Bayton Cleaning Co Pty Ltd v Chief Commissioner of State Revenue

[2019] NSWSC 657

Supreme Court

New South Wales

• Summary available

Medium Neutral Citation:

Bayton Cleaning Company Pty Ltd v Chief Commissioner of State Revenue; International Hotel Services Pty Ltd v Chief Commissioner of State Revenue [2019] NSWSC 657

Hearing dates:

11 and 12 February 2019

Decision date:

07 June 2019

Jurisdiction:

Equity

Before:

Ward CJ in Eq

Decision:

Dismiss the plaintiff’s claim with costs in each of the proceedings.

Catchwords:

TAXES AND DUTIES – payroll tax – employment agency contracts – interpretation of s 37(1) of the Payroll Tax Act 2007 (NSW) – meaning of “employment agency contract”

 

TAXES AND DUTIES – payroll tax – employment agency contracts –s 32(2)(c) of the Payroll Tax Act 2007 (NSW) – whether the “two-person” exemption applies

 

TAXES AND DUTIES – payroll tax – employment agency contracts – interpretation of s 40(1)(a) of the Payroll Tax Act 2007 (NSW) – amounts taken to be wages

TAXES AND DUTIES – payroll tax – penalty tax – whether taxpayer took “reasonable care to comply with the taxation law” within the meaning of s 27(3)(a) of the Taxation Administration Act 1996 (NSW)

Legislation Cited:

Duties Act 1997 (NSW), Ch 4
Payroll Tax Act 1971 (NSW), s 3C
Payroll Tax Act 2007 (NSW), ss 6, 7, 9, 13, 25, 27, 29, 32, 33, 35, 37, 38, 39, 40, 41, 46, 86, 87, 97, Sch 2, Pt 5
Taxation Administration Act 1996 (NSW), ss 3, 4, 9, 21, 22, 25, 27, 29, 33, 97, 100, 101
Workers Compensation Act 1987 (NSW), s 163A

Cases Cited:

671122 Ontario Ltd v Sagaz Industries Canada Inc [2001] SCC 59, [2001] 2 RCS 983
ABC Staff Hire Pty Limited v Chief Commissioner of State Revenue [2018] NSWCATAD 137
Allied Pastoral Holdings Pty Ltd v Commissioner of Taxation [1983] 1 NSWLR 1; (1983) 44 ALR 607
Al-Saeed and Associates Pty Ltd atf Al-Saeed Education and Welfare Trust v Chief Commissioner of State Revenue [2014] NSWCATAP 11
B&L Linings v Chief Commission of State Revenue (No 3) [2007] NSWADTAP 32
B&L Linings v Chief Commissioner of State Revenue (2008) 74 NSWLR 481; [2008] NSWCA 187
CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384; [1997] HCA
Commissioner of State Revenue (Vic) v Snowy Hydro Ltd [2012] VSCA 145; (2012) 43 VR 109
Commissioner of Taxation of the Commonwealth of Australia v Murry (1998) 193 CLR 605; [1998] HCA 42
Freelance Global Ltd v Chief Commissioner of State Revenue [2014] NSWSC 127
Grain Growers Limited v Chief Commissioner of State Revenue (NSW) [2016] NSWCA 359
Hollis v Vabu Pty Ltd (2001) 207 CLR 21; [2001] HCA 44
HRC Hotel Services Pty Ltd v Chief Commissioner of State Revenue [2018] NSWSC 820
Jones v Dunkel (1959) 101 CLR 298; [1959] HCA 8
JP Property Services Pty Limited v Chief Commissioner of State Revenue [2017] NSWSC 1391
Lease A Leaf Property Pty Limited v Chief Commissioner of State Revenue [2011] NSWADTAP 41
Levitch Design Associates Pty Ltd ATF Levco Unit Trust v Chief Commissioner of State Revenue [2014] NSWCATAD 215
Madikian v Chief Commissioner of State Revenue [2017] NSWCATAD 263
Mutual Acceptance Co Ltd v Federal Commissioner of Taxation (1944) 69 CLR 389; [1944] HCA 34
MW v Director-General, Department of Community Services [2008] HCA 12; (2008) 82 ALJR 629
Plaintiff S4/2014 v Minister for Immigration and Border Protection (2014) 253 CLR 219; [2014] HCA 34
Project Blue Sky v Australia Broadcasting Authority (1998) 194 CLR 355; [1998] HCA 28
Qualweld Australia Pty Ltd v Chief Commissioner of State Revenue [2014] NSWCATAD 227; (2014) 100 ATR 339
Queensland Stations Pty Ltd v FCT (1945) 70 CLR 539; [1995] HCA 13
Raftland Pty Ltd v Commissioner of Taxation (2006) 227 ALR 598
Richard Walter Pty Ltd v Commissioner of Taxation (1996) 67 FCR 243
RVO Enterprises Pty Ltd v Chief Commissioner of State Revenue [2004] NSWADT 64; (2004) 55 ATR 445
Sydney Flooring Pty Ltd v Chief Commissioner of State Revenue [2017] NSWCATAD 96; (2017) 105 ATR 546
SZTAL v Minister for Immigration and Border Protection [2017] HCA 34; (2017) 91 ALJR 936
Thomas v Commissioner of Taxation [2015] FCA 968
UNSW Global Pty Ltd v Chief Commissioner of State Revenue [2016] NSWSC 1852; (2016) 104 ATR 577
Winday International Pty Ltd v Chief Commissioner of State Revenue [2016] NSWCATAD 270
Winston-Smith v Chief Commissioner of State Revenue [2018] NSWSC 773
Winston-Smith v Chief Commissioner of State Revenue [2019] NSWCA 75
Workers’ Compensation Board of Queensland v Technical Products Pty Ltd (1988) 165 CLR 642; [1988] HCA 49
World Book (Aust) Pty Ltd v Commissioner of Taxation (1992) 27 NSWLR 377

Texts Cited:

Explanatory Note, Payroll Tax Bill 2007 (NSW)
New South Wales Legislative Assembly, Parliamentary Debates (Hansard), 13 November 1985, 9557-9559

Category:

Principal judgment

Parties:

Bayton Cleaning Company Pty Ltd (Plaintiff)
International Hotel Services Pty Ltd (Plaintiff)
Chief Commissioner of State Revenue (Defendant)

Representation:

Counsel:
R Seiden SC, M Sealey, N Gangemi (Plaintiffs)
S Balafoutis, D Stretton (Defendant)

  Solicitors:
DPR Legal Pty Ltd (Plaintiffs)
Crown Solicitor for NSW (Defendant)

File Number(s):

2018/00052078; 2018/00052068

Publication restriction:

Nil

Judgment

1. HER HONOUR: Before me for hearing on 11-12 February 2019 were two sets of proceedings (to which I will refer as the Bayton proceeding and the IHS proceeding, respectively) involving a dispute between the respective taxpayers (Bayton Cleaning Company Pty Ltd, to which I will refer as Bayton; and International Hotel Services Pty Ltd, to which I will refer as International Hotel Services (collectively, the plaintiffs)) as to liability for payroll tax arising out of arrangements entered into between the respective plaintiffs and their clients for the provision of specialised cleaning services to the clients.

2. In December 2016, following an audit, the Chief Commissioner of State Revenue (Chief Commissioner) assessed each of Bayton and International Hotel Services for payroll tax on the basis that payments made to their contractors for the relevant years were liable to payroll tax under the employment agency provisions contained in s 40 of Div 8 of the Payroll Tax Act 2007 (NSW) (Payroll Tax Act) and imposed penalty tax and market rate interest due to the failure of the taxpayers to pay those amounts.

3. Each of Bayton and International Hotel Services has brought an application seeking review of those assessments pursuant to s 97 of the Taxation Administration Act 1996 (NSW) (Administration Act). Pursuant to orders made on 29 August 2018, the respective proceedings were heard together, with evidence in the one proceeding being evidence in the other.

The respective proceedings

4. The Bayton proceeding (2018/00052078) concerns assessments for payroll tax issued to Bayton on 21 December 2016 for the financial years ending 30 June 2012 through to 30 June 2016 (the Bayton Assessments). Although the Bayton Assessments were issued on the basis that the tripartite arrangements between Bayton, its clients and its contractors fell within the definition of “employment agency contract” in s 37 of the Payroll Tax Act, in the Appeal Statement filed by the Chief Commissioner in the Bayton proceeding, the Chief Commissioner also seeks to support the Bayton Assessments on an alternative basis, namely, that each of the arrangements between Bayton and its contractors was a “relevant contract” as defined in s 32 of the Payroll Tax Act (the relevant contractor provisions). In that regard, Bayton relies upon the “two-person” exception in s 32(2)(c) of the Payroll Tax Act, contending that the subcontractors (or, if not all, then around 86% of them) provided the cleaning services using two or more persons. The Chief Commissioner maintains that this exception would apply, at best, to a small fraction of the subcontractors.

5. The IHS proceeding (2018/00052068) relates to assessments issued by the Chief Commissioner to International Hotel Services at around the same time as the Bayton Assessments and in relation to the same period, assessing International Hotel Services for payroll tax again on the basis of the employment agency provisions (the IHS Assessments). In the case of International Hotel Services, however, the Chief Commissioner does not seek to support the assessments pursuant to the relevant contractor provisions of the Payroll Tax Act.

6. The Chief Commissioner applied the market rate of interest on the unpaid tax, plus 25% penalty tax. The plaintiffs seek a remission of the penalty tax (under, variously, ss 25, 27(3)(a), 29(1) and 33 of the Administration Act) on the basis that they took reasonable care to comply with the taxation law (having regard to the fact that the company accounts were audited by external accountants – see T 118.4-13) and that they disclosed all requested documents and information during the audit in 2016 which led to the issue of the respective Assessments. The Chief Commissioner denies that Bayton and International Hotel Services took reasonable care and says that there is no basis for the remission of the penalty tax.

7. It is not disputed that the plaintiffs bear the onus of proving their case (see s 100(3) of the Administration Act) on the balance of probabilities, i.e., that the Assessments are excessive, by disproving the basis (or bases) of assessment advanced by the Chief Commissioner (see Allied Pastoral Holdings Pty Ltd v Commissioner of Taxation [1983] 1 NSWLR 1; (1983) 44 ALR 607 (Allied Pastoral)); although the plaintiffs point to the recognition of the High Court contained in a footnote (fn 111) in MW v Director-General, Department of Community Services [2008] HCA 12; (2008) 82 ALJR 629 (by reference to Richard Walter Pty Ltd v Commissioner of Taxation (1996) 67 FCR 243 at 245-246; 259 and Raftland Pty Ltd v Commissioner of Taxation (2006) 227 ALR 598 at [81]), that the factual or forensic onus may shift on particular issues. In that regard, the plaintiffs submit, among other things, that the “the slightest balance” of probative evidence in their favour on a particular issue is sufficient for it to satisfy the onus of proof; that they need not exhaust all the possible evidence that might be produced on a particular point; and that, once they have adduced probative evidence that discharges their evidential onus (and that prima facie discharges the legal onus), the evidential onus shifts. In the present case, the question of evidential onus was raised in particular in the context of the evidence adduced by the plaintiffs in relation to the “two-person” exemption on which Bayton relies but, ultimately, in my opinion, nothing turns on the interaction between the legal and evidentiary onus in the determination of the present proceedings.

8. For the reasons set out below, I am of the opinion that: the arrangements in question fell within the employment agency provisions contained in the Payroll Tax Act; the respective Assessments are correct and should be confirmed; and there should not be a remission of the penalty tax (or market rate of interest) imposed by the Chief Commissioner.

Background

9. Mr Constantino Katsinas (Mr Katsinas) is the Chief Executive Officer of both Bayton and International Hotel Services and has given evidence as to the operating procedures and clients of each of those companies (see his affidavits affirmed 7 August 2018, 23 October 2018, 5 December 2018 and 7 February 2019, respectively). The following summary of the background to these proceedings is drawn largely from that affidavit evidence and the plaintiffs’ submissions and does not seem to be disputed.

10. Each of Bayton and International Hotel Services operates a commercial cleaning business providing specialised cleaning services to its clients.

11. Bayton, which has been in business since the 1960s, was described in oral submissions as a “longstanding larger scale cleaning services provider” servicing a diverse range of clients (see T 12.19), which it broadly divides into two industry sectors (corporate and commercial clients, on the one hand; and aged care and health sector clients, on the other (clients in this latter category mainly being retirement villages and aged care facilities though Bayton also includes in this industry classification one school and one hospital)).

12. International Hotel Services, which has been part of the broader Bayton group of companies from the early 1990s, specialises in the cleaning of (or provision of housekeeping services for) hotels. International Hotel Services operates as an independent economic entity within the Bayton group, although there is common management and ownership of the two companies.

13. Each of Bayton and International Hotel Services markets itself as providing specialised cleaning services to its clients. Each does so pursuant to written agreements (the cleaning contracts) entered into with clients and utilising both its own employed staff and staff sourced through subcontractors under separate written agreements (the cleaning sub-contracts). The manner in which those cleaning/housekeeping services are provided (in accordance with the scope of works under the relevant cleaning contracts) is considered in more detail by reference to the evidence later in these reasons.

14. On or about May 2016, Bayton was contacted by an officer of the office of the Chief Commissioner in relation to a state taxes investigation into Bayton and International Hotel Services. Mr Katsinas referred that officer to Mr Anthony Palumbo of Minett & Partners (M&P), who was the external accountant for both Bayton and International Hotel Services at the time. The plaintiffs say that Mr Palumbo was the main point of contact for the Chief Commissioner in relation to the investigation and that Mr Ross Jenkins (who was then the Managing Partner of M&P), Mr Sam Alan (who was and remains Bayton’s Chief Financial Officer) and other Bayton staff, as required from time to time, also assisted the office of the Chief Commissioner with its pre-assessment enquiries. In late 2016, Bayton and International Hotel Services engaged a solicitor (Mr David Rydon) to assist with the response to the tax investigation.

15. On 25 November 2016, the preliminary findings arising from that investigation were notified to the plaintiffs (see the email from Ms Bhatt, in the office of the Chief Commissioner, attaching the undated “Preliminary Findings” document), including reference to the intention of the Chief Commissioner to issue assessments to the plaintiffs (based in large part on the application of the employment agency provisions to prior financial years) which, if issued, would result in substantial additional payroll tax (and interest).

16. Written submissions dated 9 December 2016 were then provided by Bayton and International Hotel Services to the Chief Commissioner, after which the Chief Commissioner prepared internal audit reports in relation to each of Bayton and International Hotel Services. The plaintiffs point out that in each of those audit reports, it was noted that: Mr Palumbo had provided all the requested documents on time; Mr Palumbo, Mr Jenkins and Mr Alan attended meetings with the Chief Commissioner to provide the Chief Commissioner with an understanding of the business operations; and Mr Palumbo was cooperative and provided the requested documents in a timely manner.

17. It was ultimately determined by the Chief Commissioner in the audit reports that: the amount of penalty tax payable was to be 25% of the amount of tax unpaid, and that interest would be imposed at the market rate only, by operation of the discretion in s 25 of the Administration Act.

18. The Chief Commissioner issued the respective Notices of Assessment on 21 December 2016: assessing Bayton to payroll tax of $1,761,690.02 (on amounts paid to its subcontractors during the relevant years totalling $32,324,587.60) and International Hotel Services to payroll tax of $884,266.99 (on amounts paid by International Hotel Services to its subcontractors during the relevant years totalling $16,225,082.32) (the s 40 amounts) plus 25% penalty tax and interest at the market rate.

19. The present proceedings were then commenced by each of Bayton and International Health Services, both contending that none of the arrangements entered into with their clients and contractors fell within the definition of an “employment agency contract” in s 37 of the Payroll Tax Act and, hence, that the respective Assessments should be reduced by the s 40 amounts for each of the relevant years and that the penalty tax and interest imposed should be reduced or remitted wholly or in part. (In the alternative, each contended that if some of the arrangements that relate to work done in respect of certain clients or classes of clients do not fall within the definition of an “employment agency contract”, then the Assessments should be reduced by a proportion of the s 40 amounts for each of the relevant years with a corresponding reduction of the penalty tax and interest.)

20. Insofar as the Chief Commissioner has sought to sustain the Bayton Assessments by reference to the relevant contractor provisions, Bayton contends that (when regard is had to matters including: evidence in relation to company policy and practice; the analysis of Certificates of Currency in relation to insurance held by various of its contractors, and the affidavit evidence of the contractors themselves) none of the arrangements between Bayton and its contractors fell within the definition of a “relevant contract” in s 32 of the Payroll Tax Act (on the basis that the “two-person” exemption in s 32(2)(c) applied to those arrangements) or, in the alternative, that the exception applied in respect of 86% of any amounts assessed under the relevant contractor provisions (with the respective percentages for each of the five financial years as set out in Schedule B to its submissions).

Relevant provisions

The Employment Agency provisions

21. Section 37 (‘Definitions’) of the Payroll Tax Act, as in force at the relevant time, provided that:

(1)    For the purposes of this Act, an employment agency contract is a contract, whether formal or informal and whether express or implied, under which a person (an employment agent) procures the services of another person (a service provider) for a client of the employment agent.

(2)    However, a contract is not an employment agency contract for the purposes of this Act if it is, or results in the creation of, a contract of employment between the service provider and the client.

(3)    In this section

contract includes agreement, arrangement and undertaking. [emphasis per the original]

22. Pursuant to ss 38 and 39 of the Payroll Tax Act, the employment agent under an employment agency contract is taken to be an employer, and a person who performs work for or in relation to which services are supplied to a client under an employment agency contract is taken to be an employee of the employment agent.

23. Section 40 (‘Amounts taken to be wages’) provided:

(1)    For the purposes of this Act, the following are taken to be wages paid or payable by the employment agent under an employment agency contract:

(a)    any amount paid or payable to or in relation to the service provider in respect of the provision of services in connection with the employment agency contract,

(b)    the value of any benefit provided for or in relation to the provision of services in connection with the employment agency contract that would be a fringe benefit if provided to a person in the capacity of an employee,

(c)    any payment made in relation to the service provider that would be a superannuation contribution if made in relation to a person in the capacity of an employee.

24. Section 41 (‘Liability provisions’) provided:

Subject to section 42, if an employment agent under an employment agency contract:

(a)    by arrangement procures the services of a service provider for a client of the employment agent, and

(b) pays payroll tax in respect of an amount, benefit or payment that is, under section 40, taken to be wages paid or payable by the employment agent in respect of the provision of those services in connection with that contract,

no other person (including any other person engaged to procure the services of the service provided for the employment agent’s client as part of the arrangement) is liable to pay payroll tax in respect of wages paid or payable for the procurement or performance of those services by the service provider for the client.

The Relevant Contract provisions

25. The relevant contract provisions as in force at the relevant times provided as follows. Section 32 (‘What is a relevant contract’) of the Payroll Tax Act provided:

(1)    In this Division, a relevant contract in relation to a financial year is a contract under which a person (the designated person) during that financial year, in the course of a business carried on by the designated person:

(a)    supplies to another person services for or in relation to the performance of work, or

(b)    has supplied to the designated person the services of persons for or in relation to the performance of work, or

(c)    gives out goods to natural persons for work to be performed by those persons in respect of those goods and for re-supply of the goods to the designated person or, where the designated person is a member of a group, to another member of that group.

(2)    However, a relevant contract does not include a contract of service or a contract under which a person (the designated person) during a financial year in the course of a business carried on by the designated person […]

(c)    is supplied by a person (the contractor) with services for or in relation to the performance of work under a contract to which paragraphs (a) and (b) do not apply where the work to which the services relate is performed:

(i)    by two or more persons employed by, or who provide services for, the contractor in the course of a business earned on by the contractor, or

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

…

(3)    For the purposes of this section, an employment agency contract under which services are supplied by an employment agent, or a service provider is procured by an employment agent, is not a relevant contract.

The penalty tax and interest provisions

26. Where there is a tax default (as defined in s 3 of the Administration Act) s 27(1) of the Administration Act provides for the imposition of penalty tax at 25% of the amount of the tax unpaid, subject to the succeeding provisions of the Division.

27. Subsection 27(3)(a) of the Administration Act relevantly provides that the Chief Commissioner may waive penalty tax in respect of a tax default if the Chief Commissioner is satisfied that the taxpayer (or a person acting on its behalf) “took reasonable care to comply with the taxation law”.

28. Section 29 of the Administration Act relevantly provides that :

(1)   The amount of penalty tax determined under section 27 is to be reduced by 20% if, after the Chief Commissioner informs the taxpayer that an investigation relating to the taxpayer is to be carried out and before it is completed, the taxpayer discloses to the Chief Commissioner, in writing, sufficient information to enable the nature and extent of the tax default to be determined.

(2) This section does not apply in respect of information disclosed by a taxpayer if the taxpayer is registered under a taxation law [as defined in s 4 of the Administration Act] and

(a)    the tax default involved a failure to lodge a return as required under that taxation law, or

(b)    the tax default involved a failure to pay tax by the date required under that taxation law.

29. Section 33 of the Administration Act further provides that the Chief Commissioner may “in such circumstances as the Chief Commissioner considers appropriate, remit penalty tax by any amount”.

30. As to the remission of interest, s 25 of the Administration Act provides that:

The Chief Commissioner may, in such circumstances as the Chief Commissioner considers appropriate, remit the market rate component or the premium component of interest, or both, by any amount.

Issues

31. The following issues (which for ease of reference I have numbered sequentially), summarised below, have been identified by the parties as arising for determination in the present proceedings (see plaintiffs’ submissions at [100]-[104], with which statement of issues the Chief Commissioner agrees; together with an issue raised for the first time in the plaintiffs’ supplementary submissions – namely, issue 6 below; T 15.20-16.38).

Bayton Assessments

1. Whether or to what extent the arrangements between Bayton, its clients and its contractors fell within the definition of an “employment agency contract” in s 37 of the Payroll Tax Act.

2. Whether or to what extent any of the arrangements between Bayton and its contractors fell within the definition of a “relevant contract” in s 32 of the Payroll Tax Act (which turns on whether or to what extent the exception in s 32(2)(c) applied to those arrangements).

3.   Whether there should be remission/reduction of all or some interest and penalties imposed upon the plaintiff by the Bayton Assessments.

IHS Assessments

4. Whether or to what extent the arrangements between International Hotel Services, its clients and its contractors fell within the definition of an “employment agency contract” in s 37 of the Payroll Tax Act.

5.   Whether there should be remission/reduction of all or some interest and penalties imposed upon the plaintiff by the IHS Assessments.

Bayton/IHS Assessments

6. What amounts are taken to be wages pursuant to s 40(1)(a) of the Payroll Tax Act? Do the amounts taken to be wages include the payments from Bayton and International Hotel Services to their subcontractors (as the Chief Commissioner contends), or only the wages paid by those subcontractors to their individual workers (as Bayton and International Hotel Services contend)?

Plaintiffs’ evidence

32. Evidence was adduced as to the nature of each of the businesses of its respective clients. First, in respect of corporate and commercial clients, Mr Katsinas gave evidence deposing as to his knowledge of the nature and conduct of the businesses or activities of those clients; there was evidence of material obtained from the internet as to the nature and conduct of the businesses of clients in that category; and the contracts between Bayton and each client were tendered. Second, in respect of the aged care and health sector clients (and the one school, St Maroun’s College), affidavits were read from senior personnel of three clients in this sector (Uniting NSW.ACT (Uniting), Baldwin Living and Thomas Holt); there was material obtained from the internet as to the nature and conduct of the businesses of clients in that category; and the contracts between Bayton and each client were tendered.

33. For its part, International Hotel Services adduced evidence of the nature of the businesses of its respective clients by way of: affidavits from senior personnel of two of its clients in this sector (Lancemore Group, Medusa Hotel); material obtained from the internet as to the nature and conduct of the businesses of those clients; and the tender of most of the contracts between International Hotel Services and its clients.

34. Bayton and International Hotel Services rely on evidence of the nature of the services they have provided to their clients, including: whether the cleaners wear the Bayton or International Hotel Services uniform when performing their work; the hours during which the services were provided; whether the cleaners were supervised by managers from Bayton or International Hotel Services (as appropriate) and whether interaction with staff of the client was encouraged.

35. The plaintiffs prepared a number of schedules attached to their submissions (some of which were superseded and/or updated) containing a summary of relevant information about respective clients (to which I will refer collectively as the Features Schedules). Mr Katsinas had exhibited to his first affidavit affirmed 7 August 2018 (Mr Katsinas’ first affidavit) different schedules containing some of the same (and additional) information in relation to Bayton and International Hotel Services’ clients respectively, the accuracy of which he confirmed in his third affidavit affirmed 23 October 2018 (Mr Katsinas’ third affidavit) at [11](d) and [17], respectively. I note for completeness that some of the Chief Commissioner’s submissions appear to refer to this schedule which differs somewhat from the schedules attached to the plaintiffs’ submissions (and amendments thereto). I raise this only to minimise the scope for confusion. References to the Features Schedules in these reasons are intended to encompass the collective group of schedules ultimately relied upon by the plaintiffs.

36. That evidence may be summarised as follows.

Bayton’s corporate and commercial clients

37. Bayton has apportioned amounts paid to its contractors by industry classification (noting that its accounting system does not record amounts paid to each contractor in respect of work done for each individual client). Bayton calculates that over the relevant years 56% of the total amount Bayton paid to its contractors was for work performed in relation to its corporate and commercial clients, with 44% attributable to work performed in relation to the aged care and health clients (plaintiffs’ submissions at [49]).

38. Bayton has a diverse range of corporate and commercial clients, including: Alcoa Australia Rolled Products Pty Ltd (AARP), which operates aluminium rolling mills; Downer EDI Group (Downer EDI), an infrastructure company that designs, builds and sustains assets, infrastructure and facilities for customers in Australia and New Zealand; Fuji Xerox Australia Pty Ltd (Fuji), an Australian subsidiary of Fuji Xerox Co Ltd which supplies photocopiers; Merck, Sharpe and Dohme (Australia) Pty Ltd (MSD), a wholesaler and manufacturer of pharmaceutical products; the National Institute of Dramatic Art (NIDA), a national education and training institute for the performing arts; and the Sydney Swans (Swans), an Australian Rules Football Club. (A list of the corporate and commercial clients was attached to Bayton’s written submissions but will not here be reproduced.)

39. Mr Katsinas has deposed that there is no uniformity about the cleaning contracts entered into with commercial and corporate clients and that there is often little negotiation possible about contractual terms although with smaller contracts Bayton may have its own contract (Mr Katsinas’ first affidavit at [43]).

40. The cleaning contracts with corporate and commercial clients operate in effect to outsource to Bayton the regular cleaning of the clients’ commercial premises. The cleaning contracts generally specify: the location of the premises; the type of services to be provided (such as removal of rubbish, vacuuming or mopping particular areas, wiping bench tops, and cleaning windows); the number of cleaning staff to be provided; the number of hours to be worked by those staff; the times of day they are to provide the services; and the price of the services. In addition to standard cleaning services, Bayton will, upon request, provide specialised cleaning services such as, for example, high window cleaning and it is noted that Bayton remains contractually liable to the client for the performance of the specialised work.

41. Bayton’s evidence (some of which is inconsistent – see below) is that, in most cases, the cleaning services provided to Bayton’s corporate and commercial clients were either provided to sites that are not open to the public (such as was the case with Fuji and MSD) or provided out of the client’s business hours; and that cleaning services are generally performed so as to minimise interaction with, and interruption to, the employees and activities of each of the corporate and commercial clients (plaintiffs’ submissions at [35]).

42. Further, Bayton’s evidence is that the cleaning services are supervised by Bayton managers, who regularly attend the client sites during the cleaning works to supervise the work (though in cross-examination Mr Katsinas accepted that in many instances there was no Bayton supervisor on-site for most of the time (see T 68.37)). Generally speaking, the supervisors in relation to the performance of the client contracts tend to be Bayton employees, with the cleaning staff provided by the subcontractors. Depending on the size of the client’s business, Bayton and International Hotel Services have one or more supervisors on-site when contract works are being performed by the subcontractors.

43. Bayton cleaning staff, including subcontractors, are said in general to wear Bayton uniforms which are said to be distinctive and easily identifiable (plaintiffs’ submissions at [36]) (though again there was some unreliability as to the evidence - for example, Mr Katsinas accepted in cross-examination that with respect to Dan Properties Pty Ltd (Dan Properties), cleaners wore uniforms with that client’s logo - T 68.28). Mr Katsinas says that he makes regular visits to the clients to verify compliance with this practice.

44. Mr Katsinas’ evidence is that in no cases were the Bayton contractors encouraged or invited to utilise the client’s staff facilities (such as staff canteens) (plaintiffs’ submissions at [37]). (The Chief Commissioner takes issue with the general proposition as to use of facilities, at least facilities other than staff canteens – see below.)

Bayton’s aged care and health sector clients

45. Bayton’s clients in this industry sector encompass mainly retirement villages and aged care facilities (but, as noted earlier, include one school and one hospital).

46. Bayton’s cleaning contracts with these clients provide for the regular cleaning of residential units/rooms and common areas at these facilities. The facilities are open 24 hours a day (see plaintiffs’ submissions at [45]). As with its corporate and commercial clients, Bayton says that there is no standard contract for its aged care and health sector clients, again noting that there is limited opportunity to negotiate those contracts.

47. As with its corporate and commercial clients, all cleaners who performed cleaning services at aged care and health sector client sites are required to wear Bayton uniforms, compliance with that requirement being verified by Mr Katsinas on his regular visits to those client sites (plaintiffs’ submissions at [42]).

48. It is said that, except in exceptional cases, there is no direct supervision of Bayton contractors by staff of the aged care and health sector clients; rather, that such supervision is performed by the employed Bayton supervisors when they are on-site (plaintiffs’ submissions at [43]). Again, it is said that in no cases were the Bayton contractors encouraged to utilise the client’s staff facilities (such as staff canteens) (plaintiffs’ submissions at [44]).

49. While Bayton accepts that its aged care and health sector clients “technically” operate around the clock, it says that there are periods in the 24-hour cycle in which there are periods of low activity and that Bayton provides cleaning services in this sector in a manner which minimises the impact of the cleaning services carried out by its contractors on the residents of the aged care facilities (plaintiffs’ submissions at [45]). (So, for example, it is said that in relation to the Residential Aged Care facilities operated by Uniting, most cleaning of common areas is carried out in the early hours of the morning or later in the evening, in a way which minimises the impact on residents and staff.)

50. In written submissions, Bayton contends that the primary or core business of its aged care clients is the provision of aged care, achieved through the provision of buildings and appropriate amenities and the provision of appropriately qualified nursing and care certified staff. As to the retirement village operators, it is submitted that their core business is that of real estate (see T 25.34) since there is evidence that the profit made by the operators of the various retirement villages derives from the sale and re-sale of interests in long term leases to incoming residents of the villages (and see the evidence of Mr Burkett, the Chief Executive Officer of Baldwin Living, affirmed 23 July 2018, especially at [8](l)); not the provision of administrative services (which include the cleaning of the facilities) in relation to the operation of retirement villages on a highly regulated non-profit or cost recovery basis only, with no direct on-charging of the cost of cleaning to residents. Moreover, one of the aged care sector clients accepted, in relation to the Uniting Residential Aged Care facilities, that the concept was creating the overall environment in which the resident could live (T 98.36 (Hodkinson)).

International Hotel Services’ clients

51. All of the clients of International Hotel Services operate hotels or the like. International Hotel Services provides cleaning services to each of these clients in accordance with the scope of works which forms part of that client’s contract with International Hotel Services.

52. It is said that while the hotel sites tend to operate around the clock, there are periods in their business cycle where there are periods of lower activity and that International Hotel Services provides its cleaning services in a manner which minimises the impact of its cleaning services on hotel guests. It is said that hotel clients generally prefer for rooms to be cleaned when guests are not present or have already checked out (and before the next check in occurs) and that if the scope of works includes public areas then these are generally required to be cleaned after 11pm and before the early morning check out (see plaintiffs’ submissions as [52]).

53. International Hotel Services says that, except in exceptional cases, there is no direct supervision of International Hotel Services’ contractors by staff of the hotel; rather, supervision is performed by the employed International Hotel Services supervisors when they are on-site.

54. International Hotel Services says that, for certain of the hotel clients, the International Hotel Services contractors are required to wear the hotel’s uniform, whereas for other of the clients the contractors do not wear the hotel’s uniform but wear either an International Hotel Services uniform or a black unmarked uniform (plaintiffs’ submissions at [54]).

55. Relevantly, International Hotel Services has calculated the amounts that were included in the IHS Assessments referable to amounts paid to its contractors for work in relation to each client of International Hotel Services, as generated under its accounting system.

Acquisition of new clients

56. The plaintiffs’ evidence is that the process by which each of Bayton and International Hotel Services acquires a new client is, broadly, that: Bayton or International Hotel Services will ascertain by word of mouth or tele-marketing that a new client requires cleaning services; the management team will assess the scope of works required to fulfil the contract and determine the appropriate number of cleaners required to complete the work; the scope of work is (typically) negotiated with the client (involving site visits by management with the client personnel); the scope of work informs the tender that the business proposes to the client to secure the work, which is then costed by Mr Katsinas and his staff; and the relevant plaintiff calculates an overhead charge to cover the cost of its own staff and management team, materials and equipment.

Insurance

57. Each of Bayton and International Hotel Services is contractually liable to its clients for the performance of its work and the evidence is that, if issues regarding performance of obligations under a contract are raised by a client, Bayton or International Hotel Services (as the case may be) assumes primary responsibility for those issues and any liability (including any reimbursement claims). Each of the plaintiffs maintains a number of insurances in relation to its cleaning operations and accepts liability claims from its clients if there is a failure to meet the relevant standards (plaintiffs’ submissions at [24]-[25]).

Accreditation

58. Each of Bayton and International Hotel Services has achieved (and is required under the cleaning contracts to maintain) accreditation to Health and Safety AS 4801, Quality Management ISO 9001 and Environment ISO 14001 (plaintiffs’ submissions at [26]). Emphasis is placed by the plaintiffs on the provision by them of “added value” (over and above the provision of cleaning services per se) to their clients (largely by reference to their accreditation for such purposes and their ability to ensure clients meet relevant accreditation standards), for the proposition that each of the plaintiffs is not just a service provider (T 13.14) and for the proposition that the plaintiffs are not providing services of workers “in and for the conduct of client’s business” but, rather, for the plaintiffs’ own businesses (T 12.33ff).

Development of software and other programs/policies

59. Bayton has developed an extensive software program called “i-Bayton Live” to provide up to date client reporting on Bayton’s performance and achievement under its client contracts (plaintiffs’ submissions at [27]). Bayton has also developed an internal procedure, quality, environment, health and safety policy (QEHS Policy), which is implemented through the Bayton intranet and which includes (by way of example) that contractors are to wear a Bayton or International Hotel Services uniform where one has been issued (plaintiffs’ submissions at [28]). Further, both plaintiffs conduct training and induction programs on site at the clients’ business (more extensive programs for International Health Services clients than Bayton clients).

Contractors

60. Bayton and International Hotel Services have produced a list of contractors which were engaged during the relevant years. Their contractors are paid a standard rate, which is calculated by Mr Katsinas based on the relevant award plus allowances for such matters as overheads and profits.

61. Mr Katsinas’ evidence is that each time a contractor signs a new contract with either Bayton or International Hotel Services, the following documents are obtained: a signed copy of a standard Bayton contract, and a statutory declaration concerning the contractor’s liability to any payroll tax. It is noted that each of those statements contains a clear statement by the declarant that “[w]here the Subcontractor is required to be registered as an employer under the Payroll Tax 2007, the Subcontractor has paid all payroll tax due in respect of employees who performed work under the contract…”. Included as part of the package of documentation provided by each contractor to Bayton are the various Certificates of Currency in relation to the workers’ compensation or business insurance that is required to be taken out by each contractor. It is noted that the Certificates of Currency (certificates issued by an insurer to an employer) state, inter alia, the number of workers covered by the insurance (see s 163A of the Workers Compensation Act 1987 (NSW)) and that in many instances the Certificate of Currency discloses the number of workers in the contractor’s business in respect of the annual period of currency.

62. In relation to the number of persons used by each contractor in the course of their work, Mr Katsinas has deposed that Bayton and International Hotel Services had, during the relevant years, a management policy of engaging contractors who had two or more persons working for the subcontractor entity (be it a sole trader, partnership or company); and that this policy was a management concern of his since his commencement as Chief Executive Officer. It is noted that it is stipulated in the QEHS Policy that before any new subcontractor is engaged there is to be a meeting with that subcontractor and Mr Katsinas. Mr Katsinas’ evidence is that he met with new subcontractors engaged during the relevant years, and communicated the two-person requirement to each contractor. (It is submitted that instances where the two-person threshold was not met by a contractor were uncommon, and were regarded as errors, being more likely to occur with very small contractors doing small contracts or one-off jobs of low value – see Mr Katsinas’ third affidavit at [14]-[15].)

63. There is evidence from various of the contractors engaged during the relevant years to the effect that: they engaged two or more persons in relation to work performed for Bayton; that the cleaners would always wear Bayton uniforms; and that the cleaners were supervised by Bayton managers.

64. Reliance is placed on the Certificates of Currency that were provided by each contractor engaged during the relevant years as evidencing where those contractors engaged two or more persons (see Schedule B to the plaintiffs’ submissions). It is submitted that, over all of the relevant years, approximately 86% of the amounts paid by Bayton were paid to contractors who provided such business records or statements.

Evidence as to cleaning hours, uniforms and use of facilities

65. As adverted to above, there was some inconsistency in the evidence in relation to matters such as the hours of cleaning, wearing of uniforms and use of facilities (as between the affidavit evidence and the respective Features Schedules). In cross-examination, Mr Katsinas accepted that there were various inaccuracies in the features schedule exhibited to his first affidavit (though I accept that he was genuinely endeavouring to assist the Court in his evidence and he readily conceded where errors had been made; so I do not suggest that he was not a credible witness – simply, that his recollection and the information on which some of his evidence was based was unreliable in some respects).

66. In summary, the position in relation to these matters is as follows.

Corporate and commercial clients

67. As noted above, in Mr Katsinas’ first affidavit at [44] deposed, in relation to the corporate and commercial clients, that: the contractors all wear a Bayton uniform; there is no direct supervision (“unless in an exceptional circumstance”) of the Bayton contractors by staff of clients and, depending on the size of the client, Bayton employees will be on-site supervisors; and Bayton contractors attend the sites after the usual business hours of the clients. He deposed in his second affidavit also affirmed 7 August 2019 (Mr Katsinas’ second affidavit) at [16] that, generally, cleaning services for corporate and commercial clients were provided outside of trading hours (“night cleaning”) and, at [17]-[18], that in some instances, a corporate and commercial client would require one or more cleaners that conducted “day cleaning”, who would be present during working hours (and that, generally, the role of the day cleaning was to be a “lighter clean of toilet and kitchen facilities” outside of usual meal times).

68. The position as disclosed in his affidavit (as adverted to above) was in some instances at odds with the Features Schedules that had been prepared and that he had affirmed as accurate to his knowledge, specifically in relation to the times when cleaning occurred and the duration of the provision of cleaning services. In that regard, the following illustrates some of the inconsistencies between the information provided in the Features Schedules (in particular, the updated version having been handed up to me on the second day of the hearing after Mr Katsinas’ cross-examination) and Mr Katsinas’ relevant affidavits. It does not purport to be an exhaustive list of those inconsistencies.

Best & Less

69. The Features Schedules state that cleaning occurred from 7.30am, which could extend into the opening of the store, but cleaners had to be off the shop floor by 9am (Schedule A1.1); whereas Mr Katsinas’ second affidavit deposes that cleaning occurred as soon as the store was opened (at [24]). The affidavit of Adwar Shlemoun, the general manager of Brightstar Services Pty Limited (in liq) (Brightstar Services), affirmed 7 August 2018 says (at [9]) that cleaning of Best & Less stores typically was conducted between 7am to 9am, 7am to 9.30am and 7am to 10am. The cleaning equipment was provided by Bayton and Bayton’s operation managers and supervisors would supervise the cleaning (Mr Shlemoun’s affidavit at [11]-[12]).

70. Pressed as to whether Best & Less stores opened at 7am (T 81ff), Mr Katsinas in cross-examination said that “there were a few instances where in some of the regional stores, the store would allow for our cleaners to go onsite before they would actually open. But from a security point of view, they would prefer our staff to be there when their staff was there” (see T 82.14).

Downer EDI

71. According to the Features Schedules, cleaning occurred inside business hours (between 9am-12pm) (except at the Wagga Wagga site of Downer EDI when cleaning occurred between 7am and 2pm weekly) (Schedule A1.1).

72. At [35] of Mr Katsinas’ second affidavit he deposes that: “[w]ith one exception, Bayton only ever provided night cleaning. At the Wagga Wagga site of Downer EDI, Bayton services were provided between 7am and 2pm, once per week. These services were a full clean”.

73. When asked about this discrepancy in cross-examination, Mr Katsinas stated that he believed that the affidavit was more accurate than the schedule “when it comes to the times” (T 83.26).

Fuji

74. According to the Features Schedules, cleaning occurred generally from 6pm (but day cleaning also occurred at two sites) (Schedule A1.1).

75. However, Mr Katsinas’ second affidavit at [40] summarises the cleaning services provided for the respective sites as follows: Mascot – two cleaners for day cleaning; three cleaners for night cleaning; Guildford – five hours per week; Artarmon – two shifts of five hours per week; Parramatta – two cleaners for night cleaning; Rosehill – one cleaner for day cleaning; two cleaners for night cleaning; and Macquarie Park – one cleaner for day cleaning; four cleaners for night cleaning. Mr Katsinas’ second affidavit, therefore, suggests that day cleaning occurred at three sites (at least).

Sterling House 88 Pty Ltd

76. The Features Schedules state that it is unclear the hours when cleaning services were provided (Schedule A1.1). However, the cleaning occurred for 3.5 hours Monday to Friday, three hours on Saturday and for 0.5 hours on Sunday (Schedule A1.1).

77. However, Mr Katsinas’ second affidavit deposes that cleaning occurred outside of trading hours (at [16]).

Aged Care and Health Sector clients

78. As noted, it was submitted that cleaning was carried out at times to minimise impacts on residents and staff such as the early hours of the morning or later in the evening (plaintiffs’ submissions at [45]) with no direct on-charging of the cost of cleaning to residents (plaintiffs’ submissions at [117]).

79. According to Mr Katsinas’ first affidavit at [48]: the contractors all wear a Bayton uniform on-site at the aged care facilities; there is no direct supervision of the Bayton contractors by staff of clients (and, depending on the size of the client) Bayton employees will be the on-site supervisors; Bayton complies with a general client direction to minimise the impact of its cleaning services carried out by its contractors.

80. Uniting, Baldwin Living and MA Housing are examples of the services provided by Bayton to its aged care and health sector clients.

Uniting

81. According to the Features Schedules, it was unclear at what time cleaning services were provided for Uniting (Schedule A2.1). However, the affidavit of David Hodkinson, formerly Head of Procurement for Uniting, affirmed 22 August 2019 (at [15](b)) states that most common area cleaning is carried out either in the early hours of a morning or later in the evening. Further, cleaning times for residents’ rooms vary – “[s]ome residents are completely mobile and with those residents Bayton contractors are required to clean rooms when the room is unoccupied. Some residents are bed-bound and in these cases the cleaning function has to be performed while the resident is in the room” (affidavit of Mr Hodkinson at [15](c)). The contractors wear Bayton uniforms (affidavit of Mr Hodkinson at [14]).

82. The affidavit of Carlos Isaacs, the Director of Layla Cleaning Services (Layla Cleaning) which provided services to Bayton in relation the services Bayton provided to Uniting, sworn 6 August 2018 deposes that: “Generally the hours of service would be a mixture depending on the work required. Sometimes the hours of work would be “full-time” and sometimes it would be a few hours a week” (affidavit of Mr Isaacs at [11]); the cleaning equipment was provided by Bayton (affidavit of Mr Isaacs at [13]); the work was supervised by Bayton’s staff who would issue instructions (affidavit of Mr Isaacs at [14]); and the cleaners would always wear Bayton uniforms (affidavit of Mr Isaacs at [15]).

83. Generally, the cleaning services would be four hours daily, sometimes a few times a week (affidavit of Joel Donesa, Director of Feel 10 Years Younger Pty Ltd (Feel 10 Years Younger) which provided services for Bayton which included providing internal cleaning services for Uniting, affirmed 3 August 2018 at [11]). The cleaning was supervised by Bayton’s staff who would issue instructions (affidavit of Mr Donesa at [13]); and the cleaners always wore Bayton uniforms (affidavit of Mr Donesa at [14]).

Baldwin Living

84. According to the Features Schedules, it is unclear as to the hours when cleaning was provided to Baldwin Living (Schedule A2.1). It is stated, however, that the number of hours worked were generally 1.5, three or 4.5 hours per day (Schedule A2.1).

85. Bayton staff wear Bayton uniforms; are not supervised or directed by Baldwin Living staff (unless there is a special circumstance); there is minimal interaction between residents and Bayton staff when engaged in cleaning “other than the necessary courtesies”; on a regular (generally monthly) basis the Bayton supervisor will check on the standards and liaise with Baldwin Living (affidavit of Paul Burkett, Chief Executive Officer of Baldwin Living, affirmed 23 July 2018 at [15]). Neither Mr Burkett nor other Baldwin staff deal with issues directly with the cleaners on-site (“unless of course there is a safety or other similar issue involved”) (affidavit of Mr Burkett at [15]).

MA housing

86. Cleaning services are provided between Monday and Friday, 7.5 hours daily (affidavit of Oswaldo Wong, Director of ORW Property Services which provided for Bayton internal cleaning services for Bayton’s clients including MA Housing, sworn 3 August 2018 at [12]). According to the Features Schedules, it is unclear as to the hours when cleaning was provided (Schedule A2.1). The number of hours worked, however, based on the tender, is 38 hours per week plus two extra shifts of three hours per week (Schedule A2.1). The work was supervised by Bayton’s staff; Bayton uniforms were worn; and directions in respect of cleaning work came from Bayton’s employees (Mr Wong’s affidavit at [13]-[15]).

International Hotel Services clients

87. Cleaning is carried out at times to minimise impacts on hotel guests (plaintiffs’ submissions at [52]); supervision is performed by the employed International Hotel Services supervisors when they are on-site (plaintiffs’ submissions at [53]). For certain of the hotel clients, the contractors are required to wear the hotel’s uniform, whereas for other of the clients, the contractors do not wear the hotel’s uniform but wear either an International Hotel Services uniform or a black unmarked uniform (plaintiffs’ submissions at [54]).

88. According to Mr Katsinas’ first affidavit at [52]: the uniform requirements of hotel clients vary; the hotels generally prefer that the rooms are cleaned when guests are not present or have checked out and before the next check in occurs and public areas are cleaned after 11pm and before early morning check outs begin to occur.

Lancemore Group (i.e., Mansion House, Larmont Hotel, Alamanda Hotel)

89. By way of example, International Hotel Services contractors and staff when they attend on-site for the Lancemore Group, wear black clothes that easily distinguish them from other hotel staff who wear branded uniforms and hotel branded name tags (affidavit of Adrian Dent, the Group Director of Operations of the Lancemore Group, affirmed 1 August 2018 at [13]); cleaning of the rooms is generally carried out when the room is vacant (affidavit of Mr Dent at [14]); International Hotel Services has a supervisor on-site when cleaning is carried out (affidavit of Mr Dent at [15]); and there is little interface and interaction between Hotel staff and cleaners (affidavit of Mr Dent at [16]).

90. For the Lancemore Group, the Schedule of Hotel Clients handed up on 12 February 2019 states that: the cleaners wear black; it is unclear from the contractor the number of hours cleaning occurs for; and it is unclear the hours in which the cleaning services are provided (however, public areas are cleaned during 11pm to 5am).

Relevant principles

91. Before turning to the respective parties’ submissions, it is convenient here to set out the relevant principles.

Employment agency provisions

92. The legislative background to the employment agency contract provisions of the predecessor to the Payroll Tax Act (the Payroll Tax Act 1971 (NSW) (Payroll Tax Act 1971)) was set out by White J, as his Honour then was, in Freelance Global Ltd v Chief Commissioner of State Revenue [2014] NSWSC 127 (Freelance Global) (at [143]-[148]) and extracted by me in HRC Hotel Services Pty Ltd v Chief Commissioner of State Revenue [2018] NSWSC 820 (HRC Hotel Services) (at [62]). I do not here need to set out those passages again. His Honour identified the mischief to which s 37 of the Payroll Tax Act was directed, in UNSW Global Pty Ltd v Chief Commissioner of State Revenue [2016] NSWSC 1852; (2016) 104 ATR 577 (UNSW Global) (at [30]; [41]) as being “the avoidance of payroll tax through the interposition of an agent to give the appearance of a contractor relationship where one did not exist in substance” referring to the situation where “a person procured the services of another to perform services in and for the purposes of its client’s business where the person’s status as employee or independent contractor might be unclear” (see UNSW Global at [39]-[42]).

93. The employment agency provisions have been considered in a number of first instance decisions since Freelance Global Ltd and UNSW Global: see JP Property Services Pty Limited v Chief Commissioner of State Revenue [2017] NSWSC 1391 (JP Property Services) (Kunc J) and HRC Hotel Services (and have been the subject of a number of other proceedings in this Court that have been heard but not yet determined).

94. Relevantly, the following propositions can be drawn from the cases decided to date in relation to those provisions: that the employment agency provisions were not intended to apply only to employment agents or labour hire firms as those expressions are said to be generally understood (Freelance Global at [150]); that s 37(1) should be construed as referring to a contract under which a person (the employment agent) procures the services of another person “in and for the conduct of the business of the employment agent’s client” (UNSW Global at [62]); that the provisions apply to contracts where the services are provided by individuals “who would comprise, or would be added to the workforce of the client for the conduct of the client’s business” (UNSW Global at [63]), to help the client “conduct its business in the same way, or much the same way, as it would do through an employee” (UNSW Global at [64]), where the service providers are “working in the client’s business” (UNSW Global at [65]), and where the service providers “comprise, or are added to, the workforce of the client for the conduct of the client’s business” (JP Property Services at [74]).

95. The words “in and for the conduct of the business” of the employment agent’s client are not, as is evident from the extract of the section set out above at [21], contained in s 37(1) of the legislation. However, having had regard to the history behind the legislative provisions, as revealed by the extrinsic materials, in UNSW Global White J held that the operation of the statute should be confined by a purposive construction that his Honour considered was permitted by the text (see UNSW Global at [62]) to that effect, for the reason that giving the provisions their natural and ordinary or literal meaning (i.e., that the section simply requires that the services be provided “for” a client) would lead to an “absurd or unreasonable” result and would go far beyond the mischief intended to be addressed (UNSW Global at [46]; [49]).

264. My conclusion in this regard is reinforced by the fact that there was at least one instance (the Lancemore Group) where the whole of the relevant client’s cleaning staff was “transitioned” to International Hotel Services. That makes clear that, in a very practical sense, the cleaning staff that formerly formed part of the client’s workforce (whose services are now being provided through the auspices of International Hotel Services) are for relevant purposes part of the hotel client’s workforce (albeit no longer employed directly by the hotel client).

265. As to the remaining categories of clients, the next most obvious example seems to me to be the aged care/retirement villages’ staff. Mr Donesa was a prime example of this. He has been a cleaner at Uniting’s Wesley Gardens facility for some years. He is familiar to the residents. He is not someone who might be called in once in a while to carry out some maintenance item or special one-off cleaning task. He regularly works there and for all intents and purposes would be seen as an addition to the Uniting staff.

266. Further, I cannot accept the proposition that the “core” business of retirement villages or aged care centres is real estate, even though I readily accept that the sale of interests in long term leases in the villages or the like is the source from which operators of such business would earn their profits. In much the same way, I cannot accept that the provision of clean rooms for hospital patients or retirement village or aged care centre residents is not an essential part of the service to be provided by those operating such institutions (albeit through outsourced specialist cleaners). But even if the characterisation placed on the businesses by the plaintiffs in this regard were to be accepted, I still would not consider that to be determinative of a conclusion that the cleaners were not providing services in and for the conduct of those businesses (because I reject the proposition that it is necessary that the services be for the core business of clients).

267. Again, it is relevant to note here that Bayton has promoted the fact that it has “transitioned” a number of aged care facilities with their staff to Bayton employment (T 39.30) and has promoted its ability seamlessly to replace in-house teams with its own cleaning services (T 39.26). There is no reason to think that that is not precisely what it does; and it speaks eloquently to the fact that what Bayton is providing is in essence an addition to the client’s workforce.

268. Finally, as to the commercial and corporate clients, I accept that if the cleaning services were sufficiently segregated or divorced from the conduct of the relevant commercial or corporate client’s business then this might lead to the conclusion that the services were not in and for the conduct of the client’s business in a particular case (say, where the services of cleaners were required on a one-off basis to deal with an unexpected cleaning problem). However, I see no real distinction between the provision of cleaning services after an accounting office has effectively closed for the day and the provision of after-hours typing services in a law firm (to adopt an example postulated by the Chief Commissioner) – those services are equally required “in and for the conduct” of the relevant business.

269. Thus, I have concluded that all of the arrangements in question were employment agency contracts and assessable to payroll tax.

Issue 2 (Bayton only): “relevant contract” test

279. I have set out earlier the relevant provisions applicable to this issue. Strictly speaking it does not arise in circumstances where I have reached the conclusion that the arrangements in question were employment agency contracts. However, lest that conclusion be incorrect, I address the alternative basis on which the Chief Commissioner seeks to uphold the Bayton Assessments.

280. As noted above, Bayton prepared two schedules (schedules B1 and B) on which it relied in support of its submission that its subcontractor arrangements satisfy the “two-person” exemption under s 32(2)(c) of the Payroll Tax Act.

281. Schedule B1 is a table summarising the subcontractor arrangements between Bayton and its contractors. I have considered the extent to which, from the information contained in Schedule B1, it can reasonably be inferred that Bayton supplied at least two contractors for the performance of its contracts with both corporate and commercial, and aged care and health clients in order to satisfy the “two-person” exemption under the Payroll Tax Act s 32(2)(c). Schedule B1, among other things, records: “Contract fees per 2 weeks” (contract fees) and “No. of places of service” (places serviced).

282. I accept that it is reasonable to assume that, because the award rate for a cleaner of a Bayton contractor is $18.47, fortnightly contract fees exceeding $14,000.00 ($125/hour x 8 hours x 7 days x 2 weeks) are likely to have been generated by more than one employee. As to the places serviced, I consider that this information provides a less certain indication of whether more than one employee was being supplied to a Bayton client under the relevant contract. However, I consider it reasonable to assume that, if the number of places serviced was 11 or greater and generated approximately $10,000.00 or more in contract fees, those subcontractor agreements are likely to have been performed by more than one employee of the subcontractor.

283. Schedule B is a table summarising, for Bayton’s contractors, the number of employees disclosed in Workers’ Compensation Insurance Certificates of Currency provided by the contractors and payments made to those contractors for each of the 2012, 2013, 2014, 2015 and 2016 financial years.

284. It might be reasonable to infer that where a subcontractor disclosed for workers’ compensation insurance purposes three or more employees, that this indicates that of those employees, then at least two are likely to have been cleaners (on the assumption that if the company’s source of revenue is through cleaning it would be logical for most of the employees to be working as cleaners), although that is by no means the only available inference. However, it is not clear from the Certificates of Currency alone that those cleaners were all providing services to Bayton clients (as opposed to other employment agents’ clients). Therefore, it is again necessary to consider the amount paid by Bayton to those subcontractors in order to be able confidently to infer that more than two persons provided services to Bayton clients.

285. Based on a review of the information in the respective schedules, it seems to me reasonable to infer that subcontractors who either (i) invoiced Bayton fortnightly fees exceeding $14,000.00 or (ii) serviced 11 or more places and generated approximately $10,000.00 or more in contract fees, were contractors who it is likely, on balance, provided the services of more than two persons to Bayton’s clients, through Bayton’s arrangements with those clients (thus, attracting the two-person exemption, had the “relevant contract” test otherwise been applicable).

286. On my reading of the schedules, that group of subcontractors comprises:

1. those invoicing fortnightly fees exceeding $14,000 over the period: Feel 10 Years Younger; Layla Cleaning Pty Ltd; Aries Cleaning Services Pty Ltd; Auslaund Services Pty Ltd; ORW Property Services Pty Ltd; Reef Cleaning Pty Ltd; Reef Cleaning Services; Sky Vision Cleaning Pty Ltd; Rema Property Services; Total Property Maintenance Aust Pty Ltd; Versatile Property Services Pty Ltd; Versatile Facilities Pty Ltd; New Vision Cleaning Pty Ltd; Platinum Way Facility Pty Ltd; and Silverline Cleaning Services Pty Ltd; and

2. those servicing 11 or more places and generating approximately $10,000.00 or more in contract fees over the period: Bright Star Services Pty Ltd; Rescue Cleaning Services NSW Pty Ltd; and Ausspot Cleaning Services.

287. As to the following subcontractor agreements, I am not satisfied on the evidence that it could be concluded that the “two–person” exemption was applicable (and, hence, I am not satisfied that Bayton has discharged its onus): Bay No 6 Pty Ltd; Dunmerri Trust trading as Total Garden Solutions Wodonga Pty Ltd; We Caan Clean Solutions Pty Ltd; FAB & TAM; R & R WORX; Crystal Clean; Rodrigo; Monica Andrea Prieto Olarte; Ace Carpet Cleaners; Javier Andres Ospina Castro; Samich NSW Pty Ltd; Juan Ospina; Cipher Solutions Pty Ltd; Access Facilities Management Corp Pty Ltd; and Ozone Services Pty Ltd.

288. As to the following subcontractor agreements, the evidence leads me positively to conclude that the “two-person” exemption would not apply (due both to the small contract fees generated – the factor I consider most persuasive on this issue; but also that there appear to have been relatively few places serviced): Crown Cleaning Solutions Pty Ltd; D.K.V Cleaning Services Pty Ltd; Gsanz Pty Ltd; T & K Cleaning Services Pty Ltd; HCK Services Pty Ltd; Arpan Cleaning Services Pty Ltd; JHK Cleaning Services Pty Ltd; NCC Management Pty Ltd; Daily Industrial Cleaning Services; and MNA Cleaning & Maintenance Services Pty Ltd.

289. For the avoidance of doubt, I also note that the above does not include those clients which Mr Katsinas accepted in cross-examination were one-contractor clients (such as NIDA and M&P).

290. There is a degree of duplication in the schedules prepared by Bayton (see, for example, various of the Reef Cleaning Pty Ltd and Reef Cleaning Services entries). In the circumstances, therefore, had I considered that the relevant contract provision was otherwise applicable, I would have considered it best to remit the matter to the Chief Commissioner to determine this issue in accordance with the findings I have made, pursuant to s 101(1)(d) of the Administration Act.

Issues 3 and 5 (both Bayton and International Hotel Services): deemed wages

291. Turning then to the issue raised as to the amount to be taken to be wages under s 40(1)(a) of the Payroll Tax Act if it were to be concluded (as I have) that there was a liability to payroll tax, I consider that the Chief Commissioner has correctly assessed the plaintiffs to payroll tax when taking into account the entire amount paid by Bayton and International Hotel Services as the deemed wages pursuant to this provision.

292. The plaintiffs argue that the construction that I placed on the words “in respect of the provision of services” in HRC Hotel Services is incorrect and that the relevant wages in deemed to be wages pursuant to s 40(1)(a) of the Payroll Tax Act are only those paid to the deemed employee (i.e., the person who performs the work).

293. In HRC Hotel Services, the submission that was made by the plaintiffs there was that the purpose of the Payroll Tax Act was to tax amounts paid for personal services (the plaintiffs there referring to Mutual Acceptance where Starke J (at 401) said that, despite the generality of the definition of the word “wages”, unless the contrary intention appears, the Pay-roll Tax Assessment Act1941 (Cth) “is a tax upon wages, that is, upon payments made in cash or in kind for services rendered … [a]nd it is not, nor is it meant to be, a tax upon anything else”).

294. The Chief Commissioner had submitted in HRC Hotel Services, that it followed, from the fact that the scheme of the Payroll Tax Act is that payroll tax is imposed on wages paid by employers (including deemed employers) and employers are those who pay wages (including deemed wages) (see ss 6, 7 of the Payroll Tax Act), that the amounts taken to be wages under s 40(1) must be amounts paid by the deemed employer – that is, by the employment agent (to its subcontractors or individual workers); and that, when s 40(1)(a) refers to “any amount paid or payable”, it means paid or payable by the employment agent; arguing that the amounts taken to be wages under s 40(1) must be amounts paid or payable by the employment agent (to subcontractors or individual workers). Similar submissions were here made by the Chief Commissioner.

295. As noted above, I considered in HRC Hotel Services (see from [180]ff) that the construction advanced by the plaintiffs in that case gave no work for the words “in relation to” to do in s 40(1)(a) of the Payroll Tax Act; and that those words expanded the reach of the deemed wages under s 40(1)(a) beyond the actual amounts paid to the additional housekeeping staff. I accept that, on the construction advanced by the plaintiffs in the present case there is some work for the words “in relation to” to do. Nevertheless, I do not accept that the breadth of “in relation to” should be read down as the plaintiffs contend. In other words I do not see “in respect of” as relevantly limiting the breadth of “in relation to”. Nor do I see that the consequence of expanding the reach of the deemed wages goes beyond the mischief sought to be addressed by the legislature.

296. Thus, I consider that the amounts paid to the subcontractors (even though they presumably include a profit element) were correctly identified as the amounts in respect of which payroll tax was payable.

Issue 3 (Bayton); Issue 5 (International Hotel Services): penalties and interest

297. I have noted above the explanation given to the concept of taking “reasonable care to comply with the taxation law” in Qualweld (at [95]). The factors that were there recognised as factors that would indicate the taking by a taxpayer of reasonable care to comply with the taxation law included: reasonable attempts to comply with the tax law; reasonable professional and other inquiries to ensure compliance; and reliance on professional advice or on official published views of the tax law. Factors that it was recognised would indicate that a taxpayer failed to take reasonable care included: oversight or forgetfulness to meet with obligations; failure to maintain adequate records and procedures to prevent errors from occurring; and not seeking professional advice and errors in complying with the law.

298. In the present case, the factors on which the plaintiffs place weight are the facts that they had at all relevant times retained the services of a professional external accountant and that they had complied with the audit carried out in 2016.

299. As to the former, if it were sufficient for this to constitute reasonable care then logically any company whose accounts were audited would be in a position to do no more than retain an accountant in order to resist the imposition of penalty tax. I accept that it is a factor that (taken with others) might demonstrate reasonable care to comply with the taxation law. However, what I consider would be more relevant in this regard would be the seeking of professional advice or the making of inquiries of the Australian Taxation Office or others directed to the issue as to whether any payroll tax liability had arisen or as to the structuring of arrangements with a view to ensuring that any payroll tax liability would be met. There does not appear to be evidence of that kind in the present case.

300. As to the latter, in Sydney Flooring Pty Ltd v Chief Commissioner of State Revenue [2017] NSWCATAD 96; (2017) 105 ATR 546, a taxpayer’s compliance with previous audit findings in relation to that very taxpayer was held insufficient to engage s 27(3) of the Administration Act. Here, the co-operation with the Office of State Revenue in its investigation into the payroll tax issue is commendable, but it does not to my mind establish the taking or reasonable care to comply with the taxation law in the first place.

301. I am therefore not persuaded that the plaintiffs have discharged their onus in relation to this issue so as to warrant a remission of the penalty tax pursuant to ss 25, 27(3)(a), 29(1) and 33 of the Administration Act. As to the alternative bases (the cascading submissions as to remission) put forward by the plaintiffs, I accept the Chief Commissioner’s submission as to the inapplicability of s 29(1) due to the failure of the plaintiffs to pay the tax on the due date (see s 29(2)(b)); and, as to the application for remission under s 33 of the Administration Act the general discretion to remit, I do not consider that this general discretion should be exercised where there has been a finding that reasonable care has not been established and in the absence of some special circumstance to warrant the exercise of the discretion notwithstanding the absence of a finding of reasonable care.

302. Thus, I have concluded that the application for remission of the penalty tax in part or in full should be dismissed. In those circumstances, so too should be the application for remission of the market rate of interest (particularly having regard to what was said in Lease a Leaf – see [255] above).

Conclusion

303. For the reasons set out above, I have concluded that the arrangements in question are employment agency contracts within the meaning of s 37(1) of the Payroll Tax Act; that the payroll tax was correctly imposed on the amounts paid to the subcontractors “in relation to” the procurement of the additional staff; and hence that the Assessments for payroll tax should be confirmed. I have also concluded that the penalty tax and market rate interest should not be reduced or remitted.

304. I therefore make the following order in each of the proceedings:

1. Dismiss the plaintiff’s claim with costs.

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Decision last updated: 07 June 2019