E Group Security Pty Ltd v Chief Commissioner of State Revenue (No. 2) [2022] NSWCA 259
Background
In the Supreme Court proceeding below, E Group Security Pty Ltd (E Group) sought review of payroll tax assessments that were issued by the Chief Commissioner. The assessments were issued by the Chief Commissioner on the basis that he had determined E Group was an “employment agent” (within the meaning of that term in s. 37 of the Act) and liable for payroll tax on payments made to its service providers. The determination related to the provision of the services of security guards by E Group to its clients.
The key legal issue in the proceeding below was whether the arrangements between E Group and its clients (or, alternatively, the arrangements between E Group and its related entities) were “employment agency contracts” within the meaning contained in s. 37 of the Act.
The primary judge (Ward CJ in Eq, as her Honour then was) allowed the respondent’s review at first instance, finding that:
- E Group was not an “employment agent” because it did not procure the services of the security guards in and for the conduct of the business of its clients; and
- in relation to the Chief Commissioner’s alternative contention, the related entities did not procure the security guards for E Group but, rather, the related entities facilitated the provision of services by E Group to its clients by performing a payroll function.
The focus of this decision (ie No. 2) was on the Chief Commissioner’s appeal of the primary judge’s finding in relation to the alternative contention regarding the related entities.
A further issue arose on appeal as to whether interest, which was included in the payroll tax assessments issued by the Chief Commissioner, should be remitted and, if so, whether in whole or in part.
The Statutory Framework
The relevant provision of the Payroll Tax Act under consideration was s. 37(1), which states:
“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 agent.”
Submissions
Chief Commissioner's submissions
The Chief Commissioner contended that the primary judge erred in finding as a fact that the related entities did not “procure” the security guards, but merely performed a payroll function.The Chief Commissioner contended that:
- the related entities entered into contracts (or arrangements) with the subcontractors under which the related entities procured service providers to work in E Group’s business, in a way that satisfies the definition of “employment agency contract” in s. 37(1); and
- the documentary evidence supported the Chief Commissioner’s claim that the related entities procured service providers to work in and for the business of E Group, rather than just providing a payroll function.
E Group submissions
E Group submitted that the Group Payroll Agreements, as well as other internal documents and the evidence of its sole director, supported the conclusion that the related entities merely performed a “payroll function”, and did not “procure” the security guards for the business of E Group.
Decision
Application of employment agency contract provisions
The Court of Appeal allowed the Chief Commissioner’s appeal, finding that there was sufficient documentary evidence, apart from the Group Payroll Agreements, which indicated that there was an arrangement which involved the related entities in procuring the supply of security guards for E Group.
Griffiths AJA (with whom Simpson AJA agreed), accepted the Chief Commissioner’s contention that there were at least three categories of documents which demonstrated there were arrangements in place under which the related entities performed more than a payroll function for the group:
- invoices issued by various external subcontractors to one of the three related entities, which contained statements by the subcontractors that they had entered into a contract with one of the three related entities (and not with E Group). This indicated that the subcontractors provided security guards to one of the three related entities and not to E Group, and suggested that the related entities procured the supply of security guards for E Group (at [73]);
- various internal documents, such as a group organisational chart, stated that the related entities employed and paid all security guards. Further, tax invoices issued by the related entities during the relevant period to E Group were stated to expressly relate to “Labour Hire Services”, and these were “strongly suggest that the (related) Grouped Entities were not simply confined to performing a payroll function during the Relevant Years” (at [88]); and
- invoices sent by E Group to clients all contained a statement that the relevant security services were supplied by one or other of the related entities.
In making this finding, the Court noted that a fundamental difficulty with E Group’s position was that it relied very heavily on the subjective views of its sole director as to how the related entities were intended to operate. Those views were contradicted in varying degrees and respects by the various categories of documents. The Court emphasised that “the relevant legal issues fall to be determined primarily by reference to the contemporaneous documentation” (at [97].
Remission of interest
The Court determined as follows:
- it was “not satisfied that there are any “special circumstances” which justify a remission of the market component of interest” (at [104]); and
- the premium component of interest should not be remitted as an important consideration was that there had been “wilful default by the taxpayer in not paying the tax on time” (at [107]).
Orders
- The appeal is allowed, with costs.
- The costs order made below on 13 October 2021 is set aside and in lieu thereof the defendant is ordered to pay 50% of the plaintiff’s costs of the proceeding.
- The parties have leave to apply within 14 days hereof if they seek a variation of the costs orders in orders (1) or (2) above.
- The matter is remitted to the appellant to reassess the respondent’s payroll tax liability for the 1 July 2015 to 30 June 2018 payroll tax years in conformity with the reasons of the Court.
Link to the decision