Consideration
30The principal issue in this matter was whether the applicant is liable to payroll tax on the wages it pays the workers that perform services of its clients by reason of their common law relationship of employer and employee or the employment agency contract provisions apply regardless of the existence of an employer/employee common law relationship between the applicant and the workers.
31The respondent's case was that the applicant 'is liable to pay payroll tax solely on the employer/employee relationship with the worker'.
32The respondent primarily relied on the statutory construction of the relevant provisions on the basis of what was said by the Victorian Court of Appeal in Drake and in statements made by his Honour Gzell J in the first instance in Moore Park Gardens.
33The employment agency contract provisions have been in the law, in one form or the other, since 1985 but this issue has not been directly considered or raised in litigation of these provisions. This issue was, however, highlighted by his Honour Santow in the Court of Appeal when considering the appeal in Moore Park Gardens.
34In Drake (98 ATC 4915) in the first instance, her Honour Balmford J held that the temporaries were not common law employees but were deemed by s 3C of the Pay-roll Tax Act 1971(Vic) to be employees. Her Honour also held that some of the temporaries who provided services to Drake's clients for a period not exceeding 90 days in the financial year were exempt under s 3C(e)(iii) and that there will be many temporaries of whom it could be said that they were individuals ordinarily rendering services to the public generally and exempt under s 3C(e)(v). But the court found that evidence before her Honour did not enable to make any finding as to whether or not any individual temporary other than those who gave evidence, in fact met that description. However, her Honour held that it did not matter because, in any case, sections 19A/19B of the Pay-roll Tax Act 1971 (Vic) and sections 22/23 of the Taxation Administration Act 1997 (Vic) precluded making any refunds.
35In her Honour's reasons for decision no mention is made of any submission by the applicant or the Commissioner that the employment agency contract provisions were not available to employers with common law employees.
36On appeal, the Court of Appeal of Victoria took a different approach. His Honour Phillips J, who handed down the principal judgment, took the view that there was sufficient evidence to support the finding, as submitted by the Chief Commissioner, that the temporaries were employees of Drake according to ordinary concepts. Philips J agreed with the other findings of her Honour Blandford, but held the findings were of 'secondary importance' because 'the temporaries were employees of Drake according to ordinary concepts of the common law, so that s 3C was not called into play at all'.
37Again, the parties in Drake before the Court of Appeal did not raise any issue as to the exclusive operation of the employment agency contract provisions. Lack of any serious discussion as to whether these provisions only apply when the employer and employee relationship has to be taken as such, the decision reached by Phillips J does not offer a conclusive view.
38In Moore Park Gardens the short facts were as follows. The taxpayer was a provider of cleaning services to a number of owners corporations in the Moore Park Gardens complex. To undertake the services, the taxpayer engaged a number of workers who were each assigned to a particular building. The taxpayer incurred all the costs including wages to the workers which were apportioned to each owners corporation and the taxpayer was reimbursed for the amounts.
39In the first instance, his Honour found that the taxpayer was the employer of the cleaners and said that -
[35] The Pay-roll Tax Act 1971(NSW), s 3C in its original form did not, in my view, apply to the plaintiff for 2 reasons.
[36] First, the purpose of the Pay-roll Tax Act 1971 (NSW), s 3C(2) was to deem the employment agent, not otherwise an employer, to be such. For a person who was already an employer there was no point in the provision. The explanatory note to the State Revenue Legislation (Miscellaneous Amendments) Bill 1998 by which the section was introduced stated that the purpose of the introduction of the provision was: "To make employment agents, instead of the end-user, liable for pay-roll tax in respect of employment agency contracts, not being contracts of employment."
[37] Even if the plaintiff's arrangement with the owners corporations fell within the definition of an employment agency contract in the Pay-roll Tax Act 1971 (NSW), s 3C(1), I am of the view that s 3C(2) did not apply to it as it was already an employer and the exemption in s 3C(4) should be limited to circumstances in which s 3C(2) was operative.
[38] The second reason for the non-operation of the Pay-roll Tax Act 1971 (NSW), s 3C(4)(c) is that it required a declaration to have been given to the plaintiff by its clients, the owners corporations. The declarations were given in October 2002 said to be retrospective in effect to 1 January 2000.
40No submission was made to his Honour Gzell J that the relevant provisions applied exclusively to all employment agency contracts. His Honour reached his conclusion, similarly as Phillips J did in Drake, unaided by submissions to the contrary view.
41An appeal to the Court of Appeal (Handley, Santow and Bryson JJA) was dismissed. The principal judgment was handed down by Santow JA who held that:
[74] For s 3C to apply at all there must be an "employment agency contract" within the definition in s 3C(1). That definition presupposes that the relevant contract workers, here the cleaning staff, have their services procured by MPGM for the Owners Corporations, importantly by a means "other than a contract of employment between the contract worker and the client".
[75] I am satisfied that there is nothing in the evidence which indicates that the cleaners were employees of the Owners Corporations and that MPGM merely acted as their agent. All that appears is that their costs were reimbursed. MPGM recruits, instructs, pays, insures and provides for the superannuation and leave entitlements of the cleaners. The modest equipment required (buckets, mops, detergents, etc) is provided by the Owners Corporations (black, 5L-Q).
[76] In those circumstances, the threshold requirements of s 3C are satisfied. Hence, the section applies with these consequences:
(a) the employment agent, being MPGM under the employment agency contract, is taken to be an employer;
(b) the contract worker under the employment agency agreement is to be taken to be the employee of MPGM;
(c) the amounts paid or payable to the cleaning staff, though reimbursed to MPGM, must be taken to be wages paid or payable by MPGM so as to render MPGM subject to pay-roll tax unless;
(d) MPGM was potentially entitled to the exemption in s 3C(4)(c).
42His Honour agreed with the respondent 'that it is not possible for the client of an employment agency to provide a s 3C(4)(c) declaration on a retrospective basis' and that, because the declarations were given after the client's liability arose, the taxpayer was not entitled to the exemption.
43His Honour went on under the heading 'The alternative basis for liability to pay-roll tax' to make the following important observations:
[79] In view of the conclusion I have reached above, it is not necessary for me to determine whether, were the exemption in s 3C(4)(c) applicable, the appellant would nonetheless be liable as a common law employer pursuant to s 6. That must depend on whether s 3C constitutes an exclusive regime for determining the liability of an employment agent who procures the services of contract workers for a client or whether it is simply an extension of the general liability to the tax with an exemption applicable only to that extension.
[80] The rationale for this regime is set out by the minister in the earlier Second Reading Speech. The regime regulates in detail the common situation of managing agents making available contract workers to a client under an employment agency contract such that, even if the contract of employment technically resides with the employment agent, nonetheless the contract workers are doing the work for the client who is reimbursing the managing agent.
[81] Thus I incline to the view that s 3C is a self-contained regime exhaustively governing the liability to pay-roll tax of employment agents where there is no contract of employment between contract worker and client. However, I do not need to express a concluded view on that question.
44 The respondent's submission was that his Honour's 'comments are obiter and are of little precedential value as they are passing remarks on matters that had not been fully argued'. I do not agree. I think, so far as this Tribunal is concerned, his Honour's statement is a strong dictum, although said by way of obiter. I also think that, in the case of the current provisions under consideration, there are other indicators to form the view that Division 8 is a 'self-contained regime' dealing exhaustively with employment agency contracts for purposes of payroll tax.
45Division 8 is headed 'Employment agents' but the Division should be more appropriately headed 'Employment Agency Contracts'. When the PTRA 1971 was amended to introduce a similar provision for the first time, it was appropriately headed 'Application of this Act to certain contracts'.
46In my view, Division 8 is essentially designed to deal with the liability to payroll tax in relation to an employment agency contract.
47Section 37(2) defines an 'employment agency contract' as 'a contract, whether formal or informal and whether express or implied, under which a person (an employment agent) procures the services of another person (a service provider) for a client of the employment agent'. (Emphasis Added)
48It is important to note that the definition speaks of 'a person' who, for purposes of Division 8, is treated as 'an employment agent'. No attempt is made to define 'an employment agent' because the provision applies to any person who enters into an employment agency contract as defined. That clearly leads to the conclusion that it does not matter if the person is a common law employer or is not one who can be regarded as such. The Explanatory Notes relating to the Bill that introduced the PRTA 2007 noted in relation to the definition in s 37 that the term 'person' was used as a 'wide concept' and 'may include a company, a partnership or a natural person'.
49I also find support for this view in the following recent statement made by his Honour White J in Freelance Global Ltd v Chief Commissioner of State Revenue when rejecting the taxpayer's submission that the 'legislative history demonstrates that it was Parliament's intention that employment agents provisions should apply only to employment agents or labour hire firms' -
... Undoubtedly it was Parliament's intention that the amendments should apply to such persons. It does not follow that that was the only intended application of the provision.
150. In my view, the provisions were not intended to apply only to employment agents or labour hire firms as those expressions are said to be generally understood. That appears from the text of s 3C and s 37 and by the language used in other legislation at the relevant times regulating the licensing of employment agents.
151. If s 3C (or s 37) were intended to apply only to the activities of employment agents, as that expression is said to be commonly understood, subs (1) would not have defined an "employment agent" for the purposes of the Act by reference merely to any person who by arrangement procured the services of another for a client of the employment agent etcetera. The section could simply have provided that an employment agency contract was one under which an employment agent procured the services of another for a client of the employment agent etcetera. If Parliament thought that there was not a common understanding of what an employment agent is, then there was a definition readily to hand in s 702 of the Industrial Relations Act 1991 (NSW) (and formerly in s 145B of the Industrial Arbitration Act 1940 (NSW)) which provided that a person carried on the business of a private employment agent if he acted as an agent for the purpose of finding or assisting to find a person to carry out work for a person seeking to have work carried out, or finding or assisting to find employment for a person seeking to be employed, whether pursuant to a contract of employment or otherwise (see later s 60P introduced to the Fair Trading Act 1987 in 2002).
50Reading narrowly the provisions in Division 8 to confine them to persons other than 'common law employers' lead to some absurd results.
51If the respondent's submission were correct that Division 8 has no application when there is a common law employment relationship between the employment agent and the worker, the concessions in s 40(2) would only apply to a person other than a common law employer. The suggested interpretation by the respondent not only produces a harsh, inequitable outcome but also two different regimes to deal with employment agents.
52Another absurd outcome would be that a common law employer who enters into 'an employment agency contract to reduce or avoid the liability of any party to the contract' would not be subject to anti-avoidance provisions found in s 42 of Division 8. Section 42 refers to 'an employment agency contract' and sets out the consequences for parties to an employment agency contract that reduces or avoids liability to payroll tax. Any party to the contract is taken to be an employer for purposes of the PTRA 2007. Clearly, Parliament did not intend to restrict the operation of the anti avoidance provisions to employment agents other than common law employers.
53I think some of the submissions made by the respondent were largely influenced by cases where this issue was not raised or fully argued. The submissions are also largely influenced on the view that Division 8, which inappropriately states that the division deals with 'Employment agents', is only applicable to non-common law employers who are taken to be employers under the Division. That might have been the case when the first provision to deal with these arrangements was introduced in 1985.
54Historically, s 3(4) of the PTA 1971 provided as follows -
(4) For the purposes of paragraph (f) of the definition of "wages" in subsection (1), a person (in this subsection referred to as the "agent") is an employment agent if the person procures by an arrangement the services of a person (in this subsection referred to as the "worker") for another person (in this subsection referred to as the "client"), under which arrangement -
(a) the worker does not become the employee of either the agent or the client but does carry out duties of a similar nature to those of an employee; (Emphasis added)
...
55The legislation in the original provision did not extend to arrangements where the worker was an employee of the agent or client. That was made clear in the Explanatory Note to the Bill which introduced the 1985 provisions -
The effect is that certain employment agents will be treated as employers, and money paid by them will be treated as wages, for the purposes of the Principal Act. (Emphasis Added)
56If Parliament wanted a similar outcome with the current provisions, the definition in s 37 would have excluded an arrangement where there is an employer and employee relationship between the agent and the worker. The only arrangement excluded is an employment agency contract if it is, or results in the creation of, a contract of employment between the service provider and the client: s 37(2).
57The starting point in considering the application of Division 8 to a particular set of facts is to identify, what was described in Freelance by his Honour White J at [99] as the 'critical question', whether there is a contract (which includes an agreement, arrangement and undertaking) which may be formal or informal, express or implied, under which a person (the employment agent) procures the services of another (the worker) for a client of the person.
58Having defined an 'employment agency contract' in s 37, the provisions in s 38 to s 40 set out the consequences that determine liability to payroll tax under the PTRA 2007. The employment agent is taken to be the employer under s 38 and the person who performs work for or in relation to which services are supplied to the client under an employment agency is taken under s 39 to be the employee of the employment agent. Section 40(1) defines what amounts, benefits or payments are to be taken as wages for purposes of the PTRA 2007. Section 40(2) excludes any amount, benefit or payment for purposes of s 40(1), 'that would be exempt from payroll tax under Part 4 (other than under Division 4 or 5 of that Part, section 50 or clause 5 of Schedule 2) had the service provider been paid by the client as an employee, if the client has given a declaration to that effect, in the form approved by the Chief Commissioner, to the employment agent'.
59The Division, in my view, deals exhaustively with the payroll tax consequences in relation to an 'employment agency contract' as defined in s 37. It is not a regime for employment agents' liability to payroll tax.
60There is nothing in the provisions to suggest that its application is confined to persons other than an employer in a common law relationship with the worker as submitted by the respondent.
61There remains the outstanding issue, as to whether in this matter there was in fact an employment agency contract as defined in s 37. The respondent's submission was that -
Section 37 of the PRTA 2007 is not engaged as there exists an employment relationship between Health Service and the worker and therefore Health Service does not procure the services of another person, but in running its own business with employees it directs them to do the work Health Service has contracted with the Client, it will do.
62The applicant's position was that the applicant 'has a contract with the workers under which it procures the services of those workers' and that the applicant 'falls squarely within that section'. It was also submitted that the respondent had 'previously conceded in its letter of 12 November 2013 that an employment agency contract exists between Health Service, its employees and end-user clients'.
63In Freelance, one of the two issues was whether there was an employment agency contract between the applicant and its clients. The case concerned independent contractors who were available to provide their services to the taxpayer's clients. Freelance did not maintain a pool of pre-screened independent contractors. Freelance entered into contracts with clients, mostly companies, who required the services of independent contractors. There was an unusual arrangement whereby an individual contractor would agree with the client as to the nature of the services required and the remuneration payable but Freelance undertook to arrange for the contractor to perform the services as a delegate of Freelance.
64As part of the arrangement, the independent contractor was invited to apply to become a beneficiary of the Freelance Trust No. 1, a discretionary trust. Freelance invoiced the client on a regular basis for the services performed by the individual contractor. Freelance, on receipt of payments from the client, paid the contractor the moneys received less an agreed fee. These payments were paid as advances but, in practice, treated as distributions to the contractor as a beneficiary of the trust for the relevant financial year. The principal issue was whether the distributions paid to its contractor beneficiaries were taxable wages. The period in issue was over tax years that were subject to the old PRTA 1971 and the current PRTA 2007.
65The taxpayer's case was 'that it did not procure the services of its beneficiary contractors for its clients'. This was on the basis that 'the services of the beneficiary contractor are procured by the client itself or by a recruitment agency acting for the contractor independently of and prior to any involvement by Freelance in the facilitation of the provision of those services'. It was also submitted that the relevant provisions only applied to employment agents and labour hire entities and Freelance was not such an entity.
66The latter submission was rejected by his Honour, White J, as set out in paragraph [49] above.
67In relation to the principal submission, his Honour examined the dictionary definitions of 'procure' and relevant cases which have considered the meaning of this term and concluded that -
115. I think the better view is that "procure" when used in s 3C and s 37 means more than facilitate or enable and requires that the employment agent cause the services of a contract worker (or service provider) to be provided to the employment agent's client, with the expenditure of care or effort by the employment agent. I do not accept that this can be done if the employment agent recruits the contract worker or service provider for the client.
68On the facts in Freelance, his Honour took the following view:
119. In my view, Freelance procured the services of its contractors to its clients by producing them by endeavour. It set out to see that the services were provided and took appropriate steps to produce that happening by means of:
(a) its arrangements with its contractors for them to be admitted as beneficiaries of the Freelance Trust, and to receive distributions from that trust, which is a matter of practice and expectation, were in the amount of the remuneration received by Freelance by its clients less its management fee;
(b) its securing its contractor's agreement to the terms on which they were admitted as beneficiaries;
(c) in many cases, by making fixed distributions of income that were paid on terms that the contractors would provide services as reasonably requested by Freelance;
(d) by having an understanding and arrangement with its contractors for them to supply the services Freelance agreed to supply to its clients; and
(e) by entering into its contracts with its clients for the provision of services by its contractors.
69In the present matter, there were different forms of agreements between the applicant and their clients. But, essentially, the applicant under the agreements undertook to provide services as and when required by the client. The applicant also undertook to provide an adequate number of contractor personnel to perform the services with due skill and care, in compliance with all applicable laws and in accordance with any reasonable direction given by the client. The applicant was also required to ensure that the contractor personnel had the necessary skills, competency and resources to perform the services.
70These agreements, in my opinion, clearly fall within the definition of an employment agency contract found in s 37. I do not think because the contractor personnel are engaged as employees by the applicant to undertake the services, rather than as independent contractors, made any difference. I think the wide definition of 'procures' extends to a person procuring workers as employees to perform the contracted work. The workers were offered positions as 'casual community care worker' or 'permanent part time community care worker'. They performed no services for the applicant but were available to perform services as and when required as contract personnel under an employment agency contract entered into by the applicant with a client. I accept that the agreements between the applicant and individual worker were clearly arrangements to procure contract workers for the client.
71For these reasons, the applicant should be taken to be an employer for purposes of Division 8 and is entitled to the exemption under s 40(2). There was no dispute that proper declarations had been given by the relevant clients to the applicant in this matter.
72The above addresses issues 4-6 identified by the parties. In view of my conclusion on the principal issue, it makes it unnecessary for the determination of the questions raised in issues 7 and 8 relating to penalty tax and interest.