Payroll Tax Emerging Issues
Nathan Hamilton, PWC presented on the future of payroll taxes.
Legislative references are to the Payroll Tax Act 2007 (Vic) and the Payroll Tax Act 2007 (NSW) (PTA 2007), the Taxation Administration Act 1953 (Cth) (TAA 1953) and the A New Tax System (Goods and Services Tax) Act 1999 (Cth) (GSTA 1999).
Nathan addressed the expanding scope of payroll tax for ‘employment agents’ who procure the services of a ‘service provider’ for an end user after CXC Consulting P/L v CSR (VIC) [2013] VSC 492 and Freelance Global Ltd v CSR (NSW) [2014] NSWSC 127.
I would add some additional observations.
An employment agency contract is a formal or informal, expressed or implied contract under which an employment agent procures the services of a service provider for a client of the employment agent but does not include a contract that results in a contract of employment between the service provider and the client. The legislation deems the employment agent to be an employer, the service provider to be an employee and the payment to the service provider in relation to the provision of the services to be wages (sec. 37-39 PTA 2007).
CXC Consulting P/L and Freelance Global Ltd each operated as a payment intermediary and did not maintain a database of service providers, introduce service providers to end clients, negotiate the terms of the engagement or supervise the performance of the service provider typical of labour hire firms.
At issue concerned the scope of the concept of ‘procuring’ services.
In CXC Consulting P/L v CSR (VIC), the court gave an expansive meaning to ‘procure’ to mean ‘supply’, ‘obtain’ or ‘make available’ (at [67] & [101]) and considered the contract between CXC Consulting P/L and the service provider relevantly procured those services (at [93] & [101]).
In Freelance Global Ltd v CSR (NSW), the court adopted the interpretation in CXC Consulting P/L v CSR (VIC) (at 141]) and considered ‘procure’ means more than facilitate or enable and requires the employment agent to cause the services of the service provider to be provided to the end client with the expenditure of care or effort by the employment agent (at [115]).
The interpretations of ‘procure’ are different and potentially limit the application of the provisions where the employment agent has the benefit of a contract without being a party to the contract.
The contract between the employment agent and the service provider relevantly engages the provisions. In circumstances where there is a trust relationship of due administration between the employment agent and the beneficiary service provider, there would appear to be the necessary formal or informal, expressed or implied contract.
In Freelance Global Ltd v CSR (NSW), the employment agent provisions deemed the trust distribution to the beneficiary service provider to be wages. The provision deems the payment ‘in relation to the provision of the services’ to be wages.
It is unclear how a trust distribution qua beneficiary can be ‘in relation to the provision of services’ without a finding of sham. The deeming of the trust distribution as ‘wages’ is inconsistent with the general policy that a trust distribution to a beneficiary made in lieu of wages is not subject to payroll tax (Ruling PTA.016; cf Bulletin PTX1/11 (Vic)).
The drafting of the provision and the expansive meaning of ‘procure’ does not limit the provisions to employment agents as ordinarily understood (Freelance Global Ltd v CSR (NSW) at [150]).
Freelance Global Ltd v CSR (NSW) considered without determining that:
- Any intermediate providing the services of directors and employees would be covered (at [156]).
- Any intermediate (such as a builder) providing labour and materials includes a contract for the performance of work so would be covered (at [159]); and
- Any intermediate (such as a lawyer) providing the services of a subcontractor (e.g. barrister) would be covered.
The provisions do not contain needed exemptions and the relevant contractor exemptions do not apply to rationalise the expansive scope of the employment agent provisions.
The pay-as-you-go withholding labour hire provisions require an entity to withhold PAYG from payments made to an individual in the course of a business of ‘arranging’ for persons to perform services for clients of the entity or of another entity (sec. 12-60 TAA 1953).
The ordinary meaning of ‘arranging’ in the context of the provision refers to the process by which a person negotiates for, or brings into effect, a dealing or agreement (ASIC Regulatory Guide 36; EM to GSTA 1999 at [5.160] - [5.162]; GSTR 2004/1 at [289] and GSTR 2009/3 at [28])).
The concept of ‘arranging’ focuses on the process of establishing rather than implementing the contract for services. There is no case law in respect of the PAYGW labour hire provisions and the decisions of CXC Consulting P/L v CSR (VIC) and Freelance Global Ltd v CSR (NSW) have no real relevance.
The contrast of the meanings of ‘procure’ and ‘arranging’, highlights the difficulties for intermediate entities in complying with State taxes and Federal taxes obligations.
These issues will be part of the paper I am presenting at The Tax Institute 2nd Victorian Annual Tax Forum, Melbourne on 9-10 October 2014 on 'Personal Services Income'.