Chief Commissioner of State Revenue v E Group Security Pty Ltd

1. [1]

   THE COURT: This appeal is brought from a judgment of the primary judge revoking various payroll tax assessments which had been made by the Chief Commissioner: E Group Security Pty Ltd v Chief Commissioner of State Revenue [2021] NSWSC 1190. The underlying dispute turned on the relationship between various subcontracting companies which supplied security services, the taxpayer E Group Security Pty Ltd and three related companies, and the ultimate companies receiving the services (which included the operators of hotels, sports grounds, hospitality venues and others), and in particular whether E Group Security was deemed to have paid assessable wages to the security guards under either (a) the grouping provisions of the Payroll Tax Act 2007 (NSW) (the Act) or (b) the provisions concerning employment agents in Division 8 of Part 3 that Act. The Court was told that the subcontracting companies themselves, which made the security guards available and seem likely to have paid their wages, were under the payroll tax threshold.

2. [2]

   Before the primary judge, the Chief Commissioner had contended that the definition of “employment agency contract” in s 37 of the Act was to be construed in accordance with the reasoning in UNSW Global Pty Ltd v Chief Commissioner of State Revenue [2016] NSWSC 1852; 104 ATR 577 at [62]. This had been common ground, and was duly applied by the primary judge.

3. [3]

   Some two months before the appeal was listed for hearing it was suggested in Bonner v Chief Commissioner of State Revenue [2022] NSWSC 441 that that construction was erroneous and warranted appellate review. Grounds 1-3 of the amended notice of appeal took up the invitation in Bonner to reconsider the existing case law. If the Chief Commissioner’s submissions were accepted, the balance of the appeal would fall away.

4. [4]

   This Court heard full argument on grounds 1-3 of the Chief Commissioner’s amended notice of appeal, and reserved its decision. No time was lost in taking that course, because almost all of the day which had originally been set down for hearing argument on the unamended grounds of the appeal was occupied by argument on the new grounds.

5. [5]

   For the reasons which follow, there should be no departure from the construction of s 37. Grounds 1-3 of the amended notice of appeal must be dismissed.

Division 8 of Part 3 of the Payroll Tax Act

1. [6]

   Division 8 of Part 3 of the Act is titled “Employment agents”. In its current form, it provides as follows:

2. [7]

   In 2017, shortly following the decision in UNSW Global, s 36A was inserted and a corresponding change was made to s 40. The effect of those changes is that the deeming provisions do not apply where the services are provided to an exempt person (for example, some charities) which would not be subject to payroll tax if the exempt person had in fact employed the service provider. Otherwise the provisions of Division 8 have remained unchanged since 2016. It will be necessary later in these reasons to return to the legislative history of this Division.

3. [8]

   The point of the Division is seen most clearly from the deeming provisions in ss 38, 39 and 40. Where an “employment agent” procures the services of a “service provider” to one of the employment agent’s “clients”, then the employment agent is taken to be an employer, the person who does the work for the client is taken to be an employee, and certain amounts specified in s 40 are taken to be wages paid by the employment agent. The latter may in turn give rise to a liability to pay payroll tax on the part of the employment agent. Thus the provisions expand the operation of the concept underlying the statute, by treating some persons who would not otherwise be employers paying assessable wages as deemed employers paying deemed assessable wages.

4. [9]

   Two further points may be observed. The first is that s 37 only applies when no contract of employment is created between the service provider and the client. In such a case, the client will be an employer and will be subject to the direct operation of the statute upon the client’s own payroll.

5. [10]

   The second is that s 41 prevents double taxation (which could occur if the person doing the work were regarded as a common law employee of the client) but only insofar as the employment agent pays payroll tax.

UNSW Global and the cases which followed

1. [11]

   In UNSW Global, White J concluded that the definition in s 37 should be construed as follows:

2. [12]

   That reasoning has been followed in a large number of cases, including JP Property Services Pty Ltd v Chief Commissioner of State Revenue [2017] NSWSC 1391; 106 ATR 639 at [6] and [54], H R C Hotel Services Pty Ltd v Chief Commissioner of State Revenue [2018] NSWSC 820; 108 ATR 84 at [98]-[107] and [118], Southern Cross Group Services Pty Ltd v Chief Commissioner of State Revenue [2019] NSWSC 666; 110 ATR 16 at [57], [59], Bayton Cleaning Company Pty Ltd v Chief Commissioner of State Revenue [2019] NSWSC 657; 109 ATR 879 at [94]-[96] and [105], Securecorp (NSW) Pty Ltd v Chief Commissioner of State Revenue [2019] NSWSC 744 at [87], Banfirn Pty Ltd v Chief Commissioner of State Revenue [2019] NSWSC 1058 at [25], Southern Cross Community Healthcare Pty Ltd v Chief Commissioner of State Revenue [2021] NSWSC 1317 at [238]-[246] and Bonner v Chief Commissioner of State Revenue [2022] NSWSC 441 at [67].

3. [13]

   Of these, further attention should be given to four.

4. [14]

   First, JP Property Services Pty Ltd v Chief Commissioner of State Revenue was first heard prior to UNSW Global, and Kunc J relisted the proceedings for further submissions after UNSW Global was brought to his attention while judgment was reserved. It is clear from [54](8) that the Commissioner invited his Honour to apply UNSW Global. His Honour did so. Indeed, Kunc J stated at [70] that had the case been decided on the basis of the previous law, the outcome may well have been different. There was no appeal.

5. [15]

   Secondly, Payne J stated in Securecorp (NSW) Pty Ltd v Chief Commissioner of State Revenue [2019] NSWSC 744 at [89] that “Care needs to be taken to ensure that White J’s construction of s 37 in UNSW Global is not over-read”. That comment was directed to Securecorp’s submission that there was implicit in the statute a notion of “end user” which restricted the operation of s 37. The submission was that Securecorp supplied the services of people who provided cleaning and security services to the companies which managed shopping centres, which in turn provided services to the owners of shopping centres. It was said that the companies managing shopping centres were closer to the end user, and as a consequence Securecorp fell outside the definition of employment agent. It may also be noted that in the same case, the Commissioner expressly submitted that UNSW Global should be followed (see at [67]-[70]), and as noted above, Payne J proceeded on the basis that the test in UNSW Global was the correct one.

6. [16]

   Thirdly, in Southern Cross Community Healthcare Pty Ltd v Chief Commissioner of State Revenue [2021] NSWSC 1317 at [239]-[241], Emmett AJA wrote in relation to White J’s construction in UNSW Global of s 37 of the Act:

7. [17]

   Fourthly, and in marked contrast to the series of first instance decisions which preceded it, in Bonner v Chief Commissioner of State Revenue [2022] NSWSC 441 Basten J was critical, in obiter dicta, of the approach which had been taken in the line of decisions commencing with UNSW Global. His Honour expressed the view that in the absence of any mistaken drafting, or absurd and unintended result, there was no basis for what he regarded as a gloss upon the statute, and accordingly the ordinary meaning of the words should be applied. His Honour concluded at [116]:

8. [18]

   The reference to language which has been “used in the past but removed and replaced” is a reference to the legislative history, which is addressed below.

The Chief Commissioner’s submissions

1. [19]

   There are no appellate decisions on this aspect of the construction of s 37. Hence, as the Chief Commissioner explained in oral submissions, there is a difficulty in the operation of the provisions for the future, and real scope for disputation, with the consequent expense to the parties and delay in courts and tribunals, until the issue is resolved. Accordingly, by amendments to his notice of appeal, the Chief Commissioner seized upon the present appeal in order to have the questions posed in Bonner resolved promptly. That was an understandable and responsible course of action for the Chief Commissioner to take, especially when it is borne in mind that some taxpayers might seek to take advantage of the broader approach suggested in Bonner (this is explained in [37] below).

2. [20]

   In this Court, the Chief Commissioner’s principal submission echoed the points made in Bonner. It was put that the UNSW Global construction imposed an unwarranted gloss upon the definition of employment agency contract, thereby departing from and narrowing the statutory text, contrary to ordinary principles of statutory construction. It was also said to involve the restoration of a statutory proviso which had been removed from the legislation. The construction was said to have adverse practical consequences in the operation of the legislation. In particular, the requirement that the services be provided “in and for” the conduct of a business of a client excluded from the scope of the Division cases where entities caused services to be provided domestically (for example nursing services being supplied at home).

3. [21]

   The Chief Commissioner submitted that his best point turned upon the legislative history of the antecedents to s 37. The first introduction of provisions dealing with employment agents occurred by ss 3(4) and 3A inserted by the Pay-roll Tax (Amendment) Act 1985 (NSW). Those provisions included a proviso excluding from their operation cases where “the worker does not become the employee of either the agent or the client but does carry out duties of a similar nature to those of an employee”. The amendments introduced in 1985 were repealed two years later by the Pay-roll Tax (Amendment) Act 1987 (NSW) (see Schedule 1 items (1) and (2)). Thereafter, in 1998, s 3C was inserted into the legislation by the State Revenue Legislation (Miscellaneous Amendments) Act 1998 (NSW), and the current provisions are in materially identical form. The Chief Commissioner’s point was that the proviso that the worker “carry out duties of a similar nature to those of an employee” is absent, and that the gloss on the word “for” in UNSW Global in practice re-instated the proviso which the Legislature was to be taken to have deliberately omitted.

4. [22]

   It was put thus in oral address:

Consideration

1. [23]

   We agree that the submission based on the legislative history is the Chief Commissioner’s best point. However, we do not agree that it provides a sound basis to overturn the line of first instance authority since 2016.

2. [24]

   One obstacle to accepting the submission based upon legislative history is that it is difficult confidently to draw any inference from the absence of a proviso in 1998 legislation when the previous legislation had been repealed a decade before, and when the 1998 legislation was hastily enacted. The second reading speech makes it plain that the 1998 provisions were inserted in response to Drake Personnel Ltd v Commissioner of State Revenue (Vic) (1998) 40 ATR 304, a first instance decision delivered on 23 June 1998. The Minister with its carriage in the Legislative Assembly referred in terms to “recent judicial pronouncements” in his speech less than 4 months later (Parliamentary Debates, Hansard, Legislative Assembly, 14 October 1998, p 8287), and the bill was given considerable expedition, passing through the Legislative Council the following week. (It turned out that the concern was likely misplaced, in light of the decision of the Victorian Court of Appeal: Drake Personnel Ltd v Commissioner of State Revenue (2000) 2 VR 635; [2000] VSCA 122.)

3. [25]

   The timing suggests that the bill was drafted hastily. There is nothing explicit in the extrinsic materials to suggest that regard was had to the legislation which had been in force in 1986 and 1987, still less that a conscious decision was made to depart from it. However, it is not unlikely in the scheme of things that some of the instructing officers would have recalled that short-lived measure.

4. [26]

   But telling against that inference is a different aspect of the legislative history, namely, that the Act can be readily amended in response to the decisions of courts. Indeed, the Act has been amended no fewer than 15 times since UNSW Global was decided. The amendments include amendments to Division 8, although not to the definition in s 37 itself. The provisions of Division 8 broadly speaking have equivalent counterparts in all other Australian jurisdictions save for Western Australia.

5. [27]

   The considerations stated by the High Court in Probuild Constructions (Aust) Pty Ltd v Shade Systems Pty Ltd (2018) 264 CLR 1; [2018] HCA 4 at [52] bear upon the Chief Commissioner’s submission:

6. [28]

   The Chief Commissioner made no challenge to that principle of construction. Instead, he submitted that there had been no “substantial” amendment to the Payroll Tax Act since 2016 so as to engage it. We do not accept that submission.

7. [29]

   The principle of construction invoked identifies the circumstances when legislative amendment to other provisions in a statute sustains the inference that a legislature is to be understood as endorsing the construction given to unamended provisions of the same statute. Much depends on the particular statute and the particular amendments.

8. [30]

   The Building and Construction Industry Security of Payment Act 1999 (NSW) considered in Probuild concerns the interim rights as between themselves of developer and contractor. In contrast, the Payroll Tax Act is a taxing act, which will in ordinary cases only give rise to litigation involving the Chief Commissioner and a taxpayer. The Chief Commissioner has been a party to every case which has considered s 37. There is no reason to doubt that the Chief Commissioner actively reviews the legislation he administers and the litigation to which he is party. Indeed, the 2020-21 Annual Report of the Department of Customer Service (the Minister for Customer Service is jointly responsible with the Treasurer and the Minister for Finance and Small Business for administering the Payroll Tax Act) includes a section on “Significant Judicial Decisions” including at p 162 a summary of Chief Commissioner of State Revenue v Downer EDI Engineering Pty Ltd [2020] NSWCA 126, which was a payroll tax appeal.

9. [31]

   Some of the numerous statutes amending the Payroll Tax Act have been enacted urgently, and directed to a particular end. Examples may be seen in the COVID-19 Legislation Amendment (Emergency Measures – Treasurer) Act 2020 (NSW), the State Revenue Legislation Amendment (COVID-19 Housing Response) Act 2020 (NSW) and the Payroll Tax Amendment (Jobs Plus) Act 2021 (NSW). Nothing can be drawn from the failure of those statutes to amend Division 8.

10. [32]

    However, the pattern of legislation shows that in most years, the government has made changes to the Payroll Tax Act, typically, within legislation described as a “State Revenue Legislation Amendment Act”. The enacted legislation tends to confirm what would in any event be expected, namely, that the executive government keeps closely under review decisions on its taxation legislation, especially those which have an impact upon revenue.

11. [33]

    In circumstances where the Chief Commissioner has regularly commenced and defended litigation based on the employment agency contract deeming provisions (including this proceeding, at first instance), has consistently propounded the test originally proposed by him in 2016, and where the legislation has been reviewed very regularly, there is a powerful inference that the Legislature is to be taken to have endorsed the construction in UNSW Global.

12. [34]

    Moreover, we do not accept the Chief Commissioner’s assertion that none of the amending legislation was “substantial” within the meaning of the passage from Probuild extracted above. There have been at least one and arguably two substantial amendments since 2016.

13. [35]

    It is debatable whether the State Revenue and Other Legislation Amendment Act 2019 (NSW) contained a substantial amendment (a new Division 3 in Schedule 2) for the calculation of estimated monthly payroll tax (see item 5 of schedule 3 of the 2019 statute). Although there was a new Division, with significant practical consequences, it may also be seen as administrative.

14. [36]

    But on any view of the matter, the State Revenue Legislation Amendment Act 2017 (NSW) falls into a different category. That statute did not merely insert s 36A into Division 8 and amend s 40. It also introduced s 66B which provided:

15. [37]

    Those new provisions identified an area in which the extended operation of the statute, brought about by the deeming provisions in Division 8, would not apply. Significantly, this was not merely an additional area of exemption. Instead, if a person could establish that it was an employment agent and had common law employees who were providing services to a client and the client, if it had employed the employee would be exempt, then the wages paid by the employment agent to its common law employees would be exempt. The significance of that change is that whereas formerly it was to the inevitable fiscal disadvantage of a person to fall within the definition of an employment agent, there is now an incentive for some persons to fall within that definition, insofar as they have clients which are exempt (such as some religious institutions and schools and hospitals). In short, following the 2017 amendments, the Act used the definition of employment agency contract both to treat some payments which were not wages as deemed wages, and also to treat some payments which were in fact wages as exempt wages.

16. [38]

    Such an amendment is “substantial” in the sense stated in Probuild. It alters the legal and practical effect of the term in issue. The 2017 statute is an amendment which takes the pre-existing scope of a defined term and adds to the legal consequences of falling within it in a markedly different way from the position which previously obtained.

17. [39]

    The issue can also be approached as follows. There is no artificiality in attributing to the Legislature an understanding that the term “employment agency contracts” bore the meaning given in UNSW Global. The 2017 amending legislation was a government bill. It would have been the result of the continuous review of the operation of the Payroll Tax Act by the Chief Commissioner. It is the opposite of the position mentioned by Gleeson CJ in Electrolux Home Products Pty Ltd v Australian Workers’ Union (2004) 221 CLR 309; [2004] HCA 40 at [8] that “there are circumstances in which it is artificial, and unpersuasive, to attribute to Parliament a consciousness of a judicial interpretation which might have been placed upon an expression, perhaps years before, and in some different context.” The Chief Commissioner had actual knowledge of the UNSW Global test because he was contending for its application in case after case in and after 2017 (including in the further hearing and further submissions in JP Property Services). The Minister with responsibility for administering the Payroll Tax Act is to be taken to have had that knowledge.

18. [40]

    Still further, the 2017 amendments correspond quite closely with the significance attributed by this Court, constituted by five judges, to a subsequent amendment to different legislation, once again in circumstances where a challenge was made to a long-standing construction of legislation. In Olde English Tiles Australia Pty Ltd v Transport for New South Wales [2022] NSWCA 108 Basten AJA said, with the agreement of Ward P, Gleeson and Mitchelmore JJA and Preston CJ of LEC at [73] and [78]:

19. [41]

    Likewise, the enactment of the 2017 amendments militate strongly against overturning the construction given to the statute in 2016.

20. [42]

    Even so, if the construction in UNSW Global were palpably wrong, this Court would overturn it. However, there is no suggestion that the construction in UNSW Global was unsatisfactory or inefficient or in any way took the Chief Commissioner by surprise. Indeed, White J recorded at [26] that it was the Chief Commissioner who propounded the test which he adopted as correct:

21. [43]

    (The reference to the Chief Commissioner’s contentions was to the formal document filed in the Court which must be taken to have been carefully reviewed and approved and filed on instructions from the Chief Commissioner.)

22. [44]

    Thus the Chief Commissioner has consistently propounded that very test in a series of cases, including the present case. He has never, until around two months ago, sought to depart from it.

23. [45]

    As Mr Hmelnitsky SC who appeared with Mr Lewis both in this Court and at first instance submitted, the construction in UNSW Global reflects a not unnatural meaning of the statutory words “procures the services of another person for a client of the employment agent”. It is to be borne in mind that the primary subject matter of the Act is a tax upon payroll – which is to say a tax upon the wage and salary earnings of employers, and that the provisions in Division 7 dealing with relevant contracts and Division 8 dealing with employment agents to an extent expand common law notions of employment.

24. [46]

    The construction in UNSW Global accords with the purpose of the Act, by taking relationships which fall short of traditional employer/employee relationships and deeming them to be such. There is nothing to suggest however that Division 8 should entirely outflank its role as an add-on to common law notions of employment. This is not impermissibly to gloss the section. It is to recognise that the preposition “for” is protean and is capable of bearing a very wide range of meanings depending upon context, and the presently relevant context is its appearance in provisions which create a legal fiction – a deemed relationship of employer and employee – in a Payroll Tax Act.

25. [47]

    The broader construction for which the Commissioner contends gives rise to difficulties. Section 41 addresses the possibility that more than one person may be liable to payroll tax. That possibility is ever-present in a Division which deems persons who are not employees to be employees. But if the operation of Division 8 extends more broadly than persons who provide services in and for the business of a client, then to that extent it will be difficult for the client and the person who answers the description of an employment agent to know that payments are deemed to be assessable wages. We would not place great weight on this consideration on which the respondent relied, but nonetheless disfavouring impractical outcomes is an orthodox principle of construction.

26. [48]

    Another consideration upon which reliance was placed in Bonner was that the text of s 37(1) did not bear upon the relationship between the person providing the services and the client: see Bonner at [18]-[19]. True it is that s 37(1) read alone does not explicitly deal with that topic. However, as Mr Hmelnitsky observed, it is necessary to have regard to all three subsections of s 37 in order to apply the definitions. Subsection (2) carves out from the definition of employment agency contract any contract which results in the creation of the contract of employment between the service provider and the client. In order to determine whether there is an employment agency contract, it is always necessary to have regard to the relationship between the service provider and the client.

27. [49]

    There are comparable provisions in other jurisdictions. The Court was told and it may be accepted that there is at the administrative level a working relationship between those administering payroll tax legislation throughout the country in order to enhance harmonisation in the tax provisions. But this is a further reason not to depart from the established meaning.

28. [50]

    This Court’s construction of harmonised payroll tax provisions would be apt to be given a deal of precedential weight in other jurisdictions, especially at first instance and in administrative tribunals, as may be illustrated by the reasoning in Compass Group Education Hospitality Services Pty Ltd v Commissioner of State Revenue [2021] QCA 98. The consequence is that for practical purposes, the Chief Commissioner is inviting this Court to alter the legal meaning of legislation which is in force not merely in New South Wales, but throughout the country.

29. [51]

    Still further, the effect of this Court accepting the Chief Commissioner’s invitation is that the change in the legal meaning of the law will have retrospective effect. It is far from improbable that there will be pending disputes and pending litigation which will be affected. As well, a number of harmonised rulings have been issued which turn on the operation of the employment agency contract provisions (including PTA027, PTA028 and PTA029, each of which is in force in every State save for Western Australia).

30. [52]

    It is in those circumstances far better for the law to be changed, if indeed it is to be changed, by legislation, and with clearly stated transitional provisions. Considerations of this nature were noted, albeit in a different context, in Jackmain (a pseudonym) v R (2020) 102 NSWLR 847; [2020] NSWCCA 150 at [163]-[165].

Conclusion and orders

1. [53]

   For those reasons, these grounds of appeal should be dismissed. The issues arising on grounds 1, 2 and 3 are self-evidently severable, and there is no reason to depart from the usual rule that costs follow the event.

2. [54]

   The balance of the appeal, which has not as yet been heard, will be listed before the Registrar on a date to be fixed.

3. [55]

   The Court makes the following orders: