Gunlake Pty Ltd v Chief Commissioner of State Revenue

[2005] NSWADT 93

Set aside by Appeal: Set Aside by Appeal on 11/07/2005

CITATION:	Gunlake Pty Ltd v Chief Commissioner of State Revenue [2005] NSWADT 93 This decision has been amended. Please see the end of the decision for a list of the amendments.
DIVISION:	Revenue Division
PARTIES:	APPLICANT Gunlake Pty Ltd RESPONDENT Chief Commissioner of State Revenue
FILE NUMBER:	046019
HEARING DATES:	29/09/2004
SUBMISSIONS CLOSED:	09/29/2004
DATE OF DECISION:	05/02/2005
BEFORE:	Hole M - Judicial Member
APPLICATION:	Pay-roll tax - contractors
MATTER FOR DECISION:	Principal matter
LEGISLATION CITED:	Pay-roll Tax Act 1971 Taxation Administration Act 1996
CASES CITED:	Colonial Mutual Life Assurance Society Limited v Producers and Citizens’ Cooperative Assurance Company of Australia (1931) 46 CLR 41 Hollis v Vabu Pty Limited (2001) 207 CLR 21
REPRESENTATION:	APPLICANT S O'Neil & E O'Neil, agents RESPONDENT I Latham, barrister
ORDERS:	1.Notices of Assessment for the financial years 2002 and 2003 correctly assess the payroll tax payable; 2.The Penalty tax is to be levied at 5% for each of the financial years 2002 and 2003; 3.The “interest assessed as at 9 October 2003” on each assessment is correct

Introduction

1 Gunlake Pty Ltd (“Gunlake”), a building company, required the services of ‘specialist’ carpenters to assist in completing 3 building projects in 2002 and 2003. The building projects were architect designed. Gunlake used the services of Andrew McLeod (“McLeod”) and Jim Schubert (“Schubert”) to complete the carpentry work required. This application depends upon whether the employment of McLeod and Schubert by Gunlake attracted the liability to pay Pay-Roll tax or was there an exemption available. Simon and Edward O’Neil are directors of Gunlake, they appeared on behalf of the Applicant.

History

2 Gunlake contracted to build the projects including construction during the 2002 and 2003 payroll tax years. An arrangement was entered into with McLeod and Schubert whereby they would be engaged “as a team to undertake the specialized (sic) carpentry jobs which the employees of Gunlake Pty Ltd were not capable of doing.”

3 McLeod and Schubert were employed during the 2002 year for 129 and 127 days respectively and during the 2003 year for 151 and 173 days respectively according to the Applicant.

4 As part of a project of the Respondent to review employers in the building and construction industry an audit was undertaken by the Respondent on 24 September 2003. An assessment of Gunlake issued in respect of both years was issued on 9 October 2003.

5 The tax has been paid by Gunlake. Gunlake sought a review claiming that the payments to McLeod and Schubert should be excluded as they “… came to our jobs with their own equipment, tools and vehicles which they used as required for the collection of materials. They were provided with detailed working plans and instructed to build designated parts of the projects in accordance with those plans. These two contractors were hired to carry out specialized (sic) carpentry jobs, …”.

6 The original decision of the Respondent was subject of review and that review was allowed in part only, being in respect of inclusion of some GST amounts as wages. This application is in respect of the assessment of payroll tax issued for the payroll tax years 2002 and 2003 relating to the payments to McLeod and Schubert.

7 Gunlake has now appealed against the decision to include the sums paid to McLeod and Schubert as part of the company’s payroll as being unfair as the industry in which they operate is not one that employs many people, and they are mainly subcontractors and exemptions apply.

8 The Respondent has submitted that the carpenters, McLeod and Schubert, did not offer their services to the public within the meaning of Section 3A(1)(e)(v) of the Pay-Roll Tax Act 1971 (“the Act”) and that the exemptions set out in the information brochure provided by the Office of State Revenue entitled “Pay-Roll Tax for Contractors”, especially Exemptions 2 and 4 do not apply.

The Issues

9 Do McLeod or Schubert offer their services to the public within the meaning of Section 3A(1)(e)(v).

10 Are the services provided by McLeod or Schubert ones that are not normally required by the business of Gunlake as described in Exemption 3 set out “Pay-roll Tax for Contractors”.

11 Are the services performed by McLeod or Schubert normally required by Gunlake for less than 180 days per year as described in Exemption 4.

12 Is there a contract between McLeod and Gunlake and/or Schubert and Gunlake which is a relevant contract and which would allow the provisions of exemptions 2 and 4 to be applied.

13 Although Gunlake was represented by its directors S. and E. O’Neil and the issue of any penalty tax was not included it would be appropriate to address whether, if the payroll tax is payable, the Applicant had co-operated with the Respondent at the time of the audit to bring into operation the provisions of Section 28 of the Taxation Administration Act 1996.

The Evidence

14 The directors of the company, Simon O’Neil and Edward O’Neil, attested to there being a verbal contract with McLeod and Schubert. Andrew McLeod also gave evidence in person. Letters from McLeod and Schubert were provided to the Tribunal and tax invoices from McLeod and Schubert to the company were included in the material supplied by the Respondent. Comprehensive wage summaries and invoices were provided to the Tribunal in respect of Gunlake, McLeod and Schubert. This material had been provided in full to the Respondent to permit the Respondent to make its assessment.

15 Gunlake is a small company with, according to Simon O’Neil, 5 employees. His evidence is that the business uses various contractors having a specialist trade. The job of the company is to build houses and as such the employment of specialist contractors is only part of that. The subcontractors are not employed continuously, the extraordinary jobs that they attend to relate to their specialist skill. Simon O’Neil submitted that Gunlake does not employ carpenters, it is a builder and the work undertaken by the contractors is not part of Gunlake’s core business. Simon O’Neil submitted that the subcontractors can not be included in wages. The tax invoices supplied to Gunlake by McLeod and Schubert are recorded in the direct deposit records of Gunlake, these disclosed the consistent invoicing and allow for calculation of days employed.

16 Gunlake employs professional accounting services to assist with calculation of the company’s liabilities and advice as to maintenance of records.

17 The representative of the Respondent submitted that the onus was on the Applicant to show that McLeod and Schubert were independent contractors. Reference was made to the definition of “independent contractor” as set out in Colonial Mutual Life Assurance Society Limited v Producers and Citizens’ Cooperative Assurance Company of Australia (1931) 46 CLR 41. The judgement of Dixon J in this case has been referred to in Hollis v Vabu Pty Limited (2001) 207 CLR 21 where the definition of “independent contractor” was said to be ‘rooted fundamentally in the difference between a person who serves his employer in his, the employer’s business, and a person who carries on a trade or business of his own’.

18 The Respondent’s representative submitted that in order that the work undertaken by McLeod and Schubert be categorised as that of an independent contractor rather than that of an employee then there would need to be evidence put to the Tribunal to permit this finding to be made. The evidence provided on behalf of Gunlake was restricted to the brief statements by each of McLeod and Schubert and letters from two architects. The letters from the architects commented on the outstanding and exceptional standard of workmanship required by Gunlake and as performed by McLeod and Schubert. A letter from Simon O’Neil on behalf of Gunlake was also provided, the information in this letter referred to McLeod and Schubert as coming to the jobs of Gunlake with their own equipment, tools and vehicles, that they were provided with detailed working plans and instructed to build designated parts of the company’s projects in accordance with those plans. There is an onus on the Applicant to provide evidence as to the nature of the employment of McLeod and Schubert. The evidence does not disclose that they were independent contractors rather the evidence discloses that they were employed by Gunlake pursuant to the arrangements between the company and McLeod and Schubert.

19 The Respondent’s representative drew attention to the evidence provided by McLeod, particularly that he was subject to the control of Gunlake on a day to day basis in respect of the work undertaken by him; that McLeod worked from the drawings provided by Gunlake as to the work to be done. Attention was also drawn to the manner in which the payment was made by Gunlake to McLeod and Schubert in that it was costed on the basis of an hourly rate in the main.

20 Simon O’Neil submitted that it was not uncommon in the building trade to pay an independent contractor on the basis of an hourly rate as this would allow the job to be completed without too much of a margin being built into a fixed price. Whilst this is an explanation as to payment by an hourly rate it may be that payment by the hour signifies that a person is an employee.

Evidence relating to Issue 1 (see paragraph 9 above)

21 The services provided to Gunlake by McLeod and Schubert were “meticulous on-site fabrication and problem solving” performing specific detailed carpentry work “as a team completing the timber lining, timber balustrades, timber doors/windows and carpentry fitout” according to McLeod. The services being, as engaged by Gunlake, as “on-site carpenter together with McLeod working as a team” according to Schubert.

22 Both McLeod and Schubert referred to working with other builders as subcontractors between the finishing stages of Gunlake’s construction works, returning to undertake work when required. There was no direct evidence supporting these comments.

23 The onus to prove that McLeod and Schubert were independent contractors offering their services to the public, sufficient to attract the application of Section 3A(1)(e)(v), has not been discharged by Gunlake.

Evidence relating to Issue 2 (see paragraph 10 above)

24 “Exemption 2. When the contract is for services that are not normally required by the business and are supplied by a person who ordinarily provides such services to the public.

This exemption recognises that many transactions are contracts for services that are not part of the mainstream of a person’s business. The exemption requires that the services be of a type not normally required and that they be supplied by a person who provides such services to the public generally. It is important to note that the requirement that the contractor provides such services to the public generally is an integral part of the exemption and must be satisfied.

Example

A business hires painters and decorators to refurbish its premises once every 5 years. This is exempt because the business does not require these services as part of its business and the workers provide their services to the public generally. If however the business operated from a chain of premises and the same contractors were engaged on a regular basis to update all of the businesses premises the exemption would probably not apply.”

25 The business of Gunlake is that of a building contractor and as such employs tradesmen to undertake building work. In this instance the work related to the construction of 3 houses. There was an absence of any direct evidence as to the skills required of those employees or any comparative material to distinguish those employees ‘as building tradesmen’ from McLeod and Schubert ‘as building tradesmen, specifically carpenters’. The references to McLeod and Schubert’s employment suggest that their services were required as a team and to carry out “specialized (sic)” carpentry jobs. The evidence was insufficient to show that their services were not ones normally required by the business of Gunlake.

26 The evidence provided on behalf of Gunlake does not disclose that McLeod and/or Schubert offered their services to the public generally. The evidence given disclosed that McLeod and Schubert relied on word of mouth to secure work. During the period that they were employed on the sites of Gunlake some evidence was given that they worked on sites other than Gunlake’s although there was no direct evidence of this. The Taxpayer had employed professional accounting services and had taken reasonable care to comply with the taxation law, including retention of copious records; therefore Section 27(3)(a) of the Taxation Administration Act 1996 should be applied, so that the Chief Commissioner's discretion ought to be applied to reduce the penalty tax to 5%.

Evidence relating to Issue 3 (see paragraph 11 above)

27 “Exemption 4. Contracts for services normally required by an employer for less than 180 days in a year.

This provision allows further concessions where a person performs services for more than 90 days but the business requires the services for less than 180 days. It recognises that businesses need various services allied to the mainstream work, but so infrequently that permanent employees are not engaged. It is important to note that this exemption rests on the number of days in a financial year that services of a particular type are required. The 180 day rule will not apply if the business uses services of that type for more than 180 days in a financial year.

Example

An operator in the NSW snow fields engages a number of contract ski instructors each year for a season of 120 days. Although each ski instructor works more than 90 days the payments are exempt as the business has no requirement for their labour outside of the snow season.”

28 McLeod and Schubert, as appears to have been agreed by both parties, provided their services for less than 180 days. The evidence provided was that McLeod provided services for 120 days and Schubert for 159 days. This exemption applies where the employer uses the services for less than 180 days in a year and more than 90 days. This exemption is not available where the business uses services of the type described for more than 180 days in the year.

29 There was no evidence provided that Gunlake’s business does not use the type of services provided by McLeod and Schubert for less than 180 days in each relevant year. The onus to prove that the type of services would be required for less than 180 days has not been discharged by Gunlake.

Evidence relating to Issue 4 (see paragraph 12 above)

30 The agreement between McLeod and Gunlake and that between Schubert and Gunlake were verbal. McLeod and Schubert supplied services to Gunlake pursuant to the agreements and, for the purposes of considering issues 1, 2 and 3, each is a relevant contract.

31 Pursuant to the provisions of Section 3A(2)(a)(ii) of the Pay-Roll Tax Act 1971 the services of McLeod and Schubert were supplied in a manner which it is considered would be that they are deemed to be employees of Gunlake in the relevant years.

Evidence relating to Issue 5 (see paragraph 13 above)

32 Gunlake disclosed all relevant information at the commencement of the investigation. The reduction of penalty tax permitted pursuant to Section 28 of the Tax Administration Act 1996 is available.

Decision

33 Gunlake has not provided sufficient evidence to permit the contracts with McLeod and Schubert to be exempted from the Pay-Roll Tax provisions for the financial years 2002 and 2003. Gunlake co-operated with the Respondent, the payroll tax has been paid and no evidence was provided that Gunlake intended to disregard the law. Therefore penalty tax should only be applied at 5%.

34 I find that:

1. Notices of Assessment for the financial years 2002 and 2003 correctly assess the tax payable.

2. The Penalty tax is to be levied at 5% for each of the financial years 2002 and 2003.

3. The “interest assessed as at 9 October 2003” on each assessment is correct.

30/05/2005 - To correct paragraph by inserting final sentence - Paragraph(s) 26