The Smith's Snackfood Company Limited v Chief Commissioner of State Revenue (NSW)

Case •

[2012] NSWSC 998

•

28 August 2012

Supreme Court


New South Wales

  • Amendment notes
Medium Neutral Citation: The Smith's Snackfood Company Limited v Chief Commissioner of State Revenue (NSW) [2012] NSWSC 998
Hearing dates:23, 24 July 2012
Decision date: 28 August 2012
Jurisdiction:Equity Division - Revenue List
Before: Gzell J
Decision:

Assessments revoked. Matter remitted to Chief Commissioner for determination in accordance with findings and decision.

Catchwords: TAXES AND DUTIES - Payroll Tax - plaintiff sells snacks through vending machines - engages independent contractors to store, transport and restock, remove goods past use by date, collect money and deliver to cash handling companies - whether amounts paid to contractors exempt from tax under the Payroll Tax Act 2007, s 32(2)(d)(i) and Pay-roll Tax Act 1971, s 3A(1A)(a) because plaintiff is supplied with services ancillary to the conveyance of goods by means of a vehicle provided by the person carrying them
Legislation Cited: Pay-roll Tax Act 1971
Payroll Tax Act 2007
Land and Environment Court Act 1979
Federal Court of Australia Act 1976 (Cth)
Judiciary Act 1903 (Cth)
Pay-roll Tax Regulation 1998
State Revenue Legislation Amendment Act 2005
Taxation Administration Act 1996
Cases Cited: Accident Compensation Commission v Odco Pty Ltd [1990] HCA 43; (1990) 64 ALJR 606
Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue (Northern Territory) [2009] HCA 41; (2009) 239 CLR 27
Arnold v Minister Administering the Water Management Act 2000 [2008] NSWCA 338; (2008) 73 NSWLR 196
Bridges Financial Services Pty Ltd v Chief Commissioner of State Revenue [2005] NSWSC 788; (2005) 222 ALR 599
DSG Ltd v Victorian Workcover Authority [2008] VSCA 42; (2008) 20 VR 514
Koala Motels Pty Ltd v Chief Licensing Inspector (1977) 18 ALR 12
Macquarie International Health Clinic Pty Ltd v University of Sydney New South Wales (1998) 98 LGERA 218
Mayne Nickless Ltd v Mackintosh [1989] VR 878
Minister for Local Government v South Sydney City Council [2002] NSWCA 288; (2002) 55 NSWLR 381
National Parks and Wildlife Service v Stables Perisher Pty Ltd (1990) 20 NSWLR 573
Nix and Dunn v Pittwater Council (1994) 84 LGERA 199
NTL Australia Pty Ltd v Minister for Land and Water Conservation [2001] NSWLEC 5; (2001) 112 LGERA 403
Scharer v State of New South Wales [2001] NSWCA 360; (2001) 53 NSWLR 299
Texts Cited: Nil
Category:Principal judgment
Parties: The Smith's Snackfood Company Ltd (Plaintiff)
Chief Commissioner of State Revenue (NSW) (Defendant)
Representation: Counsel:
D Russell QC/ D Price (Plaintiff)
C Leggat SC/ I Young (Defendant)
Solicitors:
Johnson Winter & Slattery (Plaintiff)
Crown Solicitors (Defendant)
File Number(s):SC 2010/307535

Judgment

Introduction

  1. The Smith's Snackfood Company Limited (Smith's), the plaintiff, sells various snack foods and drinks through vending machines throughout Australia. It engages independent contractors to store, transport and restock the vending machines, to remove and transport goods which have passed their use by date, to collect the money paid by purchasers of the goods in the form of notes and coins and to deliver the money to cash handling companies that credit Smith's.

  1. The Chief Commissioner of State Revenue (Chief Commissioner), the defendant, assessed Smith's to payroll tax on the commissions paid to New South Wales contractors except for a 25% allowance for the non-labour component of the payments.

  1. The Chief Commissioner issued assessments for the years ended 30 June 2005, 2006, 2007, 2008 and 2009. The assessments for the first three years were raised under the Pay-roll Tax Act 1971(1971 Act). For the fourth and fifth years the Payroll Tax Act 2007 (2007 Act) applied. The provisions under which the Chief Commissioner acted are identical from one act to the other except for the apportionment provisions in the 2007 Act that are in different terms from their counterpart in the 1971 Act.

Background

  1. A representative sample of corporate contractors gave evidence through their directors. No female directors gave evidence.

  1. Typically, a contractor stored Smith's snack foods and drinks in a garage. A director usually did a weekly stock take to work out what replacement products were needed. The director did a complete stock take usually once a month. Each week the contractor placed an order with Smith's who delivered the products to the garage.

  1. Usually on the day before a run, the director loaded the contractor's vehicle with the snack foods and drinks he thought he needed.

  1. The director drove the contractor vehicle to the first vending machine. He opened the door of the vending machine and entered its number into a hand held unit (HHU) provided by Smith's. The quantity of each product stocked in the vending machine was displayed on the HHU. The number of each of the snacks remaining in the machine was counted and entered into the HHU. The director then printed out a pick slip from the HHU. That told him the total number of each of the snacks he needed to restock the machine.

  1. The director then topped up the coin float, putting the excess notes and coins in a coin bag and printed out a coin bag receipt from the HHU and put that in the coin bag as well. The vending machine door was closed and the director returned to the vehicle and put the cash bag into a safe fitted to the vehicle at Smith's expense.

  1. The director collected the snacks he needed and returned to the vending machine, opened its door and refilled the snacks, rotating stock to ensure that snacks with a low expiry date would sell first.

  1. Snacks that would expire before the director's next round were removed and returned to the vehicle as spoils.

  1. After refilling the vending machine the director pressed a button to see if the machine was working. If there were problems a red light showed up. The director was equipped to fix minor problems but if unable to fix a problem he called a Smith's technician.

  1. Occasionally, the director was provided with point of sale promotional material that he placed on the vending machines. This involved removing earlier point of sale promotional material and putting on the new material.

  1. The director cleaned the glass, wiped the sides and wiped out the tray of the vending machine. He locked the door and walked to the next machine or back to his vehicle with the spoils.

  1. The director banked the notes and coins twice a week by driving to a nominated cash handling company.

  1. If the director could not use a recycling bin to get rid of spoils and the cardboard containers in which Smith's delivered stock, he usually went to a local tip or dump once a week.

Goods Distribution Agreements

  1. Each year the contractors were required to sign a new Goods Distribution Agreement (GDA). The commission payable under it was a percentage of retail sales through the contractor's vending machines. The GDA contained restraint of trade provisions extending beyond the person conveying the goods to all directors of the contractor. Prospective contractors were trained to service machines including procedures for filling, cleaning, cash collection, maintenance and repair. A contractor obtained a certificate of accreditation when the director successfully completed a training programme within four weeks of becoming a contractor. The obligations of the contractors under the GDAs were set out with significant specificity.

  1. Smith's had area sales managers (ASMs) who communicated with contractors in their area by telephone with varying frequency. A director spoke with his ASM to relay any customer queries, stock issues and to receive or to communicate opportunities to increase the sites for vending machines. Some ASMs discussed frequency reports and spoils reports and some drove to the director's home around Christmas time for an annual review. Some ASMs told their directors of proposed promotions on products.

  1. Smith's provided "planograms" that set out which snacks should be put into vending machines at particular sites. But some directors decided for themselves what snacks they would stock in particular machines as they knew their customer base and knew the area where the machines they were to restock were located. If a director wished to change one of the snack foods in a vending machine he was supposed to obtain approval from his ASM. But in practice directors usually made a commercial decision about what stock was selling best and filled their vending machines accordingly, informing the ASM after the event.

Joint Enterprises

  1. There is no doubt that Smith's and the contractors carried out their individual businesses in collaboration.

  1. The Chief Commissioner described the relationship between Smith's and the contractors as evidenced in the GDAs as a commercial agreement in the nature of a shared enterprise. I endorse that description.

  1. There is no doubt that the GDAs covered a joint enterprise with a relatively high level of control of the contractors by Smith's. But that does not mean that the conveyance of goods by means of vehicles provided by the persons conveying them was not a part of the main commercial purpose of the contractual arrangements between Smith's and its contractors.

Statutory requirement

  1. The Chief Commissioner appears to have taken the view that the GDAs had as one of their main commercial purposes the collection of the vending machine takings and the restocking of the machines with Smith's merchandise selected by the contractors. Further, the Chief Commissioner took the view that those services could not be described as subsidiary, incidental, accessorial or auxiliary to the conveyance of goods and hence the contracts stood outside any of the exemptions.

  1. That is not the approach prescribed by the statute. If it be relevant, the exemption is not limited to the main commercial purpose of the GDAs. Whatever the main commercial purpose be, the statute simply requires the identification in the GDA of the service of the conveyance of goods by means of a vehicle provided by the person conveying them. If the contract so provides, as does the GDA in this case, the next question is whether any other services provided under the GDA are ancillary to the conveyance.

The legislation and authorities

  1. Section 32(1) of the 2007 Act defined a "relevant contract", relevantly for present purposes, as follows:

"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)   ...

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

  1. The equivalent provision in the 1971 Act was s 3A(1)(b). Unless there is a difference in the legislation, I will analyse the 2007 Act and give but a reference to the corresponding provision in the 1971 Act.

  1. In Accident Compensation Commission v Odco Pty Ltd [1990] HCA 43; (1990) 64 ALJR 606 at 612 the court said it was a mistake to read the expression "for or in relation to performance of work" as doing anything more than qualifying the content or scope of the word "services". All that the expression was saying was that "services" must be work-related.

  1. Bridges Financial Services Pty Ltd v Chief Commissioner of State Revenue [2005] NSWSC 788; (2005) 222 ALR 599 was concerned with the 1971 Act alone. At 627-628 [221] I said:

"The structure of the Pay-roll Tax Act 1971, s 3A is to define, in broad terms, a relevant contract. If an arrangement answers that description, the second step is to determine whether any of the exceptions apply. It is because of the exceptions, that the legislation does not catch bona fide independent contractors. It is because of the non-application of an exception that the object of taxing the putative subcontractor who works exclusively, or primarily, for one person under a contract whose object is to obtain the labour of that person, is achieved."

  1. See also: Mayne Nickless Ltd v Mackintosh [1989] VR 878 at 882-883 and the approval of what was there said by the Court of Appeal in DSG Ltd v Victorian Workcover Authority [2008] VSCA 42; (2008) 20 VR 514 at 521 [31]-[32].

  1. The relevant exception in this case is s 32(2)(d)(i) of the 2007 Act (s 3A(1A)(a) of the 1971 Act. It is as follows:

"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:
....
(d) is supplied with:
(i) services ancillary to the conveyance of goods by means of a vehicle provided by the person conveying them."

  1. Ancillary means subsidiary, incidental, accessory, auxiliary. In Koala Motels Pty Ltd v Chief Licensing Inspector (1977) 18 ALR 12 at 14 Muirhead J said:

"It is important to note that the word 'ancillary' has a special meaning. It means less than supplementary or supplemental to - it means 'subservient' or 'subordinate' the derivation being from the Latin 'ancillaris' - 'ancilla' being a handmaid - a person who in the good old days was regarded as subservient to her mistress and perhaps even to her master."

  1. In Nix and Dunn v Pittwater Council (1994) 84 LGERA 199 Gleeson CJ, with whom Priestley and Powell JJA agreed, considered the Land and Environment Court Act 1979, s 16(1A) which gave the court jurisdiction to hear "a matter that is ancillary to a matter that falls within its jurisdiction under any other provision of this Act". Having contrasted that provision with the Federal Court of AustraliaAct 1976 (Cth), s 32 which gave the Federal Court jurisdiction over matters "that are associated with matters in which the jurisdiction of the Court is invoked", citing Koala Motels his Honour said at 205:

"The New South Wales legislature used, in s 16(1A), the word 'ancillary' rather than 'associated'. In his Second Reading Speech, the minister introducing the amending legislation spoke of removing the necessity for 'genuinely ancillary proceedings' to be removed to another court: (NSW, Legislative Assembly, Hansard, 11 March 1993, at 725).
The relationship between two matters referred to in s 16(1A) is clearly intended to be a narrower one than that of association."

  1. In the present proceedings, reference was made to Macquarie International Health Clinic Pty Ltd v University of Sydney New South Wales (1998) 98 LGERA 218. The court considered zoning objectives identified by the City of Sydney Local Environmental Plan that provided that a permissible development purpose was "indicated by black lettering on the map or a use ancillary or incidental to that use."

  1. Stein JA, with whom Mason P and Meagher JA agreed, observed at 223 that an ancillary use did not necessarily need to be a subordinate or subservient one. It might be more than a minor use. His Honour said that an ancillary or incidental use was not capable of being reduced to a mathematical formula and he noted that among the relevant dictionary meanings were "auxiliary" and "accessory".

  1. In Arnold v Minister Administering the Water Management Act2000 [2008] NSWCA 338; (2008) 73 NSWLR 196, Spigelman CJ, with whom Allsop P and Handley AJA agreed, considered s 16(1A) of the Land and Environment Court Act. At 214-215 [67] his Honour said that while the Land and Environment Court was exercising federal jurisdiction under the Judiciary Act 1903 (Cth), s 39(2), the scope of the jurisdiction so conferred required the identification of the limits of the subject matter with which the court had jurisdiction to deal. If the claim of invalidity of Commonwealth conduct whether legislative or executive was appropriately characterised as ancillary to the challenge that the applicants made to the validity of the Water Sharing Plan for the Lower Murray Ground Water Source 2006, then the court had jurisdiction to determine the federal issues under the Land and Environment Court Act, s 16(1A).

  1. His Honour considered National Parks and Wildlife Service v Stables Perisher Pty Ltd (1990) 20 NSWLR 573 in which Gleeson CJ (at 580) noted there was no corresponding provision to the Federal Court of Australia Act (Cth), s 32 in the Land and Environment Court Act, and agreed with the conclusion of Gleeson CJ in Nix that the word "associated" was more expansive than the word "ancillary."

  1. At 215 [73] Spigelman CJ pointed out that the Court of Appeal, on a number of occasions, had approved dictionary definitions of "ancillary" as "incidental, accessory or auxiliary" referring to Nix at 205, Scharer v State of New South Wales [2001] NSWCA 360; (2001) 53 NSWLR 299 at 308 [51], Minister forLocal Government v South Sydney City Council [2002] NSWCA 288; (2002) 55 NSWLR 381 at 416 [160], and NTL Australia Pty Ltd v Minister for Land and Water Conservation [2001] NSWLEC 5; (2001) 112 LGERA 403 at 413 [28].

  1. The Chief Justice then said at 215 [74]:

"There is a concept of subservience implicit in the idea of an 'ancillary matter': see Koala Motels Pty Ltd v Chief Licensing Inspector (1977) 18 ALR 12 at 14, referred to with approval by Gleeson CJ in Nix (at 205); and by Pearlman J in NTL Australia (at 413 [28] (c)), in turn referred to with approval in this Court in Minister for Local Government v South City Sydney Council (at 416 [160])."

  1. Macquarie International does not appear to have been cited to the Court of Appeal in Arnold. Stein JA's observation that an ancillary use did not necessarily need to be a subordinate or subservient one was not explained and did not follow an analysis of the authorities.

  1. Faced with this conflict, I prefer the reasoned judgment in Arnold and consider that subservience is a characteristic of an ancillary matter.

Characterisation by Chief Commissioner

  1. What was said in Mayne Nickless and approved in DSG, that the legislation includes exemptions designed to exempt normal business transactions, was relied upon by the Chief Commissioner in concluding that Smith's current arrangements did not constitute an orthodox or normal owner-driver arrangement. The Chief Commissioner characterised the agreements between Smith's and its contractors as multifaceted arrangements in which a main purpose was not the conveyance of goods and none of the services could be considered secondary or subservient to the others.

  1. The Chief Commissioner concedes that in a conventional or ordinary conveyance or haulage of goods contract the function of loading and unloading goods is ordinarily ancillary to the conveyance or haulage of goods by the means of the vehicle provided. The Chief Commissioner contends, however, that the GDAs do not provide for an ordinary conveyance or haulage of goods.

Interpretation of s 32(2)(d)(i) and s 3A(1A)(a)

  1. But it is not for the Chief Commissioner to limit the exemption in s 32(2)(d)(i) of the 2007 Act (s 3A(1A)(a) of the 1971 Act) to contracts that he regards as providing for a conventional or ordinary conveyance or haulage of goods. The provision says nothing about ordinary haulage contracts.

  1. The task in statutory interpretation is to start with the words of the legislation (Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue (Northern Territory) [2009] HCA 41; (2009) 239 CLR 27 at 46 [47]).

  1. What is required by s 32(2)(d)(i) of the 2007 Act is the determination of whether there is a contract under which Smith's is supplied with the conveyance of goods by means of a vehicle provided by the person conveying them and, if so, whether under that contract Smith's is supplied with services ancillary thereto.

  1. Under the GDAs the first requirement is met: the contractors convey goods by means of a vehicle provided by the person conveying them, the contractor.

  1. The Chief Commissioner submitted that unless every service provided by a contractor was ancillary to the conveyance of goods by means of the contractor's vehicle, the exemption would not apply to that contract.

  1. Such an interpretation would defeat the practical operation of the exemption because if some de minimis service, other than one ancillary to the conveyance of the goods, existed there would be no exemption.

  1. There is no reason to construe the provision in this fashion. Unlike s 32(2)(d)(ii) of the 2007 Act (s 3A(1A)(b) of the 1971 Act), which applies to services "solely for or in relation to" the procurement of persons desiring to be insured, there is no requirement in s 32(2)(d)(i) of the 2007 Act (s 3A(1A)(a) of the 1971 Act) that the services be solely ancillary to the conveyance of the goods.

  1. It should be noted, however, that s 3A(1A)(b) of the 1971 Act does not contain the word "solely." Nonetheless the contrast in the 2007 Act is significant. The absence of the requirement of exclusivity in s 32(2)(d)(i) of the 2007 Act means that multiple services can exist.

  1. The exemption should not be restricted in the manner submitted by the Chief Commissioner. In my view the exemption is not defeated if there be services provided in the GDA that are ancillary to the conveyance of goods and others that are not.

Interpretation of s 32(2)(a) and s 3A(1)(d)

  1. Section 32(2)(a) of the 2007 Act (s 3A(1)(d) of the 1971 Act) exempts a contract under which the designated person is supplied with services for or in relation to the performance of work that are ancillary to the supply of goods by the person by whom the services are supplied or to the use of goods that are property of that person.

  1. The Chief Commissioner has issued a ruling, PTA O33, for the purpose of this exemption. Where the amount relating to the provision of materials and/or equipment is more than 50% of the total contract amount the provision of labour is considered ancillary.

  1. Rulings by the Chief Commissioner do not have the force of law. They are his expression of opinion.

Adaptation of ruling PTA 033

  1. Smith's sought to apply that reasoning to the instant circumstances by interpreting the ruling to mean that if services in relation to the performance of work have a value of less than 50% of the total contract amount those services are ancillary. It was submitted that, applying that reasoning, the services provided, other than the carriage of goods by road, had a value less than 50% of the total costs of the contractors and were, in consequence, ancillary.

  1. But the context is different and there is no reason to import a value test into the owner/driver exemption. I gain no assistance on this issue from the exercise that considered the costs of the contractors and showed non-wage expenses at 35.47% of total expenses.

  1. The determination of whether a service is ancillary to the conveyance of goods in s 32(2)(d)(i) of the 2007 Act (s 3A(1A)(a) of the 1971 Act) is not a mathematical exercise. It requires an analysis of the service and its relationship with the conveyance of goods. It is a qualitative rather than a quantitative exercise.

  1. The use of the term "conveyance" rather than "transport" in s 32(2)(d)(i) of the 2007 Act (s 3A(1A)(a) of the 1971 Act) suggests that something more than transport by road is involved. To my mind it invokes the purpose of the transport by including delivery of the goods. The conveyance of goods for the purposes of the provision does not end when the contractor parks his vehicle near a vending machine. It includes the restocking of the machine with Smith's snacks.

  1. The Chief Commissioner in ruling PTA 006 accepts that, for the purpose of s 32(2)(d)(i) of the 2007 Act (s 3A(1A)(a) of the 1971 Act), "conveyance" means transportation and delivery of goods.

  1. The services the contractors provide to Smith's under the GDAs may be identified as follows:

  • placing orders for goods
  • storage of goods
  • loading goods into vehicle
  • driving vehicle to first vending machine
  • inspecting vending machine and printing slips
  • carrying out minor repairs
  • making service calls if unable to repair
  • collecting money from vending machines
  • depositing money in vehicle safe
  • collecting required goods from vehicle
  • delivering goods to vending machines
  • placing promotional material on vending machines
  • cleaning vending machines
  • depositing spoils in vehicle
  • looking for business opportunities
  • repeating actions at other vending machines
  • driving vehicle home
  • delivering money to cash handling companies
  • delivering spoils and waste to dump
  • stocktaking

Placing orders for goods and storage of goods

  1. While it may be said that both services are subservient or subordinate to the conveyance of goods by the contractors in their vehicles I do not regard either service as subsidiary, incidental, accessory or auxiliary to that conveyance.

  1. These services are not supplied for the purpose of aiding the contractors with their conveyance of Smith's products by their vehicles. The services benefit Smith's. By having the contractors in possession of goods likely to be needed to restock the vending machines, the contractors may commence their conveyance of the goods in a timely fashion.

Loading goods into vehicle

  1. This is an ancillary service. If it is not part of the contractor's conveyance of goods it is subsidiary, incidental, accessory or auxiliary to that conveyance.

  1. This service aids the contractors. There can be no transportation of goods until the vehicles are loaded with the goods to be transported. And the service is subservient or subordinate to the conveyance itself.

Driving vehicle to first vending machine

  1. This is a transportation service and is part of the conveyance of the goods.

Inspecting vending machine and printing slips

  1. This is part of the delivery process and forms part of the conveyance of the goods. The inspection determines the goods to be restocked and the slips specify the goods required.

Carrying out minor repairs and making service calls if unable to repair

  1. These services are not part of the transportation or delivery of the goods. They are not subsidiary, incidental, accessory or auxiliary to the conveyance. They are for the benefit of Smith's in keeping the vending machines operational.

Collecting money from vending machines and depositing money in vehicle safe

  1. While they are an important part of the services provided by the contractors under the GDAs, they are not services that are subsidiary, incidental, accessory or auxiliary to the conveyance of Smith's products. They do not aid the contractors in their transportation or delivery of the goods. They benefit Smith's by having its money collected and banked.

  1. It was submitted that notes and coins are goods and collecting money from the vending machines was the beginning of a transportation and delivery of those goods. But that is a different conveyance of goods. The conveyance of goods to which services are ancillary is the transportation and delivery of Smith's products and not the transportation and delivery of the money.

Collecting required goods from vehicle and delivering goods to vending machines

  1. This is part of the delivery service and is part of the relevant conveyance of goods.

Placing promotional material on vending machines and cleaning vending machines

  1. These services are to the benefit of Smith's in maintaining the cleanliness of its vending machines and promoting the sale of its products. Neither service is subsidiary, incidental, accessory or auxiliary to conveyance of the goods by the contractors. Neither service assists the contractors in transporting and delivering Smith's products to the vending machines.

Depositing spoils in vehicles

  1. The conveyance of the relevant goods is complete when they are delivered to the vending machines. The conveyance does not include any return transportation or delivery of spoils. This service aids Smith's and not the contractors. It is not a service that is subsidiary, incidental, accessory or auxiliary to the conveyance of the goods by the contractors.

Looking for business opportunities

  1. This is a service for the benefit of Smith's in leading to the placement of additional vending machines in new locations. It is no part of the transportation and delivery of Smith's products by the contractors. It is not a service that is subsidiary, incidental, accessory or auxiliary to that conveyance.

Repeating actions at other vending machines

  1. The above considerations apply equally to the repetitive actions.

Driving vehicles home

  1. This is a subsidiary, incidental, accessory, or auxiliary service that is subordinate or subservient to the conveyance of the products to the vending machines. The transportation is a round trip to the vending machines and back to the contractors' homes.

Delivering money to cash handling companies

  1. It follows from what I have said above that I do not regard this service as being ancillary to the conveyance of the goods by the contractors.

Delivering spoils and waste to dump

  1. Again, for the reasons set out above, this is not a service ancillary to the conveyance of the goods in question.

Stocktaking

  1. This is part of the storage and ordering of goods and services and is not ancillary to the conveyance of the relevant goods by the contractors.

Interpretation of s 32(2)(d)(i) and s 3A(1A)(a)

  1. There are some services provided by the contractors under their GDAs that fall within the exemption in s 32(2)(d)(i) of the 2007 Act (s 3A(1A)(a) of the 1971 Act), and there are other services that do not.

  1. In so far as a GDA provides for an exempt service it is not, to that extent, a relevant contract. And because it is not a relevant contract, moneys paid by Smith's for the service are not wages under s 35(1) of the 2007 Act (s 3A(2)(c) of the 1971 Act). It is in the following terms:

"For the purposes of this Act, amounts paid or payable by an employer during a financial year for or in relation to the performance of work relating to a relevant contract...are taken to be wages paid or payable during that financial year."

  1. Since the GDAs with respect to the supply of services ancillary to the conveyance of goods by means of vehicles provided by the persons conveying them are not, to that extent, relevant contracts, it is only the other work-related services performed by the contractors under the GDAs that constitute them as relevant contracts to that extent. And it is only payments made by Smith's with respect to those other work-related services that are wages.

  1. To the extent to which the GDAs constitute relevant contracts, s 35(2) of the 2007 Act (s 3A(2)(d) of the 1971 Act) will be engaged to the extent that payments by Smith's are attributable to the provision of the motor vehicles. Because payments by Smith's will include a component for the provision of the motor vehicles, the work-related payments will be included in that larger amount and the Chief Commissioner is required to determine how much is not attributable to the performance of work. Section 35(2) is in the following terms:

"If an amount referred to subsection (1) is included in a larger amount paid or payable by an employer under a relevant contract during a financial year, that part of the larger amount which is not attributable to the performance of work relating to the relevant contract...is as determined by the Chief Commissioner."

  1. The Chief Commissioner allowed a 25% reduction in total payments to the contractors as the non-labour component of those payments. It will now be a question of looking at this issue in relation to so much of the GDAs as render them relevant contracts.

  1. In PTA 018 the Chief Commissioner allowed reductions for non-labour components under s 35(2) of the 2007 Act (s 3A(2)(d) of the 1971 Act) by contractor type. His standard reduction for building supervisors who provided their own vehicles and inspected more than six sites per week was 25%. Whether that is an appropriate basis for a reduction with respect to the contractors is debatable.

  1. It was submitted that s 35(2) of the 2007 Act (s 3A(2)(d) of the 1971 Act) was only engaged if there were two amounts, one of which was identified as a payment for labour. But the section does not require anything more than the inclusion of the s 35(1) amount in a larger sum.

  1. With respect to the forerunner of s 35(1) of the 2007 Act in s 3A(2)(c) of the 1971 Act, I said in Bridges at 629 [237] that it spoke in terms of amounts payable for or in relation to the performance of work relating to a relevant contract. As a matter of plain English, I said that the provision was limited to the labour content of the payments made.

  1. As I have said, an exercise was done with respect to the contractors' non-labour costs as a percentage of their total costs. Another exercise calculated the time taken to drive on main roads as a percentage of the total time to provide the services under the GDAs.

  1. Both exercises suggested that a figure of 35% was a better estimate of non-labour costs than was the 25% allowed by the Chief Commissioner.

  1. I intend to revoke the assessments and remit the matter to the Chief Commissioner for determination in accordance with my findings and decision.

  1. No doubt the Chief Commissioner will bear these exercises in mind in his reassessment of the non-labour component of the payments to contractors under the GDAs. He may, however, take other considerations into account.

  1. Section 3A(2)(d) of the 1971 Act provided that where there was a larger amount paid by the employer under the relevant contract that part of the larger amount not attributable to the performance of work relating to the relevant contract might be prescribed by regulation. There was no relevant regulation. The Pay-roll Tax Regulation 1998 had no provision in it either directly or implicitly applicable to s 3A(2)(d). It was repealed by the State Revenue Legislation Amendment Act 2005, s 4(2).

  1. With respect to the first three assessments under the 1971 Act, therefore, the Chief Commissioner submitted that Smith's could not point to any statutory entitlement to a reduction for non-labour costs and his grant of a 25% reduction could not be demonstrated to give rise to an excessive assessment.

  1. Notwithstanding the absence of a regulation, the Chief Commissioner granted a 25% reduction for the non-labour component of the payments to contractors. No doubt he will grant a reduction in his reassessment but not necessarily at 25% and, of course, limited to so much of the payments under the GDAs that were not for a supply of services ancillary to the conveyance of goods by means of the contractors' vehicles.

Penalty

  1. The Taxation Administration Act 1996, s 27(1) provides that the amount of penalty tax payable in respect of a tax default is 25% of the amount of tax unpaid.

  1. In light of my findings, the amount of tax unpaid and, consequently, the amount of penalty tax must be reduced for the payments for services that I have found to be ancillary to the conveyance of goods by means of vehicles provided by the contractors conveying them.

  1. With respect to the balance of the penalty tax, s 27(3) of the Taxation Administration Act provides that the Chief Commissioner may determine that no penalty tax is payable if he is satisfied that the taxpayer, or a person acting on behalf of the taxpayer, took reasonable care to comply with the taxation law.

  1. The Investigation Report of the Office of State Revenue Compliance Division said that given the size of Smith's, the number of staff employed to handle its tax affairs, the total payments to contractors and the ramifications for making an error in relation to the contractors, it was expected that Smith's would have sought advice from the Office of State Revenue or its equivalent in other states. Since Smith's did not seek assistance it failed to take reasonable care.

  1. Seeking assistance from the Office of State Revenue is one way of obtaining advice, but it is not the only way.

  1. PricewaterhouseCoopers made a detailed submission to the Chief Commissioner. It reaffirmed the position taken by Smith's that its payments to the contractors were within s 32(2)(d)(i) of the 2007 Act. The submission was partially correct.

  1. The Chief Commissioner accepts that the taking of advice may amount to reasonable care for the purposes of s 27(3) of the Taxation Administration Act.

  1. Smith's did not take advice on s 3A(1A)(a) of the 1971 Act and no question of remission of the penalty tax for the first three years of assessments arises.

  1. The PricewaterhouseCoopers advice was given on 23 September 2009 so no question of remission arises with respect to the 2008 year.

  1. But with respect to the 2009 year the Chief Commissioner should be satisfied that by the time Smith's lodged its 2009 payroll tax return it had sought and received independent professional advice that s 32(2)(d)(i) of the 2007 Act applied to its payments to the contractors.

  1. In his reassessment one would expect the Chief Commissioner to be satisfied that Smith's had taken reasonable care to comply with the taxation law with respect to the 2009 year and to be satisfied that no penalty tax is payable.

The contract of conveyance

  1. The Chief Commissioner does not seek payroll tax with respect to a contract of conveyance of goods by means of a vehicle provided by the person conveying them.

  1. No doubt, in his reassessment the Chief Commissioner will not seek to tax that service under the GDAs.

  1. But the position is curious. Under both the 2007 Act and the 1971 Act there is no specific exemption for the conveyance of goods by means of a vehicle provided by the person conveying them. There is only the exemption for services ancillary to that conveyance.

  1. The Chief Commissioner submitted that the contract for conveyance is within s 32(2)(d)(i) of the 2007 Act (s 3A(1A)(a) of the 1971 Act) on the basis that the contract of conveyance is ancillary to the contract of conveyance. That is an awkward interpretation and one that is hardly open by any distortion of s 32(2)(d)(i) and s 3A(1A)(a).

  1. Smith's submitted that the contract of conveyance of goods by means of a vehicle provided by the person conveying them is not a relevant contract under s 32(1) of the 2007 Act (s 3A(1)(b) of the 1971 Act) because it is not a contract whereunder the designated person is supplied with services of persons for or in relation to the performance of work. It was submitted that the conveyance of goods should not be considered the performance of work.

  1. That is an equally awkward interpretation because the conveyance of goods by means of a vehicle provided by the person conveying them is the performance of work.

  1. In my view, this is a matter that ought to be referred for urgent amendment of the 2007 Act.

Orders

  1. I propose to make the following orders:

(1)   the assessments for each of the 2005 to 2009 years be revoked;

(2)   the matter be remitted to the Chief Commissioner for determination in accordance with my findings and decision;

(3)   the exhibits and subpoenaed material be returned forthwith;

(4)   the parties be heard as to costs; and

(5)   the parties bring in short minutes of order reflecting my reasons for judgment.

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Amendments

19 September 2012 - removed line break from para 88 and correct paragraph numbering


Amended paragraphs: 88-111

Decision last updated: 19 September 2012

Most Recent Citation
Cases Cited

12

Statutory Material Cited

8

Accident Compensation Commission v Odco Pty Ltd [1990] HCA 43
WorkPac Pty Ltd v Rossato [2020] FCAFC 84
Bridges Financial Services Pty Ltd v Chief Commissioner of State Revenue [2005] NSWSC 788