Payroll tax – the music continues, although not always in harmony

For what is supposed to be an efficient harmonised revenue collection measure, the payroll tax (‘PRT’) system certainly generates plenty of litigation, from time to time with conflicting decisions between courts of different States/Territories.

One common instance is the constant stream of PRT grouping cases which show few signs of abating. Grouping cases, generally deal with the Commissioner’s discretion to exclude a business from a group.

Routinely, these cases are decided in Revenue’s favour. A reader of the judgements is often left wondering why, based on the stated facts, the taxpayer bothered to argue businesses were carried on independently of each other such that the discretion should be granted.

More interesting to us, however, is the recent string of decisions exploring the scope of, and interaction between, the ‘employment agency contract’ and ‘relevant contract’ rules.

Despite decisions in these areas beginning to form a nucleus of precedent, there remain plenty of uncertainties and issues.

To top things off, the recent decision concerning The Optical Superstore (a Victorian PRT ‘contractor’ matter with national significance) has raised a new set of questions which are particularly relevant for transactions in the medical industry.

In this article we explore a few of the ongoing and emerging issues in relation to the employment agency and relevant contract rules.

While the issues are raised in the context of Victorian and NSW PRT compliance, they will have relevance in most States/Territories due to their harmonised legislative provisions.

Employment contracts cases and remaining issues

For PRT purposes, certain payments relating to ‘relevant contracts’ or ’employment agency contracts’ are deemed to be taxable wages paid by the respective principal/employment agent and subject to PRT.

As a general rule, the ’employment agency contract’ rules apply in priority to the ‘relevant contract’ rules.

Simply put:

  • An employment agency contract involves a contract between two parties where one of the parties (the employment agent) procures the services of a person (the worker) for a client (the end user). Payments by the employment agent to the worker are subject to PRT.
  • A ‘relevant contract’ taxes a payment made by a person who receives services (the principal) from a service provider (the contractor), unless one of several exemptions applies.

Exemption under the employment agency contract rules is largely limited to allowing an employment agent access to an exemption that would be available had the end user procured the labour directly.

The far broader range of exemptions available for what would otherwise be a ‘relevant contract’ encourage taxpayers to prefer any PRT liability be determined under those rules.

Taxpayers must therefore be clear as to which set of rules apply to labour/service procurement transactions.

However, as recent cases have shown, determining which set of rules apply is not simple. We comment on leading employment agent case law below and follow this with some observations on decisions in relation to ‘relevant contracts’.

UNSW Global a welcome decision

The UNSW Global case (2016) considered whether the provision of services of experts for litigation or business constituted an employment agency arrangement.

Thankfully, its interpretation of employment agency provisions recognised the statutory history and gave effect to the reason for which the rules were introduced (which reflected the evolution of the labour market and growth of contracting and labour on-hire).  In the decision, White J held that the rules should only apply in situations where the end user’s workforce was comprised of, or supplemented by, ‘employee-like’ labour supplied through an intermediary (commonly referred to a labour hire business or employment agency).  The decision confirmed that the employment agency rules should not, however, apply where what was being supplied through the intermediary was a service that, whilst benefitting the end user’s business, was not provided in the conduct of the end user’s business.

As White J stated at paragraphs 64 and 65 of the decision:

‘… Where the services of the individual are provided through the intermediary, that is, the employment agent, to help the client conduct its business in the same way, or much the same way, as it would do through an employee, then the arrangement is within the intended scope of the section.

But where the services, although provided for the client’s benefit, are not provided by the service provider working in the client’s business, the arrangement does not fall within the intended scope of the provision.’

Following UNSW Global, a number of decisions have applied White J’s interpretation to matters such as labour supply for hotel and commercial premises cleaning and security staff.  For example, in the H R C Hotels case, housekeeping staff supplied through an intermediary to a hotel were held to be working in the conduct of the hotel business under an employment agency contract. In the Bayton Cleaning case a similar finding was made in relation to cleaners supplied through an intermediary to corporates, aged care and health care service providers. However in the JP Cleaning case, because the cleaners supplied through an intermediary supplied cleaning services outside the normal operating hours of the end user businesses it was held the contracts were not employment agency contracts.

NSW Revenue has also recently issued Commissioner’s Practice Note 005 ‘Employment Agency Contracts Guidelines. It provides some useful insight and with plenty of examples about how to interpret the provisions post UNSW Global and later decisions.

The outcome of the case law is now, hopefully a more settled view on when a contract will be subject to the employment agency rules, allowing taxpayers to more confidently discharge resulting compliance obligations. However, where the employment agency rules do not apply, it is still necessary for taxpayers to consider the relevant contract rules.

Outstanding issues with the employment agency contract rules

A number of other interpretive issues remain even after a contract is classified as an employment agency contract.

For example, it is possible for a labour supply chain to include several employment agency contracts prior to the ultimate contract for supply of procured labour to an end user. A common scenario is:

  • IT specialist Harry is on the books of Employment Agency A.
  • Government Department X needs IT specialists with skills of the type possessed by Harry.
  • Government Department X contracts with Employment Agency B to source those skills.
  • Employment Agency B contracts with Employment Agency A for Harry to be on-supplied to Employment Agency B for on-supply by it to Government Department X.
  • Both the contract between Government Department X and Employment Agency B and the contract between Employment Agency B and Employment Agency A are employment agency contracts from a PRT perspective.

So, what happens next in this scenario? Which is entity liable for PRT?

Arguably, both Employment Agency B and Employment Agency C are subject to PRT in relation to the contracts. However, an administrative fix ‘of sorts’ is advocated by both NSW Revenue and Victoria Revenue to determine which employment agency is then responsible for PRT in the above type of situation. The basic administrative approach is to seek only to recover PRT from the employment agency closest to the end user.

However, this administrative approach involves a burdensome ‘declaration’ process by which the parties are expected to document agreement in relation to PRT responsibility.

In practical terms, whether the process is followed will depend on the parties. Often it will not be followed, with result that either PRT is not paid or a party other than the employment agency closest to the end user pays the PRT (albeit in a lower amount, given upstream margins have not been included).

In the situation where an employment agency other than the agency closest to the end user remits PRT, this raises a query regarding whether this results in no other party being liable for PRT. If this is the case, does this mean Revenue’s administrative views and processes would ‘not be worth the paper they are written on’?

Clearly, there is ‘more water to go under the bridge’ as these administrative arrangements are further tested.

A further issue has recently emerged. It involves an exemption that is available for an employment agent which supplies labour to an end user that would have been exempt from PRT had it employed the worker directly. The relevant exempting provision contemplates a declaration being given by the exempt end user as a means of substantiating the exemption claim.

However, in a very recent change (see ‘Timing of Declarations’), Victorian Revenue has now advised taxpayers that the declaration must be provided in the year of tax to which it relates. Subject to a limited transition period, refund claims will not be accepted where a declaration was not obtained within the period to which it relates.

Relevant contract cases and issues

Recent case law developments in relation to ‘relevant contracts’ have struck a discordant note.

The  decision in Commissioner of State Revenue v The Optical Superstore Pty Ltd  (September 2019) has challenged long-held notions regarding whether PRT applies where a medico contracts with a third party to receive certain administrative/practice management services in relation to patients treated by the medico at a clinic/facility operated by the third party.

After unsuccessful attempts before VCAT and the Supreme Court, the Victorian Revenue Office has been successful in the Court of Appeal in securing a decision  that The Optical Superstore’s collection for, and later payment of monies (including bulk billed Medicare fees)  to, optometrists were amounts ‘paid or payable [by The Optical Superstore] for or in relation to the performance of work’. As a result, the payments were prima facie captured as taxable wages by the PRT relevant contract rules. It should be noted the decision did not consider whether exemptions available under the relevant contract rules may applied.

Structuring of these types of arrangements has historically been understood to result (at least where the patient is bulk-billed) in two separate services:

  • a service being provided by a medico to the patient;
  • a separate service (access to premises, administration support etc.) from the third party to the medico for a fee (usually expressed as a percentage of the medico’s patient fees whether payable by Medicare or Department of Veteran Affairs); with payments for neither service being considered to be subject to PRT.

The Optical Superstore decision causes a major re-think of the PRT outcomes of such arrangements, which are widely used throughout the medical profession.

Curiously, in a recent NSW Civil and Administrative Tribunal decision (Homefront Nursing), a similar factual scenario also involving a medico (a General Practitioner) contracting to receive services from a third party whilst servicing patients from the third party’s premises, there was a different conclusion. In this case, the third party collected all medical fees generated by the medico and paid the amounts, net of a charge for its services, to the medico. To the extent that the third party’s payment to the medico represented fees collected from Medicare and Veteran Affairs Department, the payment was held not to be taxable wages under the ‘relevant contract’ rules, on the basis that to this extent the payment was not made ‘for in relation to the performance of work’ by the medico. To such extent, the payment did not have a ‘relevant relationship’ to the relevant contract between the medico and the third party. However, the balance of the payment (representing fees paid directly by patients, fees for medical reports, etc.) were taxable wages.

All very interesting stuff!

Onwards we forge … stay tuned as the music continues …


This article was prepared by Michael Doran and Andrew Orange.

This article provides a general summary of the subject covered and cannot be relied upon in relation to any specific instance. Webb Martin Consulting Pty Ltd and any person connected with its production disclaim any liability in connection with any use. It is not intended to be, nor should it be relied upon as, a substitute for professional advice.

This article provides a general summary of the subject covered as at the date it is published. It cannot be relied upon in relation to any specific instance. Webb Martin Consulting Pty Ltd and any person connected with its production disclaim any liability in connection with any use. It is not intended to be, nor should it be relied upon as, a substitute for professional advice.

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