The Queensland Court of Appeal has upheld a decision of the Supreme Court that 2 taxpayers did not procure the services of their employees under employment agency contracts but rather were common law employers, rendering the employees’ remuneration for their services subject to payroll tax.


The taxpayers were 2 companies that entered into contracts to provide services to a school and hospital (the clients). Under the contracts, the taxpayers were required to provide suitably qualified staff to perform agreed services, supervise the staff and ensure compliance with occupational health and safety requirements. The first taxpayer was reimbursed for all its costs, including wages and payroll tax, and was paid an annual performance fee. The second taxpayer received fees, in part fixed and in part varied, according to specified hourly rates for labour provided. Each of the taxpayers also entered into employment contracts with their own workers to provide the contracted services, under which the workers were employed on a full-time basis at the clients’ premises.

The Commissioner assessed the taxpayers for payroll tax on the basis that they were common law employers. The taxpayers objected to the assessments then applied to the Supreme Court for review of the Commissioner’s decision to disallow their objections. At first instance the primary issue was whether the arrangements between the taxpayers, their clients and employees constituted an “employment agency contract” under s 13G(1) in Div 1B of Pt 2 of the Payroll Tax Act 1971 (Qld) (the Act).

The taxpayers submitted that the client contract and employment contract considered together constituted employment agency contracts within the meaning of s 13G. The taxpayers argued that they procured a service under an employment agency contract by directing their employees to provide a service to their client in order to discharge contractual obligations. The payments would have been exempt from payroll tax if made directly by the clients, both of whom were charitable institutions. As the clients had given the required declaration, the taxpayers’ payments to employees should have been exempt under s 13J(2) of the Act.

The Commissioner submitted that s 13J(2) did not apply as the taxpayers were common law employers. The Commissioner argued that the section only applied where the scope of payroll tax liability had been extended to an employment agency under s 13J(1). The section did not apply to exclude payments from being taxable wages where an employer/employee relationship was clearly established. Even if the section were to apply to common law employers, the taxpayers had not procured the services of others for their clients within the meaning of s 13G(1). The taxpayers were not employment agents but rather provided services to the clients through their employees.

Supreme Court decision

At first instance, the Supreme Court (Holmes CJ) found that Div 1B did not apply to the taxpayers as the division had no application to common law employers: 2020 ATC ¶20-751. According to Holmes CJ, employers were not employment agents within the meaning of the definition in s 13G. The expression “procure services of another” was not intended to apply where an employer directs, or even engages, an employee to provide services for a client. Further, s 13J(2) could only apply to certain payments made by employment agencies deemed to be wages for payroll tax purposes under s 13J(1). The section did not exempt payments that were taxable under general provisions of the Act.

From that decision the taxpayers appealed to the Court of Appeal, where they primarily contended that Div 1B applied to a common law employer and the dictionary definition of “wages” did not apply in respect of an employment agency contract. As a result, they were entitled to an exemption under s 13J(2) and no liability for payroll tax arose. The taxpayers pointed out that corresponding New South Wales (NSW) payroll provisions (and, in particular, s 3C(4) of the Payroll Tax Act 1971 (NSW)) had received an interpretation that the employment agency contract provisions applied to a common law employer. The taxpayers stressed the importance of uniformity of interpretation of the Queensland legislation with “substantially the same” legislation in NSW and Victoria.

The Commissioner’s position was that the trial judge’s decision was correct. The “only sensible construction” of the employment agent provisions within the context of the Act as a whole was one that did not apply those provisions to employer/employee relationships. In any event, Div 1B did not cover the field of liability to payroll tax for employment agents. The Commissioner accepted that s 3C(4) of the NSW Act may have had the effect contended for by the taxpayers. That section purported to exempt any payment made by an employment agent to an employee under an employment agency contract. It could apply to any liability for payroll tax whether for wages or some other payment. However, s 3C(4) was not, and never had been, part of the law in Queensland. The taxpayers’ argument also proceeded on the basis that the construction of the comparable NSW provisions was settled, which was disputed.

Court of Appeal decision

The Court of Appeal justices (Morrison JA, Philippides JA and William J) unanimously dismissed the appeal, holding that the construction found by the Chief Justice at first instance and contended for by the Commissioner was correct. Division 1B did not apply to common law employers and, consequently, the employers were not employment agents. The key issue of when Div 1B applied had to be considered in the context of the Act as a whole. On undertaking such a consideration, the various factors supporting a construction that the provisions in Div 1B did not apply to the employer/employee relationship became apparent.

According to the main judgment handed down by William J, Div 1B operated to include payments made under employment agency contracts within wages and the liability for payroll tax under Div 1. It deemed employment agents to be employers, workers providing services to clients to be employees, and amounts paid to such workers under employment agency agreements to be wages for the purposes of the Act. The deeming provisions in effect created a “legal fiction” and would have no operation where what was being deemed was actually the true fact. This construction did not result in a conflict between Divs 1 and 1B. The taxpayers’ contention that Div 1B operated as a code was not established on a consideration of the Act as a whole.

In regard to the taxpayers’ reliance on the interpretation of comparable provisions in NSW, the court said that the language of s 3C of the NSW legislation was quite different to the language in s 13J(2) of the Act. The trial judge’s conclusion that the taxpayers’ construction of s 13J(2) would require an impermissible “reading in of words” was not in error. The words in s 13J(2) could not operate to achieve the same result as s 3C without something further. Consequently, reliance on the NSW case authorities did not provide any real assistance in the construction exercise being undertaken.

Source: Compass Group Education Hospitality Services Pty Ltd & Anor v Commissioner of State Revenue (Qld) 2021 ATC ¶30-022; [2021] QCA 98, 11 May 2021.