JOHN CHARLES FILSELL v TOP NOTCH FASHIONS PTY LTD No. SCGRG 94/693 Judgment No. 4764 Number of Pages - 11 Income Tax (1994) 94 ATC 4656

[1994] SASC 4764

COURT IN THE FULL COURT OF THE SUPREME COURT OF SOUTH AUSTRALIA PERRY(1), BOLLEN(2) AND PRIOR(3) JJ

CWDS
Income tax - deduction of tax by employer from salary and wages - definition of salary and wages - Appeal against dismissal of complaint incorporating 30 counts alleging failure to make tax deductions from piecework payments paid to outworkers engaged in sewing together pre-cut garments - decision of Magistrate that payments did not constitute salary or wages as defined by s.221A of the Income Tax Assessment Act 1936 upheld - payments were not "wholly or principally for the labour of any person" - appeal dismissed. Income Tax Assessment Act (Cwth) 1936 s221C(1A) Neale v Atlas Products (Vic) Pty Ltd (1955) 94 CLR 419 and World Book (Australia) Pty Ltd v Commissioner of Taxation (1992) 27 NSWLR 377, considered.

Evidence - averments - averments in the complaint were insufficient to make out the elements of the of fence because they failed to specify the period of time for the commencement and completion of the work in question. Income Tax Assessment Act (Cwth) 1936 s221C(1A)

Evidence - averments - observations as to efficacy of averments of matters of law or of mixed questions of fact and law. Taxation Administration Act (Cwth) 1953 s8ZL.

HRNG ADELAIDE, 3 August 1994 #DATE 20:9:1994 #ADD 13:3:1995

Counsel for appellant:     Mr B Hayes QC with him Mr A Hicks

Solicitors for appellant:    DPP (Cwlth)

Counsel for respondent:     R T P Kavanagh

Solicitors for respondent: Caldicott and Co

ORDER
Appeal dismissed.

JUDGE1 PERRY J This is an appeal against the dismissal by a Magistrate sitting in the criminal jurisdiction of the Magistrates Court of a complaint issued by the appellant, being a person authorised by the Commissioner of Taxation for that purpose, alleging thirty counts of breaches of s.221C(1A) of the IncomeTax Assessment Act 1936 ("the Act"). The breaches were said to be constituted by a failure to make deductions from salary or wages paid to certain alleged employees of the respondent "at the rate prescribed in accordance with s.221C(1)" of the Act. Three alleged employees were named: Trinh Phung ("Phung"), Chau Oanh Nhu Thi ("Chau") and Quang Minh Tran ("Tran").

2. The appellant called Chau and Tran at the hearing. He did not call Phung. Apart from the evidence of Chau and Tran, and some invoices and accounts to which I will refer, the appellant relied on certain averments, together with statements made in the complaint, as proof of the offences (Taxation Administration Act 1953, s.8ZL).

3. The allegations in the complaint with respect to each count, including the particulars and averments, were the same except as to the amount of money alleged to have been paid, the date of payment and the identity of the recipient. I set out count 1 as an example:
    "1. On about the 27th day of September 1991 at Adelaide
    in the said State, being an employer paid to an employee
    salary or wages and did not at the time of paying the
    salary or wages make a deduction from the salary or
    wages at the rate prescribed in accordance with Section
    221C(1) of the Income Tax Assessment Act 1936; contrary
to Section 221C(1A) of the Income Tax Assessment Act
    1936.

Particulars:
    The defendant paid salary or wages amounting to $1080 to
    Trinh Phung and did not at the time of such payment make
    a deduction for income tax:
AND THE COMPLAINANT AVERS PURSUANT TO SECTION 8ZL OF THE
TAXATION ACT ADMINISTRATION ACT 1953:
    (a) That at all material times the defendant employed
    Trinh Phung as an outworker to carry out work that
    involved the sewing of garments (hereinafter referred to
    as the "said work").
    (b) That Trinh Phung carried out the said work for the
    defendant for which she was paid the sum of $1080.
    (c) That the said work was carried out by Trinh Phung.
    (d) That all material for the said work was provided by
    the defendant.
    (e) That the amount paid to Trinh Phung for the said
    work was fixed by the defendant.
    (f) That the time within which the said work was to be
    carried out was set by the defendant.
    (g) That the agreement between the defendant and Trinh
    Phung pursuant to which the said work was done was an
    agreement for Trinh Phung to provide labour for the
    defendant."

4. Chau's evidence was that the work in question was sewing work, which she performed in her own home. She sewed garments, for example, skirts, pants and dresses. To obtain the work she went to the respondent's place of business in the city where she spoke to one Sui Lee Tang, otherwise known as Julie. Julie would give her a sample, that is, a ready-made garment, together with cut-out materials which Chau was expected to sew up according to the sample.

5. Usually Julie would stipulate the period of time during which the work was to be performed. Chau's evidence was (T30):"She would suggest an amount of money, and if I agreed, then I took the work home."

6. She said that sometimes she thought that the money was not enough and refused the work.

7. Chau did the work in a small room set aside for that purpose in her home. Sometimes her husband would help. Chau provided two sewing machines, described as an overlock machine and another machine "with two needles", and the electricity to run them. She bought and supplied the necessary thread.

8. When she completed the work, she would bring it back to Julie. If the work was not satisfactory she would have to take it back, unpick the sewing and re-do it. On occasions when that occurred, she sometimes asked her sisters or her mother to help (T34).

9. There was nothing in writing except that when she brought in the completed work, Julie would give her a document headed "Purchase Order" (or in some instances "Invoice/Statement") on which was set out the quantity of the garments which she had assembled, a description of them, the amount per garment, and the total amount for the job.

10. Chau disclosed the payments as income in her own tax return.

11. Tran's evidence was to much the same effect as Chau's. He too came to the city premises of the respondent and obtained work from the lady known as Julie. He would ring up first to see if work was available. They would negotiate a price. If agreement was reached, Julie would give to Tran a sample and the cut out material. In his case, Julie supplied the thread. Sometimes but not always, a time was set for completion of the work.

12. He had a special room set up at home in which to do the work. This was equipped with two sewing machines which he owned. He described the machines (T41) as "an industrial sewing machine and an overlocker". He paid for the electricity for the machines, and for light and heat. He regarded himself as entitled to get in others to help with the work. Indeed, Julie had asked if he wanted someone to help. He preferred to do the work himself, but had at times received some very slight assistance from one of his nieces.

13. Even when a time was set, he felt free to do the work when it suited him, within that time. He regarded himself as his "own boss". Payment was by cheque. At the time of payment, he was given a "receipt" or "invoice". It appears that he brought the payments to account in his own tax return. He set off a proportion of the cost of electricity, and of the costs of maintaining the machines.

14. The relevant sections of the Act, for present purposes, are as follows:
    221C(1A)
    "Where an employer pays to an employee salary or wages,
    the employer shall, at the time of paying the salary or
    wages, make a deduction from the salary or wages at such
    rate (if any) prescribed. ...."

15. The words "employer", "employee" and "salary or wages" are defined in s.221A, the relevant parts of which are as follows:
    221A
    "(1) 'Employee' means a person who receives, or is
    entitled to receive, salary or wages ...
    'employer' means a person who pays or is liable to pay
    any salary or wages ...
    'salary or wages' means salary, wages, commission,
    bonuses or allowances paid ... to an employee as such,
    and, without limiting the generality of the foregoing,
    includes ... any payments made -
    (a) under a contract that is wholly or principally for
    the labour of the person to whom the payments are made
    ...

(2) For the purposes of the definition of 'salary or
    wages' in sub-section (1)-
    (a) ...
    (b) a payment made to a person under a contract that is
    wholly or principally for the labour of any person shall
    be taken to be a payment made under a contract that is
    wholly or principally for the labour of the person to
    whom the payment is made if-
     (i) in the case of a payment that is made in respect
     of labour that has been performed, in whole or in
     part, before the time when the payment is made - the
     whole or principal part of the labour that was
     performed before the time when the payment is made was
     performed by the person to whom the payment is made;
     and
     (ii) in the case of a payment that is made in respect
     of labour the whole of which is to be performed after
     the time when the payment is made - the person making
     the payment can reasonably be expected to believe that
     the person to whom the payment is made will perform
     the whole or principal part of the labour in respect
     of which the payment is made. ..."

16. S.221A of the Act was considered by the High Court in Neale v Atlas Products (Vic) Pty Ltd (1955) 94 CLR 419.

17. That case concerned payments made to tilers engaged by a company which carried on the business of supplying and fixing roofing tiles. When a tiler completed one job, the company informed him that another job was available which he or she was free to accept or decline. On completion of each job, the tiler concerned would sign a written form of contract. The contract provided that the tiler would "supply the necessary labour and/or materials including wire and colour for roof tiling jobs", and further provided that the tiler would make the necessary income tax deductions in respect of both his own earnings and those of any other person engaged by him. The contract expressly contemplated that the tiler was free to engage other persons in respect of the work, in that it contained the express statement "I/we will be employing other persons in respect to this work".

18. At the time that case was decided, s.221A defined "salary or wages" to mean " ... salary, wages, commission, bonuses or allowances paid (whether at piece work rates or otherwise) to an employee as such", and included, inter alia, any payments made "... under a contract which is wholly or substantially for the labour of the person to whom the payments are made".

19. The Act did not at that time include the extended definition of salary or wages which now appears in s.221A(2)(b).

20. In Neale v Atlas Products, Dixon CJ, McTiernan, Webb, Kitto and Taylor JJ in their joint judgment said (424):
    "It is clear that monies paid to an independent
    contractor in satisfaction of a contractual obligation
    do not, in the ordinary legal sense, represent salary or
    wages".

21. They went on to say (425):
    "In the argument addressed to this Court there may have
    been a suggestion that if in the case of any independent
    contractor it appeared that the parties contemplated
    that the contractual work would be substantially
    performed by the independent contractor himself,
    although the terms or conditions of the contract,
    whether express or implied, did not actually require it,
    the particular extension of the defined term would be
    sufficient justification for characterizing his
    remuneration as salary or wages for the purposes of
    s.221C. This suggestion, however, is without validity,
    for if the contract leaves the contractor free to do the
    work himself or to employ other persons to carry it out
    the contractual remuneration when paid is not a payment
    made wholly or at all for the labour of the person to
    whom the payments are made. It is a payment made under
    a contract whereby the contractor has undertaken to
    produce a given result and it becomes payable when, and
    only when, the contractual conditions have been
    fulfilled."

22. They said further on the same page:
    "It may be, however, that in cases where an independent
    contractor is required by the terms of his contract to
    perform the contractual work himself the addition to the
    general definition may have some application, but it is
    unnecessary, in the circumstances of this case, to
    express any concluded view concerning contracts of such
    a special class."

23. The High Court in that case further found that the circumstances of the engagement of the tradesmen did not constitute the latter servants of the company. In reaching that conclusion, the Court said (426):
    "It was not, however, established that the respondent
    had the right to direct the tradesmen to any particular
    new job and the reasonable inference from the evidence
    was that there was nothing in their legal relationship
    to oblige any particular tradesman to undertake or to
    prevent him from declining any new job."

24. They also observed (428):
    "Nor was there anything to establish that any form or
    degree of control appropriate to the relationship of
    master and servant was ever exercised."

25. While it must be accepted that the appellant in Neale v Atlas Products conceded that if the written contract governed the relationship of the parties, it could not be suggested that the relationship of master and servant was established, it is clear from the judgment of the Court that the Court would have reached that conclusion in any event.

26. The applicability of the reasoning of the High Court which finds expression in Neale v Atlas Products to the extended definition of "salary and wages" which is now to be found in s.221A(2) of the Act, was considered by the Court of Appeal of the Supreme Court of New South Wales in World Book (Australia) Pty Ltd v Commissioner of Taxation (1992) 27 NSWLR 377. That case concerned a commission agent engaged to sell books.

27. In the course of his judgment, Sheller JA, with whose reasons Clarke JA agreed, said (after referring to the new section) (384):
    "This amounts to no more than saying that if the payment
    is not 'to an employee as such' but to an independent
    contractor it may fall within the definition even though
    it is not made under a contract for the labour of the
    person to whom the payment is made. It may be enough
    that it is made under a contract that is for the labour
    of some other person if, in the circumstances described,
    the labour was performed by the person to whom the
    payment is made or the person making the payment could
    reasonably be expected to believe that the person to
    whom the payment was made would perform the labour in
    respect of which it was made. Despite this change of
    definition there must, to satisfy the definition, be a
    contract wholly or principally for the labour of a
    person under which the payment is made."

28. His Honour then went on to consider the question whether the contract in issue in that case should properly be characterised as a contract for services rather than a contract of services. Sheller JA said further (385):
    "In my opinion by retaining the description of contract
    wholly or principally for the labour of a person the
    legislature has maintained a distinction between a
    contract for labour and a contract, to use the
    expression of the High Court in Neale (at 425) 'whereby
    the contractor has undertaken to produce a given result
    and' (the amount to be paid) 'becomes payable when, and
    only when, the contractual conditions have been
    fulfilled'.

Undertaking the production of a given result has been
    considered to be a mark, if not the mark, of an
    independent contractor: see, eg, Queensland Stations Pty
Ltd v Federal Commissioner of Taxation (1945) 70 CLR 539
    at 545 and 548. It may be that there are contracts for
    services which are wholly or principally for the labour
    of a person and which are not undertaken by the
    contractor to produce a given result. To the rewards of
    such contracts the definition may apply. But a contract
    which is undertaken by the contractor to produce a given
    result is not, in my opinion, a contract wholly or
    principally for the labour of a person for reason that
    the labour is undertaken not for the principal but for
    the contracting party himself to produce the result he
    has contracted to produce."

29. After going on to deal with what seemed in that case to be relevant indicia as to the characterisation of the contract, Sheller JA concluded
(386):
    "In my opinion it was open to the magistrate to find
    that the independent agent's agreement made on 16 May
    1983 between the appellant and Mr Maiden did not fall
within the description in s 221A of 'a contract ... wholly or
    principally for the labour of' Mr Maiden."

30. In this case, Mr Hayes QC for the appellant sought to distinguish the World Book (Aust) Pty Ltd case.

31. Of course, no two cases are alike, and in a context such as this it would be wrong to regard the factual decision in one case as being determinative of another.

32. However, it does seem to me that the approach identified by the reasoning of Sheller JA in that case is helpful.

33. In my opinion, the evidence in this case was sufficient to displace whatever prima facie effect should be given to the averments relating to the payments to Chau and Tran. Their work was essentially to produce a given result in accordance with the sample, which they had to re-do if it was not. They bargained for their remuneration, and were not obliged to take on any particular job. Within the confines of any time which might have been set, and a time was not always set, they were entitled to do the work in their own time, with their own equipment. No real or effective control was exercised over them by the respondent as to the manner in which they went about the work.

34. Importantly, although the evidence as to the terms of the contracts of engagement was scant, it was sufficient to establish that it was open to each of them to engage others to do the work, wholly or in part. Of course, it would not be right to imply a term of the contract to that effect merely because they in fact utilised the services of others from time to time, or even from the fact that they considered themselves free to do so. But it seems clearly to be right to conclude from the evidence that the respondent was indifferent as to who did the work. That circumstance, and the other proven circumstances surrounding the engagement of Chau and Tran, are sufficient to support a conclusion that it was an implied term of the contracts under which the work was performed by them that it was open for them to engage others to perform or contribute to the performance of the work.

35. It seems to me that the appropriate conclusion in this case is that the contracts between the respondent and Chau and Tran were not contracts "wholly or principally for the labour of any person" within the meaning of s.221A(2)(b). Neither did the evidence establish that the parties were in the relationship of master and servant at common law.

36. Mr Kavanagh for the respondent advanced a further argument in support of the dismissal of the complaint. This was not an argument which was put in the court below.

37. The charges in question assert a breach of s.221C(1A) of the Act. I repeat the relevant words of that section:
    "Where an employer pays to an employee salary or wages,
    the employer shall at the time of paying the salary or
    wages, make a deduction from the salary or wages at such
    rate (if any) prescribed in accordance with sub-section

    (1) or (1AA) as is applicable.
    Penalty: $1,000".

38. S.221C(2) provides in part:
    "For the purposes of this section and of the regulations
    made for the purposes of this section, where an employee
    receives from an employer salary or wages, he shall-
    (a) if the salary or wages is or are paid in respect of
    piece-work performed by the employee, or in respect of
    services rendered under a contract which is wholly or
    substantially for the labour of the employee - be deemed
    to be entitled to receive that salary or those wages in
    respect of the period of time from the commencement of
    the performance of the work or services until the
    completion of the work or services;"

39. S.221C(1) provides:
    "For the purpose of enabling the collection by
    instalments from employees of income tax, the
    regulations may prescribe rates of deductions to be made
    by employers from payments of salary or wages that
    employees receive or are entitled to receive in respect
    of a week or part of a week."

40. Schedule 3 of the Income Tax Regulations prescribes the rate of deduction from salary or wages in accordance with a sliding scale, depending on the quantum of weekly earnings. In cases where there is what is described as a "tax free threshold", the obligation to make a deduction does not commence until the weekly earnings reach the amount of $99, at which stage the instalment deduction is 10 cents.

41. Although the statements and averments in the complaint refer to the payment to the alleged employee of a sum, for example, in count 1, $1,080, there is no allegation of a period of time as representing the period between the commencement of the performance of the work until the completion of the work within the meaning of s.221C(2)(a). Neither was there any evidence as to the time taken to produce the work the subject of any of the averred payments.

42. In those circumstances, so the argument went, it is impossible to say whether there was a liability to make a deduction or not, with the result that the evidence (including the averments) was not sufficient to make out a conviction.

43. A similar point was taken in Neale v Atlas Products (supra). After referring to s.221C(2)(a), the Court went on to say (94 CLR 429):
    "It is clear from these provisions that if the tilers in
    question should be regarded as employees who were
    engaged on piece-work it would be necessary for the
    prosecution to establish in each instance the period of
    time taken for the completion of the work for which
    payment was made. This difficulty was fully appreciated
    by counsel for the appellant and he sought to meet it by
    pointing to the fact that more or less regular weekly
    payments had been made to each of the tilers concerned.
    But, even if regular weekly payments were made - and
    this was a matter of some dispute - it by no means
    follows that any of the payments which are in question
    in this appeal were made, or should, by reason of the
    statutory provisions referred to, be deemed to have been
    made, in respect of a period of one week. It is, we
    think, impossible to ascertain from the evidence what
    period of time was occupied by the tilers in performing
    any of the work for which the payments in question were
    made and this being so there is an additional reason why
    the appeal should fail."

44. In my opinion, the situation in this case in that respect is indistinguishable from that referred to in that passage in Neale v Atlas Products. That reasoning applied to the facts as averred in this case gives rise to another reason why the decision of the learned Special Magistrate dismissing the complaint should be upheld.

45. The conclusions which I have reached so far would be sufficient to lead to the dismissal of the appeal as to all three alleged employees. But given the fact that Phung did not give evidence, before parting with the matter, I would wish to say something as to the adequacy of the case against Phung.

46. In the absence of evidence from Phung, and in the absence of any evidence from the respondent, in considering the counts relating to the payment to Phung, the Magistrate was left with nothing but the evidentiary effect of the statements or averments contained in the complaint.

47. S.8ZL of the Taxation Administration Act 1953 provides in part:
    "(1) In a prosecution for a prescribed taxation offence,
    a statement or averment contained in the information,
    claim or complaint is prima facie evidence of the matter
    so stated or averred.
    (2) This section applies in relation to any matter so
    stated or averred although:
    (a) evidence in support or rebuttal of the matter stated
    or averred, or of any other matter, is given; or
    (b) the matter averred is a mixed question of law and
    fact, but, in that case, the statement or averment is
    prima facie evidence of the fact only.
    (3) Any evidence given in support or rebuttal of a
    matter so stated or averred shall be considered on its
    merits, and the credibility and probative value of such
    evidence shall be neither increased nor diminished by
    reason of this section.
    (4) This section:
    (a) does not apply to an averment of the intent of a
    defendant; and
    (b) does not lessen or affect any onus of proof
    otherwise falling on a defendant."

48. It follows from that section that the statements or averments may only be received as prima facie evidence to the extent that they refer to matters of fact and not as to questions of law. Where there is an allegation or averment of a mixed question of law and fact, that allegation is prima facie evidence of the fact only (s.8ZL(2)(b)). (See, for example, Brady v Thornton (1947) 75 CLR 140 per Latham CJ at 146.)

49. With those distinctions in mind, the moment one starts to read the complaint and summons, difficulties arise.

50. The opening words of the complaint identify it as a complaint of the Commissioner of Taxation
    "by John Charles Filsell, an officer of the Australian
    Taxation Office stationed at Adelaide in the State of
    South Australia, the person authorised by the said
    Commissioner to lay this complaint on his behalf ...."

51. The allegation that the complainant is a "person authorised" is, I would have thought, in one sense a pure conclusion of law, but the better view is that it is probably a mixed question of law and fact.

52. Be that as it may, I doubt whether the authority of the complainant to lay the complaint is proved by the bald allegation that he is so authorised.

53. Likewise, averment (g):"That the agreement between the defendant and Trinh Phung, pursuant to which the said work was done, was an agreement for Trinh Phung to provide labour for the defendant" is the averment of a mixed question of law and fact. That the agreement should properly be characterised as one for the provision of labour is a conclusion of law.

54. Bearing in mind that the matters to which I have just referred were not the subject of argument by counsel on the hearing of the appeal, I do not go further to reach any final conclusion as to the adequacy of the statements and averments to sustain the conviction in the case of Phung.

55. For the other reasons which I have given, the appeal must be dismissed as to all of the counts.

JUDGE2 BOLLEN J Prior J has identified the reasons of Perry J with which he agrees. I, too, agree with those reasons of Perry J. Like Prior J I do not comment on anything else.

2. I would dismiss the appeal.

JUDGE3 PRIOR J I agree that this appeal should be dismissed.

2. The contracts between the respondent and Chan and Tran were not contracts "wholly or principally for the labour of any person" within the meaning of s221A(2)(b) of the Income Tax Assessment Act 1936. Neither did the evidence establish that the parties were in the relationship of master and servant at common law. I agree with the reasons published by Justice Perry about that. I also agree with him that in Phung's case, as well as with respect to Chan and Tran, it is impossible to say whether there was a liability to make a deduction as required by s221C so that the averments and evidence were not sufficient to make out any convictions. I would dismiss the appeals on those grounds.

3. I decline to express any opinion on the matters not subject to argument before us.