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Sydney Flooring Pty Ltd and Sydney Flooring 1959 Pty Ltd v Chief Commissioner of State Revenue [2017] NSWCATAD 96

Date of judgement 03 April 2017 Proceeding No. 2014/00382470
Judge(s) Senior Member A R Boxall
Court or Tribunal New South Wales Civil and Administrative Tribunal
Legislation cited Civil and Administrative Tribunal Act 2013

Payroll Tax Act 2007

Taxation Administration Act 1996
Catchwords Payroll tax – onus of proof – designated person - contract – relevant contract – exemptions - section 32(2)(b)(iii) - services provided for a period that does not exceed 90 days - section 32(2)(b)(iv) - ordinarily performs services of that kind to the public generally - section 32(2)(c)(iii) - in the course of a business carried on by the contractor – splitting of payments – market rate component interest – circumstances beyond the taxpayer’s control – illness of director - penalty tax – reasonable care – following previously audited practice
Cases cited Behmer v Commissioner of State Revenue (1994) 28 ATR 1082

Chief Commissioner of State Revenue v Incise Technologies Pty Ltd [2004] NSWADTAP 19

Commissioner of State Revenue (Vic) v Snowy Hydro Limited [2012] VSCA 145

Drake Personnel v Commissioner of State Revenue (1998) 40 ATR 304

Evans v Federal Commissioner of Taxation (1989) 20 ATR 922

Levitch Design Associates Pty Ltd atf Levco Unit Trust v Chief Commissioner of State Revenue [2014] NSWCATAD215

Roden Security Services Pty Limited v Chief Commissioner of State Revenue [2010] NSWADTAP 10

RVO Enterprises Pty Ltd as trustee for the R M O’Mara Family Trust v Chief Commissioner of State Revenue [2004] NSWADT 64

Trust Co of Australia v Chief Commissioner of State Revenue [2002] NSWADT 21

Background

This was an application for the review by the Tribunal of the Chief Commissioner of State Revenue’s payroll tax assessments for the 2009-10 to 2012-13 financial years.

There were two Taxpayers (“the Taxpayers”):

  1. Sydney Flooring Pty Ltd, which carried on the relevant business until and including 31 December 2010;

  2. Sydney Flooring 1959 Pty Ltd, which carried on that business from and including 1 January 2011, as the successor to the first Applicant.

The issues considered by the Tribunal were as follows:

  1. Whether five contractors whose services as flooring installers (“the Installers”) were each engaged by the Taxpayers under a “relevant contract”;

  2. Whether the figures as to amounts paid by the Taxpayers to the Installers, and relied on in calculating the Taxpayers’ liability for payroll tax were correct; and

  3. Whether the interest charges and penalties should be remitted.

The Tribunal relied on factual background contained in the Taxpayers’ evidence. Affidavits of Mr Durkowyak set out the elements of the relationship between the Taxpayers and the floor layers and how their services were procured for customers. The Installers’ services were procured as follows:

  • A quote is provided to the customer which states “…the goods that are to be supplied and the work to be undertaken [underlining added]. Once the customer accepted the quote, the Taxpayers took a deposit from the customer and signed a contract with the customer. The quote was not made in consultation with the Installers;

  • The Taxpayers then made enquiries with their preferred Installer to ascertain if one “…. is available to do the work on the dates required”. It is to be noted here that it was timing, not pricing, which dictated the choice of the Installer; and

  • Once an available Installer was identified, the Taxpayers sent an email or facsimile to him, “… setting out details of the work to be done”, and subsequently further instructions for all aspects of the work that is to be performed.

The Taxpayers’ evidence did not show that the Installers exercised any control or influence over the price at which they laid floors. From this, the Tribunal drew the inference that the pricing was neither contested nor negotiated by the Installers. The Tribunal determined that “this system of price dictation raised real questions as to whether the Installers in reality adhered sufficiently to ordinary commercial principles to be genuinely independent businesses” [15].

Decision – Relevant Contracts

The Tribunal was satisfied that a relevant contract existed between each of the Installers, Robert Horn, Keld Schultz Flooring Pty Limited (“Keld Schultz “), Alfonsus Meenhuis, John Parker and Lee Parker, and the Taxpayers.

  1. Mr Robert Horn

    The Chief Commissioner claimed payroll tax is payable on payments made by the Taxpayers to Mr Horn for the 2011 tax year. The Taxpayers first submitted that Mr Horn satisfied the exemption under s. 32(2)(b)(iv) of the Act, that is“… ordinarily performs services of that kind to [sic] the public generally in that financial year...”  The Taxpayers provided no evidence from Mr Horn as to the scope of his business during 2011. Mr Horn’s turnover reported in his Business Activity Statement exceeded the aggregate payments received by him from the Taxpayers during the 2011 tax year, but only by $599. This did not indicate that the activities of Mr Horn involved the provision of services to other businesses similar to those provided by him to the Taxpayers.

    The Tribunal also considered the application of the exemption under s. 32(2)(c)(iii). It was acknowledged that Mr Horn may have enjoyed the assistance of one or more other persons in his activities of laying floors. However, this was not of itself sufficient to confer the benefit of the exemption as this assistance would need to be obtained “in the course of a business carried on by the contractor”. There was no evidence that Mr Horn sought or secured his own customers, set or negotiated his own prices, or conducted his activities in a way which was genuinely an independent business.

    Accordingly, the Tribunal concluded that the exemptions under ss. 32(2)(b)(iv) and 32(2)(c)(iii) did not apply to payments made by the Taxpayers to Mr Horn.

  2. Keld Schultz Flooring Pty Limited

    The Chief Commissioner claimed payroll tax was payable on payments made by the Taxpayers to Keld Schultz in the 2011 tax year. The Taxpayers first submitted that Keld Schultz satisfied the exemption under s. 32(2)(b)(iii) of the Act, that is, the services were provided for a period not exceeding 90 days. The Taxpayers submitted that the modesty of the amounts paid to Keld Shultz makes it “highly likely” that Keld Shultz provided services to the Taxpayers for less than 90 days in the 2011 tax year. However, the Tribunal found no evidence from time sheets or daily rates to support such a submission.

    Further, the Taxpayers’ submitted that Keld Shultz satisfied the exemption in s. 32(2)(b)(iv) of the Act (ie, that he ordinarily performs services for the public generally). There was no evidence from Keld Shultz as to the scope or size of its business during 2011, its customer base during that year or the extent to which it provided services to customers other than the Taxpayers during the 2011 tax year.

    Accordingly, the Tribunal concluded that the exemptions under ss. 32(2)(b)(iv) and 32(2)(b)(iii) did not apply to payments made by the Taxpayers to Keld Schultz.

  3. Mr Alfonsus Meenhuis

    The Chief Commissioner claims payroll tax on payments made by the Taxpayers to Mr Meenhuis for the 2011 and 2013 tax years. The Taxpayers first submitted that Mr Meenhuis satisfied the exemption under s. 32(2)(b)(iii) of the Act (90 day exemption). As with Keld Schultz above, the Tribunal determined that there was no evidence of time sheets, daily rates or days worked in order to satisfy the application of the exemption under s. 32(2)(b)(iii) of the Act.

    The Taxpayers’ also submitted that Mr Meenhuis satisfied the exemption in s. 32(2)(b)(iv) of the Act (ie, that he ordinarily performs services for the public generally).  In relation to the 2011 tax year, Mr Meenhuis was employed by Earthpower as an “operator/landfill” and also provided instruction to students of Allied Timber Trades at Lidcombe College. However, these were not services of the same kind provided by him to the Taxpayers. In relation to the 2013 tax year, there was a payslip issued to Mr Meenhuis by Heartwood Timber Floors and Shutters Pty Limited. However, the Tribunal found there was no evidence as to the purposes for which Mr Meenhuis was engaged by Heartwood or whether Heartwood was engaged in the supply of wooden flooring to need the services of a skilled floor layer.

    The Taxpayers’ also submitted that Mr Meenhuis satisfied the exemption in s. 32(2)(c)(iii) of the Act. The Tribunal was satisfied that Mr Meenhuis received the assistance of a person in performing the work for the applicant for the 2011 tax year, and for the 2013 tax year, and it was reasonably likely that he received the assistance of one or more persons. Nonetheless, there was no evidence that Mr Meenhuis sought or secured his own customers, set or negotiated his own prices, or conducted his activities in a way which was genuinely an independent business.

    Accordingly, the Tribunal concluded that the exemptions under ss. 32(2)(b)(iii), 32(2)(b)(iv) and 32(2)(c)(iii) did not apply to payments made by the Taxpayers to Mr Meenhuis.

  4. Mr John Parker

    The Chief Commissioner claimed payroll tax was payable on payments made by the Taxpayers to Mr John Parker for the 2010, 2011, 2012 and 2013 tax years. The Taxpayers submitted that Mr Parker falls within the exemption provided for in s. 32(2)(b)(iv) of the Act (ie that he ordinarily performs services for the public generally).

    Mr Parker’s Business Activity Statements were provided, but they showed that revenue from sources other than the Taxpayers were, at most, 18.56% of turnover and at its lowest 7.9% of his turnover. In the absence of evidence as to the sources of his turnover, the Tribunal was unable to determine that the exemption under s. 32(2)(b)(iv) was satisfied.

    The Taxpayers also submitted that Mr Parker satisfied the exemption in s. 32(2)(c)(iii) of the Act. The Tribunal was satisfied that it was reasonably likely Mr Parker received assistance from at least one person during the 2010 to 2013 tax years, that is, his son Lee Parker. However, there was no evidence that Mr Parker paid wages during the period in order to satisfy the requirement that this person was “employed or provided services to the contractor”. Invoices provided by the Taxpayers identified a split between father and son of 50% of the invoiced amount. The Tribunal determined that Lee Parker was not providing his services to his father, but rather providing his services to the Taxpayers.

    Accordingly, the Tribunal concluded that the exemptions under ss. 32(2)(b)(iv) and 32(2)(c)(iii) did not apply to payments made by the Taxpayers to Mr John Parker.

  5. Mr Lee Parker

    The Chief Commissioner claimed payroll tax was payable on payments made by the Taxpayers to Mr Lee Parker for the 2010, 2011, 2012 and 2013 tax years. As a preliminary issue, The Tribunal determined that the splitting of invoices between Lee and John Parker meant that an informal arrangement for the provision of Lee Parker’s services existed between him and the Taxpayers. Therefore, the Tribunal concluded that Mr Lee Parker supplied his services to the Taxpayers “under a contract”.

    The Taxpayers did not submit that any exceptions apply to Lee Parker under s. 32 of the Act.  Nonetheless, the Tribunal considered whether the exemption under section 32(2)(b)(iv) of the Act applied (ie that he ordinarily performs services for the public generally). The Tribunal had regard to Lee Parker’s Business Activity Statements, and concluded that his turnover did not demonstrate that his services were also offered to the public generally.

    Accordingly, the Tribunal concluded that the exemption under ss. 32(2)(b)(iv) did not apply to payments made by the Taxpayers to Mr Lee Parker.

Decision – Financial Information

The Taxpayers submitted that the records originally provided to the Chief Commissioner, and upon which the calculation of payroll tax was based, were incorrect and payroll tax should be calculated on the amounts provided during the objection.

The Tribunal accepted and relied on Mr Carroll’s affidavit and the reported finances of the Installers and their invoices to assist in the determination of this issue. The Carroll affidavit identified two types of error: a systemic error in posting payments to Installers, and the accounting system failed to recognise the splitting of payments between John and Lee Parker. The discrepancies were identified and reported by the accountant, Mr Rankin, and set out in Annexure B to the Carroll Affidavit.

The Tribunal was satisfied with the accuracy of the figures set out in Annexure B. Accordingly, the Tribunal determined that the figures described under the heading “New Revised Amounts after Adjustments (incl. GST)” in Annexure B to the Carroll Affidavit are the amounts by reference to which the Chief Commissioner should determine payroll tax liability for which the Taxpayers are liable.

Decision – Interest and Penalty Tax

The original assessments only applied the market rate component of interest. The Taxpayers sought a remission of interest on the basis of Mr Durkowyak’s “serious illness” during the period from September 2015 until June 2016, and that he was the controlling mind of the Taxpayers. It was submitted that these circumstances were “outside the control” of the Taxpayers. The Tribunal rejected this submission as it did not consider Mr Durkowyak’s illness was an exceptional circumstance for the Taxpayers, because there was another Director, a General Manager and 11 full time employees who could ensure compliance with the Taxpayers’ taxation obligations. Accordingly, the Chief Commissioner’s decision with respect to interest was upheld.

Although the assessments did not include penalty tax, the Tribunal considered whether the Taxpayers had taken reasonable care. The Taxpayers submitted that they took reasonable care to comply with their payroll tax obligations by continuing their relationships with the Installers in the same way that they had done during a previous period (the 2003 to 2006 financial years) for which they had been audited and were not assessed for payroll tax.

The Tribunal considered that even if no payroll tax was assessed in the earlier audit, this does not mean the Taxpayers may not be liable for payroll tax in future tax years. Further, prudence demanded that the Taxpayers review and reassess the payroll tax status of their relationship with the Installers and take a more dynamic approach to their compliance obligations, by obtaining appropriate advice and reassessing the appropriateness of the previous status of the Installers. The Tribunal concluded that the Taxpayers did not take reasonable care to ensure they complied with their payroll tax responsibilities for the 2009-10 to 2012-13 tax years.

Orders

The assessments under review were remitted to the Chief Commissioner for re-determination in accordance with the Tribunal’s findings set out above.

Link to decision

Sydney Flooring Pty Ltd and Sydney Flooring 1959 Pty Ltd v Chief Commissioner of State Revenue[2017] NSWCATAD 96

Last updated: 16 May 2017