Tony Ince, Mostyn Consulting

This issue deserves some real consideration. Of course, the devil is in the detail (which we haven’t seen yet) but the concepts are worth looking at.

The idea of a State Income Tax does not appear out of nowhere, and it is worth looking briefly at the history of this issue.

Headline reads: “Government considering a State Income Tax”

For many years, I have been an advocate of this being considered. In November 2012, I wrote a small piece entitled “What Price a State Income Tax?”. With pressure on the States and Territories to raise more of their own income, what are the chances that a state income tax could be reintroduced?

At a broad theoretical level, it has some appeal. The States complain of “vertical fiscal imbalance”, a term that we know reflects that the States are committed to much more expenditure than revenue they raise, with the balance coming from the Commonwealth in the form of various grants.

The introduction of the GST was supposed to overcome this to some degree, but recent and continuing events suggest that Commonwealth/State financial relationships are back where they were pre 2000.

History

Back in the day (at the time of Federation), the States levied their own income taxes and the Commonwealth raised most of its revenue by way of customs and excise duties. In 1942 during the Second World War, the Commonwealth introduced such a high rate of income tax and gave itself priority for collection that it made it impossible for the States to continue to levy their own income tax.

This measure was a temporary one for the duration of the war (where have we heard that before?), and the States were given compensation by way of what are now known as Commonwealth grants. These grants were to continue for five years after the cessation of the war.

Upset at the loss of their access to income tax, a number of States (most notably South Australia) took their case to stop the Commonwealth to the High Court in 1942 in what was called “the first Uniform Tax Case”. They lost. This meant that the Commonwealth was allowed to raise income tax and take priority in collection even though it effectively meant the States could not also apply their own income tax.

In 1957, some States again took the Commonwealth to the High Court on a similar issue (boringly called the second Uniform Tax Case) and, unsurprisingly, lost.

These decisions do not mean that the States cannot apply their own income taxes; it seems that they are Constitutionally allowed to do so. What it means, I think, is that the Commonwealth calls the shots. If the Commonwealth wants to apply an income tax and take priority, it can. But there does not seem to be anything to stop the Commonwealth from allowing the States to levy their own income taxes.

On 19 January 1970, the Premiers of all States signed a document entitled The Financial Relationships of the Commonwealth and the States. This document envisaged a scheme whereby the States should have access to income tax. At the subsequent Premiers’ Conference in February 1970, the Prime Minister, John Gorton, rejected this proposal, citing a number of objections. These included macro-economic policy-making considerations, the “equitable” treatment of all Australians brought about by uniform taxation, the budgetary problems that would be faced by the States as income tax receipts fluctuated and the problems that would arise in the process of calculating equalisation grants by the Commonwealth Grants Commission

In 1976, as part of Malcolm Fraser’s “New Federalism” policy, income tax sharing arrangements with the States were introduced. As part of those arrangements, the Income Tax (Arrangements with the States) Act 1978 was passed which enabled the States to levy marginal income tax surcharges or rebates. The Act was repealed in 1988 and, during that ten year period, none of the States took up the opportunity to levy their own income tax. This may have been in part because the Commonwealth was not prepared to make room by lowering its rates.

In 1991, the Working Party on Tax Powers to the Special Premiers Conference noted that addressing vertical fiscal imbalance would “involve fundamental changes to the relationships between the various levels of government as well as the tax system of the nation. Changes of this nature have far-reaching effects on the community and, while that is no reason for avoiding change, it does argue for very careful consideration”.

In 2000, the Commonwealth introduced the GST, with revenues hypothecated to the States.

In 2010, the review of Australia’s Future Tax System (the “Henry Tax Review”) noted that:

“VFI may lead to accountability problems in regard to expenditure and taxation decisions made by governments. A closer matching of revenue and expenditure responsibilities at each level of government may increase the accountability of governments by making government financing more transparent.”

The Current Problem

Put simply, the States have limited capacity to raise revenue. They have inefficient taxes like (stamp) duty which raise a considerable chunk of their revenue. There is also the unpopular payroll tax (a tax on employment) and land tax. States have varying access to mining royalties and gambling taxes but the raising of royalties effectively reduces their access to Commonwealth grants.

While some level of vertical fiscal imbalance has been in place since the start of Federation, there are some significant issues which arise from the current extent of vertical fiscal imbalance in Australia:

• the States do not face the real costs of raising the revenue which they spend, which can make their service delivery less efficient; and
• there is a lack of accountability and associated blame-shifting between the Commonwealth and the States, as both parties are responsible for funding service delivery across a wide range of government functions.

So in spite of many variations on revenue sharing over a long period, vertical fiscal imbalance continues to get worse. In his paper “Vertical Fiscal Imbalance in Australia: A Problem for Tax Structure not for Revenue Sharing” Bhajan Grewal makes the following observations.

(T)he current system of revenue sharing has produced a situation in which :

• the Commonwealth Government appears to believe that the centralisation of economic and fiscal decisions is necessary for the achievement of national economic objectives, and the Commonwealth grants to States are an indispensable instrument of centralisation;
• the Commonwealth has on occasions used the blunt instrument of Commonwealth grants to starve the States financially in order to achieve their agreement on specific issues;
• the States have shown, except on a few occasions when the tax powers were pursued with unanimous support, generally a preference for Commonwealth grants, and have been opposed mainly to conditions attached to specific purpose grants:
• the States have often been content with blaming the Commonwealth for not giving them enough funds, instead of going seriously for additional tax powers; and
• the institutions of fiscal federalism largely waste their time and effort on the determination of the level, the distribution and the composition of Commonwealth grants, instead of playing a constructive role in policy development and co-ordination.

Although this was written in 1995, many of these observations still seem valid. I do note, however, that the States are playing a more constructive, if largely individual, role in tax policy development.

The States say that they want more certainty in their funding without having to negotiate constantly with the Commonwealth on how much they will get from the Grants Commission via complex formulae.

The Commonwealth is continuing to put pressure on the States to get rid of a plethora of small taxes as well as inefficient taxes like (stamp) duty. We are now considering the possibility of the Commonwealth giving a certain level of income tax responsibility to the States.

Exactly what this State income tax would look like is part of the detail to be determined. It could be on all taxpayers, an addition to the current income tax (although the current rate would presumably be reduced because the Commonwealth would have less expenditure to the States). This would seem to be the most efficient method but no modelling has been done on this to my knowledge. Perhaps it would be a business income tax only. This would need to be resolved. Those States seeking to encourage businesses could apply a lower rate, the tradeoff being that they raise less income.

The vertical fiscal imbalance would also be overcome to some extent with reliance on the Commonwealth being reduced. Presumably efficiencies would arise as there would be a significant reduction in the blame-shifting game.

Political opportunists will come up with catchy slogans as to why it won’t work, and people smarter than me will have arguments against the proposal. Some of these are addressed.

It won’t be revenue neutral. My comment: if it makes the tax and allocation system more efficient, it will hopefully save money. Notwithstanding that, there is currently big demand on revenue which can only be resolved by cutting expenditure, increasing revenue or a combination of both. The current system does not lend itself to revenue neutrality.

It will disadvantage the smaller States. My comment: I haven’t seen the economic modelling on this but have no problem in accepting this. If each State and Territory is free to levy its own income tax rates (within parameters presumably), smaller States may find it difficult to compete with larger States. Perhaps some form of compensation could be built in to any model.

It is double taxation. My comment: This is just scaremongering. While technically income may be taxed “twice”, it is just a substitute for the current rates. So instead of income being currently taxed at, say 35 cents in the dollar, the new rate would be (say) 20 cents in the dollar for the Commonwealth and (say) 15 cents in the dollar for the State. How is that double taxation?

It would produce nine different tax regimes. My comment: We have not seen any detail about the proposal, but all models to date have simply used the existing Income Tax Assessment Acts, with the tax being separately allocated. Also, don’t forget that we currently have separate State Duty Acts, Payroll Tax Acts and Land Tax Acts. Hopefully some or all of those will go in the transition.

So What?

The proposed State Income tax is, to quote Sir Humphrey Appleby from Yes Prime Minister, “very brave, Prime Minister”. It will be difficult to sell to electors who traditionally do not trust politicians of any persuasion, State or Federal.

But surely it is worth considering, especially as more details come out.

If it makes States and Territories more responsible for raising the money they spend, and adds efficiencies to the system, then surely it will be a good thing. Will everybody be better off? Probably not, but if it is for the greater good and compensation is put in place to minimise the downside, it is worth serious consideration.

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.

The NSW Civil and Administrative Tribunal in Winday International Pty Ltd v Chief Commissioner of State Revenue has found that radiologists working at an imaging facility were employees of the facility provider for payroll tax purposes under the “employment agent” provisions.

This is a significant decision for two reasons. Firstly, it potentially applies to payments to many medical practitioners that have traditionally not been included in any payroll tax liability. Secondly, it continues the courts’ broadening of the interpretation of the “employment agents” provisions, seemingly with the (unsurprising) support of the Commissioners of State Revenue.

The Decision

Winday provided a fully equipped and staffed radiology facility operating on a bulk-billing basis in which specialist radiologists worked on a sessional basis under the terms of a Service Agreement with Winday. The Chief Commissioner of State Revenue issued assessment notices to Winday for payroll tax, interest and penalty tax for 2008 to 2013 on the basis that payments by Winday to the radiologists were subject to payroll tax under either the “employment agent” or “contractor” provisions in the Payroll Tax Act 2007 (NSW).

Before the Tribunal, the primary issue was whether the payments were caught by the employment agent provisions. In the NSW payroll tax legislation, it is covered by section 37:

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.

The same or similar wording is in all Australian payroll tax jurisdictions.

After examining how Winday conducted its business and the obligations imposed on the radiologists by the Service Agreements, the Tribunal found that the Service Agreements formed part of arrangement which comprised an employment agency contract.

As regards the question of whether Winday procured the services of the radiologists for its clients, the Tribunal rejected Winday’s argument that the statutory framework of Medicare and the prohibition on anybody other than medical practitioners providing radiologist services meant that the patients were not its “clients”. This argument by Winday is supported by the view in the decision in Health Services for Men & Ors v D’Souza & Ors.

The Tribunal 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.

Comment

This is a really interesting decision. The “employment agent” provisions require that a person, in this case Winday, the practice manager, procures the services of another person, in this case the radiologist, for a client of Winday. The Tribunal has concluded that the patient is a client of the practice, rather than a client of the radiologist (or even the GP that referred the patient).

I am not sure if this decision is being appealed, but it seems to me an unusual conclusion by the Tribunal. Only a radiologist can render accounts for fees as required by the Health Insurance Act 1973, and all fees received by Winday belonged to the radiologist. How can the patient be a “client” of Winday’s?

It is interesting to note that the Tribunal also very quickly dismissed the argument by Winday that the section was aimed at employment agents. Counsel for Winday submitted:

I don’t believe the tribunal should extend the range of situations where the employment agency provisions would apply in circumstances where it is totally outside of what the provision was introduced to deal with and that is disguise employment employee relationships, which certainly is not the case in either where the client is the patient or the GP.

It would lead to some very absurd results going forward. It would lead to a huge increase in the reach of the tax which clearly is not the way that the OSR tax the employment agency provisions at this point in time and if it was intended that that be the reach, then there should be something very specific to say that that was intended.

… I’m saying you need to interpret the legislation and apply the legislation to the facts.

The Tribunal concluded, based on some previous cases, that it should not be restricted from applying the words of the legislation as they stood. Many clients don’t think they fall within the legislation because they are not employment agents. A good reminder that you don’t need to be an employment agent to fall under these provisions.

The Fallout

If you have clients that conduct medical practices in this (standard) way, you should review the payroll tax aspects as a result of this decision. It could be a game changer that I am sure the Commissioners will roll out in their audits of medical practices.

Based on this decision, any payroll tax audit could assess payroll tax and penalties for the past five years.

It seems like the ATO is getting ready to go into battle on the employee/contractor with their rather aggressive position statement. ATO Deputy Commissioner Steve Vesperman, in a recent (February 2016) press release, said there are many myths about employee/contractor arrangements, and that it is important for all businesses to get the distinction right.

“We know from our own field work that many businesses are getting the employee or contractor decision wrong, and often this is just not knowing what determines one from the other,” Mr Vesperman said.

Incorrectly treating employees as contractors is a problem in many industries, in particular the building and construction, cleaning, road transport and security industries.

Mr Vesperman said while most business tried to do the right thing, some businesses deliberately treated their employees as contractors to illegally lower their labour costs by not withholding tax or paying the super guarantee.

The following are the ATO’s views in relation to some “myths” about employee v contractors. My views are also included.

Myth # 1: If the worker has an ABN, they’re a contractor.

ATO view: Having an ABN makes no difference, and will not make your worker a contractor for a job. If the working arrangement is employment, whether your worker has or quotes an ABN will not make them a contractor.

Tony’s view: Having an ABN is only one factor, and certainly not determinative. It does, however, show some intent by the worker to be considered a contractor. Make sure your contractors do have an ABN.

Myth #2: If the worker only works for short periods, they’re a contractor.

ATO view: Just because work is short term or irregular makes no difference and will not make your worker a contractor for a job. The working arrangement determines whether they are an employee or a contractor, not the amount of time they work for you.

Tony’s view: Short term or irregular work suggests a more flexible working arrangement more akin to a contract. But it is the working conditions that will determine the legal status of the working arrangement.

Myth #3: If others in my industry are doing the same, then my worker is a contractor.

ATO view: Industry practices make no difference and will not make any of your workers a contractor for a job. Don’t assume other businesses have worked it out correctly – it’s your working arrangement that determines if your workers are employees or contractors.

Tony’s view: This is a killer because it’s true. Many times I have been the bearer of bad tidings that businesses have tax liabilities because their workers are employees. This makes the business uncompetitive. Between a rock and a hard place. If you want your workers to be contractors, make sure the arrangements are such to support this view.

Myth 4: If the contract or agreement says so, the worker is a contractor.

ATO view: A contact or agreement makes no difference and will not make your worker a contractor for a job. If the working arrangement is employment, a contract or agreement stating the worker is a contractor won’t override this employment arrangement or change the obligations you need to meet.

Tony’s view: Make sure you have a contract, and make sure the contract reflects the actual arrangements. Contracts that say one thing but operate another (which is what I think the ATO are referring to) are not worth the paper they are written on.

Myth #5: If the worker submits an invoice, they are a contractor.

ATO view: Submitting an invoice for work done or being “paid on invoice” makes no difference and will not make your worker a contractor for a job. The working arrangement determines whether they are an employee or a contractor, not whether they submit an invoice.

Tony’s view: One of the best tests of a contractor is that they are paid to produce a result. This should, where possible, be reflected in the invoice they provide.

Typically the ATO takes a very one-sided view of these matters. While what they say is largely correct, it is critical that any contractor has an ABN, and where possible, written contracts should be in place and invoices issued. All of these factors do make a difference (despite what the ATO says) but it is the actual nature of the working relationship that will ultimately determine whether the worker is an employee or a contractor. These factors may help to correctly identify that arrangement.

Be prepared for the ATO to follow the stance of the State and Territory Offices of State Revenue and take a hard line on this issue. Whether or not the position will be supported by the courts is a different matter.

In my view, taking critical tax reform issues off the table and abandoning the Tax White Paper process is a lost opportunity to make the sort of structural tax changes essential to Australia’s long-term prosperity. What we need is a mature debate, but instead we see a flurry of headlines on isolated issues. This has substantially narrowed the discussion on tax reform.
Lots of people invested lots of time and effort to make detailed submissions to the Tax White Paper. Despite the hope, it seems that the political tax debate has returned to its natural base, simplistic slogans and name calling.
In an effort to purge my pent up frustration on this, I have penned this blog.
Earlier this year, the Opposition leader, Mr Shorten, took to the supermarkets to talk to the battlers about how an increase in GST would affect them. He asked a lady “What’s your favourite type of lettuce?”. This led to a flurry of comments on social media, including the tweet:
“Bill Shorten really proving the political truism this week: you don’t win friends with salad.”
For the record, the woman responded “iceberg”, and Bill Shorten said “I like all sorts of varieties of lettuce”.
With these comments, the Opposition set the battle lines; they would not be countenancing any increase in the GST rate. The Government held its line for a while but then moved to distance itself from any increase in the GST.
Mr Turnbull said:
“It’s not a question of politics here. At this stage I remain to be convinced that a tax mix switch of that kind would actually give us the economic benefit that you’d want in order to do such a big thing.”
This reflects a subtle change, rather than the “turnaround” that the media are suggesting. It is a subtle change because the government had indicated that all potential changes to tax that may help the economy were on the table. In concentrating only on a rate increase for the GST without considering broadening the base, Mr Turnbull is largely correct in saying that economic benefit would be limited.
By doing this, the Government now avoids having to consider any changes to the GST and it now seems that any moves for real tax reform in this Budget are gone.
Why should a change to the GST be considered?
In its submission to the recent White Paper discussions the Tax Institute said:
“The Government should adopt a policy of shifting away from being dependent on income tax for the bulk of revenue collections towards more simple and efficient consumption taxes.
In light of this, the Government should undertake a comprehensive review of the current exemptions and special rules in the current GST law to determine their ongoing necessity/appropriateness and to ensure that the simplicity and efficiency that is sacrificed by the presence of these exceptions is still justified.”
By comparison, Australia has one of the lowest rates of GST among OECD countries and a smaller than average base (due to the number of exemptions) than other OECD countries with a GST or VAT.
Consumption taxes are generally regarded as efficient taxes due to their broad base. However, introducing exemptions brings complexity and detracts from the efficiency and simplicity offered by a broad-based consumption tax. For this reason, changes to rate and scope of the GST should at least be considered.
How could the GST change?
1. Increase the rate
2. Broaden the base.
There are currently 18 sub-divisions within the GST-free category but those most likely for review would be:
a. Food
b. Health
c. Education
d. Child care
e. Supply of a Going Concern
f. Farmland
3. Combination of both
Simply increasing the rate is a blunt tool, and unlikely to be classified as “tax reform”. It seems our political masters have reached the same conclusion, if for more basic reasons.
While any changes are worthy of consideration, it seems to me that a comprehensive review would be most beneficial, if also most politically dangerous (witness current events). Provided compensation is afforded to those that need it, a more efficient and resilient tax system should be the outcome. How that compensation is determined and delivered is the test of any government.

Political Reality
“Always back the horse named self-interest, son. It’ll be the only one trying.”
Jack Lang – Labor premier

A couple of recent payroll tax cases caught my eye when I returned to work and was staring at the screen wondering when it was time for my first Corona of the day.
The cases themselves were not particularly significant but the both showed common characteristics of a number of payroll tax disputes in which I have been involved. Those characteristics:
1. The taxpayer has never appreciated the breadth of the payroll tax.
2. The taxpayer has been audited previously by the respective Office of State Revenue and no assessment had issued. They effectively get the all clear from the Office of State Revenue.
3. Another more recent audit concludes that the taxpayer does have a payroll tax liability and a retrospective assessment issues.
4. The taxpayer is (rightfully) aggrieved and objects. The objection is disallowed and the taxpayer appeals to the Appeals Tribunal.
5. The taxpayer is self-represented in the Tribunal, and largely unprepared for arguing the case.
6. The taxpayer loses.
In Terick Pty Ltd v Comr of State Revenue [2015] VCAT 1901, a self-represented taxpayer has been unsuccessful before the Victorian Civil and Administrative Tribunal in a matter concerning a payroll tax assessment in relation to its inclusion in a payroll tax group for the financial years ending 30 June of 2008 to 2011.
I do not intend to go into detail about why the de-grouping application was unsuccessful other than to say that, overall, the Tribunal concluded that the degree of control and dependence of the other businesses was sufficient to mean that the businesses were not run substantially independently of one another. Accordingly, it held the taxpayer had failed to discharge the onus of proving that it was independent and not connected with any of the other businesses.
What did come out of the case for me was that the taxpayer was investigated for the period 2003 to 2007 and was de-grouped by the Commissioner. The taxpayer contended (and it seems that the Commissioner did not disagree) that nothing had changed between the earlier investigation and the investigation leading to the assessment. It argued that the Commissioner should be prevented from issuing retrospective assessments. This is broadly what estoppel is.
The Tribunal said:
As I have already mentioned, estoppel is not applicable in this type of situation. That is, there can be no estoppel against the operation of the statute. .. I sympathise with the applicant in the sense that Mr Driscoll pointed out that it has created a financial difficulty for the applicant on the basis that the applicant believed that it would not be grouped in payroll tax and thus it now has a burden to meet that it would not have to meet otherwise. Had this been pointed out to the applicant during the years in question, from a financial management point-of-view it would have been a lot easier for it. However, that is not something I can take into account.
In Styling Australia Pty Ltd v Comr of State Revenue [2015] VCAT 1792, another taxpayer (also self-represented) has been unsuccessful before the Victorian Civil and Administrative Tribunal in a matter concerning a payroll tax assessment relating to payments to workers for the period from 1 July 2010 to 30 June 2013.
The taxpayer was a proprietor of an organisation which provided hosting and promotional staff for events, functions, carnivals and marketing campaigns. The Commissioner decided the taxpayer was an employer for payroll tax purposes in relation to the promotional staff that the taxpayer supplied to its clients. The Tribunal agreed.
Once again, the reasons are not particularly ground breaking and add little to the large volume of “employee/contractor” cases. The taxpayer’s case suffered from a lack of witnesses to support its position, leaving the Tribunal to rely on the Commissioner’s evidence.
What is interesting is that the taxpayer maintained that there was an investigation in relation to the period from 1 July 2005 to 30 June 2010 whereby the Commissioner did not assess the applicant for payroll tax in that period. As such, it argued it should be able to rely on that, and should not be liable to pay tax now pursuant to the new assessments.
The Tribunal said, in response to that argument:
“It is clear, that the investigations that the respondent made during the period referred to above, were a different period to the present, and it is not clear that the same material was presented before the respondent. In any event, a previous decision of the respondent cannot operate as an estoppel against the proper construction and application of the Act, and cannot prevent the Commissioner from performing his statutory duty to administer taxation laws. … Further, even if the respondent gave the applicant incorrect advice, such advice is not capable of creating an estoppel in the present situation. “

Let’s have a closer look at that last sentence.
“Further, even if the respondent (in this case, the Commissioner) gave the applicant (the taxpayer) incorrect advice, such advice is not capable of creating an estoppel in the present situation.”
Read “tough luck for the taxpayer”.
The various taxing authorities have practices that can reduce the exposure of taxpayers but the Offices of State Revenue in particular only provide comfort in very select circumstances. So just because a business has been audited previously and found not to have a payroll tax liability does not mean that they may not be assessed retrospectively in a future payroll tax audit. And that business cannot rely on any findings (or non-assessment) in the previous audit as a defence.
I have been involved in a number of these cases and it is difficult to explain to clients how their business practices have not changed, the law has not changed but they can be subject to retrospective assessments of up to six years.
Lessons for us all
1. The payroll tax legislation can be very broad and far-reaching. Moreover, interpretations by the Office of State Revenue can change subtly over time. Businesses should review possible areas of exposure, especially grouping, employees and the relevant contracts provisions, on a regular basis.
2. A non-assessment in a previous audit will not protect you from a retrospective assessment in a future audit. An audit clearance letter will usually not help because of the vague wording typically included.
3. If a business does want to take the matter to appeal, it should seek professional advice. Even if you do not want a lawyer representing you at the Tribunal (which can be expensive), you should be aware of what you need to prove, and your chances of success.

As a baby boomer struggling with technology (I’m still trying to work out my VHS), I was fascinated about recent stories about the rapid development of 3D Printing. Coincidentally, I saw this story on the same day the Treasury released updated draft GST legislation on the so-called Netflix Tax, known to us as the “Tax Laws Amendment (GST Treatment of Cross-Border Transactions) Bill 2015”. Spooky or what?
I figured I couldn’t be the only one interested in 3D Printing and GST, so here it is.
What is 3D Printing?
3D printing, or more correctly, “additive manufacturing”, is the way of the future. I thought it would be interesting to have a little look at it and how it might affect the way we buy stuff in the future, and how GST might be applied to those sales. Let’s start with the technology.
According to the website 3dprinting.com, additive manufacturing works like this.
3D printing or additive manufacturing is a process of making three dimensional solid objects from a digital file. The creation of a 3D printed object is achieved using additive processes. In an additive process an object is created by laying down successive layers of material until the entire object is created. Each of these layers can be seen as a thinly sliced horizontal cross-section of the eventual object.
It all starts with making a virtual design of the object you want to create. This virtual design is made in a CAD (Computer Aided Design) file using a 3D modeling program (for the creation of a totally new object) or with the use of a 3D scanner (to copy an existing object). A 3D scanner makes a 3D digital copy of an object.
3D scanners use different technologies to generate a 3D model such as time-of-flight, structured / modulated light, volumetric scanning and many more.
Not all 3D printers use the same technology. There are several ways to print and all those available are additive, differing mainly in the way layers are built to create the final object.
Some methods use melting or softening material to produce the layers. Selective laser sintering (SLS) and fused deposition modeling (FDM) are the most common technologies using this way of printing. Another method of printing is when we talk about curing a photo-reactive resin with a UV laser or another similar power source one layer at a time. The most common technology using this method is called stereolithography (SLA).
To be more precise: since 2010, the American Society for Testing and Materials (ASTM) group “ASTM F42 – Additive Manufacturing”, developed a set of standards that classify the Additive Manufacturing processes into 7 categories according to Standard Terminology for Additive Manufacturing Technologies.
For you tech-heads, have a look at all the detail at http://3dprinting.com/what-is-3d-printing/
GST and additive manufacturing
So will the increase in households being able to “print their own goods” change the way GST is applied in Australia, and indeed the way VAT is applied around the world?
Well the answer in the short term is “yes”. In the longer term it will probably be caught in the so-called “Netflix tax”. Digital products and services supplied into Australia will be taxed from 1 July 2017, assuming the relevant legislation is passed. Updated draft legislation was released recently.
What the draft legislation does is amend the “connected with Australia” rule (more correctly but more confusingly called the “connected with the indirect tax zone” rule). Basically, the amendments extend the scope of the GST to supplies of services and intangibles made by non-residents to an Australian consumer. These will be “connected with Australia” and therefore subject to GST under the proposed new law.
Schedule 1 to the Bill amends the GST law to make all supplies of things other than goods or real property connected with the indirect tax zone where they are made to an Australian consumer. An Australian consumer is broadly an Australian resident other than a business.
This change will result in supplies of digital products, such as streaming or downloading of movies, music, apps, games, e-books as well as other services such as consultancy and professional services, receiving similar GST treatment whether they are supplied by a local or foreign supplier.
So if the law passes as it is, it would seem to apply to the purchase of “virtual objects” although this does not seem to have been contemplated, judging on the wording in the Explanatory Memorandum. There will come a time in the not-too-distant future where you will order a “virtual object” over the net that is emailed to for you to. You then print it off on your 3D printer (or go to a retail outlet that charges you to use theirs). You have the goods. They have not passed through Australian Customs and had GST applied because they were not goods at the time.
Under the proposed new law, the non-resident supplier (in the first instance) will have a GST liability. They will have supplied something other than goods or real property to you, an Australian consumer. I guess the questions will be further highlighted in this example: how will the know ATO who these suppliers are and what legal jurisdiction to chase and prosecute them will they have under current arrangements? I suspect that there will be a lot more supplies of digital goods that may not be worried too much about laws, especially tax laws in another country.

There have been a spate of cases recently where the Commissioner has disallowed input tax credits of purported acquisitions from related entities because these entities have not been “carrying on an enterprise”.
In its simplest form, the arrangement goes like this. The taxpayer has an entity (Company A) that is registered for GST on an accruals basis. Another entity (Company B) is set up which is registered for GST on a cash basis. Company B purports to make substantial supplies to Company A, and issues the appropriate tax invoices. Company A claims GST input tax credits. Company B does not report any GST sales as it has not yet been paid.
A more complicated version of this was the subject of the decision in Harland v FCT, in which the taxpayer sought to claim a one-off refund of GST of $5,359,891 (yes, $5.3m!!) and wondered why he got audited and shut down before the refund issued.
These schemes have a number of weaknesses. Apart from any possible Division 165 application (the GST general anti-avoidance provision), there is the question as to whether or not the purported supplier is “carrying on an enterprise” and, even if they are, whether or not there has been any real supply.
Finally, there is the application of little known section 21-15 of the GST Act which deems any acquisition not paid for within 12 months to be a bad debt for which an increasing adjustment applies. In other words, if you have claimed an input tax credit but have not paid the tax invoice after 12 months, you have to give the GST input tax credit you claimed back to the Commissioner.

In a recent decision (Floorplay Pty Ltd v FC of T [2013] AATA 637), the AAT has found that crew, including the skipper and deck hands, on fishing boat were “employees” for the purposes of the Superannuation Guarantee legislation.
The crew were engaged under a “Share Fishing Agreement”, common in the industry. The Agreement provided that the crew met a proportion of the expenses and received a proportion of the catch.
The Tribunal reviewed a number of factors and, in considering the totality of the arrangements, concluded that the crew were not carrying on their own businesses but were employees of the boat owner. The Tribunal concluded:
“The control of Floorplay extended to the catch and how it was dealt with. The crew members were not at liberty to treat the catch as the product of their endeavours which they could sell as and how they saw fit in their economic interests. Instead they were obliged to have a catch processed and sold through one of Floorplay’s associated entities. It is, as well, significant that the parties agreed that Floorplay would deduct PAYG Withholding Tax payments from amounts otherwise payable to the crew members. Such an arrangement is not consistent with the notion that the crew members are operating independent businesses; it is, instead, suggestive of the relationship of employer and employee.”
The decision of the Tribunal is not new or particularly ground breaking. What continues to amaze me is that employers continue to hide their (collective) heads in the sand in regard to this issue. I am well aware of the economic and market forces at work in this type of situation. Often, employers cannot get people to work for them if they take them on as employees, withhold tax and super and pay the workers comp. But to continue to ignore the situation is a recipe for disaster.
What’s at stake?
By treating workers as contractors when they are (arguably) not, a business leaves its self open to a number of potential tax liabilities. These can threaten the very viability of the business. While each tax has a slightly different definition of “employee” (or “worker”), it is worth considering them together.
The SGC is a 9.0% impost on the gross wages. The ATO has, to date, been reluctant to be too aggressive on this and it is our experience that they tend to only go back a year or two. The liabilities we have seen to date have been manageable, even taking into account potential penalties.
The various Offices of State Revenue, on the other hand, take a particularly aggressive stance in relation to payroll tax. In Western Australia, any assessment for payroll tax on employees can go back 6 years and include substantial penalties. If the business has a significant “contract” workforce, this assessment can be devastating.
Workers compensation in Western Australia is not a huge concern in terms of retrospective payments. Unlike other jurisdictions, there is usually only payment required for the current year. The big issue arises when a worker hurts themselves and is held to be covered by your workers comp. Apart from the obvious distress caused by the injury, the business can find itself in real trouble if no payments have been made for the worker.
Finally, PAYGW can also be an issue but tends to be at the lower end of the scale in terms of ATO audits as well as past liability, if assessed.
What have we learnt from this recent case?
The facts of this case again show the problem of trying to address potential problems without getting the proper advice. The boat owner understood the problem but sought to overcome it by getting someone else’s Agreements and using them for himself. To make matters worse, the actual terms under which the crew worked were different from the terms of the written Agreement.
Identify if you have a potential problem in the area of employee/independent contractor. If you have, seek professional advice on the best way to deal with it in terms of all of the legislation that will affect you. Make sure that the agreement you have with your workers reflects the actual position.
Deal with it now; it won’t go away.

There have been three recent AAT cases on GST matters which have piqued my interest, such is my sad and somewhat lonely world. All three provide real life lessons on the importance of getting the GST right from the beginning. That’s where I come in (advertisement).
The first is Naidoo and Commissioner of Taxation [2013] AATA 443 (28 June 2013) where the Commissioner wanted to have his (or the taxpayer’s) cake and eat it too.
Briefly, this was about whether or not the partnership was “carrying on an enterprise” and allowed to be registered for GST. As is relevant to this article, the partnership had registered for GST and been claiming GST refunds from 1 April 2007 to 31 March 2011. The refunds resulted from an excess of input tax credits over GST charged.
The Commissioner took the view that the partnership had never been carrying on an enterprise but interestingly only cancelled the GST registration from 31 March 2011 rather than from day one. He then assessed on the basis that the partnership was not entitled to any input tax credits as the expenses had not been incurred in carrying on an enterprise, an entirely reasonable position.
What appeared to be a substantially less reasonable position was that he refused to credit the partnership for the GST on its sales that had been returned in the BASs. This meant that the partnership could not get back the GST it had included in the BASs when it was not carrying on an enterprise but was not entitled to any input tax credits during the period.
Naturally, the Commissioner’s position was supported by a view of the legislation. Fortunately for the partnership, the Tribunal did not share the Commissioner’s view. The GST outcome, as in this case, does not always follow the path that you think it will.
Lesson One: understand the GST implications of “carrying on an enterprise”. Many people take it for granted (one way or another) to their detriment.
The next case is Rod Mathiesen Truck Hire Pty Ltd as trustee for the Mathiesen Family Trust and Commissioner of Taxation [2013] AATA 496 (15 July 2013). The taxpayer loses money on the sale of land but does not get a GST credit for the amount of the bad debt.
Very briefly, the facts are that the vendor of property reluctantly provided vendor finance of about $1m on the sale of about $3m of vacant land. Shortly thereafter, the bank moved on the purchaser and the vendor lost its $1m.
The vendor claimed that it should only remit GST on the $2m, as it never received the other $1m. The ATO (and the AAT) disagreed saying that the GST liability was on the $3m and the lost $1m was as a result of a failed loan, a financial supply for GST purposed. No “reducing adjustment” was available for GST purposes as would have been the case if the transaction was simply failure to pay for the land.
Lesson Two: make sure that the arrangements entered into protect your GST position.
Finally we have AJJJ’s Emporium Pty Ltd and Commissioner of Taxation [2013] AATA 501 (16 July 2013). Samuel Goldwyn is (apparently incorrectly) reported as saying “a verbal contract is not worth the paper it is written on”. The same could be said, it seems, about ATO phone advice.
This was simply about the quantum of penalties for over claimed input tax credits. There was no dispute that the input tax credits had been over claimed but the ATO assessed penalties at 50% on the basis that the taxpayers had been “reckless”.
I found a couple of things interesting about this case. Firstly, both parties (and indeed the AAT) relied heavily on a number the Commissioner’s Public Rulings and Practice Statements. While I have no issues with the matters they relied on, it is somewhat concerning that these rulings seem to be elevated to the status of case law.
Perhaps a more potent reminder for taxpayers is the way the AAT dealt with phone advice that the taxpayer purported to rely on. The AAT said, in part:
“…even assuming the applicant … provided accurate and complete background information when raising its telephone enquiry, it does not follow that it was entitled to rely upon general and essentially theoretical advice obtained under such circumstances. A private taxation ruling, or at least informed professional advice, could and should have been sought, given the relatively sizable amount of the applicant’s claim.”
Lesson Three: I will let you work this one out. Any questions, give me a call (no irony intended).