Two recent cases have brought to light the difficulties that businesses, tax practitioners and even the tax authorities have in determining possible payroll tax liability.
This is of critical importance to affected businesses because retrospective assessments can go back up to six years. Add penalties to this and you can see the implications for businesses that had no idea that they may have had a payroll tax liability.
The issue is not the perennial employee/contractor issue (although that continues to cause lots of problems) but the “employment agent” provisions. That’s OK, I hear you say, I am not an employment agent. But the Act does not require you to be an employment agent as you and I understand the meaning. The relevant provisions of the Payroll Tax Act 2007 are in Division 8 of Pt 3. Division 8 define an employment agent contract as follows:
“Division 8 Employment agents
37 Definitions
(1) For the purposes of this Act, an employment agency contract is a contract, whether formal or informal and whether express or implied, under which a person (an employment agent) procures the services of another person (a service provider) for a client of the employment agent.
(2) However, a contract is not an employment agency contract for the purposes of this Act if it is, or results in the creation of, a contract of employment between the service provider and the client.
(3) In this section:
contract includes agreement, arrangement and undertaking.
I should also note that, although each state and territory has its own Payroll Tax Act, the “employment agent” provisions are, for all intents and purposes, the same.
So let’s break that down.
• Under an arrangement, a person procures the services of another person (the worker/subby).
• The services are provided to a third person.
• The worker does not become an employee of either party. That is, they can be an independent contractor in their own right.
In a previous article (insert link?), I referred to a recent case where a radiology clinic operator was held to be an employment agent because it “procured” independent radiologists to provide services to patients. I had (and still have) serious reservations about that decision but my understanding is that it is not being appealed.
An even more recent case, however, came to a different decision on facts that I would have thought were more likely to lead to an “employment agent” decision. I guess it’s lucky that I’m not a judge.
The case (UNSW Global Pty Ltd v Chief Commissioner of State Revenue) was decided in the NSW Supreme Court. Briefly, the facts were as follows.
UNSW Global is wholly owned by the University of New South Wales. It has a business unit called Unisearch that arranges the provision of expert opinions. Its first service line is called Expert Opinion Services. It maintains a database of experts comprising academics employed by the University of New South Wales and experts external to the University. The areas of expertise cover many areas including analytical chemistry, medicine, civil, electrical and mechanical engineering, occupational health, architecture, aviation, school education, metallurgy, lighting, and actuarial science. Experts are added to the database either by making an application on Unisearch’s website or by being selected by staff employed by Unisearch.
Typically a law firm whose client was involved, or expected to be involved, in litigation would make an inquiry of Unisearch as to the availability of an expert in a relevant field. Staff employed by Unisearch would consider the request and obtain more information from the law firm if necessary to enable the identification of a suitable expert or experts. An expert would usually be identified from a search of the database. The Unisearch employee would contact the person who had been identified with relevant expertise and ask him or her if he or she were willing to take the job.
There was no question that the experts retained by Unisearch to provide services in the form of an expert opinion were independent contractors. It was not suggested that the moneys payable by Unisearch to the expert could be characterised as wages in the ordinary sense of that term. The Commissioner was seeking to levy payroll tax on UNSW Global as an “employment agent”.
The Court held that UNSW Global were not “employment agents” for the purposes of the Payroll Tax Act. My understanding is that OSR will be appealing the decision.
Why did the Court reach that decision?
This where it gets a bit tricky.
Both Winday and UNSW used very similar arguments. Trying to de-clutter them, they go something like this.
The late Justice Hill in a paper in 2001 “How is tax to be understood by the Courts?” for the Taxation Institute of Australia 2001 South Australia State Convention stated that the following principles could be extracted:
(a) The fundamental rule of interpretation is to ascertain what Parliament intended as expressed in the words it has used.
(b) Context is vital. Sections are not to be construed in isolation
(c) Where the language if a statute is clear and unambiguous and consistent with context it must be given its ordinary and grammatical meaning, even if the result is inconvenient
(d) Where two constructions are open the court will prefer the construction that avoids inconvenience or injustice
(e) Where the literal meaning of words is to be departed from it must be clear that the literal meaning does not give effect to the intention of the legislature and that a departure from the literal meaning will achieve that intention
(f) The literal meaning will be departed from where it gives rise to an operation that is capricious or irrational
Senior Member Isenberg in the Winday case applied these principles. He concluded that the literal meaning of the provisions were clear, and found that Winday made an offer pursuant to its advertising to provide services to the public with the implied undertaking that it would procure the services of qualified radiologists to provide the required medical services. Accordingly, patients receiving those services were clients of Winday.
White J. in the UNSW Global case applied the same principles and came to a different outcome. He concluded:
“… the provisions should be construed so as not to apply to all arrangements that could fall within their literal terms, but should be construed in accordance with the legislative intent as ascertained from the statutory context, including the juxtaposition of the employment agency contract provisions with the relevant contract provisions, the legislative history, and the extrinsic materials.”
So while it seems that the principles outlined by the late Justice Hill have been applied in both cases, how those principles have been interpreted leaves us none the wiser.
• What did Parliament intend in bringing in the “employment agents” provisions?
• Should the “employment agent” provisions extend the legislation to workers who would not otherwise be included (like the radiologists)?
• Is the language of the provision clear and unambiguous?
• Which construction avoids inconvenience or injustice?
• Does the literal meaning give effect to the intention of the legislature?
Where to from here?
As I said earlier, my understanding is that the Winday decision is not being appealed (pity) but the UNSW Global one is. Watch this space.
But the thing to take out of this for all businesses is that the “employment agent” provisions of the Payroll Tax Act can be read very broadly. Businesses should review all their arrangements to ensure that there is no risk. If there is, it may be possible to refine the arrangements to make any payroll tax liability less likely.