State revenue authorities have been raising payroll tax assessments for subcontracting arrangements – by using the broad scope of the employment agent provisions.
In a welcome decision, the New South Wales Supreme Court in UNSW Global Pty Ltd v Chief Commissioner of State Revenue  NSWSC 1852, found that an employment agency contract requires the subcontractor to be in the client’s business and providing services for the conduct of the client’s business. It is not enough for the client to simply receive a benefit because the subcontractor does its job, which helps the head contractor do its job.
Who is an ‘employment agent’? Hint – not just labour hire companies
‘Employment agency contracts’ are defined as contracts under which a person (the employment agent) ‘procures’ the services of another person (third party) for the client of the employment agent.
Amendments were made to the payroll tax legislation introducing the employment agent provisions to stop payroll tax avoidance where taxpayers were using agents to argue that there was a contractor relationship and payments were not subject to payroll tax.
However, the amendments that were made to the legislation went a lot further.
The OSR has previously argued that the subcontractor’s services may be ‘for’ the client, as well as ‘for’ the head contractor. If the head contractor has ‘procured’ the services of the subcontractor for its client, then any payment is deemed to be wages subject to payroll tax. To make it more problematic, the exemptions that often apply to the ‘relevant contractor’ provisions (e.g. providing services for less than 90 days or the contractor employing employees) do not apply to the employment agent provisions.
For information on what it means to ‘procure’ the services of another person, please see our article here.
What happened in UNSW Global?
The Commissioner issued UNSW Global with payroll tax assessments for the 2007 to 2012 income years on the basis that UNSW Global was an employment agent. As a result, payments that UNSW Global made to various experts were taxable wages under the Pay-roll Tax Act 1971 and Payroll Tax Act 2007.
UNSW Global is owned by the University of New South Wales. Unisearch (one of UNSW Global’s business units), operated a business arranging for third parties to provide expert opinions to UNSW Global’s clients. There were two service lines:
- Expert Opinion Services – which contracted with law firms to provide expert reports and testimony for the purpose of litigation; and
- Domestic Consulting – which provided expert services related to UNSW Global’s clients’ businesses, often involving some form of inspection, analysis and report.
Unisearch handled the administration of engaging an appropriate expert. It also provided the expert’s report to the client.
The Court acknowledged that, on a literal reading of the legislation, UNSW Global was an employment agent. However, the Court concluded this was an absurd result and one that wasn’t intended by Parliament. Other absurd results would include law firms being liable for payroll tax for payments to barristers when engaging barristers for their clients.
As the words in the legislation went far beyond what was intended, White J found that the phrase ‘procures the service of another … for a client of the employment agent’ was limited to scenarios where an employment agent procures the services of another in and for the conduct of the business of their client.
This limits the circumstances in which subcontractors are caught by the employment agent provisions.
What can you do to reduce your risk?
It was a happy ending for UNSW Global as the assessments were revoked and it received a refund for the amounts that it had paid.
The case also provides a blueprint for reducing the risk of the OSR applying the employment agent provisions to subcontracts. The key is to structure the commercial arrangement to match the test in UNSW Global – and make sure the contract is properly drafted and applied in reality.
We suspect that the OSR will continue to audit on the employment agent provisions. If the OSR forms the view that payments to subcontractors are caught by the employment agent provisions, the payments are deemed to be wages subject to payroll tax. This generally has a substantial impact on a business’s net profit, particularly as assessments often cover multiple income years, and can be exacerbated by interest and penalties.