Chief Commissioner of State Revenue v Downer EDI Engineering Pty Ltd

Court of Appeal (NSW)|2020-02-20|Before: Bathurst CJ, Macfarlan JA, Meagher JA, Payne J

urt or tribunal: Supreme Court Jurisdiction: Equity Division Citation: [2019] NSWSC 743 Date of Decision: 21 June 2019 Before: Payne J File Number(s): 2017/301085

HEADNOTE [This headnote is not to be read as part of the judgment] The respondent, Downer EDI Engineering Pty Ltd (Downer), had a contract with Foxtel, pursuant to which Downer engaged subcontractors to deliver and install Foxtel equipment to Foxtel customers. The appellant, the Chief Commissioner of State Revenue (the Commissioner), claimed that payments made by Downer to the subcontractors under the subcontracts were liable to payroll tax. Downer contended that the payments were exempt from payroll tax by virtue of s 32(2)(a) or s 32(2)(d)(i) of the Payroll Tax Act 2007 (NSW). The Payroll Tax Act provides that a "relevant contract", under which payments made are liable to payroll tax, does not include a contract under which a person "is supplied with services for or in relation to the performance of work that are ancillary to the supply of goods by the person by whom the services are supplied" (s 32(2)(a)), or a contract under which a person is supplied with "services ancillary to the conveyance of goods by means of a vehicle provided by the person conveying them" (s 32(2)(d)(i)). Pursuant to the subcontracts, on a typical day, a subcontractor would collect any necessary stock from Downer's warehouse, travel to the Foxtel customer's premises, conduct a risk assessment, obtain the customer's approval to proceed and unpack the equipment (including the Foxtel set top box). If Foxtel hardware was not yet installed, the subcontractor would provide installation services which could include installing a satellite dish, cables, wall mounts and isolators. The subcontractor would connect and activate the set top box and explain to the customer how the Foxtel service worked. The subcontractor would then put away their tools, collect any rubbish and proceed to the next job. The primary judge in the Equity Division upheld Downer's claim and held that the subcontracts were excluded from the definition of a "relevant contract" under both s 32(2)(a) and s 32(2)(d)(i). The primary judge indicated that even if that were not the case, he would have remitted the penalty tax and interest payable on the amount by 50%. The Commissioner's grounds of appeal raised various issues. These included whether the statutory expression "supply" apprehends more than mere delivery of goods, whether Downer was supplied with services ancillary to the supply of goods, whether Downer was supplied with services ancillary to the conveyance of goods, and whether the primary judge erred in his approach to the remission of penalty and interest. The Court of Appeal dismissed the appeal. Did the subcontracts fall within the s 32(2)(a) exemption? i) To the extent that the question involves statutory construction, that task begins and ends with a consideration of the text, having regard to its context, which includes legislative history, extrinsic materials and purpose: [112] (Bathurst CJ); [153] (Macfarlan JA); [154] (Meagher JA). Federal Commissioner of Taxation v Consolidated Media Holdings Ltd (2012) 250 CLR 503; [2012] HCA 55; SZTAL v Minister for Immigration and Border Protection (2017) 262 CLR 362; [2017] HCA 34, referred to. ii) It was not necessary for legal title to pass for there to be a supply of goods within the meaning of the subsection. The subcontractor as sub-bailee of the Foxtel Consignment Equipment lawfully passed possession to the customer, which was a supply of goods by the subcontractor: [115]-[119] (Bathurst CJ); [153] (Macfarlan JA); [154] (Meagher JA). Lloyd's UDT Finance Ltd v Chartered Finance Trust Holdings plc [2001] STC 1652, considered. TRM Copy Centres (UK) Ltd v Lanwall Services Ltd [2009] 1 WLR 1375; Yearworth v North Bristol NHS Trust [2010] QB 1, referred to. iii) The supply (to the customer) was under the subcontract. While the contractual relationship was between Downer and the subcontractor, "under" can mean that the supply occurred in the discharge of an obligation imposed by the terms of the subcontract: [120]-[125] (Bathurst CJ); [153] (Macfarlan JA); [154] (Meagher JA). Federal Commissioner of Taxation v Sara Lee Household & Body Care (Australia) Pty Ltd (2000) 201 CLR 520; [2000] HCA 35; Smith's Snackfood Company Ltd v Chief Commissioner of State Revenue (NSW) [2013] NSWCA 470, considered. Rinehart v Hancock Prospecting Pty Ltd [2019] HCA 13; 93 ALJR 582; Inghams Enterprises Pty Ltd v Hannigan [2020] NSWCA 82, referred to. iv) The installation services were ancillary to the supply of goods. The goods supplied would provide no benefit to the customer until they were installed. The installation was something which tended to assist, or which naturally went with, the supply of goods necessary to receive the Foxtel service: [127]-[139] (Bathurst CJ); [153] (Macfarlan JA); [154] (Meagher JA). Smith's Snackfood Company Ltd v Chief Commissioner of State Revenue (NSW) [2013] NSWCA 470; Navy Health Ltd v Federal Commissioner of Taxation (2007) 163 FCR 1; [2007] FCA 931; Macquarie International Health Clinic Pty Ltd v University of Sydney (1988) 98 LGERA 218, considered. v) The subcontracts fell within the s 32(2)(a) exemption. Did the subcontracts fall within the s 32(2)(d)(i) exemption? i) Consistent with the conclusion in Smith's Snackfood, and bearing in mind that the question of whether the service was ancillary is a matter of fact and degree, the subcontracts fell within the s 32(2)(d)(i) exemption: [140]-[141] (Bathurst CJ); [153] (Macfarlan JA); [154] (Meagher JA). Smith's Snackfood Company Ltd v Chief Commissioner of State Revenue (NSW) [2013] NSWCA 470, considered. Was the primary judge's approach to penalty and interest correct? i) The power in s 33 of the Taxation Administration Act 1996 (NSW) to remit penalty tax is not limited expressly or by necessary implication by the mandatory reductions required by ss 28 and 29. There is also no limit on the power in s 25 to remit interest: [149]-[151] (Bathurst CJ); [153] (Macfarlan JA); [154] (Meagher JA). Bayton Cleaning Company Pty Ltd v Chief Commissioner of State Revenue [2019] NSWSC 657, considered.

Judgment

BATHURST CJ: This is an appeal from a decision of a judge (the primary judge) in the Equity Division of the Court, setting aside assessments of payroll tax made against the respondent, Downer EDI Engineering Pty Ltd (Downer), by the Chief Commissioner of State Revenue (the Commissioner), and ordering the Commissioner to issue Downer with replacement Notices of Assessment for the relevant financial years as if the objection lodged by Downer had been allowed in whole.
The proceedings concerned the issue whether certain payments made by Downer to various subcontractors pursuant to contracts between it and the subcontractors were liable, wholly or in part, for the payment of payroll tax or were exempt from the payment of such tax by virtue of the provisions of s 32(2)(a) or s 32(2)(d)(i) of the Payroll Tax Act 2007 (NSW). In order to put the matter in context, it is convenient first to refer to the relevant legislation under which the issue arises.

The legislation

Section 6 of the Payroll Tax Act imposes payroll tax on taxable wages. Section 7 provides that the employer who pays the taxable wages is liable to pay the tax.
Division 2 of the Act deals with the concept of taxable wages. Section 10 defines "taxable wages" as "wages that are taxable in this jurisdiction", while s 11 deals with circumstances where wages are taxable in the jurisdiction for the purpose of the Act.
Section 13 defines "wages". It is in the following terms: "13 What are wages? (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)."
Division 7 of the Act extends the concept of wages to payments made to persons under what are described as relevant contracts. The following provisions of Div 7, as in existence in the years in respect of which the assessments were made, are relevant: "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 ... 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. … 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."
The legislative history of these provisions is conveniently set out in the primary judgment (at [101]-[110]). It is unnecessary to repeat what is there set out.
The following provisions in Part 5 of the Taxation Administration Act 1996 (NSW) (the TAA) are also relevant: "21 Interest in respect of tax defaults (1) If a tax default occurs, the taxpayer is liable to pay interest on the amount of tax unpaid calculated on a daily basis from the end of the last day for payment until the day it is paid at the interest rate from time to time applying under this Division. (2) Interest is payable under this section in respect of a tax default that consists of a failure to pay penalty tax under Division 2 but is not payable in respect of any failure to pay interest under this Division. 22 Interest rate (1) The interest rate is the sum of: (a) the market rate component, and (b) the premium component. (2) The market rate component is: (a) unless an order is in force under paragraph (b), the Bank Accepted Bill rate rounded to the second decimal place (rounding 0.005 upwards), or (b) the rate specified for the time being by order of the Minister published in the Gazette. (3) The premium component is 8% per annum. … 25 Remission of interest The Chief Commissioner may, in such circumstances as the Chief Commissioner considers appropriate, remit the market rate component or the premium component of interest, or both, by any amount. 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. … 97 Review by Supreme Court (1) A taxpayer may apply to the Supreme Court for a review of a decision of the Chief Commissioner that has been the subject of an objection under Division 1 if: (a) the taxpayer is dissatisfied with the Chief Commissioner's determination of the taxpayer's objection, or (b) 90 days (not including any period of suspension under section 92) have passed since the taxpayer's objection was served on the Chief Commissioner and the Chief Commissioner has not determined the objection. (2) A taxpayer who has applied to the Civil and Administrative Tribunal under section 96 for an administrative review in respect of a decision cannot apply to the Supreme Court under this section in respect of the same decision. However, the taxpayer may do so if the earlier application is withdrawn with the approval of the Civil and Administrative Tribunal for the purposes of enabling the Supreme Court to deal with the matter. … (4) A review by the Supreme Court is taken to be an appeal for the purposes of the Supreme Court Act 1970 and the regulations and rules made under that Act, except as otherwise provided by that Act or those regulations or rules. … 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."

The assessment

Downer was engaged by FOXTEL Management Pty Limited (Foxtel) under a contract described as a "Service Provider Installation Agreement" (the Foxtel Contract). In the fulfilment of its obligations under that contract, Downer engaged various subcontractors to deliver and install Foxtel equipment to Foxtel customers. The subcontractors were generally engaged under one of two forms of contract, one of which was described as a "Subcontractor Agreement Foxtel Satellite Installation" (the Satellite Agreement) and the other as a "Subcontractor Agreement Foxtel Cable Installation" (the Cable Agreement) (together, the subcontracts).
On 13 April 2016, the Commissioner issued amended payroll tax assessments against Downer for the financial years ended 30 June 2010 to 30 June 2013. The assessments reflected the Commissioner's conclusion that the payments made by Downer to the subcontractors were payments "for or in relation to the performance of work relating to a relevant contract" within the meaning of s 35(1) of the Payroll Tax Act and, after an allowance of 25 per cent of the total amount paid pursuant to s 35(2), the remaining 75 per cent of the payments were assessed to be liable to payroll tax.
The Commissioner imposed penalty tax pursuant to the provisions of Div 2 of the TAA. He reduced the default penalty of 25 per cent of the amount of tax unpaid (s 27 of the TAA) to 20 per cent by virtue of the provisions of s 29 of the TAA.
The Commissioner also imposed interest at what is described in s 22 of the TAA as the market rate component. He remitted the premium component of the interest pursuant to s 25 of the TAA.
Shortly prior to the hearing before the primary judge, the parties agreed that the apportionment made by the Commissioner pursuant to s 35(2) of the Payroll Tax Act should be varied to reflect the fact that only 42.3 per cent of the total amount paid was attributable to the performance of work. It was agreed between the parties that irrespective of the outcome of this appeal, it will be necessary for the Commissioner to reassess Downer for the years in question.
The primary judge concluded that the contracts between Downer and the subcontractors fell within the exemptions to the definition of "relevant contract" contained in s 32(2)(a) and s 32(2)(d)(i) of the Payroll Tax Act and set aside the assessments. He also indicated that had he not been of that view, he would in any event have remitted the amounts of the penalty by 50 per cent, and the interest payable in the same proportion.

The Foxtel Contract

It is not necessary to refer to the Foxtel Contract in great detail. This is because the critical contracts in the present case are the subcontracts with which I have dealt below, and many of the detailed operative provisions in the Foxtel Contract are in any event mirrored in the subcontracts.
The Foxtel Contract contains the following Recitals: "A FOXTEL operates a subscription television service for which it requires installation services. B The Service Provider [Downer] provides installation services. C FOXTEL wishes to engage the Services Provider to provide, and the Service Provider wishes to provide, installation services in accordance with the terms of this Agreement."
Clause 1.1 of the Foxtel Contract sets out the services Downer was required to provide: "1. SERVICES 1.1 Provision of Services 1.1.1 FOXTEL appoints the Service Provider on a non-exclusive basis to provide, and the Service Provider agrees to provide, the Services. 1.1.2 The Service Provider agrees to provide the Services in accordance with this Agreement including, but not limited to: (a) the Orders; (b) the Scopes of Work set out in Schedules 1A and 1B; (c) the Operational Procedures set out in Schedules 2, 2A and 2B; (d) the Service Levels set out in Schedule 3; (e) the Charges set out in Schedule 4 and 4A; (f) the occupational health and safety and environmental obligations set out in Schedule 5; (g) the Land Access obligations set out in Schedule 6; (h) the Insurance obligations set out in Schedule 7; (i) the Security of Payment obligations set out in Schedule 8; (j) the Definitions set out in Schedule 9 and otherwise in this Agreement; (k) FOXTEL's Privacy Policy set out in Schedule 10; (I) FOXTEL's Fraud, Corruption and Piracy Policy and obligations set out in Schedule 11; (m) the Transition obligations set out in Schedule 13; (n) and [sic] (o) the Business Continuity obligations set out in Schedule 15."
Clause 4 deals with the engagement of personnel by Downer to perform services under the subcontract. The following provisions are relevant: "4.1.1 The Service Provider agrees to engage at its own cost, and must ensure that it recruits and maintains, a sufficient number of dedicated Personnel required to ensure that the Service Provider provides the Services in accordance with this Agreement. … 4.3.1 The Service Provider must ensure that the Personnel: … (d) are skilled, competent, proficient, trained, licensed and experienced in performing the tasks to be performed by them; (e) will perform the Services with the degree of care, diligence, professionalism, prudence, efficiency, purposefulness and skill that would be expected from an experienced person engaged in performing the Services"
Clause 6 deals with title and risk to equipment. Relevantly, it is in the following terms: "6.1.1 Title in the FOXTEL Equipment will at all times remain with FOXTEL. 6.1.2 Ownership of any lead-in cable, whether or not installed by the Service Provider as part of performing Services, is vested in Telstra. 6.1.3 Ownership of all Telstra Plant is vested in Telstra. 6.1.4 Except for the Service Provider's Intellectual Property, which shall remain the property of the Service Provider at all times, all technical drawings, specifications or designs and all intellectual property relating to the provision of the Services will remain the property of FOXTEL or Telstra. 6.1.5 The Service Provider agrees and acknowledges that it is a bailee and its Personnel are sub-bailees, of FOXTEL, regarding Consignment Equipment and, accordingly, the Service Provider and its Personnel owe FOXTEL a duty of care from the time: (a) the Service Provider takes possession of the Consignment Equipment until that Consignment Equipment is installed; and (b) the Consignment Equipment is removed from a Customer's Premises until that Consignment Equipment is returned to FOXTEL's possession."

The Cable Agreement

This is a Subcontractor Agreement pursuant to which the subcontractors provided services in cases where the Foxtel service was to be connected to customers' premises by cable. The Recitals to this agreement are in the following terms: "A. The Contractor [Downer] wishes to engage the Subcontractor to perform work under the Subcontract (the 'Works') in relation to the Service Provider Installation Agreement. B. The Subcontractor represents to the Contractor that it has the requisite skill, experience, ability and available resources to perform the Works and has agreed to accept such engagement upon the terms of the Subcontract."
Clause 2 of the Subcontract Conditions deals with the obligations of the subcontractor in the performance of the works. Of relevance are the following provisions: "2.1 The Subcontractor shall perform the Works described in Annexure A and in accordance with Annexure B, and in accordance with Orders issued by the Contractor. The Subcontractor acknowledges that Annexure A will be interpreted so that references to the party 'FOXTEL' will be read as references to 'the Contractor' and that references to 'the Service Provider' will be read as references to 'the Subcontractor' under this Subcontract. 2.2 The Subcontractor must: … (vi) not do anything which will put the Contractor in breach of its contract with FOXTEL (including breaching any of Foxtel's policies and procedures which are set out in Annexure E); … 2.4 Unless stated in the Subcontract or agreed otherwise in writing, the Subcontractor shall provide everything necessary, (labour, plant, equipment, vehicle and other things), to perform the Works."
Clause 3 deals with the responsibility for plant and equipment. So far as relevant it is in the following terms: "3.1 With respect to plant and equipment and other things provided by the Contractor to perform the Works, the Subcontractor shall be responsible for the: (a) safe and timely delivery and collection to and from the Contractor's store or Customer's premises and all necessary loading and unloading of the plant and equipment and other things; … 3.2 The Subcontractor must purchase a delivery vehicle for use in carrying out the Works, which: (a) is a white 1 tonne van or similar"
Clause 5 deals with subcontractor's employees. The following provisions are relevant to these proceedings: "5.1 The Subcontractor shall not engage any personnel to carry out the Works unless it has received the Contractor's prior written approval. … 5.3 The Subcontractor shall ensure, to the reasonable satisfaction of the Contractor that at all times each of its Personnel: … (c) are skilled, competent, proficient, trained, licensed and experienced in performing the tasks to be performed by them; (d) will perform the Works with the degree of care, diligence, professionalism, prudence, efficiency, purposefulness and skill that would be expected from an experienced person engaged in performing the Works and … (k) have all relevant licenses from the relevant authorities to conduct work on telephony and provide the Services; … 5.10 The Subcontractor must ensure that the personnel: (a) maintain membership to the ADTIA and any other industry body that may be relevant from time to time; (b) maintain currency of their ADTIA membership and any qualifications through auditing, training, payment of fees, and other ADTIA membership requirements; (c) when new, become members of the ADTIA on commencement with the Subcontractor and successfully complete accreditation training within three months of commencement or other period reasonably agreed by the Contractor; (d) successfully complete the Contractor's Training Programs and ADTIA Training Programs; and (e) obtain any other qualification that may be necessary from time to time. 5.11 In accordance with clause 5.10(d) the Subcontractor must carry out such training as is reasonably required by the Contractor at the Subcontractor's cost and the Subcontractor must ensure that all personnel undertaken [sic] the required training before commencing Works."
Clauses 6 and 9.1 are in the following terms: "6. REGISTRATION AND INSURANCE OF PLANT AND EQUIPMENT The Subcontractor shall ensure that all plant and equipment in the Subcontractor's possession is registered and insured against loss or damage for its market value." "9.1 The Subcontractor must ensure that at all times the vehicle that is being used to perform Works is comprehensively insured, and compulsory/statutory insurance."
Clause 13 deals with payment of the subcontractors. Clause 13.1 provides as follows: "13.1 In consideration for performing the Works the Contractor shall pay the Subcontractor the amount(s) derived by multiplying the payment codes necessary to perform the Works by the relevant Charges stated in Annexure C."
Annexure C provides a detailed method of calculating the payments due to subcontractors. It is unnecessary to set it out. The Subcontract also sets out the "Scope of Works". The overview to the Scope of Works contains the following information: "The Scope of Works are to be used in conjunction with the detailed processes, policies and procedures contained within the most current version of the Domestic Installation Manual and/or Satellite MDU, MRE & Commercial Installations Manual or its replacement. Completion will be when Orders are closed on the telephone IVR system (e.g. activation) and/or when closed on the FOXTEL Customer Management Systems (ViVA/CMP/FTP/Web Services)."
The Scope of Works encompasses 77 items, although not all are relevant to each installation. They include installation of cables, wiring and other equipment necessary to receive the Foxtel service, including the set top box. Of relevance to the present proceedings is one of the items within the Scope of Works identified as the "Truck Roll" (see [41] below).
The balance of the Scope of Works provides detailed installation instructions. It is not necessary to refer to all of these, but the explanation of item 4 ("Deliver STU Standard") in the Scope of Works provides a useful summary of the work required to be done at a customer's premises: "4.2 Services included under this Order relative to Business This Order includes: a) [the provision of] all other consumable materials required to complete the installation as specified on the Installer Product List; b) *installation of Standard Digital STU including all interconnection leads as in accordance with the Interconnection requirements of the FOXTEL Domestic Installation Manual *perform a manual front panel download of the latest FOXTEL software (note: FOXTEL will not consider the installation complete until this has been done); c) tuning of TV, VCR & DVD as required; d) full completion of Order form (including signature of customer); e) provision of marketing material as required; f) use of appropriate equipment to maintain cleanliness (e.g. drop sheets, booties, etc.); g) clean up site (including cleaning TV); h) return of equipment to the installer's warehouse in each state, bar coded and packed ready for shipping to desired FOXTEL location, when required; i) FOXTEL Customer Education. 4.3 Services not included under this Order This Order does not include: a) connection of Standard Digital STU to Customer's Entertainment system (surround sound etc). 4.4 Completion This Order is complete when: a) The Standard Digital STU has been activated and customer has a working FOXTEL service." The whole of the Scope of Works was also set out in identical terms in a Schedule to the Foxtel Contract.
Annexure B to the Cable Agreement (Operational Procedures General, Commercial & MDU) contains further conditions relevant to the present litigation. Clause 10 deals with the equipment to be supplied to the customer. The following provisions are of relevance: "10.1.1 Title in the FOXTEL Equipment will at all times remain with FOXTEL. 10.1.2 Ownership of any lead-in cable, whether or not installed by the Contractor as part of performing the Works, is vested in Telstra. 10.1.3 Ownership of all Telstra Plant is vested in Telstra. 10.1.4 All technical drawings, specifications or designs and all intellectual property relating to the provision of the Works will remain the property of FOXTEL or Telstra. 10.1.5 The Subcontractor agrees and acknowledges that it is a bailee and its personnel are sub-bailees, of the Contractor, regarding Consignment Equipment and, accordingly, the Subcontractor and its personnel owe the Contractor a duty of care from the time: (a) the Subcontractor takes possession of the Consignment Equipment until that Consignment Equipment is installed; and (b) the Consignment Equipment is removed from a Customer's Premises until that Consignment Equipment is returned to the Contractor's possession. … 10.2.1 The Contractor will procure that FOXTEL will procure the FOXTEL Equipment for the Contractor, and the Contractor will supply the FOXTEL Equipment to the Subcontractor, to complete Orders. The Subcontractor must purchase any other Equipment required on the FOXTEL Approved Parts List. … 10.3.1 There are 4 categories of Equipment: (a) Consignment Equipment; (b) Sell Through Equipment; (c) Approved Parts List; (d) Free Of Charge Equipment. 10.3.2 The Subcontractor must collect from the Contractor's nominated store the Equipment that the Contractor is required to provide to the Subcontractor. The opening hours of the Contractor's nominated store will be as notified to the Subcontractor by the Contractor from time to time. 10.3.3 The Subcontractor must use all reasonable endeavours to pre-place Equipment orders with the Contractor or ensure that it has a full list of required Equipment when it arrives at the Contractor's nominated store. … 10.4.1 The Contractor will issue the Consignment Equipment to the Subcontractor, at no cost. 10.4.2 The Contractor will allocate the Consignment Equipment in accordance with the Subcontractor's orders placed with the Contractor and having regard to the Subcontractor's volume of Orders. 10.5 All Consignment Equipment is serialised with FOXTEL serial numbers and the Subcontractor must track all Consignment Equipment by the FOXTEL serial numbers. The FOXTEL Equipment will be managed through the FOXTEL rolling stocktake and by FOXTEL serial number reconciliation. … 10.6.1 The Contractor will issue the Sell Through Equipment to the Subcontractor in accordance with the Subcontractor's orders placed with the Contractor. 10.6.2 Where the Sell Through Equipment is in the Contractor's opinion obsolete, and the Subcontractor has purchased that Sell Through Equipment from the Contractor, the Contractor may credit the Subcontractor some or all of the amount the Subcontractor paid for that Sell Through Equipment."

The Satellite Agreement

The Satellite Agreement, generally speaking, is in similar terms to the Cable Agreement. However, the Scope of Work includes work relevant to the installation of a satellite dish.

Factual findings made by the primary judge

The primary judge made findings concerning the activities undertaken by the subcontractors. He stated that on a typical work day, subcontractors would be allocated two to four tickets of work for the next day, which they would accept or decline. Subcontractors would then contact the Foxtel customer to confirm the appointment to attend his or her premises and plan the delivery route.
Prior to delivery, the subcontractors would undertake a stocktake of the materials in their vehicle. If they required additional materials they would order and acquire them from Downer's warehouses.
Upon arrival at the customer's premises, subcontractors would complete a "zero harm risk assessment", which involved inspecting the customer's premises to identify any health and safety risks.
The subcontractors would ask the customer where they would like the set top box to be located and discuss where cables would run and access points, obtain the customer's approval to proceed and unpack all necessary equipment, tools and materials. Where customers already had Foxtel hardware installed on their property, all that was required was the connection and commissioning of the set top box, while other customers would require hardware such as satellite dishes, wall mounts and cables to be fixed in place.
The primary judge described the manner of installation of the set top box, which was done by use of an HFC cable connected to a satellite dish or 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 premises. The primary judge noted that the subcontractors on some occasions had to extend the conduit to connect the cable to the premises. This was known as a "full installation", which the primary judge described as "the most complex of the tasks a subcontractor was required to perform". This involved the subcontractor connecting the cable through a "Maddison Box" (a grey box outside the customer's premises), installing an isolator (to stop the current running backwards into the network) and running the cable into the premises where it would terminate on a wall plant. When set top boxes started to have internet connection, subcontractors would connect the set top box to the customer's internet modem using a cable if the modem was close, or a powerline adaptor to connect the box to the modem.
The subcontractors would then check that the Foxtel signal was being received by the set top box and then connect the box to the television and enter the customer's Foxtel code. They would then explain to the customer how the service operated.
The subcontractors would then put away their tools, collect all the rubbish and proceed to the next job.
The summary set out above is consistent with the requirements of "order fulfilment" set out in cl 4 of Annexure B to the Cable Agreement.
The primary judge referred to the scope of works to which I have referred at [26]-[28] above. He stated that most of the 77 discrete items were "repetitive and describe[d] different ways of performing the one 'activity'".
The primary judge concluded that the installation tasks were "properly described as mechanical or menial". As will be seen the Commissioner contends that that description is inaccurate. The primary judge noted that the tasks "involved unskilled labour". He stated that "[m]ost subcontractors did not have technical qualifications" and that training "was limited to attending a short training course conducted by Downer and obtaining mandatory occupational health and safety certifications", which he described as a "short and straightforward process".
The primary judge stated that "[b]y far the most important item in time spent by the subcontractors" was taken up by the collection and delivery of goods. He noticed this was encompassed in part by the item described as the "truck roll" in the Scope of Works. He noted that this was defined as the "standard callout charge for the travel time to attend a location and proxity [sic]" to Downer's local base. He accepted the following description of the components of the truck roll contained in paragraphs [21]-[24] of the affidavit of Noel Gerard Redfern sworn on 28 February 2018 as accurate: "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 variables. As with the 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."
The primary judge stated that truck roll "encompassed a number of critical requirements of the subcontract".
The primary judge stated that the fee Downer charged to Foxtel was known as the "sell price", which was calculated by applying a profit margin to the cost of materials and labour agreed between Foxtel and Downer for each task. He noted that the fee paid by Downer to the subcontractors for each task was known as the "buy price". He noted that once the sell price had been fixed, the buy price 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. His Honour stated that "[t]he fact that a fixed buy price applied to all of the tasks required [to] be performed under the Subcontract underlined the correct characterisation of the required installation tasks as mechanical or menial" (at [26]).
The primary judge noted that "[t]he 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 the subcontractors". He noted that Downer supplied some materials, including the set top box, free of charge. However, the subcontractors were required to purchase consumables, such as cables, powerline adaptors, screws and silicone sealant. Downer sold these materials to subcontractors at cost.
The primary judge noted that there were four categories of materials. The first category was Foxtel consignment equipment, comprising the set top box and Smartcards which were supplied by Foxtel to Downer. The second category, Foxtel sell-through equipment, which included satellite dishes, assembly kits, powerline adapters and HDMI cables, were sold by Foxtel to Downer which in turn sold them to subcontractors at cost.
The third category was Foxtel free of charge equipment, which included the remote control unit. The fourth category was Foxtel approved parts and consumables, which were not required to be obtained from Foxtel but had to conform to Foxtel specifications, and which Downer sold to subcontractors at cost.
The primary judge referred to a time and motion study carried out by a Mr Heydenrych of seven subcontractors of various experience. His Honour accepted Mr Heydenrych's evidence that the results of the time and motion study were consistent with his own experience. Although the primary judge set out the result of all seven studies, it is only necessary to refer to two to gain an understanding of the work done and the time spent on each task.
The first study was of a Mr Stavrianos who completed two jobs on the day in question. Two hours and 41 minutes was spent travelling to pick up stock and attending the customers' premises (including idle time and travel time to home), and a maximum of 2 hours and 8 minutes was spent actually performing installation tasks. His Honour found that the time spent performing installation tasks was exaggerated as those tasks included a component of "conveyance" or "supply", for example, the time taken to place the set top box in place after discussion with the customer. He noted that Mr Stavrianos' first job involved 18 minutes mounting the satellite dish to the roof, 18 minutes for 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 activation. He noted that a total of 25 minutes was spent on safety assessment and setup, 13 minutes on clean-up and check of the work area and 21 minutes in customer interaction.
The second study was in relation to a Mr Luu. Mr Luu completed three jobs on the relevant day. Two hours and 28 minutes was spent travelling to pick up stock from the warehouse and attending the customers' premises. A maximum of 3 hours and 11 minutes was spent performing installation tasks. The primary judge referred to the second job, a cable installation, as involving 22 minutes in running and crimping cables correctly and 11 minutes in location and connection of the set top box to the television. He noted that a total of 16 minutes was spent on safety assessment and setup, a total of 23 minutes in clean-up and check of the work area and 17 minutes in customer interaction.
From these and the other studies carried out by Mr Heydenrych, the primary judge concluded (at [33]) that the "[s]ubcontractors spent a substantial part of their work time collecting and transporting the Foxtel equipment in their vehicles to the customers' premises". He concluded that in most cases, "subcontractors spent more time travelling in their vehicles than actually performing installation tasks", even taking into account the fact that the time recorded for installation tasks also included a component of "conveyance" or "supply" of the relevant goods.
In relation to the truck roll, the primary judge noted that travel time was charged by the subcontractors. Non-labour costs were also charged, being fuel, lease, registration, insurance and administration costs, parking and sundry other costs.
The primary judge noted the agreement between the parties that 57.7 per cent of the total sum paid by Downer to the subcontractors was not attributable to the performance of work. He noted that of the remaining 42.3 per cent, "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".

The conclusions reached by the primary judge

His Honour noted that insofar as the interpretation of s 32(2)(d)(i) was concerned, he was bound by the decision of this Court in Smith's Snackfood Company Ltd v Chief Commissioner of State Revenue (NSW) [2013] NSWCA 470. He noted that in that case, Gleeson JA, with whom Beazley P agreed, held that subservience is not a characteristic of an "ancillary" matter in the present statutory context. He stated that a critical part of Gleeson JA's conclusion was 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" (at [120]). In that context, the primary judge dealt with the question whether the subcontracts were excluded from the definition of a "relevant contract" by either s 32(2)(a) and/or s 32(2)(d)(i) of the Payroll Tax Act.
For s 32(2)(a) to apply, the primary judge noted that there must be a supply of goods under the subcontract by the subcontractor, and the supply of services for or in relation to the performance of work must be ancillary to that supply of goods.
His Honour concluded that the delivery by the subcontractors to Foxtel customers of Foxtel equipment constituted a supply of goods. He stated that there was no textual reason to restrict the supply to a designated person. He noted that the legislature had expressly identified the supplier of services, the recipient of services and the supplier of the goods, but had chosen not to identify the recipient of the goods.
The primary judge stated that in any event, the delivery of the Foxtel goods constituted "supply" in the ordinary sense of the term. He stated that as a matter of ordinary English, a supply of goods does not require a transfer of ownership, but rather, the transfer of the legal right to possession is sufficient. He stated that this was supported by s 32(1)(c) where a "re-supply" of goods does not require a transfer of title or any proprietary interest.
The primary judge stated that it did not follow that s 32(2)(a) covers the same field as s 32(2)(d)(i), stating that "[s]ervices ancillary to the supply of goods will not necessary involve conveyance of goods by a vehicle".
So far as the words "under the contract" in s 32(2)(a) were concerned, the primary judge referred to the observation of Gummow J in Commissioner of Taxation v Energy Resources of Australia Ltd (1994) 54 FCR 25 at 53 that in ordinary parlance something might be "under" a contract if it occurred in the exercise of a right or discharge of an obligation conferred or imposed by the terms of the eligible contract, whilst a broader formulation could include where the thing has come about by reason of the existence of the contract or performance of the contract. He concluded in those circumstances that the transfer of legal possession from the subcontractor to the Foxtel customer was a supply of goods by the subcontractor under the contract.
The primary judge stated that the question posed by s 32(2)(a) was whether the services supplied were "ancillary", in the sense of supplemental or auxiliary or accessory to an identified circumstance or event, namely the supply of goods under the contract.
His Honour stated that even if the Commissioner was correct in saying that the subcontract first had to be characterised as either a "contract for the supply of goods" or a "contract for installation services", the subcontract was properly characterised as one for the supply of goods. He stated that the fundamental purpose of the subcontract was "to collect, store and deliver the necessary ingredients of the Foxtel service to customers and then to connect those goods to existing Foxtel infrastructure". He repeated his view that the installation services were "essentially repetitive or mechanical tasks" and were "properly described as unskilled".
His Honour, referring to the words of the statute, concluded that the services supplied by the subcontractor were ancillary, in the sense of supplementary or auxiliary or accessory, to the supply of goods by the subcontractor.
The primary judge referred to the summary of the actions taken by the subcontractors, to which I have referred at [31]-[37] above. He stated that if the question 'What is critical to the Subcontract?' is posed, the answer is the obligation to supply the Foxtel equipment, the installation being necessary because without it, the customer would be deprived of the practical benefit of possession. He stated that the transfer of legal possession would not be complete without the installation and testing of the Foxtel equipment.
His Honour stated that his conclusion was supported by the evidence of the time actually spent in the supply of services and of the dollar values of what was paid under the subcontract.
The primary judge also concluded that the subcontract fell within the exemption in s 32(2)(d)(i) of the Payroll Tax Act. He stated, referring to Smith's Snackfood, that the conveyance was not limited to vehicular transport, but included further steps to make the conveyance "complete" such as placing the goods in a particular location, and noted that in Smith's Snackfood it included placing the items in a vending machine.
His Honour stated that some of what the Commissioner in the present case described as "installation" was in fact part of the conveyance. Referring to the contractual obligations placed on the subcontractors, he stated that the subcontractors collected and transported the equipment, and delivered it to its final location, which included placing the set top box in the location required by the customer, placing the other items of Foxtel equipment in their final location and handing the remote control unit to the Foxtel customer. He stated that the other matters required by the subcontract, including the connection of the equipment to the cable or satellite, manipulating equipment other than Foxtel equipment, cleaning rubbish and demonstrating the use of the equipment were ancillary to the conveyance.
The primary judge pointed to similarities between the present case and Smith's Snackfood. He referred to the fact that in each case, the subcontractor was required to own and provide his or her own vehicle, undertake relatively simple and short term training, collect, transport, unload and manipulate the items until they were in their final location, clean the site and check installed equipment. He rejected the Commissioner's submission that the installation task was complex, stating that it was "no more complex" than the minor mechanical repairs required of subcontractors in Smith's Snackfood and emphasising the minimal training required and the "mechanical and repetitive" nature of the tasks.
The primary judge referred to the Commissioner's submission that the "truck roll" represented 21 per cent of the amount paid to the subcontractors. He said assuming that to be correct, it was agreed that 57.7 per cent of the payments made were for materials purchased by the subcontractors plus vehicle costs but excluding travel time. He noted that the 42.3 per cent attributable to the performance of work included payment for travel time. He said that to determine the proportion of the payments attributable to installation services, the 42.3 per cent needed to be reduced by subtracting the travel time component of the truck roll, and subtracting that part of labour as opposed to materials component of the tasks for the conveyance activities. He concluded that in those circumstances, the payments for installation services were only a fraction of the total payments made under the subcontract.
His Honour further noted what he described as "a number of similarities" between Smith's Snackfood and the present case. He said first, both cases involved delivery services and associated unskilled manual labour requiring minimal training. Second, the focus of the contracts in each of the 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. Third, while there was clearly a link between the subcontract and the installation agreement, that demonstrated that the ultimate objective of the subcontractors' work was to ensure that the customers would receive the Foxtel subscription television service. Fourth, there was no reason to regard the sales-based commission in Smith's Snackfood as a distinguishing factor. Fifth, it was relevant in both cases that the contractors spent the majority of their work time driving, which suggested that the installation services were ancillary to the conveyance. In those circumstances the primary judge concluded that s 32(2)(d)(i) also excluded the subcontracts from the definition of "relevant contract" in s 32(1) of the Payroll Tax Act.

Penalty tax

As I have indicated, the primary judge stated that had he reached a contrary conclusion to that to which I have referred above, he would have remitted the amount of penalty tax by 50 per cent.
The primary judge, referring to s 101 of the TAA and the decision of the High Court in Tasty Chicks Pty Ltd v Chief Commissioner of State Revenue (NSW) (2011) 245 CLR 446; [2011] HCA 41, concluded that on the review he had all the powers of the Commissioner. He stated that he did not accept that ss 28 and 29 of the TAA exhaust the circumstances in which the Court can take into account conduct of each of the parties merely because the matter touches or concerns the operation of those sections. He stated that 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 the TAA.
The primary judge stated that even on the assumption that his conclusion as to liability for payroll tax was incorrect, the adjustment to the amount paid for performance of work would result in an assessment of tax in a much smaller amount than that originally assessed by virtue of the apportionment of 57.7 per cent being substituted for the previous apportionment of 25 per cent. He said that the Commissioner was in a position to know that the original apportionment was incorrect.
The primary judge also stated that on being told of the Commissioner's investigation, Downer started an investigation which included progressive disclosure of information to the Commissioner. He said that the extent of that disclosure was highly significant. He also referred to the long delay by the Commissioner in determining Downer's objection, and stated that even if his conclusion on the liability for payroll tax was incorrect, Downer's position was reasonable.
For similar reasons the primary judge stated he would have remitted the interest payable by 50 per cent.

The grounds of appeal

The Commissioner relied on the following grounds of appeal: "APPEAL GROUNDS Ancillary to the supply of goods 1 The trial judge erred in holding that the installation services were ancillary to the supply of goods under the subcontract. 2 The trial judge erred in construing the expression 'supply', for the purposes of s32(2)(a) of the Payroll Tax Act 2007 (NSW) (the Act) as not requiring the transfer of ownership, or any other proprietary interest in the goods to the recipient and that the transfer of the legal right to possession is sufficient 3 The trial judge erred in construing the expression 'ancillary' in the context of s32(2)(a) of the Act, as follows: a. ancillary means supplemental or auxiliary or accessory, but not (by omitting to refer to it) subsidiary; and b. when determining what is ancillary an evaluation of what is the principal function under the contract is not required. 4 The trial judge erred in finding that the installation tasks were mechanical, menial and unskilled. 5 The trial judge erred in finding that, as a dollar value, installation was a much smaller percentage than payments for the supply of goods, when the evidence did not establish that. 5A The trial judge erred by under-recording the time spent by misreading the spreadsheets annexed at Annexures B and C to the affidavit of Mr Heydenrych and as a result incorrectly calculating the time spent by subcontractors on installation tasks and travel time. 6 The trial judge erred in finding, in the alternative, that the principal subject matter of the contract was the supply of goods. Ancillary to the conveyance of goods 7 The trial judge erred in holding, in the alternative, that the installation services provided under the subcontract were ancillary to the conveyance of goods. 7A The trial judge erred in finding that the 'conveyance' was the lion's share of activities required by the subcontract. Penalty and Interest 8 The trial judge erred in holding, in the alternative, that the penalty tax should, if payable, be remitted to a lesser amount than that which was imposed under the relevant assessments. 9 The trial judge erred in holding, in the alternative, that the interest should, if payable, be remitted to a lesser amount than that which was imposed under the relevant assessments." (references omitted)
Ground 5 of the grounds of appeal ultimately was not pressed.
As senior counsel for the Commissioner pointed out, the grounds essentially raised four issues. First, whether the statutory expression "supply" apprehends more than what she described as "a mere delivery of goods". Second, whether Downer was supplied with services ancillary to the supply of goods. Third, whether Downer was supplied with services ancillary to the conveyance of goods and fourth, whether the primary judge erred in his approach to the remission of penalty and interest.
To these issues may be added what may be described as the challenge to the factual findings of the primary judge (grounds 4 and 5A).
Notwithstanding this division, it is convenient to deal with the underlying question of whether the subcontracts were excluded from the definition of a "relevant contract" generally, rather than by reference to the individual grounds of appeal. It will be necessary to deal with the question of penalty and interest separately.

Were the subcontracts excluded from the definition of relevant contracts?

The Commissioner's submissions

The Commissioner submitted that in the present case the supply for the purpose of s 32(2)(a) must be a supply by the subcontractor. Senior counsel for the Commissioner submitted that the primary judge erred in concluding that supply involved no more than mere delivery. She stated that for s 32(2)(a) to operate the supply must involve a transfer of a legal interest. She submitted that the conveyance provision in s 32(2)(d)(i) deals with a situation where there has been a delivery without the transfer of a legal interest. She submitted that on the construction preferred by the primary judge, s 32(2)(d)(i) has no work to do.
Senior counsel for the Commissioner submitted that the purpose of the contractual arrangements was to ensure the customer obtained the Foxtel service. She stated that to achieve that, it was necessary for certain "widgets" to be in place and for these to be connected.
Senior counsel for the Commissioner submitted that the definition of "supply" supported her argument. She stated that the fact there may not be a transfer of title in the case of a resupply does not affect the position as a resupply involves a supply to the original holder of the goods in an altered form.
Senior counsel for the Commissioner accepted that it was conceded in the Court below that there was a supply of some of the smaller items owned by the subcontractor. However, she stated that it was maintained in the Court below that the subcontractor did not supply a large part of the goods, in particular the set top unit which was submitted to be very valuable.
Senior counsel for the Commissioner emphasised that cl 6.1 of the Foxtel Contract provided that title in the Foxtel equipment at all times remained with Foxtel, and that the subcontractor was a bailee of that equipment.
Senior counsel for the Commissioner referred to the summary by the primary judge of the steps taken by the subcontractors in performing their contractual obligations (see [31]-[37] above). She stated that of the 77 items in the Scope of Works, only one (the truck roll) was a non-installation task. She accepted that the subcontractor supplied some goods to the customer.
In relation to the finding by the primary judge that the installation tasks were mechanical and menial, senior counsel referred to the fact that there were training manuals for the purpose of training the subcontractors, including an induction questionnaire which identified some of the issues of which the subcontractor had to be aware. She also referred to the requirement to maintain membership of the Australian Digital and Telecommunications Industry Association contained in cl 5.10 of the subcontracts (see [23] above), and the requirement in cl 5.3(c) that subcontractors hire skilled, competent, proficient, trained and licensed personnel. She also referred to the evidence of Mr Heydenrych, to the effect that he was a supervisor for training and supported the field supervisors by training and auditing Foxtel contractors and the assigned work. She also referred to his evidence that he gave subcontractors induction training when they first joined Downer (about half a day), classroom training (also about half a day) where he taught them how to work out why a connection was not working and in field training where he showed the subcontractors how to perform a job. Mr Heydenrych observed that the latter training was remedial training for poorer performers.
In his written submissions, the Commissioner pointed out that the mere fact that subcontractors were not required to hold formal or tertiary qualifications did not tell against the work being skilled, or suggest the work was somehow menial. It was submitted that Downer could not have fulfilled its contractual obligations to Foxtel by engaging merely unskilled drivers or couriers. It was also submitted that Downer was "at pains" in fulfilment of its contractual obligations to engage competent installers who were also able to convey the goods (and themselves) to the place of installation.
Senior counsel for the Commissioner stated that it had been agreed between the parties that the table in Appendix A1 of the Commissioner's submissions in reply accurately recorded the breakdown of travel time and installation time. She submitted that the primary judge placed too much weight on the total amount of travel time, because it included the time the driver took to drive from home to the site or warehouse and from the site to his or her home.
Senior counsel for the Commissioner referred to the primary judge's finding that the transfer of legal possession would not be complete without the installation and testing of the Foxtel equipment (see [62] above). She submitted that the delivery was complete once the equipment was delivered and placed where the customer wanted it, and that installation was another discrete, significant task not ancillary to the delivery.
Senior counsel for the Commissioner noted the conclusion of the primary judge that the fundamental purpose of the subcontracts was to enable the customer to get the Foxtel content. However, she submitted that his Honour erred in elevating the delivery to be synonymous with this fundamental purpose. She submitted that the subcontract should be characterised as an installation services agreement. She submitted that for there to be a supply there must be some transfer of title and it was not enough for the customer to hold the set top box as bailee. She submitted that the inclusion of s 32(2)(d)(i) in the legislation made it clear that more than mere delivery was required for s 32(2)(a) to operate.
Senior counsel for the Commissioner submitted that it was important to characterise the subcontract. She stated that if it could be characterised as a contract for the conveyance of goods by means of a vehicle provided by the person, the services of the driver would be ancillary and the contract would be excluded by virtue of s 32(2)(d)(i). She said that in the case of a conveyance and installation it would be necessary to characterise the contract.
Senior counsel for the Commissioner contended that the primary judge's conclusion that the subcontracts fell within s 32(2)(a) was incorrect for two reasons. First, supply of goods was not constituted by mere delivery and the Foxtel box was not supplied. She said if that is not accepted and supply was constituted by mere delivery, then his Honour erred as installation was a discrete task in its own right and sufficiently weighty such that it was not correct to identify it as ancillary to the supply of goods.
Senior counsel for the Commissioner contended that the construction of s 32(2)(a) preferred by the trial judge left s 32(2)(d)(i) with no work to do. She submitted that the examples given by Downer in its written submission did not establish the proposition that the construction of s 32(2)(a) by the primary judge left s 32(2)(d)(i) with work to. She referred first to the example given of an owner-driver who conveys goods but does not transfer possession of them, because the owner-driver is required to exercise control over the goods. She submitted that that would be covered by the second limb of s 32(2)(a) whereby the services are ancillary "to the use of goods which are the property of that person". In the Commissioner's written submissions in reply it was pointed out that if the services were not ancillary but rather were the essence of the contract, then the contract would not fall within either s 32(2)(a) or s 32(2)(d)(i).
The other example given by Downer where s 32(2)(d)(i) applies and s 32(2)(a) does not was where the owner-driver travels with another person who performs the ancillary services. Downer submitted that this would not satisfy s 32(2)(a) because the services are provided by a person other than the person who supplies the goods. In the Commissioner's written submission in reply this example was described as "strained", and it was suggested that the person travelling with the owner-driver could be said to be supplying the goods in a broad sense, satisfying both s 32(2)(a) and s 32(2)(d)(i).
Senior counsel for the Commissioner submitted that the supply of goods had to take place under the relevant contract and that it was not sufficient that the supply was to a third party who acquired the goods under another contract (in this case the contract between Foxtel and the customer).
In dealing with s 32(2)(d)(i), senior counsel for the Commissioner submitted that the installation services were not ancillary to the conveyance of the goods as they were "substantial in their own right, weighty and critical". She submitted that the correct position was that s 35 applied to alleviate the consequences of this construction to the taxpayer.
In dealing with the meaning of the word "ancillary", senior counsel for the Commissioner adopted what was said by Jessup J in Navy Health Ltd v Federal Commissioner of Taxation (2007) 163 FCR 1; [2007] FCA 931. In that case, when dealing with the question of whether an object of the appellant was ancillary to its charitable objects, Jessup J stated at [65] that the word did not mean that the object was "merely a minor one in quantitative terms", but that the object "not be of substance in its own right" but only "something which tends to assist, or which naturally goes with, the achievement of the main object".
In relation to Smith's Snackfood, senior counsel for the Commissioner referred to the Commissioner's written submissions which stated that the correct approach was first to characterise the contract (Smith's Snackfood at [92]). She referred to the description of the word "ancillary" in Smith's Snackfood at [96] as meaning "subsidiary, incidental, accessory, auxiliary". In written submissions it was submitted that each of these terms contemplates an element of hierarchy, as compared to mere association or connection.
Senior counsel for the Commissioner stated that the primary judge, in defining "ancillary" in the present case, omitted the reference to "subsidiary" which she described as a significant omission. She submitted that the primary judge erred in two respects; first, in failing to take into account that the ancillary service needs to be subsidiary to the main purpose of the contract and second, in characterising the contract as one for the supply of goods. She said that on the construction preferred by the primary judge, even a de minimis supply of goods would "cascade you" into s 32(2)(a). She submitted that in considering the issue it was necessary to take s 35 into account. She submitted that the construction for which she contended provided a coherent operation of the provisions of the Payroll Tax Act in ensuring that even where labour is taxed where that is the principal aspect of a contract, the operation of s 35 means that materials and goods are not accidentally caught.
In reply senior counsel for the Commissioner again emphasised that the installation services were discrete, weighty and substantial and therefore not ancillary. She also submitted that consistent with Smith's Snackfood, it was necessary to first characterise the subcontract, and that when it is characterised as a contract for installation, the installation cannot be ancillary to the supply of goods. She noted in particular what was said in that case by Gleeson JA at [86], that "[t]he exemption involves the characterisation of a relevant contract having regard to its terms" and that "[i]t is necessary to address the question to be answered by reference to the contract under consideration". She submitted that the approach for which she contended was consistent with what was said by Gleeson JA at [92].

Downer's submissions

Senior counsel for Downer submitted that the Commissioner's approach to construction, namely, that it was necessary to characterise the subject matter of the contract, involved a departure from the language of the subsections. He referred to the statement of the primary judge to which I have referred at [59] above and said that a cognate way of stating the question that arises under s 32(2)(d)(i) is "are the services that are supplied ancillary in the same sense to the conveyance of goods by means of a vehicle provided by the person conveying them". He submitted that the statute identifies the object to which the services must be ancillary, being the conveyance of goods by means of a vehicle provided by the person conveying them.
Senior counsel for Downer submitted that the primary judge was correct in finding that there was a supply of goods under the subcontract because there was a transfer of the legal right to possession of the set top box, and because the subcontractor purchased and then transferred legal title to the satellite dish, to the wall plates, to all the connecting cables and to a number of other pieces of equipment. He stated that he was not suggesting that there was a contract between the customer and the subcontractor, but rather that the subcontractor was contractually obliged to supply legal title to the equipment to the customer. He submitted that the set top box was a piece of consignment equipment that the subcontractor was required to supply to the customer who was legally authorised to use it.
Senior counsel for Downer submitted that the statutory question of whether services supplied were ancillary to the supply or conveyance of goods did not turn on what could be described as the principal matter of the contract. He submitted that the Commissioner's submission in this Court and the Court below that one must first identify the principal matter of the subcontract to be the supply or the conveyance of goods, and only then ask whether the services are ancillary to that principal matter, departs radically from the statutory question. He accepted, however, that there needed at least to be a significant supply of goods.
Senior counsel for Downer pointed out that there was no restriction on the identity of the recipient of the relevant goods. He submitted that the section simply addressed the supply of goods under the contract by the person supplying the services to Downer. He submitted that all that was required was that the supply take place under the contract. He referred to the finding of the primary judge concerning the equipment that had to be supplied under the contract, and reiterated his submission that regardless of what view was taken about the set top box, there was a significant supply of goods by the subcontractor.
In relation to the set top box he submitted that the concept of supply means furnish or provide, and includes the provision of goods in circumstances where the recipient obtains the legal right to possession of the goods.
Senior counsel for Downer referred to the primary judge's reasoning based on the assumption that for the purpose of ss 32(2)(a) and 32(2)(d)(i) it was necessary to characterise the subcontract (see [59]-[62] above). He emphasised that that was an alternative to his Honour's primary conclusion. He submitted that even on that characterisation the primary judge was treating the installation services as ancillary. He submitted that when his Honour stated that the transfer of legal possession would not be complete without installation (see [62] above) he was referring to the overall characterisation question and that nothing he said there contradicted his earlier finding that there was a supply of goods.
Senior counsel for Downer submitted that the installation services were not part of the supply of goods but rather what enabled the goods to perform their ultimate contractual function.
In relation to the word "ancillary", senior counsel submitted that the primary judge was correct in concluding that the meaning of ancillary "is not to be resolved by some labelling exercise, identifying what is or is not the principal subject matter or characterisation of the contract". He submitted it is a word that can have a number of meanings depending on context, and includes merely supplementary which involves no ranking of priorities. He referred to Smith's Snackfood at [78] where Gleeson JA stated that an ancillary service need not be subordinate or subservient to the conveyance of goods, and to his statements at [79] that the expression "under which" may be taken as meaning "in accordance with", "pursuant to" or "required by" and that it is "the relationship between the services required to be provided … 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 … as to whether any of the services can be considered secondary or subservient to the other".
In dealing with the statement by Gleeson JA at [86] that it was necessary to characterise the contract, senior counsel for Downer submitted it was necessary to the extent of determining whether there was a supply of goods and a supply of services under the contract.
Senior counsel for Downer submitted that his construction of "ancillary" was supported by the decision of this Court in Macquarie International Health Clinic Pty Ltd v University of Sydney (1988) 98 LGERA 218 at 223-224 and the decision of the English Court of Appeal in R v Her Majesty's Treasury; Ex parte Smedley [1985] QB 657 at 669, 673-674.
So far as the overlap of ss 32(2)(a) and 32(2)(d)(i) was concerned, senior counsel submitted, referring to the legislative history, that the exemption in s 32(2)(d)(i) was added to the legislation to ensure that owner-drivers were exempted even when they were supplying goods and the other exemptions might operate.

Did the subcontracts fall within the exemption in s 32(2)(a) of the Payroll Tax Act?

There is no dispute in the present case that the task of the Court in considering this issue is to conduct its own evaluative review in the manner set out in Warren v Coombes (1979) 142 CLR 531 at 552; [1979] HCA 9, rather than applying the House v The King standard to appellate review of evaluative conclusions: see Norbis v Norbis (1986) 161 CLR 513 at 518; [1986] HCA 17; Minister for Immigration and Border Protection v SZVFW (2018) 264 CLR 541; [2018] HCA 30 at [41]-[44].
As the primary judge pointed out, to the extent that the question involves the task of statutory construction, that task begins and ends with a consideration of the text, having regard to its context, which includes legislative history and extrinsic materials, and purpose: Federal Commissioner of Taxation v Consolidated Media Holdings Ltd (2012) 250 CLR 503; [2012] HCA 55 at [39]; SZTAL v Minister for Immigration and Border Protection (2017) 262 CLR 362; [2017] HCA 34 at [14], [38].
As I have indicated the primary judge set out at [101]-[110] the legislative history surrounding the introduction of the predecessor to s 32. The Explanatory Note to the Bill which introduced the legislation stated that the terms of the definition of "relevant contract" "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". This statement and other statements to like effect in the Second Reading Speech are of limited assistance in the present case.
Section 32(2)(a) for present purposes essentially poses five questions. By reference to the present proceedings they may be stated as follows: (i) Was Downer supplied with services by the subcontractor? It was not disputed that the answer to this question is 'yes', the services being supplied to Downer to enable it to fulfil its obligations under the Foxtel Contract. (ii) Was there a supply of goods? (iii) Was the supply of goods by the subcontractor (the person by whom the services were supplied)? (iv) Was the supply of goods by the subcontractor under the subcontract? (vi) Were the installation services supplied by the subcontractor ancillary to the supply of goods by the subcontractor under the subcontract?
In my opinion there was a supply of goods. As I have indicated at [79]-[82] above the principal argument advanced by the Commissioner was that there was no supply because there was no transfer of a legal interest in at least a significant part of the equipment including the set top box.
I do not agree that it is necessary for legal title to pass for there to be a supply of goods within the meaning of the subsection. The definition of "supply" in s 31 of the Payroll Tax Act which is an inclusive definition refers to hire. In Lloyd's UDT Finance Ltd v Chartered Finance Trust Holdings plc [2001] STC 1652, Sir Andrew Morritt VC observed that the normal meaning of hire is "to obtain from another the temporary use of a chattel for a stipulated payment". He stated that the concept involves "obtaining the right to possession of the chattel for the period of the hire" to the exclusion of the owner. In Palmer on Bailment (3rd ed, 2009, Sweet & Maxwell) the learned authors at [21-004] stated that "[a]t common law, four principal qualities distinguish contracts of hire: (i) the transfer of both the possession of a chattel, and the right to possession of it, to a person who voluntarily receives it, (ii) an authority in the bailee to use it for his benefit, (iii) an advantage or reward accruing to the bailor in return for this possession and use, and (iv) a promise by the hirer to deliver up the chattel to the lessor (or at his instruction) at a stated or determinable time." (footnotes omitted)
The contract pursuant to which the Foxtel subscription service was supplied unfortunately was not in evidence. However, it is evident from both the Foxtel Contract and the subcontracts that Foxtel sought to retain title in what was described as the Foxtel Equipment (or Consignment Equipment) and that the subcontractors were bailees of the equipment until installed (see cl 10 of Annexure B to the Cable Agreement referred to at [29] above). It seems to me that it can be reasonably inferred that once installed the customer had possession and use of that equipment as a bailee for reward, on condition it be dealt with as Foxtel directed at the expiration of the agreed period of possession: see TRM Copy Centres (UK) Ltd v Lanwall Services Ltd [2009] 1 WLR 1375 at [10]; Yearworth v North Bristol NHS Trust [2010] QB 1 at [48].
In these circumstances, the transfer of the right to possession in my opinion constituted a supply. Further, it must be borne in mind, as senior counsel for the respondent pointed out, that there was other equipment supplied by the subcontractor in respect of which legal title was transferred.
That supply of goods was by the subcontractor. Up to the time that the goods were installed the subcontractor was a sub-bailee from Downer of the Foxtel Consignment Equipment, and in fulfilment of his or her contractual obligations lawfully passed possession on behalf of Foxtel to the recipient. In that sense there was a supply by the subcontractor. There was also a supply of other goods by the subcontractor in respect of which title was transferred.
The more difficult question is whether that supply (to the Foxtel customer) was under the subcontract. Although there was some debate concerning the issue at the hearing, it is important to note that the conclusion of the primary judge on it (at [137]-[138]) was not the subject of any ground of appeal. Nevertheless in the circumstances it is appropriate to deal with it briefly.
It was not suggested that there was any contractual relationship between the customer and the subcontractor or, for that matter, between the customer and Downer. There is some force in the argument that the supply of the equipment (or at least the Foxtel Equipment) took place under the contract between the customer and Foxtel.
The word "under" is a word which takes its meaning from the context in which it occurs: Rinehart v Hancock Prospecting Pty Ltd [2019] HCA 13; 93 ALJR 582 at [17]. At its narrowest, in the present case it would require that for the supply to be under the contract the supply must occur pursuant to a contract for supply between the subcontractor and the customer.
However, as the primary judge pointed out, "under" can have a broader meaning including that the supply occurred in the exercise of a right or discharge of an obligation conferred or imposed by the terms of the relevant contract: see [58] above; see also Smith's Snackfood at [79]). In Federal Commissioner of Taxation v Sara Lee Household & Body Care (Australia) Pty Ltd (2000) 201 CLR 520; [2000] HCA 35 the question was whether a disposal took place under a contract for the purpose of the capital gains tax provisions in s 160U of the Income Assessment Act 1936 (Cth). The plurality considered (at [49]) that the question required a judgment as to whether the contract could properly be seen as the source of the obligation to effect the disposal. It seems to me that a similar approach should be taken in dealing with the present legislation. See also Inghams Enterprises Pty Ltd v Hannigan [2020] NSWCA 82 at [137]-[139].
In the present case, the subcontractor had a contractual obligation to deliver the Consignment Equipment which he or she held as sub-bailee and the other equipment either supplied by Downer or the subcontractor to the customer. The supply occurred in fulfilment of that contractual obligation to Downer and thus occurred "under the contract". It does not seem to me that the position is any different by reason of the fact that the subcontractors' contractual obligation to supply the goods did not arise by virtue of a contract entered into by them with either Foxtel or the customer. Further, it is by no means clear from the evidence that any contractual arrangement was entered into between the customer and Foxtel prior to a time contemporaneous with the supply of the goods. Clause 4.2.2(e) of Annexure B to the Cable Agreement obliges the subcontractor to provide a copy of the Foxtel Subscription Agreement to the customer or advise the customer where he or she can find it online, and cls 4.7.3 and 4.7.4 oblige the subcontractor to complete the Work Order Form before departing the customer's premises, have the customer sign and date it and explain to the customer that by signing the Work Order Form the customer has indicated agreement to the terms of the Foxtel Welcome Pack, including the Residential Subscription Agreement. The sample Work Order Form signed by a customer which was in evidence contains an acknowledgement by the customer that the work was carried out at her request and an agreement that she be bound by the documents in the Welcome Pack, including the Foxtel Residential Subscriber Agreement.
It seems to me that, having regard to those matters, the supply took place under the subcontract.
I would add that contrary to the Commission's submission, I do not think this construction leaves s 32(2)(d)(i) with no work to do. Whilst there clearly would be an overlap in circumstances where goods were supplied under a contract by use of a vehicle, s 32(2)(d)(i) would apply where the conveyance of goods took place by means of a vehicle when there was no change in the right to possession of the goods, for example, by a removalist where the owner of the goods is moving house, the ancillary service being the packing and unpacking of the goods. As senior counsel for the respondent pointed out, s 32(2)(d)(i) was inserted by the legislature to ensure that owner-drivers were exempt from the provisions: see the discussion by the primary judge at [107]-[109]. Another example is Smith's Snackfood where the owner-driver conveyed Smith's products to the vending machines from which Smith's sold the products. It was correctly not argued in that case that s 32(2)(a) had any application.
The remaining question is whether the installation services were ancillary to the supply of goods. In Smith's Snackfood Gleeson JA, with whom Beazley P agreed, stated that the question did not involve determining whether the services were subordinate or subservient to the conveyance of goods. His Honour made the following remarks at [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." (emphasis in original)
His Honour also stated that "the question of whether one activity is ancillary to another is a question of fact and degree": Smith's Snackfood at [109].
As I have previously set out, senior counsel for the Commissioner placed reliance on the statement by Gleeson JA (at [96]) where his Honour noted that the parties were in broad agreement that the word ancillary should be taken to mean "subsidiary, incidental, accessory, auxiliary". She contended that the primary judge in the present case erred by stating the relevant question (at [140]) as "are the services supplied ancillary, in the sense of supplemental or auxiliary or accessory" to the supply of goods, without referring to the word "subsidiary". I do not think that this contention has any real force. First, as Gleeson JA pointed out, the question is always one of fact and degree. Second, the primary judge (at [121]) expressly cited Gleeson JA's construction of the word ancillary.
We were referred to a number of cases which considered the meaning of the word "ancillary" in different contexts. As I indicated at [96] above, senior counsel for the Commissioner adopted what was said by Jessup J in Navy Health Ltd v Federal Commissioner of Taxation, namely, that an ancillary object is something which tends to assist, or which naturally goes with, the achievement of the main object. It should be noted that Jessup J also emphasised that the ancillary object did not have to be a minor one in quantitative terms.
We were also referred to the decision of this Court in Macquarie International Health Clinic Pty Ltd v University of Sydney, which involved a development of a private teaching hospital on lands zoned partly "education" and partly "hospital". The Court concluded that the teaching hospital could be built on both parcels of land. In that case Stein J, with whom Mason P and Meagher JA agreed, made the following remarks (at 223): "However, 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'."
In the present case, in my opinion the installation services are ancillary to the supply of goods under the subcontract. Put simply, the goods supplied would provide no benefit to the customer until they were installed. To adopt what was said by Jessup J in Navy Health v Federal Commissioner of Taxation, the installation was something which tended to assist, or which naturally went with, the supply of the goods necessary to receive the Foxtel service. To use an imperfect analogy, work necessary to make a piece of household equipment operate will be incidental to the supply of that piece of equipment.
Senior counsel for the Commissioner placed substantial reliance on the proposition that the installation services were "discrete, weighty and substantial" and therefore not ancillary to the supply of goods. With respect, the installation tasks could not be described as discrete. It seems to me that the installation tasks were in substance bound up with the supply of goods required to access the Foxtel service.
In relation to the submission that the services were weighty and substantial, the extent and nature of the services required, whilst relevant, is not necessarily determinative of whether a service is ancillary to the supply, namely, whether it provides something which assists or naturally goes with the achievement of the supply of goods necessary to receive the Foxtel service.
Again as previously set out, senior counsel for the Commissioner also submitted that the primary judge erred in describing the installation tasks as mechanical and menial. Whether or not this description is correct, the installation tasks to be performed were essentially repetitive and the subcontractors (apart from poor performers) only required a total of one day's training. There is no evidence that they were required to hold any trade qualifications, although Mr Rasool Safavizad, the National Stakeholder Manager of Downer, stated that he worked as a Foxtel contractor from October 2012 to January 2013 and that prior to that time spent four months accompanying a Telstra technician and a Foxtel contractor on their jobs, and also did a two week TAFE course to obtain a Certificate in Cabling.
Senior counsel for the Commissioner also submitted that the primary judge placed too much weight on the travel undertaken by the subcontractors in performing their obligations as his calculation included time taken by them to travel from home to the site of Downer's premises and travel from the site to his or her home. The agreed calculations showed that in respect of the subcontractors the subject of the time and motion study, their total travel time was 18 hours and 8 minutes, of which 8 hours and 37 minutes involved travelling from home to the site or warehouse and from the site to their home, leaving a balance of travel time of 9 hours and 31 minutes compared to installation time of 17 hours 43 minutes and 34 seconds.
I do not think these figures are particularly helpful in determining whether the work was ancillary: see Macquarie International Health Clinic Pty Ltd v University of Sydney at 223. In particular, I do not think that the adjustment made by the Commissioner in respect of the travel time is of any real significance. Similar adjustments could be made to the installation time to reflect the time spent on the customer's premises not actually installing equipment, an adjustment which in my view would be equally unhelpful. Ultimately, as the primary judge pointed out in a finding which was not disputed (at [159]-[160]), 57.7 per cent of the total payments to subcontractors was compensation for materials purchased, collected and conveyed by the subcontractors and of the remaining 42.3 per cent attributable to the performance of work, a proportion of this included the payments for travel time. Viewed in that way the payment for the installation services comprised a relatively minor part of the total payment.
Moreover, these calculations tend in my opinion to obscure the proper question, namely, whether the installation services were ancillary to the object of the contract, namely the supply of goods for use by the customer. To the extent this involves a characterisation of the contract it is consistent with the approach in Smith's Snackfoods in dealing with the question of whether the services could be said to be ancillary to the conveyance: Smith's Snackfoods at [86], [92].
It follows that the installation services were ancillary to the supply of goods under the contract and the primary judge was correct in concluding that the exclusion in s 32(2)(a) of the Payroll Tax Act applied.

Section 32(2)(d)(i)

With some hesitation, I also agree with the conclusion of the primary judge that the exemption in s 32(2)(d)(i) applies. Although there is much to be said for the argument that conveyance involves mere transportation and installation could not be said to be ancillary to such transportation, as the primary judge pointed out (at [155]), this case has many similarities to Smith's Snackfoods (referred to at [68] above), and the critical difference relied on by the Commissioner was the alleged complexity of the installation tasks. Whilst I would not describe the installation tasks in the present case as "menial", I agree with the primary judge that they appear to be of a repetitive mechanical nature as is reflected in the standard payment for each of the various items within the Scope of Works.
In these circumstances, consistent with the conclusion in Smith's Snackfood and bearing in mind that the question of whether the service was ancillary is a matter of fact and degree, on balance I agree with the primary judge that the subcontracts fell within the exclusion in s 32(2)(d)(i).
It follows that the subcontracts were excluded from the definition of relevant contracts and Downer was not liable for payroll tax on any of the money paid to the subcontractors.

The submissions

In written submissions, the Commissioner contended that the conclusion of the primary judge that the power of remission in s 33 of the TAA was unconstrained was contrary to the decision of Ward CJ in Eq in Bayton Cleaning Company Pty Ltd v Chief Commissioner of State Revenue [2019] NSWSC 657 in which, it was submitted, her Honour held that the power of remission was not unconstrained and special circumstances were required to warrant its exercise.
In his written submissions, the Commissioner stated that it was not highly significant that Downer had commenced a process of investigation with a view to voluntary disclosure in circumstances where the requirements of s 28 of the TAA were not met. It was submitted that the special circumstances required to enliven s 33 were not present in this case.
In relation to interest, the submission noted that the premium component of interest had been appropriately remitted. It was submitted that one of the purposes of the market rate component was to compensate the revenue for not having the benefit of tax from the time it was due and rarely if ever should it be waived. It was submitted it should not have been varied in the present case as Downer did not discharge the onus of demonstrating that any delay by the Commissioner could be said to be unreasonable. In that context, reliance was placed on what was said by Ward CJ in Eq in Adams Bidco Pty Ltd v Chief Commissioner of State Revenue [2019] NSWSC 702 at [163].
At the hearing it was contended by the Commissioner that the primary judge erred in taking into account the delay between the assessment (13 April 2016) and the date Downer's objection was dealt with (9 August 2017). It was submitted that s 97 of the TAA conferred jurisdiction on the Supreme Court to review the assessment and that anything which occurred after the date of the assessment, including delay in dealing with the objection, was an irrelevant consideration. It was submitted that that was consistent with what was said in this Court in Chief Commissioner of State Revenue v Paspaley [2008] NSWCA 184 per Basten JA at [28], Giles and Campbell JJA agreeing. Counsel for the Commissioner conceded that the point was not raised in the Court below.
Senior counsel for Downer submitted that there was no reason to limit the remission power in s 33 of the TAA by reference to the considerations in ss 28 and 29. He submitted that the new point was not argued below, and that it does not follow from the fact that the appeal is against the assessment that in exercising the general discretion under s 33 the Court is barred from taking into account circumstances arising up to the point the objection is dealt with.
Ultimately, both parties agreed that the matter was hypothetical as there needed to be a reassessment in any event, at which stage everything up to the date of that assessment could be taken into account.

Consideration

Having regard to the conclusion I have reached on the liability question it is strictly unnecessary to deal with these matters. However, it does not seem to me that the power in s 33 of the TAA to remit penalty tax "in such circumstances as the Chief Commissioner considers appropriate" is limited either expressly or by necessary implication by the mandatory reductions required by ss 28 and 29. These mandatory reductions are a relevant matter for the Commissioner to take into account in considering whether to exercise the power to remit in s 33 but they do not limit that power.
As the Chief Commissioner pointed out, in Bayton Cleaning Company Pty Ltd v Chief Commissioner of State Revenue Ward CJ in Eq stated at [301] that except in special circumstances, the general discretion under s 33 should not be exercised beyond the limits in ss 27(3) and 29 when the circumstances giving rise to a remission under s 27(3) of the TAA had not been made out. However that was a matter of discretion not power.
Similarly, I do not think there is any limit on the power of the Chief Commissioner to remit interest contained in s 25 of the TAA.

Conclusion

In the result I would make the following orders: 1. Appeal dismissed. 2. The appellant pay the respondent's costs of the appeal.
MACFARLAN JA: I agree with Bathurst CJ.
MEAGHER JA: I also agree with the reasons and proposed orders of the Chief Justice.

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: 01 July 2020

Income Assessment Act 1936(Cth)

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