Qualweld Australia Pty Ltd v Chief Commissioner of State Revenue

Qualweld Australia Pty Ltd v Chief Commissioner of State Revenue - [2015] NSWCATAP 249 - NSWCATAP 2015 case summary — Zoe

[4]

Central Point

Section 37 of the Payroll Tax Act provides as follows: (1) For the purposes of this Act, an employment agency contract is a contract, whether formal or informal and whether express or implied, under which a person (an employment agent) procures the services of another person (a service provider) for a client of the employment agency. (2) However, a contract is not an employment agency contract for the purposes of this Act if it is, or results in the creation of, a contract of employment between the service provider and the client. (3) In this section: Contract includes agreement, arrangement and undertaking.
Given the rival positions of the parties in this case, examination of the contract between Qualweld and its client, Power Project International (PPI), in respect of a construction project at the Eraring Power Station became important. The major component of the payments made by Qualweld, which were assessed for payroll tax, were paid to contractors working on this project.
A like issue to the present was referred to by White J in Freelance Global Ltd v Chief Commissioner of State Revenue [2014] NSWSC 127 at [158] as follows: [158] The Chief Commissioner submitted that because the Act imposes taxes upon "employers" in respect of "wages" payable to an "employee" (or, under the 1971 Act, to "an employee as such") the subject of the tax is remuneration for work done. The effect of the deeming provisions is to extend the scope of the Act to a broader range of contracts and arrangements under which, or whereby, work is performed. The Chief Commissioner submitted that an agreement between a building owner and a builder for the construction of a building could not be characterised as a contract for the performance of work, but rather for the delivery of a result, namely the completed building. Similar reasoning would apply to the example of a customer who engaged a person in the business of providing brochures who procured the service of a printer. The contract to provide brochures would not be a contract whereby the contractor performed work.
(We note that White J expressed some difficulty with this analysis at [159]).

[5]

Some background facts

Qualweld is a company incorporated in Australia with its registered office and main place of business in Strathfield, NSW. It was established in 2007. At the material times, its sole director and shareholder was Mr Yong Kil Kwon (Mr Kwon). Qualweld's employees consisted of Mr Kwon, his wife and a part-time person employed to assist Mr Kwon's wife with administrative duties.
Mr Kwon was born in Korea, where he trained as a specialist welder commencing in 1977. In 1987, Mr Kwon migrated to Australia. Both before and after migrating, he worked on large scale welding projects in Asia and in the Middle East. Over the years, he developed a reputation for his specialist welding capabilities on a number of industrial and infrastructure project.
In the 2009-2012 tax years, Qualweld was involved in welding projects in New South Wales and Queensland. However, the main project for Qualweld in these years was at the Eraring Power Station where turbine and boiler units were being replaced.
Qualweld's objection to the Commissioner's assessments was made by letter dated 11 December 2012.
By letter dated 16 December 2013, the Commissioner disallowed that objection. In that letter, the Commissioner stated: By procuring the services of the welders for the end-user clients, the arrangement between Qualweld, the clients and the welders meets the definition of an employment agency contract in section 37 of the Act … Your reasons as to why Qualweld is not an employment agent have been considered. However, there is no evidence in the quotation supplied by Qualweld to its clients that payments are task based. All quotations sighted indicate Qualweld charges an hourly rate to their clients for the supply of welders. While Qualweld has ongoing involvement in the performance of the work through its part in reviewing the welding specifications and supervising the welders, these do not detract from the fact the overall arrangement and contracts between the parties satisfied the definition of an employment agency contract in section 37 of the Act.
The objection, to the extent that it related to payments to welders for services provided wholly in Queensland, was allowed. The Commissioner partly allowed an objection to the imposition of penalty tax and reduced the rate to 20%.
In February 2014 Qualweld made an application to the Tribunal for administrative review of the Commissioner's disallowance of its objection.
By letter dated 14 August 2015 to the Tribunal, subsequent to the hearing of the appeal, the Tribunal received notice of the appointment of a liquidator to Qualweld on 30 July 2015. The Tribunal has since been informed by the liquidator that Qualweld wishes to maintain its appeal.

[6]

Qualweld's case

Qualweld bore the onus of establishing that the correct and preferable decision was that there was no employment agency contract involved in these affairs: s 100(3) of the TA Act; Cornish Investments Pty Ltd v Chief Commissioner of State Revenue [2013] NSWADTAP 25.
As part of its case, without objection, Qualweld adduced evidence from two witnesses to the following effect, which evidence was not referred to by the Tribunal below: 1. PPI needed a specialist welding contractor as part of its contractual obligation to project manage and co-ordinate the installation and upgrade of boiler and turbine units at the Eraring Power Station. Mr Kwon was known to Mr Kim of PPI as a quality specialist welder. The welding needed to complete this work was complicated. PPI regarded Qualweld as a specialist welding company which was able to complete such work. PPI selected Qualweld as the specialised welding company for the Eraring Project based on Mr Kwon's experience and not on the basis of its sub-contractors and welding contractors: at [5]-[11] and [15] of the witness statement of Mr Kim, the Managing Director of PPI. 2. PPI made an oral contract with Qualweld with respect to the welding work needed at the Eraring Power Station. In discussions between Mr Kim and Mr Kwon, PPI expressed the preference that there be a lump sum contract price for the completion of the welding works. In this connection, Mr Kim said to Mr Kwon "welders can do 10 butts per 10 hour shift". However, because of the complicated nature of the work, Qualweld asked for, and PPI agreed, to payment at an hourly rate per welder: at [12] and [14] of the witness statement of Mr Kim; at [52]-[53] of the witness statement of Mr Kwon. 3. The welding work to be done at the Eraring Power Station followed upon welding work Qualweld contracted with PPI to supply at the Vales Point project. For that work, Qualweld had quoted PPI for a lump sum fixed price per butt and per panel. The hourly rates shown in the quote for that work were stand-by time in case of situations where the welding contractors were unable to perform work because of scheduling difficulties: at [49] of the witness statement of Mr Kwon. 4. According to Mr Kim (see his witness statement at [12]; see also witness statement of Mr Kwon at [18] and [59]) the oral terms agreed included: 1. Qualweld was responsible for rectification costs if the failure rate exceeded 2.5% of the total weld butts. 2. PPI would give Qualweld enough support so that Qualweld could meet the schedule for project completion. 3. Qualweld was required to attend a daily pre-start meeting and toolbox meeting so that production scheduling could be checked and OH&S issues addressed. 4. Qualweld was responsible for selecting suitable staff and the number of contractors on the site to ensure that the expected level of workmanship and timing of the project was met. All welders had to pass a proper welding test. 1. During the carrying out of Qualweld's contract at the Eraring Power Station Mr Kwon attended a daily pre-start meeting with PPI and Eraring staff at which the work to be done by welders was co-ordinated. This was then discussed and agreed upon between Mr Kwon and the welders. During each day, Mr Kwon would spend time dealing with welding failures and he worked to ensure the site was properly prepared for the welding work: witness statement of Mr Kwon at [11] and [27]-[33]. Each day there was an evaluation by PPI and Qualweld of the number of butts welded in the day measured against the number of welders used: witness statement of Mr Kwon at [56].
It is worth noting that aspects of this evidence were consistent with parts of the purchase order to which we refer in paragraph 39(8) below.
In the Tribunal below, based on such evidentiary material, Qualweld contended that the terms of the agreement with PPI, the discussion that led to a change from a lump sum price to an hourly rate and features of the operation of the PPI agreement, demonstrated that this was a contract to deliver a result, an important ingredient of which was the expertise and effort of Mr Kwon, and which was exemplified by the commercial risk Qualweld undertook in respect of defects. Due to the informality of the arrangements, it contended that it was appropriate to look beyond the paperwork (closing submissions of Qualweld, transcript of hearing on 1 October 2014 at T64.33 and see also at pages 56 to 65, particularly at T58.47, T59.28-.32, T59.47-60.16, T63.1-63.22, T64-65.23).
Qualweld also adduced before the Tribunal below a considerable body of written material concerning contracts with other clients, along with a detailed summary of that evidence.
On the appeal, Qualweld criticised the Tribunal below for not addressing this evidence. The Commissioner disputed that the Tribunal below, in substance, had not done so.
At the hearing of the appeal, we were shown this material. It is quite voluminous and it is far from easy to know what to make of it. It seems that some of the material supports Qualweld and some supports the Commissioner on the employment agency contract issue. It is not readily apparent that findings about this material could have affected the outcome. If, for example, Qualweld had failed to establish that there was no employment agency contract by reference to the relationship with its main client, PPI, it is difficult to see how an assessment of the other contractual material could have altered the result in its favour. Qualweld did not contend for a reduced payroll tax assessment by reference to payments to contractors on specific, non PPI projects.
We are of the opinion that the decision of the Tribunal below should be set aside. We have come to that view by reference to its handling of the material concerning the PPI relationship. In those circumstances, and also in view of what we have just said about the nature and significance of this other client contractual material, we do not address Qualweld's argument based on this additional evidentiary material.

[7]

The decision of the Tribunal below

For the purpose of the grounds of appeal, important aspects of the reasons of the Tribunal below were: 1. The Tribunal noted that there was no written contract between PPI and Qualweld and remarked that there appeared to be no dispute that there was an agreement between them under which Qualweld would provide the requested services based on the quoted hourly rates: at [15]. In connection with that conclusion, the Tribunal began by referring to a quote by Qualweld for the provision of welders and boilermakers at specified hourly rates, given in response to a request of 11 July 2007: at [13]. This was, in fact, the quote in respect of the Vales Point project to which we have referred above at [32(3)], but the Tribunal below did not refer to the evidence of Mr Kwon that the quote at hourly rates was for standby time and that the Vales Point project had, in fact, been contracted at a lump sum price. Nor did the Tribunal below refer to the evidence as to the context in which the quote at hourly rates for the Eraring project had occurred, following a request by PPI for a lump sum price (see at [32(2)] above). 2. The Tribunal referred to the agreements made by Qualweld with entities associated with the welders and boilermakers: at [17]-[20]. The Tribunal below considered the remuneration obtained by the entity associated with the tradesman and concluded that when viewed in the context of all the other available material the broad effect seemed to be to give Qualweld a fee for procuring the services of the worker for the client (at [79]-[80]). Qualweld generates a profit by charging its client a higher hourly rate than that charged to it by the tradesman. Whether it is correct to describe this as, in effect, a fee is debatable. The agreements themselves do not do so. We also note that the description of the parties to the written agreements characterises their relationship as that of principal contractor and subcontractor. 3. The Tribunal did not accept that the fact that payment was made to Qualweld based on hourly rates led to the conclusion that there was a delivery of a service and nothing more. The Tribunal said that it discounted the relevance that payment was often made on an hourly charge out basis, in so doing referring to authorities that emphasise that what is important is what you are paid for and not the manner in which the fee is calculated: at [59]-[62]. 4. The Tribunal was of the view that it became more difficult to accept the assertion that Qualweld carried on a business of delivering complex welding project work in circumstances where it had at its disposal the services of just one individual, albeit a very knowledgeable and relevant employee: at [67]. 5. The Tribunal referred to various critical factors outlined in Qualweld's supplementary submission about its role with its clients. It noted the Commissioner's contention that Qualweld did not conduct a broader business as suggested by Qualweld. Essentially, the Tribunal accepted the Commissioner's contention, saying even though there were elements which went beyond the provision of the welders, the central and predominant aspect of Qualweld's business was precisely that. Anything beyond the provision of such welders for the clients was largely incidental …: at [69]-[75]. 6. In arriving at that conclusion, the Tribunal below reasoned that the additional dimension to Qualweld's business as suggested by it did not emerge from the quotes or invoices, although it indicated that to some extent what Qualweld was suggesting based solely on what the Applicant has described as its business must be accepted: at [73]-[75]. The Tribunal did not identify just what it was accepting or explain why it had done so. 7. Whilst the Tribunal below referred to the quotes and invoices as adverse to the Appellant's case, the Tribunal below did not specifically refer to aspects of the Purchase Order, to which we refer below (at par 39(8)), which were, arguably, at least, favourable to the Appellant. 8. The Tribunal was of the view that the key purchase order had the flavour of an order for the supply of welders rather than an order for welding services as part of a broader business: at [83] and also at [16]. It commented that the idea seemed to be that PPI assesses the need for welders and then informs Qualweld of the number needed. In so finding, the Tribunal below made no reference to the witness evidence from Mr Kim to the opposite effect, namely that Qualweld was responsible for selecting the number of contractors (see at [32(4)(d)] above). 9. There were aspects of the Purchase Order which appeared to provide some support for Qualweld's case as follows: 5. Qualweld to supply all qualified welders and standard performance at site work must achieve average 8.2 butts welding per day for 12 hours shift each day … and less than 2.5% defect rates. 6. PPI will pay extra money if Qualweld have achieved better than standard works. By calculation of actual gains and divide between PPI and Qualweld by mutual agreement. 7. Base of calculation will be the 9370 butts of weldings and defect repair time to be 2 ̴ 3 hours per each failed welding. In its closing submissions, Qualweld referred to these aspects in items 5 and 6 of the Purchase Order: at T65.1. The Tribunal referred to one of these aspects, namely the prospect of extra money, but did not specifically refer to the others (at [81]-[84]), although the Tribunal may well have had items 5 and 6 in mind in remarking that there were aspects of documents which point the other way at [91] of the reasons, to which we refer below. 1. The Tribunal concluded (at [90]-[91]): 90 In conclusion on this issue, having regard, in particular, to the documents referred to above most of which are consistent with the view that essentially what was delivered here by the Applicant was the service of particular tradespeople for the Client; the fact that the Applicant had no employees other than Mr and Mrs Kwon; and the fact that the vast majority of the Applicant's revenue was generated from the provision of welders to the Client the preferable view is that the Applicant procured the services of the welders for the Clients and accordingly in each relevant case there is an employment agency contract. 91 There are some aspects of the documents that confusingly point the other way, but looking at the totality of the evidence presented, it seems to the Tribunal that fundamentally what the Applicant was doing was procuring the services of the tradespeople for the projects being undertaken by the Clients and the Applicant had a responsibility which carried with it certain financial implications to ensure that these tradespeople would be qualified to carry out that work to the standards required.

[8]

Grounds of Appeal

Qualweld's grounds of appeal concerning the employment agency contract issue were: Amended Questions of Law 1 Were the Tribunal's reasons adequate? 2 In failing to have regard to relevant evidence relating to Qualweld's client contracts, did the Tribunal misconstrue s 37 of the Payroll Tax Act 2007 (the Act)? 3 In undertaking the fact-finding task required to determine the existence of "employment agency contracts" under s 37 of the Act, did the Tribunal err in disregarding relevant evidence relating to the factual context and oral terms of Qualweld's client contracts? 4 In failing to have regard to relevant evidence relating to Qualweld's client contracts, did the Tribunal deny Qualweld procedural fairness? 5 Was the Tribunal's refusal to allow oral evidence to be given by Mr Kwon at the hearing relevant to Qualweld's client contracts and the documents before the Tribunal erroneous because it was contrary to the provisions of the Civil and Administrative Tribunal Act 2013 (NSW) or because it was an erroneous exercise of the discretion? … Amended Grounds of Appeal 1 The Tribunal's reasons were inadequate at common law and/or under s 62(3) of the Civil and Administrative Tribunal Act 2013. 2 The Tribunal misconstrued s 37 of the Act, and/or failed to exercise its jurisdiction to conduct a review of the assessment by limiting its consideration of the Appellant's agreements to the contents of several quotations and invoices, and by failing to consider the Appellant's evidence as to the factual context of the agreements and their oral terms. 3 The Tribunal denied Qualweld procedural fairness in circumstances where: a. The Tribunal failed to have regard to relevant evidence relating to Qualweld's client contracts; and b. The Tribunal refused to allow oral evidence to be given by Mr Kwon at the hearing relevant to Qualweld's client contracts and the documents before the Tribunal. … Grounds of appeal subject to leave 6 The Tribunal erred in finding that the provisions of Division 8 of the Act applied to the Appellant's payments to its contractors. …

[10]

Failure to consider relevant evidence

The Appeal Panel is entitled to take the reasons of the Tribunal below as setting out the findings of fact the Tribunal itself considered material to the decision and as reciting the evidence and other material which the Tribunal itself considered relevant to the decision: Minister for Immigration and Border Protection v MZYTS [2013] FCAFC 114 at [49], 239 FCR 431; Mulligan v National Disability Insurance Agency [2015] FCA 544 at [63]-[65].
Given the competing contentions of the parties on the employment agency contract issue, the nature and scope of Qualweld's obligations to PPI was an important consideration in the determination of Qualweld's case. There appeared to be no dispute between the parties that the relevant contract between PPI and Qualweld was an oral contract, albeit there were material documents to be considered in making findings about its terms. Qualweld was contending that the oral terms and context were significant in determining the ultimate issue.
We have already summarised significant aspects of the witness statements adduced by Qualweld concerning the oral contract and its performance. In conjunction with items 5, 6 and 7 of the Purchase Order such evidence assisted Qualweld's case and was, at least, arguably inconsistent with the ultimate conclusions of the Tribunal below. Such evidence was capable of establishing (we do not say it did so establish) a responsibility on the part of Qualweld to deliver a result, and not just a responsibility to supply the services of welders and boilermakers, and, furthermore, not just a responsibility to ensure that these tradespeople would be qualified to carry out that work to the standards required, as the Tribunal below found (see the Tribunal below at [91]).
In the circumstances, in our opinion, and with respect, the Tribunal should have referred to this body of evidentiary material, made findings in relation to it and evaluated its impact in the context of all of the evidence about Qualweld's operations.
The Tribunal below did not do this. Plainly, this was not a case where the terms of a document or documents supplied the parameters of the material to be considered. In the circumstances, we conclude that the Tribunal below did not consider this relevant material.
The Commissioner contends that the Tribunal below demonstrably had regard to the Appellant's evidence with regard to the nature of its business. In so contending the Commissioner points to a passage in the reasons at [73] (and in [74], where the same matter is referred to), to which we have already referred, where it was stated that : It is suggested, and to some extent it must be accepted that, based solely on what the Applicant has described as its business:….. [emphasis from the submissions of the Commissioner]
However, in our opinion, this does not disclose that the Tribunal below was considering the evidentiary material to which we have referred about the terms and operation of Qualweld's main contract with PPI. On the contrary, it tends to support our conclusion, because of the absence of a reference to the specific evidence about the PPI contract, rather than more general material about Qualweld's business, in a context where the specific evidence was material. If such evidentiary material was truly being considered, we would expect it to have been specifically referred to.
The circumstances of a case may permit more than one characterisation of legal error: Minister for Immigration and Cultural Affairs v Yusuf (2002) 206 CLR 323 at 351.5.
Fundamentally, the task and duty of the Tribunal below was to carry out a review in order to determine the correct and preferable decision having regard to the material then before it: s 63(1) of the Administrative Decision Review Act 1997; Bushell v Repatriation Commissioner [1992] HCA 47; (1992) 175 CLR 408 at 424-425 per Brennan J; Applicant WAEE v Minister for Immigration and Multicultural and Indigenous Affairs (2003) 75 ALD 630; [2003] FCAFC 184 at [44].
We see the second part of Ground 2 of the Amended Grounds of Appeal as raising a failure by the Tribunal to carry out this task and comply with this duty.
In its submissions on the appeal, Qualweld focussed upon error of law as follows: 1. error concerning the width of the meaning of "contract" in s 37 of the Payroll Tax Act or as to the general principles of the law of contract relating to determination of an oral contract and the relevance of the factual matrix. This it was said had led the Tribunal to identify the wrong issue or ask itself the wrong question and thereby fail to consider the oral evidence about the terms and context of the contract between Qualweld and PPI - an error of the kind described in Minister for Immigration and Cultural Affairs v Yusuf (2002) 206 CLR 323 at 351 [82], and in the decision of the Appeal Panel in Prendergast v Western Murray Ltd [2014] NSWCATAP 69 at [13(2)]; 2. error in the manner of undertaking the fact-finding task as described by Allsop J (as he then was) in Collins v Administrative Appeal Tribunal (2007) 163 FCR 35 at 48-49 [55] where he said: If, as here … the Tribunal has begun a process of fact finding by preferring some evidence to other evidence or be rejecting conflicting material in the formation of its opinion as to reasonable hypothesis, it would have exceeded the statutory task required of it … 1. a denial of procedural fairness.
First of all, we reject the contention of error as described in the above passage from Collins. The circumstances here are quite distinct from the particular statutory task that the Administrative Appeal Tribunal faced in the Collins case and the remarks of Allsop J (as he was then) are not pertinent to the present issue. In Collins the Tribunal was concerned with the question whether there was a reasonable hypothesis of a war injury - a task that did not involve the need to arrive at a conclusion of fact as to the cause of such injury.
Subsequent to the hearing of the appeal, Qualweld drew our attention to the recent decision of the Full Federal in Haritos v Commissioner Taxation [2015] FCAFC 92 which refers to Collins at [179]. However, we do not discern anything in that decision that advances Qualweld's argument of an error of the type found to exist in Collins. Nor do we understand the Commissioner to dispute the proposition that there can be an appeal on a question of law even though the appeal necessarily involves an examination of the Tribunal's handling of the facts - a matter dealt with in the passage from Collins referred to in Haritos at [179].
Nothing in the reasons of the Tribunal below suggests that it mistook the scope of the meaning of "contract" in s 37 of the Payroll Tax Act. The terms of s 37 themselves, which the Tribunal set out in the reasons (at [30]), make it clear that the contract may be informal.
However, it does seem implicit in the Tribunal's approach that it asked itself the wrong question or identified the wrong issue, namely, what are the relevant parts of the contractual relationship between Qualweld and PPI as determined by the documents.
In this respect, we note that the Tribunal below did characterise the following as one of six key factors raised: The way in which the work to be done by the applicant is described in the critical documents.
In many circumstances such an approach would be orthodox. However, in circumstances where the leading contract for payroll tax purposes was informal and oral and was the subject of oral evidence as to its terms and operation, it was important that such oral evidence be closely examined. That is not to say that the documentary evidence might not prove to be decisive because, for example, it was to be preferred to any inconsistent oral evidence.
In the present circumstances, this identification of a key factor, in combination with the approach that the Tribunal in fact took, supports our view. Whenever the Tribunal examined evidence that was specific to the relationship between Qualweld and PPI, it only did so by reference to documents (at [13]-[16], and the whole of the section headed The description of the work to be done by the Applicant at [76]-[86] save for [79]-[80]).
The precise error of law which led to this error of approach is not clear, but we infer that some such error occurred.
We are also of the opinion that in failing to consider the evidentiary material there was a denial of natural justice. We regard this as a denial of natural justice of the kind referred to by Gummow and Callinan JJ in Dranichnikov v Minister for Immigration and Cultural Affairs (2003) 77 ALRJ 1088; [2003] 8 HCA 26 at [24].
Needless to say, in so finding, we are not accepting that it was necessary for the Tribunal below to specifically address all of the evidence and submissions of Qualweld. Clearly, that was not required. We also note that such error is distinct from a failure to advert to some evidence resulting in an error of fact.
From what we have already said, and for the purpose of evaluating the impact of a denial of natural justice, it is clear that we do not consider that consideration of the evidentiary material in issue could not have affected the outcome: Stead v State Government Commission [1986] HCA 54, 161 CLR 141 at 145-147.
Our preferred way of characterising the error is, however, that by ignoring the relevant material there was a constructive failure to exercise jurisdiction or a failure of the Tribunal below to carry out its statutory task - a matter to which we have referred above (at [50]) and see also in Nufarm Australia Ltd v Dow AgroSciences Australia (No. 2) (2011) 282 ALR 24; [2011] FCA 757 at [102] per Robertson J; and in Mulligan, per Mortimer J at [81].
For these reasons, we uphold the second part of Ground 2 and also Ground 3a of the Amended Grounds of Appeal.

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