Knight Watch Security Services Pty Ltd v Chief Commissioner of State Revenue [2017] NSWCATAD 223

Date of judgement 13 July 2017 Proceeding No. 2016/00378337
Judge(s) Senior Member NS Isenberg
Court or Tribunal New South Wales Civil and Administrative Tribunal
Legislation cited Administrative Decisions Review Act 1997

Pay-roll Tax Act 1971

Payroll Tax Act 2007

Taxation Administration Act 1996
Catchwords REVENUE LAW – payroll tax – employment agent - penalty tax – Division 8 of Part 3 of the Payroll Tax Act 2007
Cases cited B & L Linings Pty Ltd v Chief Commissioner of State Revenue [2008] NSWCA 187, (2008) 74 NSWLR 481

Chan & Naylor Australia v Chief Commissioner of State Revenue [2016] NSWCATAD 4

Cornish Investments Pty Limited v Chief Commissioner of State Revenue (RD) [2013] NSWADTAP 25

FEDERAL COMMISSIONER OF TAXATION v. WADE [1951] HCA 66; (1951) 84 CLR 105

Freelance Global Limited v Chief Commissioner of State Revenue [2014] NSWSC 127

Happy Days Property Pty Ltd v Chief Commissioner of State Revenue [2016] NSWCATAD 289

Qualweld Australia Pty Ltd v Chief Commissioner of State Revenue [2014] NSWCATAD 227

Stature Pty Ltd -v- Chief Commissioner of State Revenue [2002] NSWADT 271

UNSW Global Pty Ltd v Chief Commissioner of State Revenue [2016] NSWSC 1852

Value Engineering (Australasia) Pty Ltd v Commissioner of State Taxation (WA) (1985) 16 ATR 296

Background

Knight Watch operates a security services business supplying its clients with security guards who are stationed at the clients’ premises. Knight Watch has entered into a contract with Coles Myer Limited (CML) for the provision of security guards. It supplies the security guards from two sources. First, Knight Watch employs its own security staff and pays payroll tax on those wages. Second, it also contracts with various third parties to obtain security staff, who are paid by the third parties. They are not paid nor employed directly by Knight Watch. This second category of security staff was the subject of the proceedings

The dispute related to the interpretation of certain provisions of Part 3, Division 8 of the Payroll Tax Act 2007 (NSW) (PT Act) and the interpretation and relevance of Revenue Ruling No. PTA 027 (Revenue Ruling).

Chief Commissioner’s submissions

The Chief Commissioner submitted that CML and its related corporations (described as “Brands” in clause 1.1 of the CML contract) were clients of Knight Watch and that Knight Watch procured the services of the security guards for CML and the related corporations.

Knight Watch submissions

Knight Watch submitted that the legislation should be interpreted as only imposing liability on the employment agent closest to the service provider. Knight Watch argued that the conceptual basis of payroll tax is that the tax on an employee’s wages is paid by the person paying the wages, and all wages paid to the security guards were paid by the sub-contractors. Knight Watch also argued that its interpretation of the PT Act was “fairer and more convenient”.

In the alternative, Knight Watch submitted that the ultimate clients were the Brands, and that CML was the employment agent closest to the Brands. Therefore, in accordance with the Revenue Ruling, CML was the employment agent liable for payroll tax

Decision

The Tribunal confirmed the decision of the Chief Commissioner to assess Knight Watch as liable to payroll tax on the basis that it was an employment agent. In rejecting the submissions by Knight Watch, the Tribunal emphasised that:

  1. the Ruling does not have the force of law;

  2. Division 8 of Part 3 of the PT Act provides that payroll tax liability is imposed on each employment agent in a chain of multiple employment agents; and

  3. section 41 of the PT Act is designed to avoid double taxation by providing that, if one employment agent has paid payroll tax in respect of the provision of services in connection with an employment agency contract, then no other person (including another employment agent) is liable to pay payroll tax in respect of the same services.

Impact of UNSW Global

After the hearing of this appeal, both parties were invited to file submissions on the impact of two cases including UNSW Global Pty Ltd v Chief Commissioner of State Revenue [2016] NSWSC 1852, in which the Supreme Court held that contracts were not employment agency contracts because they involved the carrying out by the contractors of work for the clients’ benefit as opposed to working in the clients’ businesses.

Knight Watch chose not to file any submissions.

The Tribunal determined that the Supreme Court’s decision did not assist Knight Watch because the security guards in Knight Watch worked in the ordinary conduct of its clients' businesses. This finding was made on the basis of the limited evidence presented, which showed that the security guards:

  • were stationed at clients' sites;
  • wore uniforms supplied by the clients; and
  • performed their duties in accordance with instructions given by the managers of the sites.

Penalty tax

Knight Watch argued that penalty tax should be reduced to nil because it had taken reasonable care to comply with payroll tax obligations. Knight Watch also relied on an email from the Office of State Revenue from September 2015 which contained a statement that the “minimum possible penalty” had been applied in accordance with legislation.

Furthermore, Knight Watch relied on s27 and s29 of the Taxation Administration Act 1996 (TAA) to argue that the penalty tax should be reduced to 5% of the unpaid tax.

These submission were rejected. In fact, the Tribunal held that the Chief Commissioner should not have reduced the penalty tax to 20% under section 29(1) of the TAA. This was because section 29(2)(b) of the TAA applied. That is, Knight Watch was registered under a taxation law and had failed to pay the relevant amount of payroll tax by the date/s required under a taxation law.

However, the Tribunal then held that it would be appropriate to reduce the penalty tax to 20% under section 33 of the TAA.

Interest

Knight Watch provided no evidence of any errors in relation to interest calculations and made no submissions regarding the assessment of interest. The Tribunal had regard to the onus on Knight Watch to prove its case and was not satisfied that there were any errors in the amounts of interest included in the Assessments.

Decision

The Tribunal determined that Knight Watch has not satisfied its onus of proving on the balance of probability by admissible and probative evidence that any amounts in the Assessments are incorrect.

Orders

The amount of tax payable, interest and penalty tax in the Assessments made by the Chief Commissioner of State Revenue were confirmed.

Link to decision

Knight Watch Security Services Pty Ltd v Chief Commissioner of State Revenue [2017] NSWCATAD 223

Last updated: 10 October 2017