NSW Employment Agents Payroll Tax Case Sets New Benchmark
Payroll tax is a state-based tax but varies across states and territories. However, there are some cases where a ruling by a court in one state will apply to all states and territories.
Once such instance is a recent ruling in the NSW Supreme Court. The case has made substantial changes to the ways in which payroll tax is assessed for employment agents throughout Australia. And it is good news for those impacted as some employment agents are no longer liable for payroll tax.
Defining Employment Agents
Before you jump too far ahead, you need to realise if your business is defined as an employment agent under the payroll tax legislation.
Section 13G of the Payroll Tax Act (Qld) includes:
13G Meaning of employment agency contract:-
- An employment agency contract is a contract under which a person (an employment agent) procures the services of another person (a service provider) for a client of the employment agent.
To interpret that for you, this is when a business operates as procuring workers to provide various services to their clients. The business, somewhat of a ‘middle-man’ is defined as an employment agent. The operators or persons they organise to work for their client may have their own employees or work alone. They may operate under their own corporate structure, be self-employed or contractors with their own ABN or some other arrangement.
This type of arrangement is particularly common practice in the cleaning industry, which was the sector in focus for this recent ruling. For example, a cleaning company has a supermarket client with outlets across the state or country. But that cleaning company does not actually carry out the cleaning itself.It engages a range of people or small businesses to carry out the actual cleaning work. These sub-businesses may be single operators or in turn employ their own workers.
At stake in the payroll tax determination is the status of each of the persons in the chain in relation to the main cleaning company business.
Contractor v Employee
Differentiating between who is a contractor and who is an employee is one aspect of the issue. The other is, which company are these persons the contractors or employees of? This of course determines who pays the payroll tax on their wages.
The case came before the NSW Supreme Court. The critical question was whether or not the individuals hired out by the taxpayer (in our example, the cleaning company) comprised, or were added to, the workforce of the taxpayer’s clients (in our example the supermarket) for the conduct of the client’s business.
For more information on differentiating contractors and employees, read more of our articles.
NSW Supreme Court Sets New Benchmark
The recent NSW Supreme Court ruling involved the cleaning company, JP Property Services Pty Ltd v Chief Commissioner of State Revenue.
In this case, J P Property Services Pty Ltd v Chief Commissioner of State Revenue 2017 ATC 20-634; [2017] NSWSC 1391, the Supreme Court of New South Wales held that none of the contracts used by the taxpayer in that case were employment agency contracts (EACs) under the provisions of the Payroll Tax Act 2007 (NSW).
As it is put in the Headnote to the Australian Tax Reports (the “client” is the supermarket owner):
“3. None of the three types of contracts were employment agency contracts … because the services of the contracts were not ‘for a client of the employment agent’ in the requisite sense because they were not provided by subcontractors working in the client’s business. The services provided by the subcontractors were out of hours cleaning services incidental to … the … clients’ businesses.”
The outcome, J P Property Services was not liable for the payroll tax on the personnel that they arranged for their client.
Applying the Benchmark For Other State Payroll Taxpayers
We recently relied on this case and ruling for one our clients, which ran a substantial cleaning business across three States. In that instance, the Payroll Tax Office issued assessments amounting to many millions of dollars against our client relying on the employment agency provisions of the Qld Payroll Tax Act.
However, our client’s business was very similar to JP Property Services Pty Ltd. The cleaning services were always provided out of hours, Monday to Sunday. Our client provided its services to over 300 retail stores.
We lodged an objection to the payroll tax assessments. We were able to produce to the Payroll Tax Office the written agreements between our client and its customers which expressly stated:
“The relationship of the Contractor to the Principal is that of independent contractor to principal and is NOT a partnership.”
Some of the services our client was contractually bound to provide included:
- Pick up loose rubbish
- Empty rubbish bins and replace liners
- Sweep and spot mop
- Vacuum carpet
- Sweep and mop areas around trade desks
The overall arrangement was that:
- our client as contractor agreed with its customer that it would clean the customer’s premises;
- in some cases our client fulfilled its obligation to the customer by engaging a subcontractor;
- that subcontractor’s employees performed the cleaning at the customer’s site.
We relied on the decision of JP Property Services Pty Ltd v Chief Commissioner of State Revenue which supported our submission that our client’s employees were not working in the customers’ businesses. In this instance, our objection was upheld and the substantial payroll tax assessments set aside.
Read more of our case studies for insights into what can be achieved.
Good News for Employment Agents
This outcome, which utilised a benchmark set in NSW to uphold a case in Queensland and two other states, signals good news for many similar businesses across Australia.
If you operate in this fashion, ie as an employment agent, in the cleaning or any other sector, we advise you to review your current arrangements. You should ensure that you are minimising your payroll tax obligations under this ruling.
If you find yourself in a similar situation as this example, or feel your business can benefit from this ruling, please don’t hesitate to call us at Tobin Partners on 07 3260 5189 for a confidential discussion. Alternatively, email Peter Tobin directly with your queries.
