State tax authorities have investigated sub-contracting arrangements applying the broad scope of employment agent provisions.
In a welcome decision, the NSW Court of Appeal at Chief Commissioner of State Revenue v E Group Security Pty Ltd  NSWCA 115(Call) confirmed the employment agency contract criterion in UNSW Global Pty Ltd v Chief Commissioner of State Revenue  CSNSF 1852 (Global UNSW).
Global UNSW ruled that the definition of an “employment agency contract” in the Payroll Tax Act 2017 (New South Wales) (Law) should not be read literally. The Court recognized that, on a literal reading of the legislation, UNSW Global was an employment agent. However, the Court concluded that this was an absurd result not intended by Parliament.
Bartier Perry Lawyers, led by Dispute Resolution Partner David Creais, won the case for Global UNSW argue that the words of the legislation went far beyond what was intended. On a literal reading of the legislation, law firms could be liable for payroll tax for payments to lawyers when they hire lawyers for their clients.
His Honor, White J has concluded that an employment agency contract requires that the sub-contractor be in the client’s business and the provision of services for driving of the client’s company (‘in and for the test‘). Global UNSW limits the circumstances in which sub-contractors fall within the scope of the placement agent provisions. A client who receives a benefit because the subcontractor is doing work that helps the main contractor do his job is not enough to constitute an employment agency contract.
What is an employment agency contract?
In New South Wales, section 37(1) of the Act encompasses a contract under which one person (an employment agent) procures the services of another person (a service provider) for a client of the Placement Agent.
A employment agency contract exists when the service provider performs the work in the same way, or approximately in the same way, as an employee of the client. Payments to the service provider under an employment agency contract are considered “wages” and may be subject to payroll tax. NSW income
CPN 005: Employment Agency Contract Guidelines provides guidance on the types of arrangements that constitute employment agency contracts. Recent cases highlight that assessments by state tax authorities are not limited to labor leasing companies.
The recent decision of Bonner v Chief Commissioner of State Revenue  NSWSC 441(Bonner) (arising after the Group E decision, but before the hearing of the appeal) cast doubt on the reasoning of Global UNSW. In BonnerJudge Basten criticized the “in and for test” in Global UNSW noting that “the words are a gloss on status”.
The appeal was dismissed confirming the earlier decision
(E Group Security Pty Ltd v Chief Commissioner of State Revenue  NSWSC 1190)(Group E) in favor of the taxpayer.
The Chief Commissioner appealed the decision of Group E. In light of Bonnerthe Chief Commissioner amended the Notice of Appeal to challenge Global UNSW had been erroneously decided on the ground that section 37 of the Act should be interpreted according to its ordinary and natural meaning.
The New South Wales Court of Appeal held that there should be no departure from existing case law on the interpretation of section 37 since:
- the law had been reviewed and amended regularly; and
- the chief commissioner himself had always advocated the test in Global UNSW.
The other grounds of appeal, including the payroll tax pooling provisions, relate to directions to the Registrar on a date to be announced.
Facts of the Group E decision
The taxpayer was the primary operating company (and parent company) of a group of companies that provided custodial services (eg.
Revenue NSW, after carrying out an audit, has imposed a payroll tax on the taxpayer in respect of payments to security guards whose services have been contracted out to third parties.
Group E decision
The issue was whether the arrangements between the taxpayer and its clients (or its wholly-owned subsidiaries) were employment agency contracts.
The “in and for the test” in Global UNSW was accepted into Group E. The Court held that the arrangements between the taxpayer and his clients for security guard services did not constitute placement agency contracts. Where services were provided on an ad hoc or ad hoc basis, security guards could not be considered part of the client’s workforce. The provisions relating to placement agencies did not apply.
The appeal decision confirms the Global UNSWapproach to statutory interpretation considering the purpose, legislative history, case law and impact on harmonized payroll tax provisions across Australia.
What can you or your clients do to reduce their risk?
This case highlights the importance of structuring the commercial arrangement so that it corresponds to the “in and for test” in Global UNSW to ensure that the contract is properly documented and enforced in practice.
Revenue NSW continues to undertake inquiries into the employment agency and grouping arrangements. It is important to engage with Revenue NSW during their audits to mitigate potential penalties, interest and multi-year assessments.
Lisa To de Bartier Perry sits on the NSW Law Society and Revenue NSW Liaison Committee and chaired the Tax Institute’s NSW Tax Forum in May 2022 with panelist, Revenue NSW’s Director of Technical Services, Ian Phillips on the NSW payroll tax theme.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.