CJ, Crennan, Kiefel, Gageler and Keane JJ, referring to the statement of French CJ and Hayne J in Certain Lloyd's Underwriters Subscribing to Contract No IHOOAAQS v Cross [2012] HCA 56; 293 ALR 412 at 418 [24]. [85] The Chief Commissioner did not point to any textual indicator or drafting history which suggested that a requirement of "primarily" should be implied in the exemption. [86] It was argued by the Chief Commissioner that unless such a requirement was implied, there would be an irrational result in the operation of the exemption. Such an outcome was postulated by reference to a hypothetical "relevant contract" under which a range of services were supplied of which only one was ancillary to the conveyance of goods by means of a vehicle. However, whether the exemption would be engaged in respect of such a hypothetical contract would depend upon the facts of the particular case. The exemption involves the characterisation of a relevant contract having regard to its terms. It is necessary to address the question to be answered by the exemption by reference to the contract under consideration in this case." (Emphasis in original.) 1. Gleeson JA commenced with an examination of the services provided under the contract and concluded: "[92] As a matter of characterisation of the GDA, the conclusion to be drawn is that the principal matter or subject of the GDA is the conveyance of goods (whether that expression be limited to the Smith's product or, as I have concluded in Section 4 below, also includes the money (coins and notes) spoils and packaging) and that the GDA is a contract under which Smith's is supplied with services ancillary to the conveyance. It is not to the point that some of the services, whether of a de minimis character or otherwise, are in and of themselves not ancillary to the conveyance. The engagement of the exemption does not require that the services supplied to Smith's be exclusively or solely ancillary to the conveyance." 1. A critical part of the conclusion is that it is not to the point that some of the services, whether of a de minimis character or otherwise, are in and of themselves not ancillary to the conveyance. A conclusion having some resonance in this case was: "[93] Furthermore, when regard is had to the evidence from the sample of contractors at the trial of the time actually spent in the performance of the services supplied under the GDAs, it is apparent that the services supplied to Smith's very substantially comprised the conveyance of goods by means of a vehicle provided by the person conveying them and services ancillary to the conveyance of goods." 1. As to the meaning of "ancillary", his Honour concluded: "[99] First, the word "ancillary" derives from the Latin "ancilla", a handmaid: Koala Motels Pty Ltd v Chief Licensing Inspector (1977) 18 ALR 12. That case concerned the concept of the supply of liquor as "ancillary to the meal" being taken in a dining room. Muirhead J considered that the word "ancillary" meant less than supplementary or supplemental to - it means "subservient" or "subordinate" and referred to the derivation from the Latin "ancillaries" – "ancilla". [100] However, as observed by Basten JA in New South Wales Crime Commission v Ollis [2006] NSWCA 76; 65 NSWLR 478 at 493 [60], whilst the derivation of the term "ancillary" is evocative, this does little to identify the bounds within which it must operate in a particular statutory context. Basten JA noted the breadth and arguably the vagueness of the concept, referring to McCleary v Director of Public Prosecutions (Cth) (1998) 20 WAR 288 at [320] per Ipp J. [101] Secondly, the relevant dictionary meanings given to "ancillary" are "subservient or subordinate", "auxiliary or accessory" or as "designating activities and services that provide essential support to the functioning of a central service or industry": Oxford English Dictionary, 3rd ed, 2000; and "accessory, auxiliary, subsidiary": Macquarie Dictionary, 5th ed, 2009. [102] Such dictionary definitions have met with approval in a number of cases including: Nix and Dunn v Pittwater Council (1994) 84 LGERA 199 at 205 per Gleeson CJ; Arnold at [73]. [103] Thirdly, there are cases which define the word ancillary far more widely. As observed by McColl JA (with whom Young JA agreed) in Baterham v Makeig [2010] NSWCA 86 at [63]-[64], these cases include Regina v Her Majesties' Treasury; ex parte Smedley [1985] QB 657 at 674 where Slade LJ said at [673] that "ancillary" was a word of wide and somewhat uncertain import. [104] The prime example of the word meaning something which is supplemental and is not subordinate, is the decision of this Court in Macquarie International Health Clinic Pty Ltd v University of Sydney where Stein JA, with whom Mason P and Meagher JA agreed said: "... an ancillary use does not necessarily need to be a subordinate or subservient one. It may be more than a minor use. It seems to me that an ancillary or incidental use is not capable of being reduced to a mathematical formula. It may also be noted that among the relevant dictionary meanings of ancillary are 'auxiliary' and 'accessory'." For this reason, a teaching hospital could be ancillary to the educational purposes of the University even though the educational use of the hospital was relatively minor. [105] Fourthly, generally speaking, the relationship between two matters connoted by the word "ancillary" is intended to be narrower than that of "association": Nix and Dunn v Pittwater Council at 204; Arnold at [72]. [106] Fifthly, there is authority in this Court that a concept of subservience is implicit in the idea of an "ancillary matter": Koala Motels Pty Ltd v Chief Licensing Inspector at 14, referred to with approval by Gleeson CJ in Nix and Dunn v Pittwater Council at [205] and by Pearlman J in NTL Australia Pty Ltd v Minister for Land and Water Conservation [2001] 112 LGERA 403 at 413 [28](c), in turn referred to with approval in this Court in Minister for Local Government v South Sydney Council [2002] NSWCA 288; 55 NSWLR 381 at 416 [160]; Arnold at 215 [74]. [107] It is to be observed, however, that the relevant context of a number of these cases concerned the scope of jurisdiction of a court, and whether a matter was ancillary to matters in respect of which jurisdiction had been conferred upon a court. Thus, the context in which the question was asked, provided the circumstance that the concept of subservience was implicit in the idea of an ancillary matter, for the purposes of questions of scope of jurisdiction. [108] Likewise, in Koala Motels, the context of whether the supply of liquor was ancillary to the meal, was that the meal was clearly the principal thing that could be enhanced by the supply of liquor, and thus the latter was seen as subservient or subordinate to the principal matter, being the meal. [109] Sixthly, ultimately the question whether one activity is ancillary to another is a question of fact and degree: R v McMahon; ex parte Darvall [1982] HCA 56; 151 CLR 57 at 60 per Gibbs CJ; Arnold at [73] per Spigelman CJ (with whom Allsop P and Handley AJA agreed). [110] As already observed, none of the authorities relied upon by the Chief Commissioner on the meaning of the term "ancillary" are directed to a statutory provision in the same terms as s 35(2)(d) or a similar context. [111] In my view, the primary judge erred in adopting the approach that subservience is a characteristic of the expression "services ancillary" in the exemption. Neither the context of the provision nor anything in the legislative drafting suggests such a qualification." 1. Gleeson JA rejected the primary judge's finding that these repair services were not ancillary to the conveyance of goods as, without these services, the contractor would not be able to restock the machine and thus the conveyance would not be complete. His Honour stated: "[144] In my view, the primary judge erred in finding that these services were not ancillary to the conveyance. I accept that there is no bright dividing line which provides a ready answer in every circumstance. However, in the context of the goods distribution agreement, where the conveyance is to be taken as including restocking the vending machines, the carrying out of minor repairs to the vending machines and the making of a service call to ensure that the vending machine was repaired if necessary, are services which are closely related to keeping the machines in good working order. This is incidental to the delivery of the goods which included the restocking, because as Smith's correctly submits, the contractor would not otherwise be able to restock the machine. Unless the machine is restocked, the conveyance which includes the delivery is not complete." 1. Sackville AJA did not find it necessary to determine if "ancillary" imported subservience but said: "[246] Nonetheless, I note that the scope of the exemption in s 32(2)(d)(i) is limited by several considerations: • the services ancillary to the conveyance of goods have to be supplied to the designated person "under" the relevant contract; • the vehicle used to convey the goods must be "provided by the person conveying them"; and • the Chief Commissioner has power to determine that a particular agreement or arrangement has the effect of reducing or avoiding the liability of any person to the assessment, imposition or payment of payroll tax and to disregard the agreement or arrangement (Payroll Tax Act, s 47(1))." Determination of the relevant contract issue 1. The question to be determined is whether Downer is liable for payroll tax on payments made to subcontractors engaged by it to deliver and install equipment for Foxtel customers so that the customers could receive Foxtel Subscription Television. 2. The contracts under which the payments were made were "relevant contracts" under s 32(1)(b) of the Payroll Tax Act. I need to determine whether those subcontracts are excluded from being relevant contracts under one or both of ss 32(2)(a) and 32(2)(d)(i) of the Payroll Tax Act and, accordingly, are not subject to payroll tax. 3. As noted at the outset 42.3% of the assessed payments are in dispute; it being agreed that 57.7% of the payments are not taken to be wages by reason of s 35(2) of the Payroll Tax Act, and, accordingly, are not subject to payroll tax. Section 32(2)(a) 1. The question posed by this provision is whether Downer was supplied by subcontractors with services under the subcontract which were ancillary to the supply of goods under that subcontract. Section 32(2)(a) provides, relevantly, an exclusion from the immediately preceding section. A "relevant contract" does not include a contract under which a person during that financial year, in the course of a business carried on by the designated person, is supplied with services for or in relation to the performance of work that are ancillary to the supply of goods under the contract by the person by whom the services are supplied. 2. This gives rise to, at least, the following questions posed by the text of the exemption. What are the goods supplied under the contract? What are the relevant services supplied under the contract? Are the identified services ones for or in relation to the performance of work? Are services supplied under the contract for or in relation to the performance of work ancillary to the supply of goods under the contract by the person by whom the services are supplied? 3. For the subcontract to satisfy s 32(2)(a): 1. there must be a supply of goods under the subcontract by the subcontractor; and 2. the supply of services to Downer by subcontractors for or in relation to the performance of work under the subcontract must be ancillary to the supply of goods referred to in (1). "Supply" 1. The ordinary meaning of supply is to furnish or provide: Symes v Stewart (1920) 28 CLR 386 at 389; [1920] HCA 73. The meaning of the term, of course, depends on the legislative context: Symes at 389; Bennett v Cooper (1948) 76 CLR 570 at 577; [1948] HCA 29. Its meaning in the present context, however, needs to be determined. 2. In its present context, I have concluded that the delivery by the subcontractor to Foxtel customers of Foxtel equipment constitutes a supply of goods for the purposes of s 32(2)(a). The supply of goods occurs under the subcontract and that supply is performed by the subcontractor. There is no textual reason to restrict the meaning of the paragraph to a supply of goods to a designated person. As to context, the legislature has expressly identified the supplier of services, the recipient of the services and the supplier of the goods, but has chosen not to identify the recipient of the goods. The section expressly identifies by whom the goods are to be supplied. This is some indication that any person can be the recipient of the goods. 3. In any event, the delivery of the Foxtel goods in this context constitutes "supply" in the ordinary sense of the term. The fact, assuming it to be the case, that it is equally apposite to describe Downer and/or Foxtel as supplying goods to the Foxtel customer by virtue of the subcontractors' physical act of delivery does not affect this conclusion. As a matter of ordinary English, a supply of goods does not require the transfer of ownership, or any other proprietary interest in the goods, to the recipient. The transfer of the legal right of possession is sufficient. 4. This construction is supported by s 32(1)(c) which provides that a relevant contract is one that "gives out goods to natural persons for work to be performed by those persons in respect of those goods and for re-supply of the goods to the designated person". This paragraph contemplates that the designated person may "give out" goods to other persons for work to be performed on those goods and then for those natural persons to "re-supply" those goods to the designated person. 5. This language suggests a transfer of legal possession without any need for a transfer of title. In context, it appears to extend, for example, to a bailment for reward. A "re-supply" of goods within the meaning of s 32(1)(c) does not require a transfer of title or any proprietary interest. The word "supply" when used in s 32(2)(a) should be construed harmoniously. 6. In a different context the High Court considered whether a supply of goods required a transfer of title in Commonwealth v Sterling Nicholas Duty Free Pty Ltd (1972) 126 CLR 297; [1972] HCA 19. Section 7 of the then Airports "Business Concession" Act 1959 (Cth) made it an offence to "sell, for delivery within the airport, or supply, any goods or services" without authorisation. The respondent sold duty-free goods to passengers and title of the goods had already passed to those persons. McTiernan, Menzies and Owen JJ held that the transfer of title was not necessary for there to be a supply of goods: at 307, 309, 319. 7. I reject the submission that the construction of "supply" I prefer means that s 32(2)(a) covers exactly the same field as s 32(2)(d)(i). Services ancillary to the supply of goods will not necessarily involve conveyance of goods by a vehicle. That is, not all s 32(2)(d)(i) cases will be subsumed by s 32(2)(a). It is true that, in the present case, the contract is concerned in important respects with either conveyance or supply of goods, but that will not necessarily be the case. "Under the contract" 1. In another context, in Commissioner of Taxation v Energy Resources of Australia Ltd (1984) 54 FCR 25 at 53, Gummow J observed that in ordinary parlance something might be "under" a contract if it occurred "in exercise of a right or discharge of an obligation conferred or imposed, as the case may be, by the terms of the eligible contract". Gummow J also observed that a broader formulation could include where the thing has come about by reason of the existence of the contract or the performance of the contract. 2. In my view the transfer of legal possession from the subcontractor to the Foxtel customer was a supply of goods by the subcontractor on either construction of the expression "under the contract". "Ancillary" 1. "Ancillary" in the context of s 32(2)(a) means supplemental or auxiliary or accessory. It is important, however, to understand that what is required in making the assessment is not a mathematical exercise. The question posed by the section does not require evaluation of the essentiality of different functions required under the contract on a relative scale. It is a false premise that the statute demands some kind of measure of what is the "principal" function under the contract. A problem with the Chief Commissioner's approach of construction in determining what aspect of the contract is "principal" is that the Chief Commissioner did not identify what measure of principality is applied or from whose perspective an aspect of a contract is principal. 2. The question posed by s 32(2)(a) is relatively simple to state: are the services supplied ancillary, in the sense of supplemental or auxiliary or accessory, to an identified circumstance or event, being the supply of goods under the contract? It is the application of this test which poses difficulties here. 3. Even assuming, as the Chief Commissioner submitted, that the structure of the Act means that I must first characterise the subcontract, asking whether it is a "contract for the supply of goods" or a "contract for installation services", I have concluded that the subcontract is properly one characterised as for the supply of goods. In this case, the essential character of the subcontract is the supply of goods. The fundamental purpose of the subcontract is to collect, store and deliver the necessary ingredients of the Foxtel service to customers and then to connect those goods to existing Foxtel infrastructure. That infrastructure is either the Foxtel HFC cable running past the premises or Foxtel's satellite television service accessed via the satellite dish. That is, if it is correct to first characterise the contract, I would characterise it as for the supply of goods, being all of the equipment necessary for a customer to receive Foxtel's pay television offering. I reject the Chief Commissioner's submission about the "relative complexity of the installation". The installation services provided under the subcontract are essentially repetitive or mechanical tasks which are properly described as unskilled. That this is so is demonstrated by the lack of formal or informal qualifications required to perform the task and the very short duration of relevant training which was provided. The fact that repetitive or mechanical tasks are involved is emphasised by the flat fee paid for every aspect of the installation services. The installation services supplied under the subcontract, whilst necessary to effect the contractual purpose, are properly described as being ancillary to the supply of goods under the contract. 4. It is important to return to the words of the statute and answer the following questions: 1. is there a supply of goods under the contract; and 2. are there services supplied under the contract that are ancillary to the supply of goods? 1. For the reasons earlier discussed, I have concluded that there was a relevant supply of goods by subcontractors under the contract, being the Foxtel equipment and the other equipment necessary for a successful installation of the Foxtel subscription television service. There was plainly also a supply of installation services by the subcontractors to Downer. When the question asked by s 32(2)(a) is posed in this way I have identified, it is clear from an examination of the terms of the relevant contract, that the subcontract is a contract under which Downer is supplied by the subcontractor with services ancillary, in the sense of supplemental or auxiliary or accessory, to the supply of goods by the subcontractor. 2. The activities required of subcontractors under the subcontract are set out in some detail at [17] above, which essentially consist of subcontractors: 1. collecting the Foxtel equipment from Downer's warehouse (cl 3.1(a)); 2. transporting the Foxtel equipment to the customer's premises (cl 3.1(a)); 3. delivering the Foxtel equipment to its final location in the customer's premises as directed by the customer (see cl 2.1 which requires subcontractors to "perform the works described in Annexure A and in accordance with Annexure B"; cl 4.2.3(i) of Annexure B which requires subcontractors to "discuss with the Customer … any specific preferences or requests"; and cl 4.7.4 of Annexure B which requires that the customer's signed approval be obtained at the completion of the installation); 4. conducting a safety inspection of the customer's premises (cl 4.2.3(d) of Annexure B); 5. installing the Foxtel equipment (cl 2.1); 6. cleaning up any rubbish after completing the installation (cll 4.7.5, 11.6 of Annexure B); 7. ensuring that the Foxtel equipment is working (cl 4.7.1 of Annexure B); and 8. providing a brief demonstration of its use to the customer (see cll 4.7.8-4.7.10 of Annexure B which requires subcontractors to "educate the Customer" on the Foxtel service and demonstrate how to use the Foxtel equipment). 1. In order for the subcontractor to transfer legal possession of the Foxtel equipment to the Foxtel customer, the subcontractor must first collect the Foxtel equipment and transport it to the customer's premises. The Foxtel equipment must be physically located at the appropriate place, as directed by the customer, for the installation to occur. If the question is posed: what is critical to the performance of the subcontract? The answer is that the element of the subcontract, which is critical or essential, is this obligation to supply the Foxtel equipment (together with the other equipment permitting operation of the Foxtel service) and place it as directed at the appropriate place in the customer's premises. 2. The subcontractor is also obliged to install the Foxtel equipment in the customer's premises, as without installation the Foxtel service will not function and the customer would be deprived of the practical benefit of possession of the Foxtel equipment. Supply, in the sense of transfer of legal possession, of the Foxtel equipment would not be complete without the installation and testing of the Foxtel equipment in the customer's premises by the subcontractor. 3. The conclusion that the supply of services is ancillary, in the sense of supplemental or auxiliary or accessory, to the supply of goods is supported by the evidence of the time actually spent in the performance of the services supplied under the subcontract, which was the subject of the evidence from the time and motion study (as summarised at [32] above) which I have accepted. Comparing time spent on installation under the contract with other activities, installation is properly understood as supplemental or auxiliary or accessory when compared to the time spent on collecting, storing and delivering the goods to the customer. Activities required by the subcontract to effect the supply of goods, that is, collecting, storing and delivering the goods and placing those goods in the location at the customer's premises in accordance with the customer's direction, took up the majority of the time of the subcontractors. 4. The conclusion that the supply of services is ancillary, in the sense of supplemental or auxiliary or accessory, to the supply of goods is also supported by an examination of the dollar values of what was paid under the subcontract. It is now agreed that 57.7% of all payments made to subcontractors were for non-work materials. Although it was not calculated by the parties, I find that the substantial part of the remaining dollar values paid under the subcontract related, critically, to things other than installation, properly understood. I have found that the subcontractors spent more time travelling in their vehicles than actually performing installation tasks, even taking into account, as I have explained, the fact that the time recorded for installation tasks also contained a component of supply of the relevant goods. As a dollar value, payments for installation (properly so called) comprised a much smaller percentage of payments under the subcontract than payments made for the supply of goods. 5. For these reasons, I have concluded that the installation services supplied under the subcontract are ancillary, in the sense of supplemental or auxiliary or accessory, to an identified circumstance or event, being the supply of goods under the subcontract. I have rejected the Chief Commissioner's construction of "ancillary" but concluded, even applying that test, that the principal subject matter of the contract was the supply of goods. Section 32(2)(d)(i) 1. Given the conclusion I have reached about s 32(2)(a), it is strictly unnecessary to address the case raised by s 32(2)(d)(i). Nevertheless, in the event that I am wrong about s 32(2)(a), I will address the arguments under s 32(2)(d)(i) on a contingent basis. 2. In the way the Chief Commissioner's submissions were framed, it was assumed that the conveyance is limited to vehicular transport. On the basis of Smith's, it is clear that that is not the case. Conveyance includes further steps to make the conveyance "complete". Where the person conveying the goods delivers them by placing them in a certain location, that act of placement will also be part of the conveyance. So much was established in Smith's. In that case it included unloading the snack foods from the vehicle and placing them in their respective places inside the vending machine. 3. In the present case, a number of steps the Chief Commissioner characterises as "installation", in fact, comprise part of the conveyance. Unpacking materials and putting each item of the Foxtel equipment in the intended location of the customer's premises is a significant part of the task and is, in the present case, part of the conveyance. In the time and motion study (as summarised at [32] above), which I have accepted as representative, it emerged that conveyance activities are substantial and they are essential to the contractual outcome of supplying the customer with the Foxtel subscription television service. 4. In the present subcontract, the conveyance of goods by means of the vehicle provided by the subcontractor includes the subcontractor: 1. collecting the Foxtel equipment from Downer's warehouse (cl 3.1(a)); 2. transporting the Foxtel equipment to the customer's premises (cl 3.1(a)); 3. delivering the Foxtel equipment to its final location at the customer's premises (see cl 2.1 which requires subcontractors to "perform the works described in Annexure A and in accordance with Annexure B"; cl 4.2.3(i) of Annexure B which requires subcontractors to "discuss with the Customer … any specific preferences or requests"; and cl 4.7.4 of Annexure B which requires that the customer's signed approval be obtained at the completion of the installation), which includes: 1. placing the Foxtel box in the location required by the customer; 2. placing the other items of Foxtel equipment in their final location including cables, and isolator or satellite dish where required; and 3. handing the remote control unit and Foxtel brochures to the Foxtel customer. 1. I have concluded that the other items required by the subcontract, namely conducting a safety inspection, connecting the items of Foxtel equipment once they are in place to the Foxtel cable or satellite dish, moving and manipulating equipment other than the Foxtel equipment, cleaning any rubbish, and providing a brief demonstration of the use of Foxtel equipment to the customer, are ancillary to this conveyance. 2. Whilst there are differences between this case and Smith's I have concluded that those differences do not lead to any different conclusion. In each case the contractor was required to: 1. own and provide his or her own vehicle of a certain specification (cll 3.2-3.3); 2. undertake relatively simple and short-term training provided by the relevant taxpayer in how to undertake relevant tasks (cll 5.9, 5.11); 3. collect and transport the relevant items in their own vehicle (cl 3.1(a)); 4. unload the items and manipulate them until they were placed in their final location (cl 3.1(a)); 5. clean the site of the installation and remove and dispose of any items that were no longer necessary (cll 4.7.5, 11.6 of Annexure B); 6. check installed equipment to ensure it was working (cl 4.7.1 of Annexure B); and 7. undertake other de minimis activities, here cleaning and demonstrating the operation of the Foxtel equipment (cll 4.7.5, 4.7.8-4.710, 11.6 of Annexure B). 1. The critical difference relied upon by the Chief Commissioner here, the alleged complexity of the installation task, involved only the mechanical task of connecting the Foxtel set top box to Foxtel's already established infrastructure. The installation task was no more complex, on the evidence, than the minor mechanical repairs subcontractors were required to perform in Smith's. 2. The mechanical or menial nature of the installation services was underlined by the fact that the total training to provide all of the installation services was minimal. For example, the training module on the jeopardy process (the process required "when a job cannot proceed on the initial date and time") generally took 2.25 hours. This conclusion is also supported by the fact that if there were any civil works to be done, they would not be completed under the subcontract or by the subcontractors. 3. The fact that there was a standard payment for each of the items also supports the conclusion that the tasks required under the subcontract in relation to installation were mechanical and repetitive tasks of the same character as required of the subcontractors in Smith's. 4. To the extent that the Chief Commissioner invited an exercise of comparison of costs, such a comparison leads to the same conclusion. It will be recalled that the Chief Commissioner submitted that "truck roll" represented 21% of the aggregated payments to the subcontractors. Assuming in the Chief Commissioner's favour that this is so, the evidence demonstrates that the majority of the remaining 79% of the aggregated payments were not paid to subcontractors as compensation for providing installation services. Those payments were made as compensation for materials purchased, collected and conveyed by the subcontractors. That this is so is demonstrated by the finding, which each side agrees I should make under s 35(2) of the Act, that 57.7% of the payments was not attributable to the performance of work. 5. Breaking down the 79% figure, the aggregated payment to the subcontractors is made up of 42.3% attributable to the performance of work plus 57.7% not attributable to the performance of work. The 57.7% portion comprises the cost of materials purchased by the subcontractors plus vehicle costs (relevantly, truck roll) excluding the payments for the subcontractors' travel time. The 42.3% portion agreed as attributable to the performance of work includes the payments for travel time. 6. In determining the payments attributable to the installation services as opposed to conveyance services, this 42.3% needs further to be reduced by: 1. subtracting the travel time component of truck roll; and 2. subtracting that part of labour as opposed to materials component of the tasks for the conveyance activities. 1. Payments for installation services, properly understood, were only a fraction of the total payments made under the subcontract. 2. There are a number of similarities between Smith's and the present case: 1. both cases involved "multi-stage" processes, both involved essentially delivery services and associated unskilled manual labour. In both the contractors were required to undergo minimal training; 2. the focus of the contracts in the two cases was not materially different, and much of the present subcontract was directed at the vehicular delivery of the Foxtel equipment and the completion of its conveyance inside the customer's premises; 3. while there is clearly a link between the subcontract and the installation agreement, this demonstrates that the ultimate objective of the subcontractors' work was to ensure that the customers would receive the Foxtel subscription television service; 4. there is no reason to regard the sales-based commission in Smith's as a distinguishing factor; and 5. it is relevant that in both cases the contractors spent the majority of their work time driving, which itself suggests that the installation services are ancillary to the conveyance in the installation agreement. 1. The "conveyance", as that term was defined in Smith's, was the lion's share of the activities required by the subcontract. The installation services provided under the subcontract were ancillary to the conveyance of goods. Conclusion – ss 32(2)(a) and 32(2)(d)(i) 1. For these reasons I conclude that Downer is entitled to succeed under ss 32(2)(a) and 32(2)(d)(i) of the Payroll Tax Act and each of the assessments must be revoked in full. Penalty tax and interest 1. Given the conclusions I have reached it is strictly unnecessary to address this question. Nevertheless, as it has been fully argued, I will make findings on the contingent basis that I am wrong about both s 32(2)(a) and 32(2)(d)(i). Downer's submissions 1. Downer submitted that, in the event that they were unsuccessful in their principal argument and were only successful on the apportionment, the Court should nevertheless set aside the penalty and interest components of the assessments. 2. Downer noted that there was a divide between the parties concerning the exercise of discretion concerning penalties and interest in the reassessment process. The Chief Commissioner took the view that ss 28 and 29 of the Taxation Administration Act 1996 (NSW) exhaust the circumstances in which the Court can take into account matters such as reasonable conduct, disclosures and co-operation. Downer submitted that this was an erroneous view of the scope of the discretion under s 33. 3. Downer submitted that, under s 101(1)(b), the Court could set aside the current assessments as the wrong apportionment figure was applied and, as a companion piece, set aside the penalty and interest. 4. Downer submitted that the Court should set aside the penalty assessment and substitute it with another decision that remits penalty to a greater extent than currently. 5. Downer submitted that the Court should stand in the shoes of the Chief Commissioner and exercise the broad discretion under s 33, which was not confined by ss 28 and 29. 6. Downer submitted that the chronology, from the defendant's engagement of Deloitte to assess payroll tax in October 2013 through to the grounds of objection and eventual agreement on a 57.7% figure on 29 August 2018 (after court proceedings), is relevant to this Court's broad discretion to remit penalty. 7. Downer submitted that there is no reason to read the wide discretion in s 33 in the way that the Chief Commissioner does to prevent a Court, or the Chief Commissioner, taking account of the special circumstances of this case. 8. Downer submitted that the overall position was that, aside from slowness in addressing its payroll tax position in the early years, Downer thereafter has acted in an exemplary way. In those circumstances, Downer submitted that a fair and reasonable remission is greater than the 20% remission already allowed and is greater than 25%, and that there should be a further significant remission by way of re-exercising this discretion. Downer submitted that, if the Court were to come up with a percentage which is greater than 20%, the matter should be remitted to the Chief Commissioner. 9. Downer submitted that the same considerations apply in relation to interest. There is a general power to remit interest under s 25 of the Taxation Administration Act. It was submitted that the period between the original assessments and the payments, when tax was outstanding, was longer than it should have been by virtue of the Chief Commissioner's delays and erroneous decision concerning apportionment. Chief Commissioner's submissions 1. The Chief Commissioner submitted that the Court should give a harmonious operation to all of the provisions and that it would be an error to exercise the broad discretion in s 33 in circumstances that are apprehended by some of the express exemptions. 2. The Chief Commissioner submitted that the penalty operates on the tax default. Thus, the particular discretion is not qualitative in the sense that it is not what the disclosure was or where the different provision applied and whether ultimately the assessment was on a different provision; it is whether or not there was a disclosure before one was ordered. It was submitted that it was of no moment that the parties ultimately agreed that the correct apportionment is closer to 60% than 25%. 3. The Chief Commissioner submitted that, if the Court were to conclude that some different percentage should be applied, the calculation of that percentage should be remitted to the Chief Commissioner. 4. The Chief Commissioner submitted that there is no authority on what is permissible for the Court to take into account when determining penalty tax and remission under 28-29. It was submitted that H R C Hotel Services Pty Ltd v Chief Commissioner of State Revenue [2018] NSWSC 820 examined the reasonable care provision under s 27(3). 5. The Chief Commissioner submitted that the policy and purpose of the Act informs s 33, which is thus limited in scope. Consideration – penalty tax and interest 1. Division 2 of Pt 5 of the Taxation Administration Act provides: 26 Penalty tax in respect of certain tax defaults (1) If a tax default occurs, the taxpayer is liable to pay penalty tax in addition to the amount of tax unpaid. (2) Penalty tax imposed under this Division is in addition to interest. (3) Penalty tax is not payable in respect of a tax default that consists of a failure to pay: (a) interest under Division 1, or (b) penalty tax previously imposed under this Division. 27 Amount of penalty tax (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. (2) The Chief Commissioner may increase the amount of penalty tax payable in respect of a tax default to 75% of the amount of tax unpaid if the Chief Commissioner is satisfied that the tax default was caused wholly or partly by the intentional disregard by the taxpayer (or a person acting on behalf of the taxpayer) of a taxation law. (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. 28 Reduction in penalty tax for disclosure before investigation (1) The amount of penalty tax determined under section 27 is to be reduced by 80% if, before the Chief Commissioner informs the taxpayer that an investigation relating to the taxpayer is to be carried out, the taxpayer discloses to the Chief Commissioner, in writing, sufficient information to enable the nature and extent of the tax default to be determined. (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. 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. (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. 30 Increase in penalty tax for concealment (1) The amount of penalty tax determined under section 27 is to be increased by 20% if, after the Chief Commissioner has informed the taxpayer that an investigation is to be carried out and before the investigation is completed, the taxpayer took steps to prevent or hinder the Chief Commissioner from becoming aware of the nature and extent of the tax default in whole or part. (2) For the purposes of this section, a taxpayer takes steps to prevent or hinder the Chief Commissioner if the taxpayer: (a) deliberately damages or destroys records required to be kept under the taxation law to which the investigation relates, or (b) refuses or fails (without reasonable excuse) to comply with a requirement made by the Chief Commissioner under Division 2 of Part 9 for the purposes of determining the taxpayer's tax liability, or (c) hinders or obstructs an authorised officer exercising functions under that Division for that purpose. … 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. Section 101 of the Taxation Administration Act provides the power to set aside and direct a deduction of 57.7% on the apportionment ground. Section 101 provides: 101 Powers of court or tribunal on review (1) The court or tribunal dealing with the application for review may do any one or more of the following: (a) confirm or revoke the assessment or other decision to which the application relates, (b) make an assessment or other decision in place of the assessment or other decision to which the application relates, (c) make an order for payment to the Chief Commissioner of any amount of tax that is assessed as being payable but has not been paid, (d) remit the matter to the Chief Commissioner for determination in accordance with its finding or decision, (e) make any further order as to costs or otherwise as it thinks fit. (2) Nothing in this section limits the application of the following provisions in respect of an application for review before the Civil and Administrative Tribunal: (a) Division 3 of Part 3 of Chapter 3 of the Administrative Decisions Review Act 1997, (b) section 60 (Costs) of the Civil and Administrative Tribunal Act 2013. 1. In Tasty Chicks Pty Ltd v Chief Commissioner of State Revenue of New South Wales (2011) 245 CLR 446; [2011] HCA 41, the High Court stated that the primary judge in that case had correctly dealt with the Chief Commissioner's de-grouping discretion: "[18] When all these provisions are read together it becomes readily apparent that Gzell J correctly proceeded on the basis that the Supreme Court was empowered to set aside the disallowance by the Chief Commissioner of the objection by the appellants, allow the appellants' objection, set aside the determination of the Chief Commissioner not to exercise his "de-grouping" discretion, revoke the assessments, and require reassessments by the Chief Commissioner. [19] Reliance for the contrary result in the Court of Appeal upon Avon Downs is misplaced. In that case, the taxpayer was dissatisfied with the disallowance of a deduction which would have been allowable but for the operation of s 80(5) of the Income Tax Assessment Act 1936 (Cth) (the Income Tax Act) as it then stood. The sub-section turned upon the taxpayer satisfying the Commissioner of the existence of a certain state of affairs. There was no requirement that the Commissioner give reasons, and his decision presented an inscrutable face. On the other hand, s 93 of the Administration Act required that the Chief Commissioner give, in the notice of determination of an objection, reasons for the disallowance of the objection or its partial allowance. The dissatisfied taxpayer in Avon Downs had utilised the avenue provided by s 187(b) of the Income Tax Act by requesting that the Commissioner treat its objection "as an appeal" and forward it to the High Court; upon that "appeal" the taxpayer was limited to the grounds stated in the objection. By way of contrast, where the taxpayer pursued the avenue leading to a Board of Review, the Board had all the powers and functions of the Commissioner and its decisions upon review were deemed to be assessments, determinations or decisions of the Commissioner (s 193(1))." (Footnotes omitted.) 1. I do not accept that ss 28 and 29 of the Taxation Administration Act exhaust the circumstances in which the Court can take into account conduct of each of the parties merely because a matter touches or concerns the operation of those sections. The existence of the broad power of remission in s 33 should not be constrained by restrictions not found in the text or context of Act. 2. Each case must be addressed on the basis of the particular facts proved. If it had been necessary to do so, in the facts of this case, I would have remitted the penalty otherwise payable by Downer by 50%. This is for the following reasons: 1. there was an amount of tax that was unpaid between the original due dates and the payment dates that followed the assessments, but even on the contingent assumption that I am making, the assessments in this case would result in an assessment of tax in a much smaller amount than originally assessed by the Chief Commissioner by virtue of the apportionment of 57.7% being substituted for the previous apportionment of 25%; 2. the Chief Commissioner was in a position to know that this apportionment basis was incorrect, and that the correct apportionment figure was in the order of 58%, from early in the disclosure process, essentially in 2014, but, despite that, the objection decision in August 2017 rejected Downer's submission about apportionment; 3. before being told of the Chief Commissioner's investigation, Downer started an investigation with a view to voluntary disclosure which included progressive disclosure of information to the Chief Commissioner and which was not driven by pressure from the Chief Commissioner. The extent of that disclosure and the evidence provided was highly significant; 4. there was a long delay by the Chief Commissioner in determining Downer's objection and in eventually conceding immediately before the trial that 57.7% of the payments made were not attributable to the performance of work; and 5. Downer's position, even on the contingent hypothesis I am making, was reasonable in respect of both the primary issue and the apportionment issue. 1. The same considerations apply in relation to interest. There is a general power to remit interest under s 25 of the Taxation Administration Act. As the period between the assessments and the payments, when tax was outstanding, was longer than it should have been by virtue of the Chief Commissioner's delays and his initial decision concerning apportionment, if it were necessary to do so I would remit 50 % of the interest payable. Conclusion and orders 1. For the foregoing reasons I make the following orders: 1. Application allowed. 2. Assessments for payroll tax issued to the plaintiff for the years ended 2010, 2011, 2012 and 2013 are revoked. 3. The defendant issue the plaintiff with a replacement Notice of Assessment for the relevant financial year in respect of each of the Notices of Assessment referred to in (2) above, as if the objection lodged by the plaintiff under s 86 of the Taxation Administration Act 1996 (NSW) had been allowed in whole. 4. The defendant pay the plaintiff's costs as agreed or assessed. ********** Endnotes 1. Whilst there is an earlier version of the subcontract in evidence, Senior Counsel for the Chief Commissioner, Ms Seiden SC, agreed with Senior Counsel for Downer, Mr Young QC, that the 2012 version of the subcontract is relevantly identical to the earlier version. Accordingly it is necessary to refer only to this form of subcontract for the purposes of these proceedings. 2. New South Wales Legislative Assembly, Parliamentary Debates (Hansard), 13 November 1985, at 9557-9559. 3. New South Wales Legislative Assembly, Parliamentary Debates (Hansard), 29 April 1986, at 3070-3072. 4. New South Wales Legislative Assembly, Parliamentary Debates (Hansard), 30 April 1986, at 3504-3509. 5. Section 13(3) was inserted by the State Revenue Legislation Further Amendment Act (No 2) 2009 (NSW) Sch 3 [3] which commenced on 19 November 2009. 6. Section 32 as enacted applies to the relevant period of 1 July 2009 to 30 June 2013. The section was amended by the State Revenue Legislation Further Amendment Act 2014 (NSW) which amendments do not apply in the present case. Amendments 21 June 2019 - [11], [12], [147], [152] - Cross references amended. 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: 21 June 2019