E Group Security affirms Employment Agency Contract test for Payroll Tax in UNSW Global

State Revenue authorities have been investigating subcontracting arrangements by applying the broad scope of the employment agent provisions.

In a welcome decision, the NSW Court of Appeal in Chief Commissioner of State Revenue v E Group Security Pty Ltd [2022] NSWCA 115 (Appeal) affirmed the employment agency contract test in UNSW Global Pty Ltd v Chief Commissioner of State Revenue [2016] NSWSC 1852 (UNSW Global).

UNSW Global held that the definition of an “employment agency contract” in the Payroll Tax Act 2017 (NSW) (Act) should not be read literally. The Court acknowledged that on a literal reading of the legislation, UNSW Global was an employment agent. However, the Court held this was an absurd outcome unintended by Parliament.

Bartier Perry Lawyers, led by dispute resolution partner David Creais, won the case for UNSW Global arguing the words in the legislation went far beyond what was intended. Under a literal reading of the legislation, law firms could be liable for payroll tax for payments to barristers when engaging barristers for their clients.

His Honour, White J 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 (‘in and for test’). UNSW Global limits the circumstances in which subcontractors are caught by the employment agent provisions. A client that receives a benefit because the subcontractor does a job that helps the head contractor to do its job is not enough to constitute an employment agency contract.

What is an Employment agency contract?

In NSW, s 37(1) of the Act captures 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.

An employment agency contract exists where the service provider performs work in the same way, or much the same way as an employee of the client. Payments to the service provider under an employment agency contract are taken to be “wages” and may be liable to payroll tax. Revenue NSW’s CPN 005: Employment Agency Contracts Guidelines  provides guidance on which types of arrangements constitute employment agency contracts. Recent cases highlight that assessments raised by State Revenue authorities are not limited to labour hire companies.

The recent decision in Bonner v Chief Commissioner of State Revenue [2022] NSWSC 441 (Bonner) (occurring after the E Group Decision, but before the hearing of the Appeal) cast doubt over the reasoning of UNSW Global. In Bonner, Justice Basten criticised the ‘in and for test’ in UNSW Global noting the “words are a gloss on the statute”.

Appeal decision

The Appeal was dismissed upholding the earlier decision (E Group Security Pty Ltd v Chief Commissioner of State Revenue [2021] NSWSC 1190(E Group) in favour of the taxpayer.

The Chief Commissioner appealed against the E Group decision. In light of Bonner, the Chief Commissioner amended the notice of appeal to contend UNSW Global had been wrongly decided on the basis that s 37 of the Act should be construed according to its ordinary and natural meaning.

The NSW Court of Appeal held there should be no departure from the existing case law on the construction of s 37 since:

  • the Act had been reviewed and amended regularly; and
  • the Chief Commissioner had himself consistently advocated for the test in UNSW Global.

The other grounds of the appeal, including payroll tax grouping provisions, is for directions before the Registrar on a date to be advised.

Facts of the E Group decision

The taxpayer was the main operating company (and the parent company) in a group of companies that provided security guarding services (eg. patrolling buildings, maintaining static security posts and crowd control) to its clients.

Revenue NSW, after conducting an audit, assessed the taxpayer to payroll tax in respect of payments to the security guards whose services were sub-contracted from third parties.

E Group decision

The issue was whether the arrangements between the taxpayer and its clients (or its wholly owned subsidiaries) were employment agency contracts.

The ‘in and for test’ in UNSW Global was accepted in E Group. The Court held that the arrangements between the taxpayer and its clients for the security guard services did not constitute employment agency contracts. Where the services were provided on a one-off or ad hoc basis, the security guards could not be taken to be integrated into the client’s workforce. The employment agency provisions did not apply.

The Appeal decision affirms the UNSW Global’s approach to statutory construction having regard to purpose, legislative history, case law and the impact on harmonised payroll tax provisions across Australia.

What can you or your clients do to reduce their risk?

This case highlights the importance to structure the commercial arrangement to match the ‘in and for test’ in UNSW Global to ensure the contract is properly documented and applied in practice.

Revenue NSW continues to undertake investigations on the employment agency and grouping provisions. It is important to engage with Revenue NSW during its audits to mitigate potential penalties, interest and multi-year assessments.

Bartier Perry’s Lisa To sits on the NSW’s Law Society and Revenue NSW Liaison Committee and chaired the Tax Institute’s NSW Tax Forum in May 2022 with panellist, Director of Technical Services at Revenue NSW, Ian Phillips on the topic of NSW Payroll Tax.

Please contact us if you require assistance with review of your subcontractor arrangements and payroll tax investigation by Revenue NSW.

Authors: Lisa To & Hayley Constantine