Levitch Design Associates Pty Ltd ATF Levco Unit Trust v Chief Commissioner of State Revenue

Issues 8The parties are agreed that, in relation to the assessments, there are five issues, namely-

• Does the applicant engage Mr Wright under a "relevant contract" pursuant to s 32(1) of the Payroll Tax Act?
• Does the exception in s 32(2)(b)(i) apply?
• Does the exception in s 32(2)(b)(ii) apply?
• Does the exception in s 32(2)(b)(iii) apply?
• Does the exception in s 32(2)(b)(iv) apply?

Facts 9The applicant and Mr Wright are the parties to an "Independent Contractor Agreement" made 14 December 2007 (Agreement) (Ex R1 at folio 440). Pursuant to cl 3 of the Agreement Mr Wright, as "contractor", agrees to provide "the services and obtain the results as set out in Schedule 1 hereof within the time frame stated therein". Schedule 1 describes the work to be performed as "architectural services as required", and provides for an hourly rate nominated as "$45/hr" and a "piece work" rate nominated as "by negotiation" (Ex R1, folio 442). 10Unless earlier terminated, the Agreement was to endure for a period of 12 months (cl 2). According to cl 7, the Agreement "will terminate in (sic) August 30 2008", but "either party may terminate" the Agreement on an earlier date by giving 7 days written notice to the other. 11The applicant and Mr Wright are the parties to the Consulting Agreement (Ex R2). In the Consulting Agreement the applicant is referred to as, "LDA" (LDA) and Mr Wright as, "Consultant". Pursuant to the Consulting Agreement the Consultant "must provide the Services in accordance with this agreement" (cl 1), and "LDA must pay the Consultant the Fees due in accordance with this agreement" (cl 2). Clause 1.1, defines "Fees" as "means the amount to be paid by LDA to the Consultant calculated in accordance with schedule 2", and "Services" as- means the services to be performed by the Consultant as set out in the schedule 1, and any services necessarily incidental to them (including the provision of all professional advice and skills required for the provision of such services); The Fees prescribed in Schedule 1 are, "Supervision work $45/h plus GST", and "Design work $65/h plus GST". 12Mr Wright provided architectural services to the applicant (LDA) throughout the Tax Period. Mr Wright was not the only consultant engaged by LDA during the Tax Period to provide architectural services in relation to Clients' projects: AS1 at para 1.18. 13Cl 4.3(b)(1) of the Consulting Agreement requires the Consultant, amongst other things, "ensure that ...the Key Personnel" are "the key personnel performing the Services". "Key Personnel" is defined in cl 1.1 to mean "each of the Consultant's personnel identified in schedule 3". The only Key Personnel named in Schedule 3 is Mr Wright. 14Schedule 1 of the Consulting Agreement, under the heading "1 General description of Services", recites- The Consultant will provide all services in connection with: Description: Architectural Services required by LDA to facilitate the provision of LDA's services to customers. Description of Services: The Services are the following services: As required by LDA: Assessment of potential sites on town planning, architectural and financial basis. Completion of written feasibility study if required. Services of a Project Architect and working within time and financial budgets. Provided [sic] detailed advice regarding statutory regulations covering, local council, state instruments and BCA codes. Design and documentation of projects within these codes. Effective negotiation and liaison with planning officers in relation to projects. Briefing and liaising with specialist consultants such as engineers, urban planners, contractors, and landscape architects. Identifying and analyzing what kind of design a building should have in relation to a site. This may involve considering the climate, the surrounding buildings, and the slope of the site. Creating preliminary sketches and working with clients of LDA to suggest the general shape and appearance of the building, the method of construction, where it will be placed on the site, and how the inside will look. Preparing design development plans for statutory approval. Preparing Construction Plans, which are sufficient to show the builder how the structure is to be built and indicating the dimensions and placement of each element for construction. Plans may incorporate the work of other consultants and may include diagrams for heating, ventilation, and air-conditioning ducts and indicate the paths for plumbing pipes and electrical wiring. Preparing for each project as required Specifications that include technical information on products and materials, or specifications, of the materials to be sued and the methods of installation. Preparation and supervision of the plans which go to tender for contractors. Responsibility to work with clients of LDA to select the most appropriate contactor based on price and quality of work etc. Once construction begins, visiting sites as required by LDA's client and LDA. 15During the Tax Period Mr Wright, as architect, provided services to persons or entities besides LDA. See AS1, paras 7.1 and 8.10, and Attachments 7 and 7-1. 16Mr Wright was not called as a witness at the hearing of the application for a review. Attachment 7 to AS1 is a document which purports to be a statutory declaration made by Mr Wright on 24 April 2014: AS1, para 8.10. Mr Wright declares as follows: (1)The "Schedule of Projects-Thom Wright Architect" lists some of the projects carried out by me for the period from 1 July 2007 to 30 June 2013. I have provided some sample invoices to show that Levitch Design was not the only organization I contracted with during the relevant financial periods. (2)The invoices are for work started but not necessarily completed, a job may span over two financial years. (3)Please note, there are a few inconsistencies between the fee proposals and invoicing due to the fee being negotiated down, the invoicing reflects the actual agreed fee. 17The following reproduces the Table, set out in RS1 at para 34. Year LDA Other LDA Proportion 2008 $15,477.44 $11,350 58% 2009 $57,818.36 $4,500 93% 2010 $73,956.29 $46,417 61% 2011 $47,610.99 $15,515 75% 2012 $55,741.55 $12,857 81%

Column "LDA" are payments declared by LDA as made to Mr Wright (Ex R1, folio 17 and RS1 para 18); column "Other" are payments received by Mr Wright for services from persons other than LDA (RS1 para 34). As to the "Other" amounts, LDA say (AS2 para 15.1), [Mr Wright] may have not provided all of his income by architectural exertion, only the fees from a select few clients was provided .... This may not be his aggregate or accurate income and as such is not reliable as gross income. LDA does not reference evidence to support these assertions.

Liability for payroll tax 18Under the terms of the Payroll Tax Act, payroll tax is imposed on all "taxable wages" (s 6). Liability for the tax falls upon the employer by whom taxable wages are paid or payable (s 7). "Taxable wages" are wages (excluding exempt wages) taxable in NSW (s 10). The term "wages" as defined in s 13(1) includes an amount that is "taken to be" wages by any other provision of the Act (s 13(1)(e)). 19Division 7 of Part 3 of the Payroll Tax Act (Division 7) comprises ss 31 to 36 and applies to a "relevant contract". The expression "relevant contract" is defined in s 32. In the case of a relevant contract the parties are "taken to be", respectively, the employer and the employee (s 33 and s 34). For the purposes of the 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 are "taken to be" wages paid or payable during that financial year (s 35).

Payroll Tax Act 2007 (NSW), s 32 20Section 32(1) and s 32(2)(b) of the Act provide as follows- (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)... (d)... 21Pursuant to s 31 of Division 7, "contract" includes an agreement, arrangement or undertaking, whether formal or informal and whether express or implied;and "services" includes results (whether goods or services) of work performed.

Scheme of Division 7 22Sections 32(1) and 32(2) substantially re-enact the terms of their immediate predecessor, s 3A(1) of the Pay-roll Tax Act 1971 (NSW) ("1971 Act"): Freelance Global Ltd (as trustee for the Freelance Trust No 1) v Chief Commissioner of State Revenue [2014] NSWSC 127 ("Freelance Global"); The Smith's Snackfood Company Ltd v Chief Commissioner of State Revenue [2012] NSWSC 998 ("The Smith's Snackfood Case") at [25]ff. Section 3A of the 1971 Act had its origins in s 3C of the Pay-roll Tax Act 1971 (Vic), inserted by the Pay-roll Tax (Amendment) Act 1983 (Vic). Gzell J in Bridges Financial Services Pty Ltd v Chief Commissioner of State Revenue (2005) 222 ALR 599 noted- [218] In introducing the bill to the Victorian legislative assembly, the treasurer, in his second reading speech, stated the object of the legislation to be to catch relationships where a subcontractor worked exclusively, or primarily, for the one person and the object of the contract was to obtain his labour. At Hansard, Legislative Assembly, 27 October 1983, p 1581 the treasurer said: "In essence, the legislation is intended to catch those relationships where the sub-contractor works exclusively or primarily for the one person and where the object of the contract between the parties is to obtain the labour of the sub-contractor." [219] Section 3A of the [1971 Act] was introduced by the Pay-roll Tax (Amendment) Act 1985. In his second reading speech, the Minister for Employment and the Minister for Finance said that bona fide independent contractors would not be caught by the legislation: Hansard, Legislative Assembly, 13 November 1985, p 9558. 23According to the Explanatory Note to the Payroll Tax (Amendment) Act 1985 (NSW), the terms of the definition of "relevant contract" in s 3A(1) were: 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. (See Smith's Snackfood Co Ltd v Chief Commissioner of State Revenue [2013] NSWCA 470 ("Smith's Snackfood CA") at [9].) 24The s 31 definitions of "contract" and "services" re-enact, respectively, ss 3A(6)(a) and 3A(6)(d) of the 1971 Act. Since "contract" as defined includes an informal "arrangement", it follows that it is not necessary to prove that the services were performed pursuant to a legal obligation to do so: cf QSR Limited v Industrial Relations Commission of NSW [2004] NSWCA 199 at [47] per Spigelman CJ. 25The structure of Division 7 is to first define, in broad terms, "relevant contract". If an arrangement answers that description, the second step is to determine whether any of the exceptions apply. It is because of the exceptions that the legislation does not catch bona fide independent contractors. It is because of the non-application of an exception that the object of taxing the putative subcontractor who works exclusively, or primarily, for one person under a contract whose object is to obtain the labour of that person, is achieved. See The Smith's Snackfood Case at [24-29] per Gzell J endorsing as applicable to Division 7 his Honour's view expressed in respect to s 3A of the 1971 Act in Bridges Financial Services at [221]; see too Smith's Snackfood CA at [61-62]. 26The s 32(2) exemption is designed to exclude from the operation of s 32(1) a limited class of persons who would otherwise be caught: Behmer & Wright Pty Ltd v Commissioner of State Revenue (Vic) (1994) 28 ATR 1082 at [15].

Onus of proof 27In a review application under Part 10 of the Act, the applicant "has the onus of proving the applicant's case" (s 100(3)). This requires the applicant to prove or establish on the balance (preponderance) of probabilities all matters necessary to enable a tribunal to answer the statutory question in the applicant's favour, and all the facts on which the applicant relies to claim any exemption. The legislation does not place any onus on the Chief Commissioner to show that the assessments were correctly made. Nor is there any statutory requirement that the assessments should be sustained or supported by evidence. The burden on the applicant is not necessarily discharged by showing an error by the Chief Commissioner in forming a judgment as to the amount of the assessment. It is for the taxpayer to discharge the burden of proof by establishing what the correct amount of an assessment should be. See Cornish Investments Pty Ltd v Chief Commissioner of State Revenue (RD) [2013] NSWADTAP 25 at [5-7], [29-36] and cases there cited; see also Lend Lease Development Pty Ltd v Commissioner of State Revenue (Vic) [2012] VSC 108 at [51], Conder Tower Pty Ltd v CSR [2012] VSC 107 at [46], Wesfarmers General Insurance Ltd v CSR [2009] VSC 599 at [14], Theophilas v Chief Commissioner of State Revenue [2014] NSWCATAD 100 at [41-42]. However, the taxpayer's evidence is not to be regarded as prima facie unacceptable and "must of course be considered on its merits, in the circumstances of the case, without any prepossession, favourable or unfavourable": McCormack v FCT (1979) 143 CLR 284 at 302 per Gibbs J. 28In AS3 at para 2, LDA draws attention to the Tribunal not being bound by the rules of evidence. The Civil and Administrative Tribunal Act 2013 (NSW), s 38(2) provides- The Tribunal is not bound by the rules of evidence and may inquire into and inform itself on any matter in such manner as it thinks fit, subject to the rules of natural justice. 29However, pursuant to s 38(3) the Tribunal must observe the rules of evidence in certain instances - none of which obtain in this matter. Thus, subject to s 38(3), pursuant to s 38(2) material inadmissible in accordance with the law can be admitted into evidence by the tribunal and taken into account by it. But only if that evidence is "logically probative" and relevant to the issues before the Tribunal: Re Pochi and Minister for Immigration and Ethnic Affairs (1979) 26 ALR 247 at 257 per Brennan J; Casey v Repatriation Commission (1995) 60 FCR 510 at 514; Secretary, Department of Social Security v Jordan (1998) 83 FCR 34 at 44. In Herrmann v Nurses Board of South Australia (1993) 61 SASR 325 a finding by a tribunal not bound by the rules of evidence was held vitiated because it was based on evidentiary material which was either irrelevant or lacked probative material.

Relevant contract 30LDA denies that the arrangement under which Mr Wright provides architectural services to LDA is a "relevant contract". The respondent contends the arrangement is a s 32(1)(b) "relevant contract". 31For reasons explained below, in my view, the arrangement between LDA and Mr Wright qualifies as a s 32(1)(b) "relevant contract". 32LDA claims (AS2, para 5)- 'professional services' cannot be included in 'services' as the independence (sic) nature of the relation of a professional precludes the definition of 'work for results'. A non-professional cannot judge results, or direct the actions of a professional, a non-professional can only appoint a professional and request they apply their skills and training to independently problem solve. The Legislation's intent is to preclude professional services, as consultants do not 'work for results' but are engaged with a focus on problem solving and cannot be lumped together with tradesmen and the like. 33LDA further claims (AS2, para 5) that "services" (in Division 7) is a limited term which does not take into account the notion of "professional services" under which, so it is said, the services provided by Mr Wright fall. 34The respondent submits (RS1): 21. In the present case it cannot be seriously contended that Mr Wright did not supply "services for or in relation to the performance of work" to LDA. He was expressly engaged by LDA to provide it with "architectural services" at its direction. 22. LDA appears to contend that the contract between it and Mr Wright is not a relevant contract because Mr Wright: (a) is an independent contractor; and (b) provides architectural services to "clients of LDA" 23. Those submissions should be rejected. Even if Mr Wright was an independent contractor, it is not a basis for concluding the contract between Mr Wright and LDA was not a "relevant contract". The very object of the provisions is to subject payments to independent contractors to payroll tax unless one of the exceptions applies.

Independent contractor 35In the objection (Ex R1, folios 299-300) LDA refers to World Book (Aust) Pty Ltd v Federal Commissioner of Taxation ("World Book Case") (1992) 27 NSWLR 377, Behmer, and Bridges Financial Services at [231]. In my view these cases do not assist LDA in its professional services contention in the context of "relevant contract". 36Sheller JA in the World Book Case at 385G-386B, observed that "undertaking the production of a given result has been considered to be a mark, if not the mark, of an independent contractor". And went on to say- It may be that there are contracts for services which are wholly or principally for the labour of a person and which are not undertaken by the contractor to produce a given result. ... But a contract which is undertaken by the contractor to produce a given result is not, in my opinion, a contract wholly or principally for the labour of a person for reason that the labour is undertaken not for the principal but for the contracting party himself to produce the result he has contracted to produce. 37The issue in the World Book Case was whether the statutory obligation on an employer to deduct tax from salary and wages paid to any employee, applied in respect to a commission paid out for the sale of a set of encyclopedia. The term "salary or wages" was defined by the legislation to include any payments made "under a contract that is wholly or principally for the labour of the person to whom the payments are made". Section 32 of Division 7 does not limit its operation to a contract that is "wholly or principally for labour". 38In my view the Tribunal's reference in Behmer to a "genuinely independent" contractor does not assist LDA. The Tribunal's view was that the exemption provision "seems to be concerned to exempt from the net of liability services provided by a contractor who is genuinely independent": Behmer at [19]. Implicit in this view is that but for the exemption the services of the contractor would be within the net of liability. 39The comments of Gzell J in Bridges Financial Services cited by LDA do not in my view assist its case. His Honour said- [231] The submission of the chief commissioner fastens upon the service to the exclusion of the performance of work to which it relates. And, furthermore, it is too narrow an approach to the exception. If correct, it would mean that bona fide independent contractors, performing a service for which they alone were licensed, would not be excluded from the operation of the provision. 40Gzell J accepted that an arrangement with a bona fide independent contractor could be a "relevant contract" under the predecessor to s 32(1). As his Honour said at [221], "It is because of the exceptions that the legislation does not catch bona fide independent contractors". 41But whether Mr Wright is an "independent contractor" is not to the point - "independent contractor" is not a term found in the legislation. The issue is not, in the first instance, whether Mr Wright is an "independent contractor" but whether the arrangement between LDA and Mr Wright "answers th[e] description", "relevant contract": Bridges Financial Services at [221]; Smith's Snackfood CA at [56]. In Roden Security Services Pty Ltd v Chief Commissioner of State Revenue [2009] NSWADT 112 it was common cause between the parties that the contractors were, during the relevant years, independent contractors and not employees (see at [1] and [8]) - the original payroll tax assessments were affirmed; the original assessments were affirmed again by the Appeal Panel on the taxpayer's appeal: Roden Security Services Pty Ltd v Chief Commissioner of State Revenue [2010] NSWADTAP 10 ("Roden Security AP").

Services 42There is no reason in the context of s 32 to give a narrow meaning to the word "services". It is clear from the extended meaning given to that word in s 31 that it was intended to have a wide meaning: DSG Pty Ltd v Victorian WorkCover Authority (2008) 20 VR 514 CA ("DSG Case") at [94]. 43As earlier noted, s 31 defines "services" as "includes results (whether goods or services) of work performed". One dictionary meaning of the word "work" is "the application of mental or physical effort to a purpose" (The Australian Oxford Dictionary). 44The Macquarie Dictionary defines "service" as meaning "an act of helpful activity"; "the supplying ... of any ... activities, etc., required or demanded"; ... "the performance of any duties or work for another". The Oxford English Dictionary is to like effect: "work done to meet some general need"; "the action of serving, helping or benefiting"; "conduct tending to the welfare or advantage of another". 45"Services", is a word of complete generality (IW v City of Perth (1997) 191 CLR 1 at 23 per Dawson & Gaudron JJ). It has a wide and varied meaning (IW v City of Perth 191 CLR at 11 per Brennan CJ and McHugh J; at 41 per Gummow J; at 70 per Kirby J). 46The legislature having chosen in s 31 an inclusive definition of "services", thereby gave the word its ordinary, wide meaning (IW v City of Perth 191 CLR at 27 per Toohey J). In its ordinary and wide meaning the concept of "services" is "by no means confined to the provision of tangible things. Its meaning is to be derived from the context." (IW v City of Perth 191 CLR at 70 per Kirby J). 47Both the Agreement and the Consulting Agreement refer to the work to be undertaken by Mr Wright as, "services". 48Medical professionals, the directors and beneficial owners of a company, in discharge of their company's contractor obligation with a Hospital Manager to provide pathology services to patients, personally provided those services. In relation to those medical professionals that arrangement was found in Mayne Nickless Ltd v Industrial Relations Commission of NSW [2004] NSWCA 359, to meet a jurisdiction requirement of being an arrangement "whereby a person performs work in any industry". 49In my view there is no proper basis to limit the meaning of "services" in s 32 to exclude professional services provided by a person who is also a member of a profession.

Section 32(1)(b) 50The arrangement between LDA and Mr Wright for architectural services answers the description "relevant contract" under s 32(1)(b). It is a "contract" under which the designated person (in this instance, LDA), in the course of a business carried on by LDA, is supplied with "services of persons for or in relation to the performance of work": Freelance Global at [167], [171-173] per White J. Cf DSG Case at [93] per Pagone AJA. 51The High Court in Accident Compensation Commission v Odco Pty Ltd (1990) 95 ALR 641 considered s 9 of the Accident Compensation Act 1985 (Vic), a provision comparable to s 32 of the Payroll Tax Act: see Smith's Snackfood CA at [54-56]; Freelance Global at [173-175]. In a joint judgment the High Court in Odco (at 650-651) said of s 9, the provision comparable to s 32(1)- The notion that the supply of services and the performance of the work referred to in s 9 are necessarily distinct and separate concepts is not borne out by a examination of the provisions. Likewise the notion that the person supplying the services or the person supplying the services of persons is necessarily different from the person performing the work cannot be made out. It is a mistake to read the expression "for or in relation to the performance of work", where it appears in s.9(1) and elsewhere, as doing anything more than qualifying the content or scope of the word "services". All that the expression is saying is that "services" must be work-related; it is not stipulating that the services are wholly distinct from the work or that the supplier of the services is a person other than the performer of the work. Some indication that this is so may be gathered from s 9(6)(d) which provides that: "a reference to services includes a reference to results (whether goods or services) of work performed". 52The point made by the High Court is that the person supplying the services need not be different from the person performing the work: DSG Case at [47]. 53Ordinarily the phrase "in relation to" requires no more than a relationship, whether direct or indirect, between two subject matters: Smith's Snackfood CA at [59]. In s 32, "for or in relation to the performance of work" are not words of limitation: Smith's Snackfood CA at [60]. 54By attending at LDA's client's site or otherwise supplying services to the client, Mr Wright supplied services to LDA under the "contract"; those services were work-related and LDA was supplied with them in the course of carrying on its business. Or, more succinctly, Mr Wright supplied services to LDA by serving the needs of LDA's clients: Freelance Global at [172], [173], [179]; see too Bridges Financial Services at [223]-[226], Smith's Snackfood CA at [56], and The Smith's Snackfood Case at [26-27]. 55For the purposes of s 32(1)(b), the relevant "services" are the services supplied to the designated person - in this instance, the "architectural services" supplied to LDA by Mr Wright: Behmer at [16] and [19]. See too Drake Personnel Ltd v Commissioner of State Revenue (Vic) (2000) 2 VR 635 CA ("Drake Personnel CA") at [46] and DSG Case at [93].

Section 32(2)(b) - exceptions 56Given that LDA's arrangement with Mr Wright answers the description of a "relevant contract" the next step is to determine whether any exemption to the definition of "relevant contract" applies: Smith's Snackfood CA at [62]; Bridges Financial Services at [221]. 57In order to qualify for the benefit of any s 32(2)(b) exception LDA must satisfy the Tribunal that the particular exception applies: Mayne Nickless Ltd v Mackintosh [1989] VR 878 at 890.

"Ordinarily required" 58The term "ordinarily required" is used in both subpara 32(2)(b)(i) and (ii). Subject to context, the term "ordinarily" means "commonly'' or "regularly", not "principally", "exclusively" or "predominantly": Clean Investments Pty Ltd v Commissioner of Taxation (2001) 105 FCR 248 at [97]. 59LDA claims (AS2 para 10) that- LDA itself does not require architectural services. LDA would need to procure no services unless its clients need them. LDA does not ordinarily require any service its clients do not require. Be that as it may, in my view architectural services are, within the meaning of s 32(2)(b), "required by LDA". 60In s 32(2)(b) the word "required" is used with the word "services" in relation to a designated person who is supplied with those services. In this context, I think "required" services equates with services of the kind "supplied" or "provided" to the designated person. Services supplied by Mr Wright to LDA's clients are, for the purposes of s 32(2)(b), services supplied to LDA. 61Architectural services are supplied under the terms of at least the Agreement and the Consulting Agreement - Schedule 1 of the Consulting Agreement describes the Services as "required by LDA to facilitate the provision of LDA's services to customers".

Performs; public generally 62Both subpara 32(2)(b)(i) and (iv) require that the "those services" are "performed by a person who ordinarily performs services of that kind to the public generally". That person must be someone who actually performs the services as opposed to someone who is merely offering or available to perform the services: Roden Security AP at [45-48]. 63The test is a factual enquiry into the performing of services by the contractor to persons other than the designated person. It is concerned not with the business of LDA (the designated person) but rather, with that of the contractor (Mr Wright): Behmer at [10]. The factual inquiry to be undertaken is one which must be undertaken in the context of the proper legal construction to be given to the words in the enactment: Behmer at [14]. 64That the performing be "to the public generally", means no more than that the contractor performs services to other members of the public apart from the person otherwise liable to tax. The requirement that the services to the public generally be "ordinarily perform[ed]" does no more than require that the ordinary course of the contractor's business is to perform the services to whoever will contract on like terms. Cf Behmer at [19]; Drake Personnel v Commissioner of State Revenue (Vic) (1998) 40 ATR 304 ("Drake Personnel") per Balmford J at [39-41]; Drake Personnel CA at [42-48] per Phillips JA.

Does the exception in s 32(2)(b)(i) apply? 65On the terms of subpara (i), LDA, in order to qualify for this exception, must establish that architectural services are "not ordinarily required" by LDA. 66LDA sets out a Table in AS1 at para 3.2, which includes the following details of fees amounts in the Tax Period- FYs Gross fees Arch. Fees % 2008 $1,389,681 $143,470 10.3% 2009 $2,735,201 $190,558 7.0% 2010 $3,484,634 $238,947 6.9% 2011 $2,817,465 $93,080 3.3% 2012 $5,545,404 $85,344 1.5% Total $15,972,385 $751,399 4.7% - Average

The Table shows LDA's "Gross fees" and "Architectural Fees" income for the financial years in the Tax Period (AS1 para 3.2). 67LDA say (AS1 para 4.2)- Our tax returns and financial statements show that architectural services accounted for and (sic) average of 4.7% of income in the years 2008 to 2012. Architectural services are not a central component of the overall services provided by LDA. Architectural Services are ad hoc, occasional, expensive and rare. We market these services .... It is rarely called for. 68That 4.7% of LDA's gross income is attributed to architectural services does not of itself establish that those services were not ordinarily required. The attributed proportion of gross income generated is not necessarily an indicator that those services either are or are "not" ordinarily (or commonly or regularly) required. In the context of s 32(2)(b)(i), "not ordinarily" is a factual enquiry of the particular services, not a comparison with value or frequency of other services required by the designated person. 69LDA at the request of the respondent, provided copies of Tax Invoices Mr Wright issued to LDA for the periods 1January to 31 December 2010, and 1 January to 30 June 2012 (Ex R1, folio 319). Mr Wright issued a monthly invoice for each of the months of that 2010 and 2012 period: Ex R1, folios 321-352. This seems to indicate that for those periods at least, architectural services were ordinarily required. 70I am not satisfied that LDA has established that the architectural services were "not ordinarily required" within the meaning of subpara (i).

Does the exception in s 32(2)(b)(ii) apply? 71For this exception to apply LDA must establish that architectural services supplied to LDA, whether by one or more of Mr Wright, some other contractor or an LDA employee, are of a kind ordinarily required by LDA for less than 180 days in a financial year: See Revenue Ruling No. PTA 020. LDA records in evidence indicate that in 2008 and 2009 "Architect Staff Costs", comprised wages and contractor payments: Ex R1, folios 540 and 591. 72In order to satisfy the 180 days condition, LDA must show that the number of days in a financial year on which architectural services are required by LDA is less than 180. 73Under the statutory condition, if the services involved say 10 hours of time and were supplied on one day, then, for the purposes of subpara (ii), the number of days is, one. But if the services were supplied over 5 days at the rate of say 2 hours per day, then the number of days is five. 74The following table is set out in AS1 at para 6.5- Year Fees Paid 30% reduced Hrs equiv. Days equiv. 2008 $25,251.00 $17,675.00 207.94 26.0 2009 $54,927.00 $38,448.90 452.34 56.5 2010 $69,555.00 $48,688.50 572.80 71.6 2011 $54,230.00 $37,961.00 446.6 55.8 2012 $51,530.00 $36,071.00 424.36 53.0

75The table takes the amounts paid to Mr Wright as fees over the Tax Period, and applies certain adjustments to produce hours and days equivalents. LDA claims the table demonstrates that in none of the financial years within the Tax Period did Mr Wright engage in work for LDA for more than 71.6 days (AS1, para 6.6). No evidence is tendered of the number of days on which others (employees and other contractors) provided architectural services. The respondent submits (RS1): 31. ... the submission assumes an hourly rate of $85 was paid each year. No evidence is adduced to support that assumption. Indeed it is contrary to the hourly rate actually charged by Mr Wright, which was between $45 and $65 in all years except 2012. 76The estimate of days adopted in the table was calculated on the basis of an 8 hour work day: AS1, paras 6.2 to 6.6. The evidence adduced does not demonstrate that that was the case with Mr Wright. He was the primary carer for 3 small children with no family support and was available for meetings only between 10am and 2:30pm during school terms and unavailable during school holidays (AS1 at para 8.8). 77LDA say (AS1 at para 6.6): "We are unable to assist in establishing which hours in each day was worked by [Mr Wright] as this data is not relevant to a consultant contract; it is not required for invoicing, it is not required by the principal or the client." And further (AS2 at para 13): "... there is no record of the hours expended by [Mr Wright] nor provided to LDA, as it is not relevant to the contract with LDA." 78LDA has not established that the 180 days condition is satisfied. I find that the subpara (ii) exception has not been shown to apply.

Does the exception in s 32(2)(b)(iii) apply? 79LDA must establish that architectural services provided to LDA by Mr Wright are provided for a period that does not exceed 90 days or periods that in aggregate does not exceed 90 days, and that subpara (iii)(A) and (B) do not apply. 80There is no record of the hours expended by Mr Wright: AS2 at para 13. Further, no evidence going to satisfying the subpara (iii)(A) and (B) conditions was adduced. 81LDA has not established that subpara (iii) is satisfied. I find that that exception has not been shown to apply.

Does the exception in s 32(2)(b)(iv) apply? 82Unlike the other exceptions in s 32(2)(b), subpara (iv) is a discretionary provision. It operates when the Chief Commissioner (or the Tribunal on a review) is satisfied that the "those services" are performed by a person who "ordinarily performs services of that kind to the public generally in that financial year". On its terms the discretion may be exercised when no other s 32(2)(b) exception applies. I am not satisfied that LDA has established that any other exception applies. 83On the terms of subpara (iv), to qualify for that exception in any financial year LDA must prove that Mr Wright ordinarily performs services to the public generally in that year of the kind supplied to LDA in particular. 84The then Victorian equivalent to s 32(2)(b)(iv) was explained by Phillips JA in Drake Personnel CA as follows: 46 [Section 3C(1)(e)(v)] does not inquire after the performance of the work; it refers only to the supplying of services (and "services" are defined ... to include "the results of work performed", not its performance as such). Paragraph (e)(v) inquires of the services supplied by the [contractor] to Drake under the contract between them (which is a "relevant contract" unless the exception applies), asking whether those services are of a kind which the [contractor] ordinarily renders to members of the public - thereby distinguishing between the public and Drake and asking, it seems, after the rendering of services otherwise than under the contract between the [contractor] and Drake. On my reading of the Act, the [contractor] who generally arranges his or her own work engagements directly with members of the public ... but on occasion obtains an engagement through Drake, may well be one who attracts the operation of para (e)(v). 85Section 32(2)(b)(iv) is in substantially the same terms as s 3C(1)(e)(v) of the Payroll Tax Act 1971 (Vic) - the former uses the words "performed" and "performs"; the latter uses "rendered" and "renders" and, unlike the former, does not include the qualification, "that financial year". The term "render" includes the meaning "perform" (Roden Security AP at [43]). The Drake Personnel CA (and Behmer at [16] and [19]) interpretation of s 3C(1)(e)(v) is in my view applicable in general to s 32(2)(b)(iv).

"in that financial year" 86LDA, relying on Behmer to claim the subpara (iv) exception, recites (AS3 paras 7-8) the following passage in Behmer at [15] and [20]- 15. .... If the only evidence was the quantum of work for the 1990-91 year the applicant would be hard pressed to maintain its objection because in that year the applicant provided 95% of Stubbs' [the contractor] total income. However, in the 1988-89 year the Stubbs partnership obtained 25% of its income from the provision of services to Jennings Industries Ltd; an enterprise which appears to be wholly unrelated to the applicant. In the 1989-90 year the applicant supplied only 48% of Stubbs' income. 20. In the end I am satisfied on the limited facts available in this case that the proper conclusion is that Stubbs do ordinarily render their services to the public generally. They are not tied to the applicant but seek its work when invited to tender. The applicant is not the sole consumer of the Stubbs' services and they have at least one other significant client. 87Referring to the respondent's table (see para 17 above), LDA point out (AS3 para 9) that there is only one year in which the amount of Mr Wright's income is of a proportion approaching the 95% referred to in Behmer. In all other years, say LDA, the amount of Mr Wright's income is of a proportion well below the level of 95%. 88Subpara (iv) requires that the contractor be "a person who ordinarily renders services of that kind to the public generally in that financial year". Section 3C(1)(e)(v) does not contain that "financial year" qualification. The Tribunal in Behmer does not consider or mention any "financial year" qualification. It seems plain that "... ordinarily render their services to the public generally" is a broader qualification than "... ordinarily render their services to the public generally in that financial year". The latter is the qualification promulgated by s 32(2)(b)(iv): Roden Security at [12]. The Tribunal in Roden Security at [12], after referring to s 32(2)(b)(iv) and the predecessor in its context, observed: ... it is clear that the provision must as a matter of statutory interpretation be considered in relation to a particular financial year. This indeed is how the legislation works; the tax is levied by reference to a particular year and so that the position in one financial year may differ from the position referable to another financial year. 89If whether the exception applies for the 2009 year is determined having regard to the actual activities "in that financial year", then the Behmer conclusion that for 1990/1991 "the applicant would be hard pressed to maintain its objection", seems apposite in relation to Mr Wright and 2009. In Behmer, the 5% of income from other sources in 1990/1991 represented $8745 - the 95% was $166,168 (see at [6] para 9(v)). 90For the financial year ended 30 June 2009, 93% of Mr Wright's income came from LDA. Attachment 7-1 (AS1) indicates that the 7% ($4,500) is a contract with "Saunders" relating to "house alterations" that commenced in May 2009. On its face that single project in May 2009 does not, for the year ended 30 June 2009, seem indicative of "ordinarily performs services of that kind to the public generally in that financial year". No evidence was adduced to amplify circumstances or facts beyond the limited information in Attachment 7-1.

Genuine independent business 91The respondent, citing Behmer at [19], disputes that Mr Wright is engaged in a genuine independent business as required by subpara (iv). And further submits (AS2)- 4. The evidence show that Mr Wright overwhelmingly derived his income from the Applicant. Indeed in the 2009 financial year the income derived from third parties was de minimis and in the other years, with the exception of 2010 the amounts were very small and certainly insufficient to support Mr Wright let alone the three children for whom he is the primary carer. 5. The business of Mr Wright was not independent of the Applicant. To the contrary, it was dependent on the Applicant. Without the Applicant's custom, there is no evidence to suggest that Mr Wright could have continued to carry on business as an independent contractor. 6. There is no evidence at all about the matters listed in Revenue Ruling PTA 21, which could inform a conclusion that the contractor's business is genuinely independent of the Applicant. 7. In the circumstances, Mr Wright can fairly be described as ordinarily providing his services to the Applicant not the general public as required by the Act. With the exception of 2009, the fees he derived from other parties are so low as to militate to the conclusion his was not a genuinely independent business. Adapting the expression in Behmer, the provision of architectural services to members of the public by Mr Wright was not an ordinary incident of his business. It was an extraordinary incident. 92LDA submitted that (AS3 at 11-12)- 11. ... having regard to the sixteen factors set out in the Chief Commissioner's Revenue Ruling No PTA 021, Mr Wright conducted a genuine independent business during the 2008 to 2012 financial years. The Applicant's previous submissions [AS1 and AS2] set out the Applicant's contention in this respect. The Applicant submits that the following materials produced in [Ex R1] support its contentions: ABN register extract, [folio] 108 Yellow pages extract, [folio] 110 Thom Wright resume, [folio] 307 Independent Contractor Agreement 14/12/2007, [folio] 440 Fee tender sample, [folio 443] 12. The Applicant submits that, as none of the sixteen factors set out in the Revenue Ruling refers to the financial dependency of a contractor on its customers, the inference of Mr Wright's financial dependence on LDA is not a relevant consideration. The applicant submits the notion of independence in this context is one of commercial and legal independence. 93Even accepting the "sixteen factors" are satisfied, it does not follow that the conditions of s 32(2)(b)(iv) are met. Those factors are listed in the "Ruling" (as opposed to the "Preamble") section of Revenue Ruling PTA 021. The list is preceded by the explanation that in making his determination on an application seeking an exemption under s 32(2)(b)(iv), "the Chief Commissioner will review the contractor's business and consider factors including (but not limited to):". Immediately following the list is this statement: None of the above factors is conclusive on its own. The above is not an exhaustive list of factors that the Chief Commissioner will take into account in exercising his discretion under section 32(2)(b)(iv) of the Act, he will also consider any other matters that are relevant to his decision. 94The purpose of s 32(2) is to exclude persons who work as contractors but are as a matter of fact "tied" to the taxpayer: Roden Security AP at [47]. The Tribunal in Behmer at [20], speaks of the contractor as "not tied to the taxpayer but seek its work when invited to tender" in circumstances where the taxpayer is not the sole consumer of the contractor's services. I think it plain that in this context references to an "independent" business do not refer to financial independence from customers or clients. It seems axiomatic that the life of a business is ordinarily dependent on the on-going custom of customers or clients.

Consideration 95What LDA must prove is that in each of the financial years of the Tax Period Mr Wright ordinarily performs services to the public generally in that financial year of the kind supplied to LDA in particular: Behmer at [12]. 96The Appeal Panel in Roden Security AP at [45] took subpara (iv) as requiring the Commissioner - and the tribunal standing in its place on an application for review - actively review the business of the alleged independent contractor to ensure that the services provided by the contractor are available and used by other persons. 97The evidence indicates that in each of the financial years of the Tax Period Mr Wright did provide and charge for architectural services he supplied to persons or entities other than LDA. It is not necessary in order for the exemption to apply that these persons or entities (Other Clients) comprise a large class of the public: Behmer at [19], Drake Personnel at [41], Roden Security AP at [45-47]. In some circumstances at least one other significant client may suffice: Roden Security AP at [47]. There is nothing in s 32(2)(b) that limits the application of exceptions to instances where the "services of that kind" are quantitatively significant or substantial. But plainly there is a point below which the quantum of work does not suffice to attract the exception: cf Behmer at [15]. The 2009 financial year aside, the amounts received by Mr Wright from Other Clients, and being to some extent a measure of quantity of services (Behmer at [15]), are not in my view outside the exception. 98In relation to Mr Wright's architectural services performed in the 2008, 2010, 2011 and 2012 financial years I am satisfied that, as required by subpara (iv), Mr Wright "ordinarily performs services of that kind to the public generally" in each of those financial years. 99In relation to Mr Wright's architectural services performed in the 2009 financial year I am not satisfied that LDA has shown that, as required by subpara (iv), Mr Wright "ordinarily performs services of that kind to the public generally" in that financial year.

Penalty 100Having concluded that subpara (iv) applies in the financial years other than 2009, the matter of interest and penalty tax arises only in relation to 2009. 101The TAA provides for interest and penalty tax to be applied to a tax default (s 21, s 22). A payroll tax default occurs when a taxpayer fails to pay tax when due. The taxpayer is liable to pay penalty tax in addition to the amount of tax unpaid and the interest: s 26. In respect to interest rate, the TAA provides for a "market rate component", and an 8% per annum "premium component": s 22. 102The burden rests on LDA under s 100(3) of the TAA to show why, as the case may be, the interest or penalty tax imposed in this matter should be remitted, reduced. 103LDA contends that the interest and penalties should, under s 25 of the TAA, be reduced to nil explaining (AS1 section D) - 2. We requested to the Chief Commissioner's (sic) reduce the interest rate and penalties to nil due (sic) the LDA taking reasonable care in preparing his payroll tax affairs. LDA hired a qualified accountant to prepare LDA's payroll tax monthly reporting, the payroll tax was being paid monthly and on time to the OSR. LDA also used and relied on the services of his external accountant to advise him and ensure he was compliant in his tax obligations with the Australian Taxation Office and also understood he would review the payroll tax calculations. 3. LDA also ensured that if a person was integral to the business that he would employ them on a full time basis. He understood that he was complying with the law and relied on his internal accountant to be up to date with what was included in the payroll tax liability calculation. The internal accountant missed certain payments and missed payments discovered in the OSR review have been included i.e. salary sacrificed super and it was the internals (sic) misunderstanding of the amounts included in the calculation which did not capture these payments. These were honest errors not ones that were intentionally omitted." 104The respondent submitted (RS1 para 36) that LDA's position is unsupported by the facts and is inconsistent with authority regarding the purpose of the relevant provisions. 105Interest and penalty was applied to the LDA assessments at market rate interest and 20% penalty tax on the tax shortfall - the premium component was remitted. This, according to the objection decision dated 20 December 2013 (Ex R1 at folio 366), was in accordance with Revenue Ruling PTA 036v2. 106TAA ss 25, 27 and 33 read as follows: 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. 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. 33 Remission of penalty tax The Chief Commissioner may, in such circumstances as the Chief Commissioner considers appropriate, remit penalty tax by any amount.

Remission of interest 107The premium component interest having been remitted, LDA's sole assessed interest liability is the market rate interest. The Appeal Panel in Chief Commissioner of State Revenue v Incise Technologies Pty Ltd & Anor (RD) [2004] NSWADTAP 19; (2004) 56 ATR 82 at [60] stated: In our view the primary interest rate (the market rate component) is intended to compensate the Commissioner (on behalf of the Government of New South Wales) for not having the benefit of the tax payment from the time it was due. 108In Trust Co of Australia v Chief Commissioner of State Revenue [2002] NSWADT 21 Judicial Member Verick stated at paragraph 27- 109In cases where an amount of interest is imposed by the application of the market rate, only exceptional circumstances would justify any remission. The narrow category of circumstances would include cases where the 'Tax default' is entirely due to a fault of the Chief Commissioner. Other circumstances would include situations completely out of the control of the taxpayer. 110I am not satisfied that LDA has demonstrated any exceptional circumstances to justify remission of the market rate component.

Remission/reduction of penalty 111In what it refers to as a "Tax Shortfall" in a case of "Disclosure made after investigation commenced", Revenue Ruling PTA 036v2 nominates a 20% penalty and the market component interest only. 112Section 27(3) of the TAA provides that the Chief Commissioner may determine that no penalty tax is payable if he is satisfied that the taxpayer, or a person acting on behalf of the taxpayer, took reasonable care to comply with the taxation law, or the tax default occurred solely because of circumstances beyond the taxpayer's control of the taxpayer or a person acting on behalf of the taxpayer. 113"Reasonable care" is an objective test, but the particular (and subjective) circumstances relevant to the taxpayer are to be considered in applying the test. It requires that the taxpayer exercise the care that a reasonable person would be likely to have exercised in the circumstances of the taxpayer. See FCT v Traviati (2012) 205 FCR 136; [2012] FCA 546 per Middleton J at [36] and [70]. Taking advice on the operation of relevant provisions can amount to reasonable care for the purposes of s 27: The Smith's Snackfood Case at [96-100]. In my view, simply hiring or relying on an accountant to prepare returns or assuming that an adviser would review returns, is not of itself a "taking advice" on the operation of relevant provisions: cf Snowy Hydro Ltd v Commissioner of State Revenue (2010) 79 ATR 118 at [81-82]; on appeal, Commissioner of State Revenue (Vic) v Snowy Hydro Ltd [2012] VSCA 145 at [170], [171]. 114In RVO Enterprises Pty Ltd v Chief Commissioner of State Revenue [2004] NSWADT 64; (2004) 55 ATR 445 the Tribunal, at [29], reasoned that because "reasonable care" and "circumstances beyond the control" are matters to be taken into account under s 27(3), they are not matters that are relevant for a remission of penalty tax under s 33 and so opined, that remission under s 33 would be only warranted "in exceptional and rare circumstances." 115In my view LDA has failed to demonstrate that it had either taken reasonable care to comply with the Payroll Tax Act or that the tax default occurred solely because of circumstances beyond its control. Further, there is nothing in the facts that satisfies me as being "exceptional and rare circumstances".

Orders (1)In respect to the 2008, 2010, 2011 and 2012 financial years remit the matter to the Chief Commissioner for determination in accordance with the tribunal's decision. (2)Confirm the assessment for the 2009 financial year. 116Costs Without the benefit of any submissions by the parties, in my view there should not be an order for costs in this matter and, as directed by s 60(1) of the Civil and Administrative Tribunal Act 2013 (NSW) "each party to [the] proceedings in the Tribunal is to pay the party's own costs".

I hereby certify that this is a true and accurate record of the reasons for decision of the Civil and Administrative Tribunal of New South Wales. Registrar 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: 12 December 2014