The surprisingly broad scope of ‘employment agency contracts’ for payroll tax

Employment agency contracts, for payroll tax purposes, can be much broader than traditional labour hire or employment agency arrangements. The recent decision in Qualweld Australia Pty Ltd v Chief Commissioner of State Revenue [2015] NSWCATAP 249 highlights how payments to genuine subcontractors can trigger payroll tax liabilities under the ‘employment agency’ provisions.

Employment agency contracts

‘Employment agency contracts’ are defined as contracts under which a person ‘procures’ the services of another person for the client of the first person. The case authorities all confirm that ‘procures’ has to be given a wide meaning.

In subcontracts, the risk is that the subcontractor’s services may be ‘for’ the client, as well as ‘for’ the head contractor. If the head contractor has ‘procured’ the services of the subcontractor for its client, then the payment is deemed to be wages subject to payroll tax. To make it more problematic, the exemptions that often apply to the ‘relevant contractor’ provisions (e.g. providing services for less than 90 days or the contractor employing employees) do not apply to the employment agent provisions.

The Qualweld litigation
The issue in Qualweld was whether the taxpayer was an employment agent who procured the services of others for its clients.

Qualweld specialised in welding services. It contracted with clients to complete specific welding works. To fulfil its contracts, Qualweld then contracted with subcontractors, such as welders and boilermakers, to perform the work.

The Commissioner argued that Qualweld’s business was no more than providing its clients with the services of welders and boilermakers. The Commissioner pointed to the fact that Qualweld charged on hourly rates. Qualweld argued that its contracts were not to procure the services of another person, but to achieve specific results.

Qualweld went into liquidation sometime after receiving its assessments from the Commissioner, but the liquidator continued its appeal. At first instance, the New South Wales Civil and Administrative Tribunal held Qualweld was an employment agent. That decision was then overturned on appeal with a direction for a different tribunal to consider the evidence again. The Qualweld litigation highlights the uncertainty that can arise in construing whether a subcontract is also an ‘employment agency contract’ that triggers payroll tax.

Practical steps to help reduce the risk

Qualweld highlights the need to have effective documentation. In tax disputes, the taxpayer has the burden of proving any assessment is excessive. Supporting evidence is important. If contracts are not procuring the services of a person for a client, but are to achieve a particular result, then evidence should be kept supporting that position. Written agreements should be carefully drafted on this basis, and supporting records should be maintained. This may involve keeping:

• requests for quotes;
• the corresponding quotes;
• purchase orders; and
• issued invoices.

We are aware that the QRO is auditing this issue. If the QRO form the view that payments to subcontractors are caught by the employment agent provisions, the payments are deemed to be wages subject to payroll tax. This generally has a substantial impact on a business’ net profit, particularly as assessments often cover multiple income years, and can be exacerbated by interest and penalties.

Please contact a member of our team if you would like to discuss this issue further.