B & L Linings & Anor v Chief Commissioner of State Revenue (No 3) (RD) - [2007] NSWADTAP 32

No judgment structure available for this case.

Set aside by Appeal:

Appeal Panel - Internal

CITATION: B & L Linings & Anor v Chief Commissioner of State Revenue (No 3) (RD) [2007] NSWADTAP 32

PARTIES: APPELLANT
B & L Linings Pty Ltd and L & B Linings Pty Ltd
RESPONDENT
Chief Commissioner of State Revenue

FILE NUMBER: 059044

HEARING DATES: 2 April 2007

SUBMISSIONS CLOSED: 2 April 2007

DATE OF DECISION:
2 July 2007

BEFORE: Chesterman M - ADCJ (Deputy President); Hole M - Judicial Member; Bennett C - Non Judicial Member

CATCHWORDS: Pay-roll Tax Act 1971 - liability for pay-roll tax - distinction between employees and independent contractors - statutory exemptions from liability

MATTER FOR DECISION: Principal matter

FILE NUMBER UNDER APPEAL: 046025

DATE OF DECISION UNDER APPEAL: 06/10/2005

LEGISLATION CITED: Administrative Decisions Tribunal Act 1997
Pay-roll Tax Act 1971
Taxation Administration Act 1996
Taxation Administration Act 1996 (Cth)

CASES CITED: Australian Timber Workers Union v Monaro Sawmills Pty Ltd (1980) 29 ALR 322
B & L Linings Pty Ltd & Anor v Chief Commissioner of State Revenue (RD) [2006] NSWADTAP 2
B & L Linings Pty Ltd & Anor v Chief Commissioner of State Revenue (No 2) (RD) [2006] NSWADTAP 32
B & L Linings Pty Ltd and L & B Linings Pty Ltd v Chief Commissioner of State Revenue [2005] NSWADT 129
Hollis v Vabu Pty Ltd (2001) 207 CLR 21
Humberstone v Northern Timber Mills (1949) 79 CLR 389
Jones v Dunkel (1959) 101 CLR 298
Paddison v Ultimate Image Pty Ltd t/as Hawkesbury Plasterworks [2004] NSWCA 410
Stevens v Brodribb Sawmilling Co Pty Ltd (1986) 160 CLR 16
Zuccala Homes Pty Ltd v Commissioner of State Revenue (Victoria) (1994) 94 ATC 2084
Zuijs v Wirth Brothers Pty Ltd (1955) 93 CLR 561

REPRESENTATION:
APPELLANT
J Eager, solicitor
RESPONDENT
I Latham, barrister

ORDERS: 1. The Appeal Panel upholds the Appellants’ objections to assessments for pay-roll tax, penalty tax and interest on remuneration paid by the Second Appellant to all of the 36 ‘entities’ that have been identified in these proceedings as ‘contentious’, save for the following: C1, C6, C10, C29 and C31.; 2. The matter is set down for further directions at 9.30 a.m. on Tuesday 10 July 2007.

Introduction

1 This is the third judgment to be given by us in the present appeal. The first of our judgments (B & L Linings Pty Ltd & Anor v Chief Commissioner of State Revenue (RD) [2006] NSWADTAP 2 – hereafter ‘the first appeal judgment’) was delivered on 9 January 2006. It outlined much of the background to the second judgment and the present judgment. The second judgment (B & L Linings Pty Ltd & Anor v Chief Commissioner of State Revenue (No 2) (RD) [2006] NSWADTAP 32 – hereafter ‘the second appeal judgment’) was delivered on 28 June 2006.

2 This matter came to the Revenue Division of the Tribunal by way of review of a decision by the Respondent, the Chief Commissioner of State Revenue (‘the Commissioner’), to disallow objections by the two Appellants, B & L Linings Pty Ltd (‘B & L’) and L & B Linings Pty Ltd (‘L & B’) against assessments to pay-roll tax, penalty tax and interest under the Pay-roll Tax Act 1971 (‘the Act’). Under s. 96 of the Taxation Administration Act 1996, the Tribunal has jurisdiction to review a decision of the Commissioner at the instance of a taxpayer who is dissatisfied with the Commissioner’s determination of his/her objection to an assessment.

3 The assessments in question were made against the two Appellants under ‘grouping provisions’ in the Act. They imposed liability with reference to remuneration paid to 36 so-called ‘contentious entities’ that had been engaged by L & B to perform work on various building projects. The assessments spanned the tax years 2000-2003, but it was agreed between the parties that the 2002 tax year should be treated as a sample year.

4 The first Appellant, B & L, was established in 1987 to supply and install linings made of plasterboard (sometimes called gyprock) and cornices in dwelling houses and apartments. Occasionally during the relevant period, it performed these tasks in an industrial or commercial building. It acted as a principal contractor to home building companies (hereafter called ‘contract builders’). Its sole directors and shareholders have at all material times been Vasily and Loretta Kirpichnikov.

5 In 1992, Mr and Mrs Kirpichnikov established the second Appellant, L & B, again as sole directors and shareholders. During the relevant period its principal function was to fulfil B & L’s contracts with contract builders, chiefly by subcontracting with various sole traders, partnerships and companies. It also operated a maintenance/service division. In 2001-02, the people working for it comprised a general manager (Mr Fedor Saraikin), a maintenance manager (Mr Joseph Ierace), six full-time members of its maintenance division, one full-time employee engaged in sanding operations and the ‘entities’, which it described as subcontractors. The ‘entities’ were a mixture of companies, partnerships and sole traders.

6 The Appellants carried out their business operations as follows. Initially, B & L submitted a tender for a lining job to a contract builder, based on detailed building plans supplied by the builder. If the tender was accepted, B & L purchased the plasterboard and cornices required for the job and arranged delivery of these materials to the site.

7 The procedure adopted by L & B for installing the linings and cornices involved three distinct tasks, to be performed in sequence. First, the walls and ceilings were lined with plasterboard sheets, then cornices were fixed along the lines where the walls and ceilings met, then finally the lined walls and ceilings were sanded.

8 In 2001-02, L & B maintained a list, or ‘stable’, of 53 entities amongst which it would subcontract these tasks after its tender had been accepted by the contract builder. Before these proceedings commenced, 15 of these entities were found by the Commissioner to have been independent contractors. Another 2 were conceded by the Appellants to be employees of L & B. The remaining 36 were the ‘contentious’ entities with which this litigation is concerned.

9 The 36 ‘contentious’ entities were identified by numbers within the range from C1 to C38, excluding C17 and C33. They were labelled ‘contentious’ because, in contrast to a number of other entities also engaged by L & B, the proper characterisation of their relationship with L & B remained a matter of dispute between the parties.

10 In this judgment, we will continue to use the term ‘entity’, though in some contexts it will refer to an individual (usually if not invariably a man, it would seem) who was working on one of these building projects, rather than to the company which employed him to do so or to the partnership of which he was a member.

11 The first issue of substance raised in the case was whether the 36 contentious entities, during the specified tax year, were L & B’s employees according to common law principles, not independent contractors.

12 If these entities were properly to be characterised as employees, the Appellants were indisputably liable for pay-roll tax. The remuneration paid to the entities would be wages, to be included in its tax base in accordance with s. 3AA of the Act. If however they were independent contractors, an exemption from this tax would be available if either or both of two sets of further conditions, set out in s. 3A(1) of the Act, were satisfied. The relevant parts of these two provisions of the Act are set out below.

13 The decision of the Tribunal, constituted by Acting Judge J Block, Judicial Member, was delivered on 10 June 2005 (B & L Linings Pty Ltd and L & B Linings Pty Ltd v Chief Commissioner of State Revenue [2005] NSWADT 129 – hereafter ‘the Tribunal’s judgment’). The Tribunal ruled that the entities were employees of L & B. It therefore did not have to determine whether any of the exemptions set out in s. 3A(1) were available to the Appellants.

14 B & L and L & B appealed under Part 1 of Chapter 7 of the Administrative Decisions Tribunal Act 1997 (‘the ADT Act’). Pursuant to directions given before the hearing of the appeal, the first issue to be determined was as to the correctness of this decision of the Tribunal.

15 In the first appeal judgment, we set aside the decision on the ground that the Tribunal had erred in three respects. These errors of law are outlined at paragraphs [81], [98 – 99] and [105 – 109] of our judgment. In broad terms, our conclusion was that the Tribunal, in deciding that the Appellants had failed to discharge an onus of proof imposed on them, had given insufficient consideration to a substantial quantity of documentary evidence adduced by them and had attributed undue significance to their failure to call any of the entities to give oral evidence. At [111], we granted leave under s 113(2)(b) of the ADT Act for the appeal to extend to the merits and indicated that we would decide, pursuant to s 115(1), what was ‘the correct and preferable decision’.

16 In the second appeal judgment, we determined, having reviewed the evidence that had been placed before the Tribunal and considered relevant common law principles, that the entities were independent contractors, not employees. Our principal order was in the following terms:-

The Appeal Panel determines, for the purpose of assessing the liability of the Appellants to pay-roll tax pursuant to the decision of the Respondent under review, that the 36 contentious entities were independent contractors engaged by L & B during the year ended 30 June 2002.

17 In order to dispose fully of the appeal, it therefore remained for us to determine whether the Appellants were entitled to claim the benefit of any of the exemptions from pay-roll tax set out in s. 3A(1) of the Act.

18 At a directions hearing on 9 October 2006, the parties advised the Tribunal that 19 of the formerly contentious entities were no longer contentious by virtue of a concession by the Commissioner that they fell within an exemption set out in s. 3A(1)(e)(iii) of the Act (‘the 90-day exemption’). A timetable was laid down for the filing of further evidence relating to the issue of exemption for the remaining 17 entities under s. 3A(1)(f) (‘the two-person exemption’). The appeal was set down for further hearing on 10 December 2006.

19 At this hearing, however, Mr Latham, representing the Commissioner, sought leave, in the light of evidence that the Commissioner had recently obtained, to reargue before the Appeal Panel the question that we had determined in the second appeal judgment, in addition to addressing the matter of exemptions under s. 3A(1). He drew attention to the fact that our order at the conclusion of this judgment was not a final order determining the rights and liabilities of the parties. Mr Eager, who appeared for the Appellants, conceded this point.

20 We made orders granting the leave sought by Mr Latham and adjourning the hearing. A consequence of these orders was that the number of ‘contentious entities’ reverted to 36.

21 At the adjourned hearing, which took place on 2 April 2007, further evidence was admitted (mostly on the tender of the Commissioner) and written and oral submissions were made relating to (a) the correctness of our decision in the second appeal judgment that the contentious entities were independent contractors, not employees of L & B, and (b) whether, in the event that we reaffirmed our decision, the Appellants could claim the benefit of the two-person exemption in s. 3A(1)(f) of the Act with regard to any or all of their payments that they had made for services rendered by the entities. In the present judgment, we deal with those two issues.

Relevant statutory provisions

22 The Act provides in ss. 6 and 7 that, subject to various exceptions that are not relevant here, an employer is liable to pay-roll tax in respect of any ‘wages paid or payable for services performed or rendered’. These constitute ‘taxable wages’ under a definition of that term in s. 3. In s. 3AA(1), ‘wages’ is defined to mean any ‘wages, salary, commission, bonuses or allowances paid or payable… to an employee as such’.

23 It is by virtue of these provisions that a conclusion that any one of the contentious entities was an employee of L & B during any part of the year ending 2002, and received remuneration in that capacity, has the effect of imposing a tax liability on L & B.

24 In addition, s. 3A of the Act has the potential to impose a tax liability on an employer such as L & B with respect to remuneration paid by it for services performed or rendered by an independent contractor. Such a liability will arise if the contract between the employer and the independent contractor falls within the definition of a ‘relevant contract’. For present purposes, the important (and somewhat tortuous) provisions within s. 3A are as follows:-

3A Application of this Act to certain contracts

(1) A reference in this section to a relevant contract in relation to a financial year is a reference to a contract under which a person (in this subsection referred to as the designated person), during that financial year, in the course of a business carried on by the person: …

(b) is supplied with the services of persons for or in relation to the performance of work, or…

but does not include a reference to a contract of service or a contract under which the designated person, during a financial year, in the course of a business carried on by the designated person:…

(e) is supplied with services for or in relation to the performance of work where:…

(B) for or in relation to the performance of work where any of the persons who perform the work also perform similar work for the designated person, for periods that, in the aggregate, exceed 90 days in that financial year,…or…

the contractor

(ii) where the contractor is a partnership of 2 or more natural persons, by 1 or more of the members of the partnership and 1 or more persons employed by, or who provide services for, the contractor in the course of a business carried on by the contractor, or

(iii) where the contractor is a natural person, by the contractor and 1 or more persons employed by, or who provide services for, the contractor in the course of a business carried on by the contractor,

(2) For the purposes of this Act:

(a) a person: …

(ii) to whom during a financial year, under a relevant contract, the services of persons are supplied for or in relation to the performance of work, …

(b) a person who during a financial year:

(i) performs work for or in relation to which services are supplied to another person under a relevant contract, …

25 A further statutory provision of significance in this case is s. 100(4) of the Taxation Administration Act 1996. This states:-

If the respondent or applicant appeals against a decision of the Administrative Decisions Tribunal in an application for review to an Appeal Panel of the Tribunal, the applicant in the application for review continues to bear the onus of proving the applicant’s case in the appeal if the Appeal Panel grants leave for the appeal to extend to the merits.

26 As stated in the Tribunal’s judgment at [22] and confirmed in the first and second appeal judgments, the Appellants have borne throughout the onus of demonstrating the facts supporting a conclusion that the entities were independent contractors according to common law principles. This onus, the Tribunal said, was conceded by them to be the same as the onus placed on taxpayers by income tax legislation. The same principles apply to the factual issues that must be resolved in deciding whether any of the exemptions set out in s. 3A of the Act are available to the Appellants.

27 In discharging the onus that they bear with regard to these issues, the Appellants may rely on whatever type or types of evidence, oral or documentary, may achieve this purpose. We explained this in the first appeal judgment at [93]:-

Allied Pastoral Holdings Pty Ltd v Federal Commissioner of Taxation

28 At the hearing on 2 April 2007, two bound folders, which had been filed in the Tribunal on 30 October 2006 and 6 March 2007 respectively, were tendered by the Commissioner and received into evidence. They contained copies of the following documents:-

(b) Within the folder filed on 30 October 2006 - in relation to 17 out of these 35 entities (C1, C2, C3, C6, C10, C12, C14, C16, C18, C19, C21, C23, C27, C29, C31, C34 and C37), a written response to a notice from the Commissioner issued under s. 72(1)(a) of the Taxation Administration Act 1996 and requiring verified answers to 39 questions (7 entities), or a note indicating that no response to such a notice had been received (10 entities).

29 The 17 entities whose responses to what we will call ‘s. 72 notices’ were included in the Commissioner’s evidence were the 17 that have remained in contention throughout. The Commissioner’s claim regarding them is that, if our ruling that they were independent contractors is confirmed in this judgment, the payments made to them by L & B must still be deemed to be ‘taxable wages’ because the Appellants have not established that they fell within either the 90-day exemption or the two-person exemption.

30 No evidence at all was filed in relation to C36, even though it was one of the entities previously identified as contentious. With regard to one further entity (C37) for which a tax return, but not a response to a s. 72 notice, was included in the evidence, the Commissioner made no submission. We accept Mr Eager’s consequent submission that unless in this judgment we reversed our decision regarding the status of the entities, these two entities must be regarded as non-contentious.

31 In relation to a third entity, C34, Mr Eager submitted that in consequence of the Commissioner’s evidence it fell within the 90-day exemption. We deal with this submission below.

32 In affidavits sworn on 30 October 2006 and 5 March 2007 and tendered in conjunction with the two folders of evidence, Mr Azam Bulbulia, a solicitor employed in the Office of the Crown Solicitor, stated that he had arranged for the folders to be prepared. He indicated that the Australian Taxation Office (‘ATO’) had provided the income tax returns to the Office of State Revenue (’OSR’) pursuant to s. 13J of the Taxation Administration Act 1996 (Cth) and a Memorandum of Understanding between these two Offices dated 27 July 2005. He also explained the process whereby a ‘summary page’ relating to each of the entities had been prepared for inclusion in the folders. These pages, he said, contained information extrapolated from the material provided by the ATO and from the entities’ answers to the questions in the s.72 notices.

33 The first six of the 39 numbered questions in the s. 72 notices asked for certain particulars (including the ABN) of the recipient entity. The remaining 33 (some of which were subdivided into groups of questions) related in different ways to the entity’s ‘dealings with B & L Linings Pty Ltd’, focusing in particular on work done by the entity for this company during the year ending 30 June 2002.

34 A number of components of the information set out in the income tax returns and the answers to the s. 72 notices are summarised below.

35 Mr Bulbulia was cross-examined by Mr Eager. During this cross-examination, the following four matters of significance emerged. First, Mr Bulbulia, who was not an employee of the OSR, was not involved in the process whereby the OSR asked the ATO for copies of income tax returns. Secondly, so far as he was aware, the OSR supplied to the ATO the names of the relevant entities (some of which were registered business names), but not their tax file numbers. Thirdly, so far as he was aware, the OSR did not ask for copies of any business activity statements or instalment activity statements that had been lodged in the relevant year by those entities which were registered for GST. Fourthly, the reason why no responses to s.72 notices were contained in the folder filed on 6 March 2007 was not that the entities did not receive such notices. Mr Bulbulia said instead that he did not believe that such replies as were received by the OSR were relevant to these proceedings.

36 On the tender of the Appellants, some pages copied from an ATO brochure entitled ‘Business and Professional Items: Instructions and Schedule’ were admitted into evidence. The relevant parts of this brochure are outlined below.

The relationship of the contentious entities to L & B

37 We will now address the question that we permitted to be reargued in the light of the evidence received at the most recent hearing (hereafter ‘the new evidence’), namely, whether the 36 contentious entities, or any of them, were employees of L & B at common law during the year ending 30 June 2002.

38 In the second appeal judgment, following a lengthy review of the evidence then before us and of our understanding of the relevant law, we set out at [141 – 148] our reasons for concluding that the entities were independent contractors. Within that passage, the following three paragraphs contain our principal findings of fact and what we would regard as the core of our reasoning:-

L & B did not routinely supervise the entities, or otherwise control the manner in which they worked, though it inspected the work that they had completed in order to ensure that it was of a sufficient standard.

L & B determined the place at which they worked and the time within which they completed the tasks carried out by them, but did not determine the specific hours when they worked.

The entities received remuneration from L & B only on completion of one or more specified tasks, though sometimes progress payments, representing a proportion of the total agreed amount, would be made before completion.

There was no evidence as to whether or not this form of payment by results was the ‘natural means’ of remuneration for work within this field.

The entities had some scope to negotiate with L & B over the amount of their remuneration, but it was within a moderate range only (the evidence suggested a range of about 13% for plasterboard installation) and frequently the entities accepted the amount offered by L & B.

All the entities had ABNs and were paid remuneration in accordance with tax invoices that L & B prepared and issued. L & B did not deduct income tax before making payment and where (as in all but three cases) the entity was registered for GST, the tax invoice included GST at 10%.

L & B did not provide paid annual leave or sick leave and did not make superannuation contributions for the entities.

During the year, the numbers of tax invoices and the total amounts of remuneration received by individual entities varied widely. There was also wide variation in the weekly amounts paid to individual entities.

At least eight of the contentious entities performed significant quantities of work for employers other than B & L.

The entities were required to be aware of relevant occupational health and safety practices, and L & B assumed no responsibility for ensuring that they put those practices into operation.

Without being required to consult or notify L & B in advance, the entities were contractually entitled to engage appropriately qualified persons to perform, or assist them in performing, their contractual obligations.

For practical reasons, and to ensure personal safety, some of the operations associated with installing plasterboard or cornices (notably bringing large plasterboard sheets or substantial lengths of cornice to the room where they were to be installed and lifting them to the appropriate place on a ceiling or a wall) could not be performed by one person alone. This did not apply, however, to the task of sanding.

L & B supplied the requisite plasterboard sheets and lengths of cornice. The entities supplied moderately expensive tools and other equipment, including a van or utility, a generator and some power tools.

The entities acquired no significant ‘chance of profit’ (for example, through accumulating assets or goodwill), but assumed the risk of loss, in so far as the cost of rectifying defective work was ‘back-charged’ to them.

From time to time, L & B would give an entity a t-shirt that it had received from a plasterboard supplier. The t-shirt displayed the logos of the supplier and L & B. The entities wore them, though L & B did not require them to do so.

143 Even allowing, however, for the significance attached to some of these matters in Hollis v Vabu Pty Ltd (2001) 207 CLR 21, we consider them insufficient to outweigh the numerous indicators tending in the opposite direction. In brief terms, these include the following: absence of continuing supervision by L & B; lack of control over working hours; payment by results (without any evidence that this was the ‘natural means’ of remuneration); absence of any provision for annual or sick leave; wide variation in the amounts paid to an entity each week; treatment of income tax, GST and superannuation matters in ways that were lawful and generally appropriate for contracts between independent businesses; responsibility for occupational health and safety taken by the entities; an express power to appoint others to perform duties or assist in their performance, without any requirement of prior consultation or notification; working conditions in which individual entities regularly required assistance; provision by the entities of moderately expensive tools and equipment; and assumption of risk of loss by the entities, through the process of back-charging.

39 Mr Latham’s submissions on this issue at the hearing of 2 April 2007 repeated a number of contentions that he had made at the earlier appeal hearing and that we took into account in preparing the second appeal judgment. In relation to some of these (for example, his contentions regarding (a) the degree of control that L & B exercised over the entities, (b) the fact that L & B prepared the tax invoices that were notionally ‘rendered’ by the entities and (c) the Appellants’ failure to call any of the entities as witnesses), the new evidence added little or nothing. Accordingly, we do not consider it necessary to revisit those contentions in the present judgment.

40 On one particular matter, however, to which we referred in the second appeal judgment, the new evidence had at least the potential to cast new light. This was the extent to which the contentious entities received income from employers other than L & B.

41 Mr Latham argued that according to the new evidence – principally, the evidence obtained from the ATO – 19 of the entities obtained all or the majority of their income for the year ending 30 June 2002 from L & B. A table forming part of his written submissions compared the evidence of the income obtained by each of these entities with the evidence, set out on a spreadsheet previously prepared by the Appellants, of the total amount paid to each of them by L & B. In 4 cases (C3, C8, C27 and C31), the amount paid by L & B exceeded (in the case of C3, substantially) the income disclosed in their tax return. In a further 6 cases (C6, C14, C16, C19, C21 and C22), the amount paid by L & B fell not far short of the disclosed income. In the remaining 9 cases (C12, C13, C20, C23, C24, C29, C30, C35 and C38), no tax return had been filed by the entities concerned.

42 In Mr Latham’s submission, the inference to be drawn – that these 19 entities obtained all or the majority of their income from L & B – had two implications of importance. First, these entities (at least) should be regarded as maintaining no significant business enterprise independently of L & B. Instead, their work was ‘integrated into’ the business of their employer. Collectively, they did in fact constitute L & B’s business enterprise. Secondly, the level of entrepreneurial risk to which they were subject was very low indeed. They did not fall within the ‘classic paradigm of an independent contractor who contracts with a variety of different parties’.

43 In this connection, Mr Latham cited to us two authorities - Stevens v Brodribb Sawmilling Co Pty Ltd (1986) 160 CLR 16 and Hollis v Vabu Pty Ltd (2001) 207 CLR 21 – to which we referred at some length in the second appeal judgment. He also cited a passage in Australian Timber Workers Union v Monaro Sawmills Pty Ltd (1980) 29 ALR 322 at 329, where the Federal Court stated that where a person is ‘part and parcel of the organisation’ that employs him or her, and is not carrying on a separate business, that person is an employee.

44 In our opinion, however, Mr Eager’s principal submission in response must be accepted. This was that, according to the case law, it was quite possible that a person who worked solely or largely for a single employer was an independent contractor, not an employee.

45 Mr Eager relied chiefly on the Court of Appeal case of Paddison v Ultimate Image Pty Ltd t/as Hawkesbury Plasterworks [2004] NSWCA 410 (a case to which we also referred in the second appeal judgment). He drew our attention to the fact that, in the course of deciding that the plaintiff, who had been engaged as a plasterer by a building company called ‘Ultimate’ in the judgments, was an independent contractor, Sheller JA (with whom Santow JA and Levine J agreed) indicated at [24] that ‘The plaintiff worked for Ultimate and no one else’.

46 Mr Eager also pointed out that in Zuccala Homes Pty Ltd v Commissioner of State Revenue (Victoria) (1994) 94 ATC 2084 (this case is discussed at length below), two building subcontractors were held to be independent contractors for the purposes of the assessment of their employer to Victorian pay-roll tax even though during the relevant years they did not work for any other employer (see the judgment at [9]).

47 In ruling in the Appellants’ favour on this question of principle, we consider it important to take account of the particular circumstances of Paddison, which was the case on which Mr Eager chiefly relied. In this case, the plaintiff endeavoured to prove that he was an employee of Ultimate, as an ingredient of his claim for damages against Ultimate for personal injuries sustained while at work. The matters on which Sheller JA relied in concluding that he was instead an independent contractor were set out in the following paragraphs of his Honour’s judgment:-

25 With regard to the job at Taren Point, Mr Kahunen [the owner of Ultimate] visited the site almost every two days, certainly every three days, bringing materials and checking on the work. He told the plaintiff how to do the job, to do quality work and take care with detail. The plaintiff did not need to be told how to do a good job so far as the physical minute to minute, hour by hour doing of the job was concerned. Ultimate let the plaintiff do his job as an experienced plasterer but picked on things, checked the work and required the work to be re-done if it was not to its satisfaction.

26 The plaintiff’s income tax returns for the relevant period show that Ultimate, without deduction for PAYE tax, was making deductions pursuant to the PPS, a system which applied to self-employed persons in particular industries. That favoured the view that the plaintiff was self-employed and not an employee of Ultimate. The plaintiff had started working for Ultimate in about February 1999. It seemed from time to time that the plaintiff’s son came and worked with him, though it is not clear how the son was paid for his work, that is to say, whether by Ultimate or by the plaintiff. The method of remuneration was that each week the plaintiff gave Ultimate an invoice of how many hours he worked on a particular job and was paid for those hours. The rate varied. He worked from Monday to Friday from 7 until 3.30 but sometimes worked back to get a job finished. He never took any holidays or leave. He could not afford to take a rest….

27 It is helpful to refer to the judgment of Latham CJ in Humberstone v Northern Timber Mills at 396 where his Honour described what might be regarded as the traditional distinction between an employee and an independent contractor. He said:

“… If the work done by one person for another is done subject to the control and direction of the latter person as to the manner in which it is to be done the worker is a servant and not an independent contractor. If, however, the person doing the work agrees only to produce a given result but is not subject to control in the actual execution of the work he is an independent contractor…. Humberstone was in my opinion a carrier in business on his own account but found that the requirements of the firm kept him fully occupied with all the work which he wished to do. The firm utilized his services on the same basis as that upon which any carrier is ordinarily employed, payment being based on the weight or some other characteristic of the goods carried and the distances for which they were carried. There is no evidence of any control exercised or exerciseable by the firm as to the manner in which the work was to be done.”

29 By contrast, in Zuijs v Wirth Brothers Pty Ltd at 569 Dixon CJ and Williams, Webb and Taylor JJ said of a conclusion that a contract between an acrobat and circus proprietors was an independent contract and not a contract of service:

“What foundation does the evidence afford for such a conclusion? Here is a man engaged indefinitely at so much a week, by the proprietors of a circus that goes from place to place, to give with a companion an acrobatic act at every performance and to appear in the grand parade. That is in effect all you know that matters. What is there in it that points to an independent contract? A weekly hiring for an indefinite period to do a defined task on the premises of the other party as an integral portion of a spectacle under his general management and control would appear to present elements characteristic of a contract of service.”

Stevens v Brodribb Sawmilling

31 In my opinion, at the time of his injury the plaintiff was not working as Ultimate’s employee.

48 We regard this passage as significant for the following reason. Although on some issues (notably description of the plaintiff as an employee, remuneration at an hourly rate and the provision of workers compensation insurance) the plaintiff, in contrast to the entities in the present case, was accorded the treatment generally associated with the status of employee, he was nonetheless held in all the circumstances to be an independent contractor, even though he ‘worked for Ultimate and no one else’. If the factor of receiving all or most of their remuneration from L & B was as important in determining the status of the contentious entities as Mr Latham claimed, we believe that the Court of Appeal would have felt impelled in Paddison to accept the plaintiff’s assertion that he was an employee.

49 We would add that in our opinion the evidence did not support Mr Latham’s associated claim that the work performed by the entities (contentious and non-contentious) collectively constituted the whole business enterprise of L & B. This is to ignore the activities of L & B’s maintenance division, whose functions included carrying out inspections of premises in which tasks had been completed by entities, ensuring that any incomplete work was completed and any defects remedied and ‘back-charging’ entities for the costs of completion and/or rectification (see the second appeal judgment at [78 – 80].

50 We also do not accept Mr Latham’s submission that any entity that received all or virtually all of its remuneration from L & B was for that reason subject to a very low level of entrepreneurial risk. As just mentioned, L & B insisted that if the work of any entity was defective, it would be ‘back-charged’ for the costs of rectification. In paragraph [141] of the second appeal judgment, quoted above at [38], we pointed out that to this extent the entities ‘assumed the risk of loss’ (see the second last dot-point).

51 In the light of this reasoning, we reject Mr Latham’s argument that, in view of the new evidence relating to the proportion of the 2001-02 income of 19 contentious entities that was paid by L & B, we should reverse our determination that they were independent contractors.

52 Mr Eager argued also that the evidence on which Mr Latham relied fell far short of justifying an inference that these 19 entities actually received all or the majority of their income from L & B. The points that he made in this connection included the following.

53 First, 3 of the 11 entities for which no income tax return was supplied by the ATO were not in fact required to file one for the year 2001-02. These 3 entities were C1, C23 and C26.

54 Secondly, some at least of the remaining 8 entities for which no tax return was obtained from the ATO (i.e., C12, C13, C20, C24, C29, C30, C35 and C38) may well have filed one. The reasons why the new evidence was prone to error on this issue were these: (a) since the ATO was not given the tax file numbers for the entities being investigated, its reliance on the names of the entities (which in the case of C24 and C29 were registered business names differing from the name of the taxpayer and in the case of C20 was misspelt) may have caused it to overlook a tax return; and (b) it was unlikely that the ATO would have failed to chase up tax returns from 7 of these 8 entities (i.e., all except C30) since they had been registered for GST before the tax year 2001-02.

55 Thirdly, where an entity had not filed a tax return for 2001-02, the fact that during that year it had received an amount, even a sizeable amount, by way of remuneration from L & B did not automatically lead to the conclusion that this remuneration constituted all, or even most, of the income that it earned.

56 Fourthly, there was good reason to believe that at least one of the entities may have understated its income in its tax return, with the consequence that the amount received from L & B appeared to constitute a larger proportion of its income than was in fact the case.

57 Fifthly, it was unlikely that one of the tax returns filed was in fact the return submitted by the relevant entity (C3). The reasons were that the only income disclosed was a Commonwealth allowance amounting to $6,620 and the tax return made no mention of any business activity, yet according to L & B’s records it made payments to this entity amounting to $22,097.

58 Sixthly, the statements made by another entity that was a sole trader, C6, in answering a s.72 notice (on which the Commissioner relied in addition to the information in a tax return) were unreliable for these reasons: (a) the questions contained in all the s. 72 notices sent out by the OSR asked for information about amounts received by the entities from B & L, even though it was undisputed that the employer of the entities was in every case L & B; and (b) the answers contained a number of improbabilities: for example, that the entity was in ‘100% - full time employment’ with B & L, averaging 4 – 6 days per week, even though the amounts of the 41 payments received by him during 2001-02 varied over a wide range and reached a total of only $41,304.

59 We agree with Mr Eager that these aspects of the new evidence provide grounds for doubting the conclusion that Mr Latham sought to derive from it. But a premise underlying Mr Eager’s submissions on this issue seemed to be that, to the extent that the Commissioner’s case depended on a finding that 19 of the contentious entities obtained all or the majority of their income from L & B, it was for the Commissioner to prove this. This contravenes the principle, accepted throughout this litigation, that the Appellants bear the onus of proving relevant factual matters.

60 In these circumstances, we rule as follows on Mr Latham’s submission that we should reverse our determination in the second appeal judgment regarding the status of the 36 contentious entities. We reject the submission on the ground that, even if the new evidence did warrant a finding that 19 of the contentious entities obtained all or the majority of their income from L & B, the other factors outlined in that judgment still lead to the conclusion that they were independent contractors. The Court of Appeal’s treatment of this particular factor in Paddison, considered in the context of its decision as a whole, seems to us to require this conclusion.

61 We do not, however, make a finding as to whether or not these 19 entities actually did receive all or the majority of their income for 2001-02 from L & B.

The ‘90-day exemption’

62 As mentioned above at [31], Mr Eager submitted that by virtue of material disclosed in the new evidence, one of the entities (C34) that remained in contention should be held to have fallen within the 90-day exemption. In its response to a s. 72 notice, this entity, which was a company, stated that during 2001-02 it had worked for L& B for periods amounting to 20-30 days and that between 2000 and 2002, it had received ‘on average’ 10% of its total income from L & B. The second of these statements was corroborated as follows: the total business income disclosed in its tax return was $248,139 and L & B’s records showed payments to it totalling $29,715.

63 Mr Latham’s submissions did not specifically address these matters.

64 We agree with Mr Eager that these data sufficiently show that, in accordance with the conditions laid down in s. 3A(1)(e)(iii) of the Act, the services that C34 provided to L & B in 2001-02 were ‘provided for a period that does not exceed 90 days’ and that the Appellants are accordingly entitled to claim the 90-day exemption with respect to the payments made to this entity.

Evidence and submissions regarding the ‘two-person exemption’

65 Ultimately, the Appellants’ claim invoking the ‘two-person exemption’ set out in s. 3A(1)(f) applied to 15 of the contentious entities. These comprise the 17 entities that have remained in contention throughout (see [29] above), except for one (C37) in relation to which the Commissioner made no submission and another (C34) in relation to which the Appellants, as just mentioned, relied on the 90-day exemption.

66 The 15 entities in question are C1, C2, C3, C6, C10, C12, C14, C16, C18, C19, C21, C23, C27, C29 and C31. All of them were engaged by L & B to fix plasterboard and/or cornices.

67 Outline of the Appellants’ argument. The argument advanced by Mr Eager in support of this claim for exemption was based on evidence that was also of importance for our decision as to whether the 36 contentious entities were employees or independent contractors. This was evidence, adduced by the Appellants, to the effect that (a) when fixing sheets of plasterboard or lengths of cornice the entities had to have more than one person on the job and (b) L & B expressly authorised them to engage other persons for this purpose without requiring L & B’s approval.

68 In the second appeal judgment at [61 – 63] and [71 – 72], we summarised this evidence as follows:-

62 Each of these documents stated as follows:-

It is hereby agreed that the engagement of [name of entity] by L & B Linings Pty Limited for the fixing and setting of Plasterboard/Cornices [in some instances, a full stop appeared here] L & B Linings Pty Limited does acknowledge that the subcontractor may employ/engage any appropriately qualified person to perform or assist the subcontractor in the performance of its contractual obligations.

71 They [the entities] were also required to ensure that plasterboard sheets and lengths of cornice – which were often of substantial size and weight – were lifted and put in place by not less than two workers. This requirement was corroborated in four items of evidence: (a) a 20-minute CD-Rom, made in 2004 by the Association of Wall & Ceiling Installers, depicting the installation of plasterboard and cornices in suburban residential settings; (b) a 20-minute video entitled ‘Your Guide to Safe Handling in the Plasterboard Industry’, made by Boral, CSR Gyprock and Lafarge Plasterboard, who are three large suppliers of plasterboard and cornice; (c) two editions (January 2001 and September 2003) of a booklet put out by CSR entitled ‘Gyprock – Residential Installation Guide’; and (d) statements by four contract builders for whom the Appellants carried out lining projects, indicating that they insisted on compliance with this requirement.

72 Mr Saraikin and Mr Kirpichnikov were both involved in the making of the CD-Rom. In evidence, Mr Saraikin estimated that the weight of one of the sheets of plasterboard shown in it was between 60 and 80 kilograms. He said that the length of a strip of cornice shown in it was 5.4 metres. He said also that although machines for lifting plasterboard sheets were available for hire, they were not suitable for use in homebuilding because the rooms were not large enough. He added that this was illustrated at one point in the CD-Rom.

69 We returned to this issue at [97], [116], [134 – 135] and [141] (the relevant parts of this last paragraph have already been quoted in the present judgment):-

116 In a passage which the Tribunal quoted in part at [72], Mr Saraikin displayed considerable reluctance to concede that entities could, in some circumstances, work alone or that he himself had actually observed individual entities (specified in the questions) doing this. He made what appears to be a legitimate point, namely, that it would be more feasible for a sander than for someone installing plasterboard or cornice. But under pressure he then admitted that while it was ‘impractical’ for cornice workers, it was not impossible. When Mr Latham showed him two documents (which were then admitted into evidence), indicating that machinery for lifting and installing sheets of plasterboard was available for hire, his response was that using such machinery to line a residential home was not ‘practical’ because the spaces were too small. He referred rather vaguely to the prospect of ‘a lot of mucking around’ if their use was attempted.

134… except only on the availability of machines for lifting plasterboard sheets, the Commissioner did not adduce any evidence on relevant aspects of the relationships between L & B and the entities. The Commissioner relied instead on the existence of alleged gaps and deficiencies in the Appellants’ documentary evidence and on unsatisfactory elements in the testimony of three of their witnesses. We agree that there are significant gaps in the documentary evidence, but do not think that Mr Latham’s challenges to the authenticity of specific documents and their capacity to reflect the true intentions of the parties were made out (see [105], [107] above). We agree also that the testimony given by the witnesses in question was at times unconvincing and/or evasive, but not that their evidence on the specific range of issues that are relevant in determining the status of the entities should for this reason be disbelieved (see [119] above).

135 With regard to the particular question on which the Commissioner did adduce evidence, we consider that that evidence – indicating as it did that machines for lifting plasterboard sheets were available for hire – provided grounds for doubting Mr Saraikin’s contention that it was impossible for only one person to lift the plasterboard sheets that were installed by the entities. But Mr Saraikin responded, both in his affidavit and in cross-examination, by claiming that these machines were too large and unwieldy to be used in a practical way in residential dwellings. This was an effective response, which was not countered by further evidence or argument on the Commissioner’s behalf. The Commissioner indeed produced no evidence at all to suggest that the entities did in fact use such machines during 2001-02.

141 In our opinion, having regard to the limited evidence put on by the Commissioner and the other considerations that we have just discussed, the Appellants’ evidence sufficiently establishes a number of matters that are specifically relevant to determining the status of the 36 contentious entities (or of some of them) during 2001-02:…

For practical reasons, and to ensure personal safety, some of the operations associated with installing plasterboard or cornices (notably bringing large plasterboard sheets or substantial lengths of cornice to the room where they were to be installed and lifting them to the appropriate place on a ceiling or a wall) could not be performed by one person alone. This did not apply, however, to the task of sanding.

70 In relation to some of the 15 entities with respect to which the two-person exemption was claimed, Mr Eager relied also on specific material contained in the Appellants’ Objections, dated 30 October 2003, against the Commissioner’s assessments for pay-roll tax (hereafter ‘the Objections’).

71 It is convenient to outline here the most important parts of this material. They relate to what Mr Eager called the ‘team cases’. Paragraph 5.4 of the Objections, which along with other relevant parts of the Objections was verified in the affidavit sworn by Mr Saraikin, commenced by referring to the Terms of Engagement that we have just described. It then stated that L & B played no part in selecting the ‘appropriately qualified persons’ that the entities, pursuant to this document, were authorised to engage.

72 Paragraph 5.4 continued as follows (in this quotation, the numbers of the entities have been substituted for their names, and except where indicated the entities concerned were sole traders):-

It [L & B] does award some subcontracts [to] subcontractors that form teams. For example, B6 [this company was a non-contentious entity] and C29 generally subcontract on behalf of a team the identity of each member of which becomes known to L & B Linings only when a claim for payment is submitted by B6 and C29 at the conclusion of a particular job or series of jobs. In such cases, at the direction of B6 and C29 representatives, L & B Linings pays part of the contract price to the ‘sub-sub-contractor’ in question: for example C8 and/or C20 and/or C23 and/or C35 and/or C38… Similarly C1 [a partnership] and C31 subcontracted as a team on an equal share basis with [one of the partners in C1] as the spokesman.

73 A further passage of relevance in the Objections is the final sentence of paragraph 5.9:-

In the ‘team’ cases each member of the team for the particular job must provide their own (tax) invoice to L & B Linings – e.g. for B6-C29 + C1-C31… team cases.

74 Relying on all this evidentiary material, Mr Eager submitted that the Appellants had discharged the onus of proving, with regard to the services that each of the entities supplied to L & B during 2001-02, that the work to which those services related was performed by two or more persons in circumstances falling within s. 3A(1)(f) of the Act.

75 With specific reference to the ‘team’ cases, he submitted that each entity in a team ‘provided services for’ the other entity or entities in the team, as well as for L & B. With reference to the cases not involving a ‘team’, he submitted that either (a) one or more ‘appropriately qualified persons’ whom the entity had engaged in accordance with the Terms of Engagement ‘provided services for’ the entity or (b) the two or more people who carried out the task were employees of an entity which was incorporated or were partners in an entity established as a partnership. In these different ways, he submitted, the requirements of s. 3A(1)(f) were satisfied in every case.

76 The relationship that must exist between an entity and a person ‘providing services’ to it. An important argument raised in response by Mr Latham was that this evidence failed to satisfy an implicit requirement of s. 3A(1)(f). This was, he maintained, that in order to claim the two-person exemption, a ‘designated person’, such as L & B, had to prove that the relevant ‘contractor’ (in the present case, an entity) had performed the relevant work in conjunction with a ‘second person’ whom the contractor had engaged either as an employee or as an independent contractor. The evidence relied on by the Appellants did not, in his submission, establish that one or other of these relationships had arisen between any of the entities and any of the ‘second persons’ who took part in the relevant operations of installing plasterboard or cornices. It was in fact generally silent as to what relationships had existed.

77 This submission by Mr Latham focused on the phrase ‘persons employed by, or who provide services for, the contractor’ where it appears in each of subparagraph (i), (ii) and (iii) of s. 3A(1)(f). He argued that the words ‘provide services for’ should be construed as implicitly requiring that a contract for services had been concluded between the contractor and the ‘second person’. There must, he said, have been a ‘separate contractual relationship’ between these two people.

78 Mr Latham cited in this context the decision in Zuccala Homes Pty Ltd v Commissioner of State Revenue (Victoria) (1994) 94 ATC 2084, to which we have already referred. In that case, the Administrative Appeals Tribunal of Victoria considered the interpretation of s. 3C(1)(f) of the Pay-roll Tax Act 1971 (Vic). Except for some immaterial differences of wording, this provision is the same as s. 3A(1)(f) of the Act.

79 The ‘contractor’ in that case was a partnership (‘the Debeleks’) carrying on business as carpenters. Its members were a father and son called Debelek and their respective wives. Zuccala Homes Pty Ltd, a building company, claimed exemption under the Victorian equivalent of s. 3A(1)(f)(ii) of the Act from liability to pay-roll tax on payments that it had made to the Debeleks. The Tribunal upheld this claim.

80 Mr Latham relied on the following passages in the Tribunal’s judgment:-

7. The evidence was that as a matter of constant practice in dealing with the Debeleks, Zuccala would engage the Debeleks or one of them to erect the frame. The Debeleks would then go to the site and measure out the areas where the holes were to be drilled for the footings…. The Debeleks would then retain a contractor, referred to as a stump hole driller, who would drill the holes…

8. When the timber was delivered to the site they would engage another subcontractor to cut the timber to lengths determined by them. This was done by an independent contractor called a frame cutter. The Debeleks would then assemble and erect the frame…. Zuccala had nothing to do with the payment or selection of either the stump hole driller or the frame cutter; the selection and payment was left entirely to the Debeleks…

9…. They [the Debeleks] arranged for payment of their own subcontractors by Gary Debelek paying the stump hole driller and the father paying the frame cutter and there being an accounting between them…

81 In addition, Mr Latham drew our attention to the following passage in the Second Reading Speech (Hansard, Legislative Assembly,13 November 1985, p 9558) introducing into Parliament the Bill that inserted s. 3A into the Act:-

This Bill includes a number of measures which will catch schemes designed to avoid liability for pay-roll tax by severing the employer-employee relationship. Such arrangements have included the use of so-called contractors to replace wages staff.

82 Finally, he cited various paragraphs of Revenue Rulings PT4 (1986) and PT11 (1987) of the OSR, in which the effect of s. 3A is explained. He placed particular emphasis on the following passage in the latter Ruling:-

“BUDDY GANGS”

10. Where a buddy gang arrangement is operating (two or more contractors working together on a particular job or on a number of jobs), the employer must establish the legal identity of the group.

11. For instance, a “gang” of three could represent a partnership of three (with or without a written agreement), an individual contractor with two employees, or three individual contractors.

12. Presuming all three persons work on the same job, the payments to the partnership and the individual would be exempt under the exemption rules outlined above. Payments to the three individual contractors could, on the other hand, attract pay-roll tax….

14. In the case of buddy gang partnerships, evidence in the form of a written agreement, use of a joint bank account or lodgement of a partnership income tax return would assist the Department to determine the bona fides of the arrangement.

83 In Mr Latham’s submission, the evidence adduced by the Appellants failed completely to indicate what relationship existed between any of the entities and the ‘second persons’ who were claimed to have worked with them on tasks which the entities had contracted to perform for L & B. There was, he said, no evidence such as clause 14 of Revenue Ruling PT11 contemplated. The necessary ingredient of a ‘separate contractual relationship’ had therefore not been established.

84 The principal arguments made in response by Mr Eager were as follows.

85 First, the sole requirement established by the words ‘who provide services for’ in each of the three subparagraphs in s. 3A(1)(f) is that the ‘second person’ should ‘provide services’ to the contractor, not to the taxpayer. The precise nature of the relationship between the ‘second person’ and the contractor is irrelevant so long as this requirement is satisfied. The ‘second person’ may provide services to the contractor in any one of a wide range of capacities, including the following: an employee, an independent contractor, a ‘delegate’, a partner (in the legal sense), a volunteer or a paid or unpaid officer of a company or a partnership.

86 Secondly, the interpretation of s. 3A(1)(f) advanced by Mr Latham, if adopted, would effectively change the text of the provision. According to normal principles of statutory interpretation, it is not for courts or tribunals to rewrite legislation. Mr Eager’s submission to this effect can be illustrated in this way. Subparagraph (i) would operate as if its wording were altered as follows by the insertion of the underlined words: ‘by 2 or more persons employed by, or who provide services under a contract for services for, the contractor in the course of a business carried on by the contractor’.

87 Thirdly, the judgment in Zuccala, when stating at paragraphs 7 to 10 that the Debeleks engaged stump hole drillers and frame cutters as independent contractors, did not indicate, either expressly or by implication, that if these ‘second persons’ had not been independent contractors or employees the exemption would not have been available. It simply stated that this was in fact the capacity in which these ‘second persons’ provided services to the Debeleks.

88 Fourthly, the policy consideration expressed in the sentence from paragraph 1 of the Zuccala judgment on which Mr Latham relied was significantly qualified in the following statement, also appearing in paragraph 1:-

The ambit of the exceptions must therefore be wide, unless Parliament wanted to levy a tax on the provision of services generally.

89 Fifthly, in Revenue Ruling PT4, on which Mr Latham relied, the operation of s. 3A(1)(f) was outlined in terms that did not suggest any need for proof of the existence, let alone the nature, of a ‘separate contractual relationship’ between the contractor and a ‘second person’. Instead, the important word used was ‘engage’, which was also the word used by L & B in its authorisation to the entities to utilise the services of ‘second persons’ (see the second appeal judgment at [62] and our finding in the 11th dot-point in para [141] of that judgment, quoted above at [38]). In explaining the impact of s. 3A(1)(f)(iii), for instance, the Revenue Ruling in clause 3(a)(vii) used the following language (underlining added):-

C) the party who contracts to provide the services is a natural person and that person, together with at least one other person engaged by him, performs the actual work required under the contract.

NOTE: In all cases, the person engaged must perform the work that is the object of the contract. It would not be sufficient for say, a spouse, who performs purely clerical work, to satisfy the exemption provisions, as he or she would not be engaged in the work to which the contract relates.

90 Sixth and finally, in quoting a passage from Revenue Ruling PT11, Mr Latham omitted a paragraph which somewhat blunted his claim that if the exemption provisions in s. 3A(1)(f) are not narrowly construed, undesirable tax avoidance will result. This paragraph is as follows:-

13. It is worthy of note that the contractor legislation contains anti-avoidance provisions and the Act provides the Chief Commissioner of Pay-roll Tax with the power to disregard any artificial arrangements.

91 In our opinion, the arguments made by Mr Eager on these matters must be preferred. We agree with him that the key phrase ‘provide services for’ in each of the three subparagraphs in s. 3A(1)(f) does not contain a requirement, express or implied, that the services must be provided for reward under a contract, let alone that the status of the ‘second person’ vis-à-vis the ‘contractor’ must be that of independent contractor. We would suggest, in fact, that in putting forward a spouse as an example of a ‘person engaged’, the OSR, in the Note in Revenue Ruling PT4 that has just been quoted, could be taken to have implied that in its opinion a person providing services on a voluntary basis could qualify as an appropriate ‘second person’. Furthermore, in so far as Mr Latham’s submissions suggested that the true characterisation of the contractual relationship between a contractor and a ‘second person’ must be proved in order to take advantage of the two-person exemption, this could have the highly undesirable effect of requiring the taxpayer to prove whether the ‘second person’ was an employee or an independent contractor. As this litigation has demonstrated all too well, resolving this issue can be an arduous and expensive task.

92 For these reasons, we see the key issue arising under s. 3A(1)(f) as simply being whether or not the ‘second person’ works for the contractor, either in the capacity of employee or in some other capacity involving the provision of services to the contractor. The term ‘engaged by’ appears to us to describe reasonably accurately the second of these alternatives, if not also the first. What matters most is that the ‘second person’ must not have worked for, been engaged by or ‘provided services to’, the ‘designated person’.

93 In this connection, the following further extract from the judgment in Zuccala strikes us as useful:-

15. The second ground of contention was that the services provided by the stump hole digger were provided not for the Debeleks but for Zuccala. There is in my view no necessary disjunction. In truth the contractor employed by the Debeleks does the work for the benefit of a number of people: not necessarily in order, they would be for himself so he could get paid, for the Debeleks so that they would be moved to pay him, and for Zuccala Homes, and others down the chain, so that the house might have a decent chance of staying aloft and they might have a decent chance of getting other jobs. It seems to me that the primary people for whom they are providing the services are the people who are asking them to perform them, and who are paying them to perform them. They are the Debeleks. Accordingly, I reject the second ground of contention.

94 It follows from this conclusion that the mere fact that in their evidence the Appellants did not establish the nature or even (except perhaps by implication) the existence of ‘separate contractual relationships’ between the entities and L & B is not enough of itself to debar them from claiming the two-person exemption.

95 Submissions regarding the new evidence. Mr Latham submitted that, with regard to 11 out of the 15 contentious entities (hereafter ‘the group of 11’) that were involved in the Appellants’ claim for the benefit of the two-person exemption, the new evidence disclosed material tending to show that they did not in fact employ any ‘second person’ at all when working for L & B during 2001-02.

96 The entities in what we are calling ‘the group of 11’ were C1, C2, C3, C6, C12, C14, C16, C19, C23, C29 and C31. The material supplied by the ATO did not include any tax returns for 4 of them (C1, C12, C23 and C29). Two shared features of the new evidence in so far as it related to the group of 11 were (a) that in the 7 cases in which a copy of a tax return was included in this evidence (C2, C3, C6, C14, C19 and C31), the returns contained no claim for a deduction on account of salary and wage expenses or contractor expenses and (b) save in the cases of C2 and C6, the entities in the group of 11 did not respond to the s. 72 notice that was sent to them. The response by C2 contained a denial of having ever worked for B & L (but as pointed out above, the entities were not asked about work done for L & B, which was the employer company). The response by C6 contained a number of assertions which are outlined above at [58].

97 With regard to the remaining 4 of the 15 entities (hereafter ‘the group of 4’), Mr Latham submitted that while the evidence showed that they made one or more payments to employees or subcontractors, it did not establish either the requisite ‘separate contractual relationship’ (in 3 instances – C10, C21 and C27) or, where such a relationship was apparent, that the work performed related to one or more jobs on which the entity had been engaged by L & B (in one instance – C18).

98 The former of these sub-groups, comprising 3 entities (C10, C21 and C27), had filed a tax return in which deductions for both ‘salary and wage expenses’ and ‘contractor expenses’ had been claimed. Only one of them (C10) had responded to a s.72 notice. Its response included the statement that in the jobs that it carried out for B & L (sic), it had not worked with anyone else. The remaining entity – C18 – specified in its tax return that it had incurred expenses in paying contractors. In its response to a s. 72 notice, it stated that it had not worked at all for B & L (sic). It also attached copies of invoices recording jobs done for L & B.

99 Mr Eager challenged the utility of this evidence in three main ways. First, due to circumstances already outlined (see [54] above), the fact that the ATO did not supply copies of tax returns for 4 entities within the group of 11 was of little or no significance in the present context. Secondly, incomplete or negative answers to questions in the s. 72 notices were quite likely to have been caused by the OSR’s error in referring to B & L, not L & B, in the notices (see [58] above). Mr Eager also argued with specific reference to the answers given by C6 that they were manifestly improbable (see again [58]). Thirdly, it could not be assumed that any entry or entries in the spaces in the income tax returns that were designated ‘salary and wage expenses’ or ‘contractor expenses’ indicated the total amount outlaid by the entity in question for those purposes within the tax year. The reason for this was that in the ATO’s instructions to taxpayers for 2001-02, a copy of which was received into evidence on the tender of the Appellants, permission was given for expenses in these categories to be entered into three other spaces on the tax return. These were the spaces designated ‘cost of sales’, ‘purchase and other costs’ or ‘other business expenses’.

100 If the income tax returns from 7 entities within the group of 11 (as indicated above, no returns from the remaining 4 were made available by the ATO) are examined with this last point in mind, it emerges that 4 of them (C2, C16, C19 and C31) claimed deductions of significant amounts (having regard to the total amount of their business income) for ‘cost of sales’, ‘purchase and other costs’ and/or ‘other business expenses’. A fifth entity (C6) claimed a small deduction for ‘other business expenses’. When the returns filed by the group of 4 are examined with the same point in mind, it emerges that 3 of them (C10, C18 and C27) claimed significant deductions under one or more of these heads and the fourth (C21) claimed a relatively small deduction.

101 One more aspect of the submissions regarding the new evidence remains to be outlined. Both parties seemed to take the view that, as we understood the position, the Commissioner was bound to obtain and tender this evidence, failing which we might draw inferences adverse to his case through applying the rule in Jones v Dunkel (1959) 101 CLR 298.

102 The basis of this interpretation of our views was, it seems, the following passage in the second appeal judgment at [137 – 139]:-

138 We agree, however, with a contention by Mr Eager that it was not necessary for the Commissioner to, in effect, rely on the Appellants to obtain this evidence. If the Commissioner believed that any of these business records maintained by the entities would or might have disproved, or at least cast doubt on, the Appellants’ claim that the entities managed their tax affairs and performed other activities as independent business enterprises, the Commissioner could have requested the Tribunal to issue appropriate summonses to one or more of the entities to produce documents, pursuant to s 84 of the ADT Act. As far as we aware, this was not done.

139 For this reason, the Appellants’ failure to seek to obtain documentary evidence from any of the entities does not, in our view, provide a sufficient basis for the application of the rule in Jones v Dunkel.

103 Our general approach to the evidence regarding the two-person exemption. As indicated above, the Appellants, as taxpayers, bear the onus of establishing the facts on which they rely in objecting to the Commissioner’s assessment, including the facts relevant to their invocation of the two-person exemption with respect to 15 of the contentious entities.

104 The principal components of the evidence on which the Appellants relied in this context are (a) the material, summarised above at [68 – 69], indicating that on account of practical considerations (including, in particular, considerations of health and safety), the tasks of installing plasterboard and cornices call for physical labour on the part of two or more people working together; (b) the documents and oral testimony depicting L & B’s general practice of engaging one entity at a time to perform a specific task of this nature, with the expectation that that entity would involve one or more other people in the completion of this task; and (c) the existence of formal documents, headed Terms of Engagement, by which L & B authorised the entities to engage appropriately qualified people for this purpose, without any need for prior approval by L & B.

105 Implicitly, the Appellants, in basing their claim to exemption on evidence of this nature, invited us to accept the proposition that the requirements of s. 3A(1)(f) could be satisfied with regard to the payments made to all 15 of the relevant entities by showing that the standard practice adopted by L & B and these entities involved arrangements falling within the scope of this provision. To put this point in another way, we have been invited to rule that the Appellants, in seeking to invoke the exemption for all of L & B’s payments to these 15 entities, are not inevitably bound to adduce evidence specifically demonstrating that such an arrangement was an attribute of each and every task performed for it by each and every one of these entities.

106 This was not a proposition that Mr Latham specifically addressed, though the general tenor of his submissions was clearly opposed to it.

107 In general terms, we agree with this aspect of the Appellants’ argument. From a practical point of view, the provision creating the two-person exemption would be unworkable if a taxpayer seeking to invoke it with respect to a series of payments made to one or more independent contractors was compelled to adduce documentary and/or oral evidence establishing, with regard to each individual payment, both (a) the engagement of one or more identified ‘second persons’ by the contractor in order to carry out the task that the contractor had agreed to perform for the taxpayer and (b) actual participation in this task by the second person or persons. A case like the present, involving numerous small-scale tasks that were performed by numerous contractors and (allegedly) numerous ‘second persons’, illustrates clearly why such a requirement would impose an undue burden on taxpayers and, indeed, on the Commissioner. The Commissioner would be bound to scrutinise detailed evidence of this nature before deciding whether any claim for the exemption should be accepted.

108 In the first appeal judgment (at [94 – 95]) and the second appeal judgment (at [127]), we noted a similar recognition within the case law that an employer who wishes to prove that a group of workers whom he/she has engaged in accordance with an established system are independent contractors, not employees, may rely on evidence outlining the key features of the system. The employer need not adduce evidence from each of the workers regarding the specific details of their individual relationships with the employer.

109 On the other hand, what we have called evidence of the standard practice adopted by a taxpayer in dealing with contractors should not prevail in the face of countervailing evidence suggesting that in any particular instance the taxpayer failed to satisfy the requirements of the two-person exemption.

110 Our assessment of the new evidence. The new evidence suggests that some at least of the 15 entities did not make significant payments to employees or subcontractors whom they had engaged, and also contains assertions by a couple of them that they have worked alone on jobs undertaken for L & B. We treat this evidence as having the potential, in individual cases, to rebut the general inferences that the Appellants would wish us to draw from the evidence on which they relied.

111 In saying this, however, we wish to make it clear that, contrary to the submissions of both parties, we do not believe the Commissioner to have been bound to obtain and tender the new evidence, or evidence of that nature, failing which we might draw inferences adverse to his case through applying the rule in Jones v Dunkel. In the passage from the second appeal judgment that we have quoted above at [102], we did not intend to suggest that in such event there would be, as Mr Latham termed it in his written submissions, a ‘reverse evidential onus’. We meant only that due to the availability to the Commissioner, as well as to the Appellants, of processes for obtaining such evidence, it was not appropriate to apply the rule in Jones v Dunkel against the Appellants on account of the failure on their part to utilise those processes.

112 Mr Eager’s written submissions at the most recent hearing did indeed incorporate the proposition that, in so far as the measures adopted by the Commissioner to obtain relevant documentary evidence from the entities were less than satisfactory (in ways that we have outlined above at [53] – [58]), adverse inferences should be drawn against the Commissioner under the rule in Jones v Dunkel. For the reasons that we have just given, we do not agree.

113 Accordingly, our view regarding the new evidence is this. In the present context, it should be scrutinised solely in order to determine the extent to which, assessed on its merits, it serves to strengthen or to weaken the case for inferring from the Appellants’ evidence the factual matters which they must establish in order to attract the two-person exemption.

114 In carrying out this exercise, it is useful first to determine the extent, if any, to which Mr Eager’s criticisms of the methodology adopted to obtain this evidence dilute its weight.

115 Briefly expressed, our conclusions on this topic are these. In the first place, we accept his argument (see [99] above) that deductions for payments to subcontractors may well have been claimed in the tax returns that were filed by the entities under headings such as ‘cost of sales’ or ‘other business expenses’.

116 The result of so doing is that, in place of the classification of the 15 relevant entities into ‘the group of 11’ and ‘the group of 4’ along the lines submitted by Mr Latham (see [95 – 98] above), the evidentiary impact of the tax returns with regard to the two-person exemption may be summarised in the following three propositions:-

In the case of 3 entities (C3, C6 and C14), there were no significant claims for deductions within one or more of the relevant categories, suggesting that no ‘second persons’ were engaged.

In the case of 4 entities (C1, C12, C23 and C29), there was no tax return within the new evidence, so there was no indication as to whether or not any ‘second persons’ were engaged.

117 Secondly, we agree with Mr Eager that, for reasons set out above at [54] and [99], the absence of any tax returns for 2001-02 from 3 of this last group of entities – specifically, C1, C12 and C29 – cannot reliably be taken to mean that they did not make any payments to ‘second persons’. The first 2 of these 3 were not required to file a return. The third may well have filed a return, but it was not located by the ATO. This modifies to a limited extent the third of the three propositions just set out, so far as these 3 entities are concerned.

118 Thirdly, we are bound to accept that the value of the evidence potentially obtainable through the use of s. 72 notices was significantly weakened by the OSR’s error in referring to B & L, not L & B. On the other hand, some of the specific answers supplied by individual entities should not be ignored for this reason.

Our specific conclusions regarding the two-person exemption

119 Adopting the approach to the evidence on this matter that we have just outlined, we reach the following conclusions regarding the Appellants’ claim to invoke the two-person exemption.

120 We consider that, except in two categories of case, the evidence regarding the standard practice adopted by L & B and the relevant entities sufficiently proves that, in fixing sheets of plasterboard and lengths of cornice pursuant to their agreements with L & B, the entities engaged ‘second persons’ who ‘provided services for’ them or, being a company or a partnership, carried out these tasks in a manner falling within subparagraph (i) or (ii) of s. 3A(1)(f) of the Act. This evidence is outlined above at [69].

121 The two categories of case in which we regard this evidence as insufficient to discharge the onus placed on the Appellants are (a) the ‘team’ cases, involving 3 of the contentious entities and (b) a group of two cases in which answers to a s. 72 notice appeared to contradict the evidence as to the standard practice adopted.

122 The ‘team’ cases. So far as the two-person exemption is concerned, the relevant teams were B6 + C29, B6 + C29 + C23 and C1 + C31. Mr Eager submitted that each entity within these teams ‘provided services for’ the other entity or entities in the team, as well as for L & B. But the evidence on which he relied, which is summarised above at [71 – 73], leaves open the possibility that in some at least of the relevant jobs the work was performed by two or more entities each of which entered into a contract with L & B. We refer here to the following statements in paras 5.4 and 5.9 of the Objections:-

5.9… In the ‘team’ cases each member of the team for the particular job must provide their own (tax) invoice to L & B Linings – e.g. for B6-C29 + C1-C31… team cases.

123 We recognise that the remainder of the second sentence of paragraph 5.4, together with the third sentence, qualifies what we have just quoted in a way that lends support to Mr Eager’s submission. Yet this qualifying passage is itself qualified by the word ‘generally’, which we have italicised in reproducing the passage here:-

generally

124 In our opinion, if the substance of an arrangement reached between L & B and a ‘team’ comprising two or more entities was that the entities would complete the relevant task, the possibility, to say the least, arises that no-one else was engaged who could be said to have played the role of a ‘second person’. We do not agree with Mr Eager that in such a case the entities involved could relevantly be said to have ‘provided services for’ each other. Any such services would be indirect only, in the sense suggested in paragraph 15 of the judgment in ZuccalaHomes Pty Ltd v Commissioner of State Revenue (Victoria) (1994) 94 ATC 2084 (see [93] above). We would characterise L & B as the ‘primary people’, in the sense in which that term was used in the following sentence in that paragraph:-

… the primary people for whom they are providing the services are the people who are asking them to perform them, and who are paying them to perform them.

125 We realise that according to the passage last quoted from the Objections, it was ‘generally’ the case that a ‘sub-sub-contractor’ was involved as well as the entities to which L & B entrusted the relevant task. But we do not see how the Appellants, who bear the onus, can claim an exemption from tax assessed with reference to a number of payments to a ‘team’ of entities when, according to their own evidence, it was only ‘generally’ that the arrangements pursuant to which those payments were made fell within the exempting provision.

126 We note also that the assertion that ‘generally’ a ‘sub-sub-contractor’ was engaged was made with reference to only one of the relevant ‘teams’ – B6 and C20. It did not expressly relate to the team comprising C1 and C31. With regard to the latter team, the significant statement in the Objections was that ‘it subcontracted as a team on an equal share basis with [one of the partners in C1] as the spokesman’.

127 For these reasons, we conclude that the Appellants have failed to prove that they are entitled to the two-person exemption with respect to the payments made by L & B to the following contentious entities: C1, C29 and C31.

128 Contradicting answers in s. 72 notices. Finally, we turn to two entities – C6 and C10 – which stated in their answers to s. 72 notices that in the jobs that they undertook for L & B they worked ‘by themselves’. While recognising that, as submitted by Mr Eager, the reliability of these answers (particularly the answers given by C6) is open to question, we do not think that they should be ignored. As we said in the second appeal judgment at [116] (this paragraph is quoted above at [69]), Mr Saraikin conceded in his oral evidence that working alone was ‘impractical’ for cornice workers, but was not impossible. Both C6 (a sole trader) and C10 (to all appearances, a one-man company) were cornice workers. It follows, in our opinion, that their statements are sufficient to prevent us drawing from the Appellants’ evidence of the standard arrangements the inference that these two entities engaged one or more ‘second persons’.

129 For these reasons, we conclude that the Appellants have failed to prove that they are entitled to the two-person exemption with respect to the payments made by L & B to the following contentious entities: C6 and C10.

Conclusions

130 Our main conclusion can be shortly stated. We uphold the Appellants’ objections to assessments for pay-roll tax, penalty tax and interest on remuneration paid by L & B to all of the 36 entities that have been identified in these proceedings as ‘contentious’, save for the following: C1, C6, C10, C29 and C31. Our principal order is to this effect.

131 In the final paragraph of his written submissions, Mr Eager pointed out that, depending on the nature of our decision in this judgment, questions relating to penalty tax and/or costs might remain for determination. It may be that any such questions could be resolved ‘on the papers’, under s. 76 of the ADT Act. But with a view to identifying them with sufficient precision and determining an appropriate procedure for their resolution, a directions hearing seems desirable.

132 The matter is accordingly set down for directions at 9.30 a.m. on Tuesday 10 July 2007.

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Citations

B & L Linings & Anor v Chief Commissioner of State Revenue (No 3) (RD) [2007] NSWADTAP 32

Most Recent Citation

B and L Linings Pty Ltd and Anor v Chief Commissioner of State Revenue (No 4) (RD) [2008] NSWADTAP 14

Cases Citing This Decision

8

B & L Linings Pty Ltd v Chief Commissioner of State Revenue [2008] NSWCA 187

Bayton Cleaning Co Pty Ltd v Chief Commissioner of State Revenue [2019] NSWSC 657

Novus Capital Ltd v Chief Commissioner of State Revenue [2018] NSWCATAD 72

Cases Cited

13

Statutory Material Cited

4

B & L Linings Pty Ltd & Anor v Chief Commissioner of State Revenue (RD) [2006] NSWADTAP 2

B & L Linings Pty Ltd & Anor v Chief Commissioner of State Revenue (No 2) (RD) [2006] NSWADTAP 32

B & L Linings Pty Ltd and L & B Linings Pty Ltd v Chief Commissioner of State Revenue [2005] NSWADT 129

CITATION:	B & L Linings & Anor v Chief Commissioner of State Revenue (No 3) (RD) [2007] NSWADTAP 32
PARTIES:	APPELLANT B & L Linings Pty Ltd and L & B Linings Pty Ltd RESPONDENT Chief Commissioner of State Revenue
FILE NUMBER:	059044
HEARING DATES:	2 April 2007
SUBMISSIONS CLOSED:	2 April 2007
DATE OF DECISION:	2 July 2007
BEFORE:	Chesterman M - ADCJ (Deputy President); Hole M - Judicial Member; Bennett C - Non Judicial Member
CATCHWORDS:	Pay-roll Tax Act 1971 - liability for pay-roll tax - distinction between employees and independent contractors - statutory exemptions from liability
MATTER FOR DECISION:	Principal matter
FILE NUMBER UNDER APPEAL:	046025
DATE OF DECISION UNDER APPEAL:	06/10/2005
LEGISLATION CITED:	Administrative Decisions Tribunal Act 1997 Pay-roll Tax Act 1971 Taxation Administration Act 1996 Taxation Administration Act 1996 (Cth)
CASES CITED:	Australian Timber Workers Union v Monaro Sawmills Pty Ltd (1980) 29 ALR 322 B & L Linings Pty Ltd & Anor v Chief Commissioner of State Revenue (RD) [2006] NSWADTAP 2 B & L Linings Pty Ltd & Anor v Chief Commissioner of State Revenue (No 2) (RD) [2006] NSWADTAP 32 B & L Linings Pty Ltd and L & B Linings Pty Ltd v Chief Commissioner of State Revenue [2005] NSWADT 129 Hollis v Vabu Pty Ltd (2001) 207 CLR 21 Humberstone v Northern Timber Mills (1949) 79 CLR 389 Jones v Dunkel (1959) 101 CLR 298 Paddison v Ultimate Image Pty Ltd t/as Hawkesbury Plasterworks [2004] NSWCA 410 Stevens v Brodribb Sawmilling Co Pty Ltd (1986) 160 CLR 16 Zuccala Homes Pty Ltd v Commissioner of State Revenue (Victoria) (1994) 94 ATC 2084 Zuijs v Wirth Brothers Pty Ltd (1955) 93 CLR 561
REPRESENTATION:	APPELLANT J Eager, solicitor RESPONDENT I Latham, barrister
ORDERS:	1. The Appeal Panel upholds the Appellants’ objections to assessments for pay-roll tax, penalty tax and interest on remuneration paid by the Second Appellant to all of the 36 ‘entities’ that have been identified in these proceedings as ‘contentious’, save for the following: C1, C6, C10, C29 and C31.; 2. The matter is set down for further directions at 9.30 a.m. on Tuesday 10 July 2007.