The Office of State Revenue (OSR) has been very active lately in issuing assessments to so-called “employment agents”. The assessments arise where a service provider gets workers from another supplier of temporary workers. That supplier of labour undertakes to meet all tax liabilities, including payroll tax, but OSR ignores this and assesses the service provider.

The assessments are invariably detailed explanations of the payroll tax legislation, citing case law and Commissioner’s Rulings, leaving the service provider with a feeling that any resistance is hopeless.

While taxpayers may see the position as futile given the seemingly watertight case presented by OSR, this is definitely not the case.

Background

The history of activity in this area is interesting. You may recall that recently, the former Australian Taxation Office Deputy Commissioner, Michael Cranston, was found not guilty of misusing his position to help his son, who was allegedly involved in a tax scam.

That scam was huge in itself and seems to be the basis of many of the current payroll tax assessments. In just 11 months before it collapsed, the group managed to convince government departments and prestigious IT companies to funnel as much as $1.3 billion in payments to tens of thousands of workers through a series of “straw companies” run by nobodies who the conspiracy controlled.

The cash was destined to be legitimate salary payments for the workers, but the trick was that those involved in the conspiracy held back for themselves as much as 40 percent of the $400 million that was supposed to be paid as income tax. Their desperate gamble was that by the time the ATO caught up with them, the conspirators would have long since vanished and only the straw directors would be left holding the baby.

It seems that there are (or were) some copycat labour hire businesses out there.

Payroll Tax implications

While income tax may have been the main driver, non-payment of payroll tax was also seemingly involved. Anecdotal evidence would suggest that a number of other “labour hire” companies have operated in a similar manner around Australia.

We have been approached by a number of legitimate businesses who, in good faith, out sourced the employment of workers to a third party labour hire business. Those third parties undertook to meet all the tax obligations, including payroll tax but, in many cases, apparently didn’t. The legitimate business is none the wiser until visited by OSR auditors.

Rather than pursuing those third parties who have fraudulently not remitted payroll tax as they undertook to do, OSR has chosen to enact a strict interpretation of the legislation to reef the payroll tax liability back to the legitimate business. The written explanation that the business gets from OSR leaves them with little hope.

The Payroll Tax position

The OSR position is a very narrow interpretation of the legislation and one-sided presentation to the taxpayer. It involves the business being considered an “employment agent” for the purposes of the payroll tax legislation, ignoring existing and legal employment relationships and relying on the Commissioner’s discretion in assessing the business.

We consider that there are several grounds on which the assessments can be challenged. It is possible that the matter may ultimately decided by the courts, but, given the number of legitimate business that have been harshly treated by an OSR who see them as an easy target, they will not be fighting alone.

The outcome, of course, will depend on the facts in each case, but the remarkable similarity of a number of instances brought to our attention in recent months means that it is certainly worth reviewing.

Don’t be bullied into accepting the Commissioner’s position.