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

Summary

Freelance Global Ltd as trustee for the Freelance Trust No. 1 (“Freelance”) sought a review before the Supreme Court of decisions of the Chief Commissioner assessing Freelance to be liable to payroll tax pursuant to the employment agency contract provisions of the payroll tax legislation.

The Court held that:

• in accepting payroll tax returns and payments made by Freelance, the Chief Commissioner did not make “assessments” of Freelance’s liability for payroll tax for the purposes of the Taxation Administration Act;
• therefore the Chief Commissioner’s decision to refuse the request for a refund by Freelance (because he considered that the employment agency provisions applied) was not a “reassessment” for the purposes of s.9 of the Taxation Administration Act, and in turn the question of whether that decision was in accordance with legal interpretations and assessment practices generally applied in relation to matters of that kind, did not arise;
• the contracts concerned were employment agency contracts under both the Pay-roll Tax Act 1971 and the Payroll Tax Act 2007;
• the relevant contracts provisions under either Act, (and consequently the exclusions available under the Acts) did not apply.

Background

Freelance provides services to independent contractors who wish to provide their services to clients. Freelance provides the services of such contractors to clients who wish to engage contractors. It does not maintain a pool of pre-screened independent contractors.

Freelance enters into contracts with companies (“clients”) who desire the services of independent contractors. Pursuant to those contracts, it undertakes to provide services. However, the scope and nature of the services and the rate of pay have been agreed upon between the client and the individual contractor. Typically, Freelance undertakes to endeavour to arrange for the individual contractor to perform the services required by the client as a delegate of Freelance.

At the same time, the independent contractor is invited to apply to become a beneficiary of the Freelance Trust No. 1, a discretionary trust. Freelance invoices the client on a regular basis for the services performed by the individual contractor. Freelance pays the contractor the moneys received from the client less an agreed fee. The regular payments made by Freelance to the independent contractor are treated as advances. In practice, Freelance determines to make distributions to the contractor beneficiaries in the same amount as the advances made during the financial year.

The issue in the proceedings was whether the distributions paid by Freelance to its contractor beneficiaries are taxable wages within the meaning of the applicable payroll tax legislation.

The Statutory Framework

The decisions under review related to the tax years ending 30 June 2003 to 30 June 2009, and as such spanned over two legislative periods.

The relevant statutory provisions applying to employment agents were:

• s.3C of the Pay-roll Tax Act 1971 (“PRT 1971”) for the period prior to 1 July 2007; and
• ss.37 to 40 of the Payroll Tax Act 2007 (“PRT 2007”) from 1 July 2007.

Additionally, the more relevant provisions of the Taxation Administration Act 1996 (“TAA”) were:

• s.8 - General power to make assessment
• s.9 - Reassessment
• s.17 - Acceptance of money or return not necessarily an assessment

The Chief Commissioner’s Decisions

Freelance requested “reassessments” of payroll tax in relation to the period 1 April 2003 to 30 June 2007 (“the First Period”). Payroll tax had already been paid for the First Period but Freelance contended that it had incorrectly paid tax on distributions made to the contractor beneficiaries and to the “secondary beneficiaries” nominated by them.  Freelance therefore requested a refund of the allegedly overpaid tax.

The Chief Commissioner refused the request because he concluded that the arrangements between Freelance and the contractor beneficiaries fell within the definition of employment agency contracts.

Further, the Chief Commissioner issued notices of assessment of payroll tax for the financial years ending 30 June 2008 and 30 June 2009 (“the Second Period”).

Legal Issues

There were two key issues before the Court.

First, whether the Chief Commissioner’s decision refusing the request for refund of payroll tax for the First Period was a “reassessment” within the meaning of s.9 of the TAA, such that the restrictions in s.9(2) should apply.

Secondly, Freelance contended that s.3C of the PRT 1971 and ss.37-41 of the PRT 2007 apply to employment agents or labour hire firms as commonly understood, of which it is not one.  Freelance submitted that it does not “procure” the services of contractors for the clients; it does not place the contractors or source or recruit them; and it does not screen them to assess their suitability for the engagement.

The Chief Commissioner’s primary contention was that Freelance is an “employment agent” as that expression is defined and that its agreements with clients are “employment agency contracts” as defined so that the amounts paid or payable by Freelance to the contractors are taken to be wages payable by Freelance.

Decision

Whether there was a reassessment

The Chief Commissioner did not issue notices of assessment in respect of the First Period.  Rather, there was a process of self-assessment by which the taxpayer lodged a return, paid the money and the money was accepted.

Freelance argued that the Chief Commissioner must be taken to have made an assessment in respect of tax liabilities where a return is lodged and the Chief Commissioner is satisfied with that return.  (This is in spite of s.17 TAA.)  Freelance further submitted that, notwithstanding the use of the word “may” in s.8(1) TAA, the Chief Commissioner was obliged to make an assessment to give effect to a tax liability that arises by operation of the statute, relying in support on Gunasti v Chief Commissioner of State Revenue [2012] NSWADT 218 at [29].

White J held that an assessment by the Chief Commissioner is not necessary to give effect to the liability that arises by operation of the statute: [41].

Further, his Honour held that by reason of s.17 TAA, it cannot be said that the Chief Commissioner is taken to have made an assessment by accepting the returns lodged and the payments made by Freelance: [45].

White J concluded as below at [46]:

“…When the question of Freelance’s liability to pay payroll tax for that period was raised by KPMG …., the Chief Commissioner … was required to consider whether Freelance’s own assessment of its liability for payroll tax for that period was correct or incorrect In deciding that … the Chief Commissioner was not making a “reassessment” for the purposes of s.9 of the Taxation Administration Act. The question whether the Chief Commissioner’s decision was in accordance with legal interpretations and assessment practices generally applied by him in relation to matters of that kind did not arise.”

His Honour further commented that even if that question had arisen, the particular type of arrangement between Freelance and its contractors had not previously been considered by the Chief Commissioner, and therefore there was no relevant legal interpretation or assessment practice applicable to the present case.

Whether Freelance’s arrangements constituted an “employment agency contract”

Having considered the meaning of the word “procure” in a number of decisions involving a variety of factual circumstances, White J stated at [115]:

“I think the better view is that “procure” when used in s.3C and s.37 means more than facilitate or enable and requires that the employment agent cause the services of a contract worker (or service provider) to be provided to the employment agent’s client, with the expenditure of care or effort by the employment agent. I do not accept that this can only be done if the employment agent recruits the contract worker or service provider for the client.”

His Honour identified the steps taken by Freelance to procure the services of its contractors to its clients at [119] of the judgment. This included Freelance’s arrangements with its contractors for them to be admitted as beneficiaries of the Freelance Trust; for them to receive distributions from that trust which in practice were in the amount of remuneration received by Freelance from its clients less its management fee; and by entering into contracts with its clients for the provision of services by its contractors.

The Court considered that the recent decision of Ginnane J of the Supreme Court of Victoria in CXC Consulting Pty Ltd & Ors v Commissioner of State Revenue [2013] VSC 492 was on point. Freelance sought to distinguish that decision on the basis that in the agreements between CXC Consulting and its contractors, or the three-party contracts (among CXC Consulting, its clients and the contractors), there was a term that obliged the contractors to provide the services to the clients. Freelance submitted that there was no such causative link between Freelance’s entry into the contract with its client and the contractor’s provision of services to the client (see [134]).

However, White J held that the absence of an express contractual obligation by the contractor to perform the services that Freelance agreed to provide to its clients is not critical to a conclusion whether Freelance procured the services of its contractors: [138]. Regarding CXC Consulting, White J said at [139]:

“…The fact that prior arrangements had been made by the contractors with the clients for the contractors to carry out work on terms agreed between those parties did not mean that CXC Consulting did not procure the services of the contractor for its clients. That conclusion is directly applicable to the present case.”

Justice White agreed with Ginnane J’s construction of s.37 of the Payroll Tax Act 2007 (Vic) which is materially in the same terms as s.37 of the PTA 2007 (NSW): [141].  His Honour rejected Freelance’s submission that the legislative history of s.3C and s.37 supports its construction.  If s.3C or s.37 were intended to apply only to the activities of employment agents as that expression is said to be commonly understood, then s.3C(1) and s.37(1) would not have defined “employment agent” for the purposes of the Act: [151].

As to the relationship between the employment agency contract provisions and the relevant contract provisions, White J noted that they operate in different fields.  Further, s.3A(1B) of the PTA 1971 and s.37(3) of the PTA 2007 expressly exclude from the operation of s.3A and s.32 contracts under which services are supplied by an employment agent under an employment agency contract, or a contract worker or service provider is procured by an employment agent under an employment agency contract.  Therefore it is not appropriate to read down the operation of the employment agency contract provisions by making assumptions about the intended operation of the relevant contract provisions: [160]. Based on his Honour’s findings about the application of the employment agency provisions to the present case, he held that the relevant contract provisions do not apply: [163].

Orders

The Court dismissed the appeal by Freelance, and ordered Freelance to pay the Chief Commissioner’s costs.

Link to decision

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